Tuesday, December 13, 2011

Final post for 2011

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2012.

Similarly, the Twitter postings will also take a hiatus until the New Year as from today.

Very best wishes for Christmas and the New Year period and thank you to all of those advisers who have read, and particularly those that have taken the time to provide feedback in relation to, the various posts.

Until the new year.

Monday, December 5, 2011

Statement of principles to be (finally) amended (?)

Many readers will be aware of the full Federal Court decision earlier this year of Clark.

In that case, the Court largely reiterated the decision from 10 years ago in Commercial Nominees that, generally speaking, a resettlement of a trust for tax purposes can only happen in a very limited range of circumstances.

At the end of last week, the Tax Office released a decision impact statement in relation to the Clark decision and has, finally, accepted that the position set out in the case may mean that the 'Creation of a New Trust – Statement of Principles' last updated in August 2001, may need to be changed.

A previous post links the Statement of Principles for those that have not seen it, and in that document, the Tax Office suggests that there are in fact quite a large range of situations where a trust may be resettled for tax purposes.

It is hoped that the Tax Office can prioritise providing some clarity around their position on trust resettlements, particularly given that most specialist advisers in this area believe that, in accordance with Commercial Nominees and Clark, significant changes should be able to be made to trust deeds without triggering a resettlement.

For those interested in reviewing the complete decision impact statement, the relevant link is as follows –

Until next week.

Monday, November 28, 2011

How do the intestacy rules work?

Following last week’s post, I have had a couple of enquiries about how the intestacy rules work.

As most readers will know, the intestacy provisions apply where a person dies without a valid will in relation to all of their assets. In this regard, it can in fact be possible to die ‘partially intestate’. This simply means that there are assets in a person’s estate that are not validly dealt with under the will in place at a person’s death.

Not dissimilar to a number of the other issues dealt with in previous posts, the intestacy rules are (at least currently) inconsistent across each state in Australia.

The intestacy rules in each state are however set out under the relevant Succession Acts and, in very broad terms, provide for the distribution of wealth amongst immediate family members according to predetermined formulas.

In very general terms, only one set of intestacy rules will apply and which rules are relevant will depend on where the deceased person was 'domiciled'.

The question of domicile can in itself a fairly complex issue and if there is a level of interest, I will try to address this in a future post.

Until next week.

Monday, November 21, 2011

Court drafted wills

Last week I had an example of a client situation which in some respects was similar to the post a few weeks ago where a sole director died without a will.

The situation that came up last week involved a client who was the sole director of a number of companies and had lost capacity.

While she had an attorney appointed via the Guardianship and Administrative Appeals Tribunal (there are separate entities in each state regulating how someone can be appointed as an attorney where the incapacitated individual has not otherwise made a valid appointment), the director here also did not have a will.

In many situations, there is now the possibility to apply to a court before someone’s death and have the court approve a will.

The process is a relatively intense one, primarily because the court system holds the making of a will as something that ultimately should only ever be made by the individual in control of the relevant assets.

This said, when compared to dying intestate, the process is often one that we strongly recommend be considered.

Until next week.

Monday, November 14, 2011

Financiers being financiers

With apologies for the lack of post last week (for reasons that I won’t bore you with), this week’s post looks at one area where financiers seem to have had a continued focus on recently. In particular, with the continuing economic uncertainty, we are seeing a number of clients being asked to comply with the financial assistance rules.

Financial assistance can be a relatively complex area of the Corporations Act, however essentially it centres around situations where a company provides some form of help to shareholders (or associates of shareholders) in relation to the provision of finance.

What amounts to ‘financial assistance’ can be an issue of some debate in many transactions, however ultimately the 'golden rule' invariably applies. That is a financier will normally have the last word as to whether they believe there is a financial assistance issue.

There is a specific process set out under the Corporations Act that allows a transaction to proceed despite the existence of financial assistance, however there are a number of strict timelines that must be satisfied in order to comply with these provisions. Therefore, unless all parties are aware of the possibility that financial assistance approval may be required, significant difficulties can arise.

Until next week.

Monday, October 31, 2011

Why do so many people still talk about Richstar?

The interest from recent posts about accessing assets of a family trust on marriage breakdown reminded me of the Richstar decision.

It has been a few years since the very well publicised decision in Richstar was handed down. The decision does however remain an interim one and there does not seem to be any clear indication as to if or when proceedings might be restarted.

For those unfamiliar with the exact decision of Richstar, please email me and I can provide a summary.

While there have been a number of cases that have criticised various aspects of Richstar, it still seems to be generally the case that most commentators strongly recommend that the broad principles in Richstar be considered as part of any trust structuring exercise (whether it be the establishment of a new trust or the variation of a pre-existing trust).

Pragmatically, it may also be that part of the reason that Richstar has remained so relevant despite the fact that it is only an interim decision of a single judge from Western Australia is that the judge involved has now gone on to become the Chief Justice of the High Court.

Until next week.

