Monday, August 23, 2010

The price of love

Two weeks ago, we touched on a situation where the gifting of a family home was potentially exposed under the bankruptcy clawback rules.

As I mentioned, if the original transaction had been structured slightly differently, around 20% of the value of the property could have been protected.

In simple terms, instead of a straight gift of the property, the following steps could have been taken:

1. The house could have been sold by the husband to his spouse for its market value 3½ years ago.

2. The transaction should have been structured under a vendor finance arrangement.

3. Following completion of the sale transaction, the husband could have forgiven the outstanding debt for 'natural love and affection'.

4. Assuming that all steps would have been properly legally documented, then the wife would have had at least a reasonably arguable case that the capital growth in the asset since the date of the initial transfer would have been quarantined to her benefit and not available to creditors on the bankruptcy of her husband.

Until next week.

Matthew Burgess

Monday, August 16, 2010

Unpaid present entitlements (UPE) & the election

Last week, the National Institute of Accountants (NIA) sought to turn the UPE issue into an election topic.

An extract from the Weekly Tax Bulletin released on Friday is set out below.

It highlights, as many have, that the changed approach by the ATO effectively renders the specific provisions under Division 7A in relation to UPEs irrelevant.

Until next week.

The NIA has called on both political parties "to show their small business credentials and intervene to put a stop" to the ATO's changed view of the treatment of unpaid entitlements to corporate beneficiaries. The NIA said that Taxation Ruling TR 2010/3 now confirms the ATO view that unpaid present entitlements (UPE) to corporate beneficiaries will be treated as loans and potentially deeming them as unfranked dividends.

NIA chief executive officer Andrew Conway said this new approach puts an end to a 12 year long standard practice of not treating unpaid entitlements to corporate beneficiaries as loans. "For the majority of cases the use of such funds by the trust is solely for business working capital related purposes. We have been reminded that the mischief which the ATO is trying to address is where these funds are used for private purposes within the trust," he said.

The NIA says there is strong evidence to indicate that it was never the intention of Div 7A to extend to UPEs and that "this latest change of heart by the ATO has no legislative basis". The ruling contradicts the underlying policy intent of Div 7A, the NIA said.

Tuesday, August 10, 2010

House transfers and real love

Last week, I was reminded about the importance of proper planning when implementing asset protection strategies.

The particular scenario involved the potential clawback under the bankruptcy rules of a family home that had been gifted by a husband to a wife approximately 3½ years before a bankruptcy event. Many of you will be aware that changes to the bankruptcy rules extended the clawback period from 2 to 4 years a few years ago.

Whether the transfer could in fact be clawed back for this client was an issue which is as yet unresolved. The issue last week, however, was in relation to whether the value of the house as to today’s date could be clawed back or whether its value 3½ years ago was the relevant value.

The question was quite critical because notwithstanding the intervening GFC, the value of the house had gone up by more than 20% over the 3½ year period.

As the original transfer had been crafted simply as a gift for 'natural love and affection', we had to advise the client that the house itself was the asset that would be exposed and therefore the value at today’s date was at risk.

Next week, I will try to provide an example of how the original arrangement could have been structured differently to potentially limit the total value exposed under the clawback provisions.

Until next week.

Matthew Burgess

Monday, August 2, 2010

Trustee companies multitasking

Last week we touched on the importance of trustee companies not accumulating assets in their own right.

The specific example that inspired last week’s post related to a recent client situation where the trustee company had been used to receive distributions out of the trust that it acted as trustee for.

Often advisers assume that it is not in fact possible at law for a trustee company to also act as the corporate beneficiary. While this is often a good assumption, it is not necessarily the case.

The question of whether a trustee company can in fact be a beneficiary of the trust it acts as trustee for depends on the terms of the trust deed.

Even where a trustee company is listed under the trust deed as a potential beneficiary of the trust that it acts as trustee for, we normally strongly recommend against it being used as a corporate beneficiary.

This is because the trustee is liable for any difficulties that arise against the trust.

It is therefore preferable a completely 'cleanskin' company acts as the corporate beneficiary in order to ensure that the accumulated profits of the trust are quarantined from any litigation against the trustee from time to time.

Until next week.

Matthew Burgess