Monday, November 29, 2010

Trustee indemnity case - Appeal

Even though the post last week touched on a court case that was relatively widely reported, the importance of the streaming decision meant I felt it appropriate to profile.

This week another court decision caught my eye, even though it was simply in relation to the granting of leave to appeal a previous decision.

Many readers will have noticed the 'Bruton Holdings' case from earlier in the year. In that case, a single court judge held that a corporate trustee was not indemnified by a trust for expenses incurred in (successfully) challenging the Tax Office. The lack of indemnity was largely based on the fact that the expenses were incurred after it had ceased to be trustee of the trust.

An appeal has now been granted against the original decision on the basis that -

(a) the issues are of general importance to the powers and rights of trustees; and
(b) the state of the law regarding the powers and rights of bare trustees is not settled.

Until next week.

Monday, November 22, 2010

Streaming decision released

There was confirmation last week from the Queensland Supreme Court that where a trust deed of a discretionary trust has appropriate powers and the trustee resolutions are appropriately crafted, a trustee can allocate franking credits differentially from net income.
For those interested the full title of the case is 'Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417' (Supreme Court of Qld, Applegarth J, 11 November 2010).
The decision turned to a large extent on the terms of the trust deed and the fact that the trustee:
(a) could treat franking credits as income of the trust capable of distribution;
(b) had discretion to distribute franking credits to different beneficiaries; and
(c) had the power to stream different categories of income between beneficiaries.
In light of the above powers, in brief terms, the key aspects of the decision were as follows:
1. selective allocation of franking credits is possible under section 207-35 ITAA 1997;
2. section 97 ITAA 1936 takes a proportionate approach to the distribution of net income (as set out in the Bamford decision);
3. section 207-35 is an exception to Division 6 (and therefore section 97) ITAA 1936;
4. franking credits need not follow the shares of net income included in a beneficiary's assessable income on an equal footing;
5. net income (under section 95 ITAA 1936) does not need to exceed the franking credits included in assessable income for those credits to pass through to beneficiaries; and
6. the ATO's comments that franking credits may not be able to form part of the income of a trust estate for trust law purposes because they are 'merely a tax concept which do not represent an accretion to the trust fund over and above the distributions to which they attach' could not be accepted;
7. ultimately, franking credits were held to have some attributes of income under the tax legislation, therefore they could be dealt with by the trustee.
Until next week.

Monday, November 15, 2010

What difference does 1% make?

Last week we were walking through an asset protection exercise with a business owner and one of the recommendations was that the family home (currently owned by the wife and husband as joint tenants) should be converted to tenants in common ownership and 49% of the total interest of the house owned by the husband was then to be transferred to the wife.

An earlier post touches on the difference between owning an asset as joint tenants as opposed to tenants in common - a summary of the distinction is available via the 'core services' section of the View Legal website (

Today’s post focuses on the reasons why an at-risk spouse might retain a 1% interest in a property.

The main reasons that an at-risk spouse would retain a nominal percentage interest can include:

1. Protection against spouse or relationship difficulties.

2. Protection against the majority owner seeking to encumber the property. In particular, if there is (for example) a gambling issue that arises, no mortgage may be taken out over the property without the consent of the spouse who owns the nominal interest.

3. For ease of security arrangements – often a financier will prefer to see the at-risk spouse’s name on title documentation, even if their actual ownership interest is nominal.

4. Stamp duty savings. This issue is not as relevant as in days gone by because generally there is no longer any substantial stamp duty benefit, even if both spouses retain an interest in the property.

In relation to stamp duty, it should be noted that in most states there are concessional provisions which apply where one spouse who owns 100% of a family home and transfers 50% (but no more or less) to their spouse and this is another concept that we may deal with in a future post.

Until next week.

Monday, November 8, 2010

Virtual company registers

We are seeing an increasing number of accounting firms that we assist with company establishments opt to receive all documentation electronically, as opposed to the traditional provision of a physical folder to store the company register.

The ability to maintain a company register in electronic form only is a relatively recent innovation under the Corporations Act and particularly for accountancy firms who act as registered office for a number of their clients’ companies, is certainly one worth exploring.

Obviously, there are a number of issues that always need to be taken into account, however broadly, so long as the following issues are addressed, it should be possible to avoid the need for a physical register to be stored:

1. The company must resolve that it intends to maintain an electronic, as opposed to a physical, register.

2. The relevant technology steps need to be taken - McR often assists accounting firms in this regard.

3. The company must have a process by which a physical register can be produced if ever required.

Until next week.

Monday, November 1, 2010

'Same plane' provisions in wills

Most estate planning lawyers recommend that every single will contain a 'calamity' provision.

This provision is also sometimes referred to as the 'same plane' clause – i.e. it is the one that applies if the will maker and all of their intended immediate beneficiaries die in the same accident.

Last week, we had a situation where the two clients (who were spouses) each had quite particular (and different) provisions that they wanted to see apply if the two of them and their children died at once. During the discussion it became clear that each spouse was considering the total combined assets as solely 'their' assets.

Our strong recommendation was that each spouse should in fact have mirror provisions under their respective wills and simply divide 50% of the entire estate according to each of their respective wishes.

The reason for this recommendation was that the only time a calamity provision does in fact apply is when both spouses and all of the immediate family have passed away. In other words, the estate should be viewed as one combined estate; not two separate ones.

Until next week.