Monday, October 24, 2011

Insurance funding via superannuation

Earlier posts have mentioned the ‘debt reduction’ and ‘hybrid’ buy sell arrangements and I can forward information in this regard for those interested.

One particular issue raised with me recently in this area was the ability to use superannuation owned policies for insurance arrangements supporting a debt reduction (or asset protection) solution.

Generally the position is that the asset protection (debt reduction) component of any insurance policy should be self owned, rather than superannuation owned.

This is because a superannuation fund trustee is unlikely to be able to make the required payment directly to the other principals, as the fund can only pay a benefit to a member (in the case of disablement), or to the dependants or estate (in the case of death).

Furthermore, a superannuation fund could not be a party to the agreement as this would raise issues about compliance with the sole purpose test, and also might be construed as an assignment of a benefit, which super fund trustees are prohibited from recognising.

Given these technical limitations, there could be no certainty that insurance proceeds held in superannuation would find their way to the correct parties to enable them to pay down the external debt.

This said, it is often possible to have two policies for each principal under a hybrid buy sell deed, one being a self owned policy for asset protection (debt reduction) purposes and the other policy being owned through superannuation for equity transfer (that is, traditional ownership or buy sell) purposes.

Until next week.

Monday, October 17, 2011

Further comments on assets protected by a family trust on marriage breakdown

Further to last week’s post, some feedback was received about other aspects of the decision mentioned (Keach & Keach).

To provide some more context to the main conclusion of the case mentioned last week, it is worth noting that:

1. The relevant trust was established by the father of the divorcing husband.

2. The father had all practical control over the trust as well as legal control.

3. While the main asset of the trust (being a home that the husband and wife were living in) was allegedly used by the husband 'as if it were his own', this did not change the legal ownership position.

4. In order for an arrangement to be a sham (and therefore, for example, for the trust’s ownership to be ignored), it must be shown that all relevant parties had the common intention to mislead others.

5. Even if the husband was conducting himself as if he were the owner, unless it could have been shown that the husband’s father intended the arrangement to be a sham, then there was no access to the assets of the trust.

6. Here the evidence was in fact the opposite – i.e. the husband’s father deliberately structured the arrangements to ensure that he retained control and direction of the trust. On this basis, the assets of the trust could not be considered as assets of the marriage.

Until next week.

Monday, October 10, 2011

Family law case excludes assets owned by a family trust

As mentioned in last week’s post, a family law case from earlier this year involving a family trust has received an amount of attention given the decision seems somewhat at odds with the High Court’s decision in Spry.

The more recent case (named Keach & Keach and Ors [2011] FamCA 192 – (if you would like a copy of the case please email me
) focused on a family trust that the father of the divorcing husband had established.

The father admitted that among other things, one reason for setting up the trust was to keep the assets as far away from the reach of the family court as possible.

The divorcing wife argued that the assets of the trust should be available to her on a property settlement as her former husband effectively treated them as his own.

The court held that the assets should be ignored on the property settlement. Essentially, it was held the only time that the legal documents and arrangements could be ignored was where they were a sham or a 'mere puppet'. In all other instances, the family court cannot ignore the interests of third parties in the property, nor the existence of conditions or covenants that limit the rights of the party who owns it.

Until next week.

Monday, October 3, 2011

Spry - one year on

Undoubtedly, the highest profile family law case (at least involving trusts from 2010) was the Spry case.

While the actual scenario was somewhat unique and obviously the decision became one of the highest profiled decisions issued by the High Court in this space in recent years, the actual implications of the case may not in fact be as far reaching as first thought.

In particular, what many advisers in this area are seeing is that a number of the aspects of the decision can be explained by the particularly aggressive and arguably misleading approach that the husband took in relation to attempting to remove assets from the pool that could be distributed to his former wife.

Unless something else comes up during the week, next post I will summarise a recent family law decision that further confirms that the Spry decision may not be as concerning as many commentators first thought.

Until next week.

Monday, September 19, 2011

Interdependency relationships – further examples

Following on from last week’s post, some comments were received in relation to the lack of cases in this relatively new area of law.

Interestingly, the superannuation legislation (for those particularly interested, the actual regulation is 1.04AAAA) sets out a number of tests in relation to whether a relationship between two people amounts to an interdependency relationship.

In summary, the tests include:

(a) the duration of the relationship;

(b) whether or not a sexual relationship exists;

(c) the ownership, use and acquisition of property;

(d) the degree of mutual commitment to a shared life;

(e) the care and support of children;

(f) the reputation and public aspects of the relationship;

(g) the degree of emotional support;

(h) the extent to which the relationship is one of mere convenience; and

(i) any evidence suggesting that the parties intend the relationship to be permanent.

A link the above definition is as follows:

Many of these themes are similar to the definition of what a de facto relationship is, which were summarised in a post a few weeks ago.

Due to the September holidays, the next post will be in a couple of weeks time.

Monday, September 12, 2011

What is an ‘interdependency relationship’?

Following on from last week’s post, one issue that was raised with me related to the concept of an 'interdependency relationship' under the superannuation rules.

Again, for those who have not had cause to look at it recently, this definition is worth reviewing closely and an extract of it is included below.

Two persons (whether or not related by family) have an interdependency relationship under this section if:

(a) they have a close personal relationship; and
(b) they live together; and
(c) one or each of them provides the other with financial support; and
(d) one or each of them provides the other with domestic support and personal care.

In addition, two persons (whether or not related by family) also have an interdependency relationship under this section if:

1. they have a close personal relationship; and
2. they do not satisfy one or more of the requirements of an interdependency relationship mentioned in paragraphs (a), (b), (c) and (d); and
3. the reason they do not satisfy those requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability.

A link the above definition is as follows:


Until next week.

Monday, September 5, 2011

Being a 'kept’ woman (or man) may not be a de facto relationship

Following last week's post, I was reminded of a case from earlier in 2011 that involved a lady who had been a part of a secret intimate relationship with a married family man for 17 years.

According to her evidence, she and the man involved 'spent time together at various times in various places, had a sexual relationship, and expressed love and affection for each other'. The argument being that this was a 'de facto relationship' within the meaning of section 4AA of the Family Law Act (which was summarised in an earlier post).

The man denied 'any such relationship’, and instead claimed it was simply 'an affair' and the lady was a 'kept woman’. Both parties agreed that they travelled overseas together and the man paid the lady $24,000 to help her buy a home and $2,000 monthly, increasing progressively to $3,000 a month.

While the court rejected the man’s argument that 'exclusivity' was necessary for a de facto relationship to exist, the facts here did not support the lady’s argument that they were de factos.

The quote that best captured the decision here was as follows:

“the key to that definition (i.e. de facto) is the manifestation of a relationship where both the parties have so merged their lives that they were, for all practical purposes 'living together' as a couple on a genuine domestic basis. It is the manifestation of 'coupledom' which involves the merger of two lives as just described, that is the core of a de facto relationship as defined and to which each of the statutory factors (and others that want to apply to a particular relationship) are directed”.

Until next week.

Monday, August 29, 2011

De facto relationships - further examples

Further to last week’s post, the list below sets out some of the specific circumstances that are taken into account by the courts to determine whether a relationship does amount to a de facto relationship.

Circumstances of the relationship taken into consideration include any or all of the following:

(a) the duration of the relationship;
(b) the nature and extent of their common residence;
(c) whether a sexual relationship exists;
(d) the degree of financial dependence or interdependence, and any arrangements for financial support, between them;
(e) the ownership, use and acquisition of their property;
(f) the degree of mutual commitment to a shared life;
(g) whether the relationship is or was registered under a prescribed law of a State or Territory as a prescribed kind of relationship;
(h) the care and support of children; and
(i) the reputation and public aspects of the relationship.

A link to the above definition is as follows:

Until next week.

Monday, August 22, 2011

What is a de facto?

Following on from last week’s post, I thought it would be useful to also summarise the definition of 'de facto'.

This particular definition is taken from the Family Law Act (Section 4AA).

In summary, a person will be in a de facto relationship with another person, if:

(a) the persons are not legally married to each other; and

(b) the persons are not related by family (see subsection (6)); and

(c) having regard to all the circumstances of their relationship, they have a
relationship as a couple living together on a genuine domestic basis.

A link to the above definition is -

Until next week.

Monday, August 15, 2011

What is a spouse?

The issue that what kind of relationship satisfies the definition of a 'spouse' has been coming up increasingly regularly.

The Tax Act sets out one of the most used definitions in this regard and I thought it useful this week to extract that definition in its entirety, given that it has been amended relatively recently.

A "spouse" of an individual includes:

(a) another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a State law or Territory law prescribed for the purposes of section 22B of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

(b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

Until next week.

Monday, August 8, 2011

Review of a trustee's decision

Last week we had to assist a trustee of a family trust in their attempt to resist a review of a decision by a disgruntled beneficiary.

Many will be aware of the High Court decision in Finch v Telstra Super Pty Ltd [2010] HCA 36 – a link to the case is as follows:


In very broad terms, we confirmed to the trustee the relatively settled position that seems to have evolved in this area, namely that the exercise of a discretion by a trustee is not subject to review by the court unless one of the following three factors is present:

1. The trustee does not act in good faith;

2. The trustee does not give real and genuine consideration to the exercise of the discretion and the purposes for which the discretion was granted; or

3. Reasons for the decision are provided by the trustee, but those reasons are unsound.

Until next week.

Monday, August 1, 2011

Prenups and the need for independent legal advice

An interesting issue came up recently in relation to a 'prenuptial agreement (more technically referred to as a 'binding financial agreement')'.

In particular, as many would know, the need for both parties to the relationship to obtain independent legal advice was brought into question because often one party will choose not to follow the advice that is provided. That is the lawyer may recommend that the agreement not be signed, however the client will still sign.

Based on recent cases, it seems clear that:

1. There is no need for independent advice to be actually accepted or followed to satisfy the requirement that independent advice is sought.

2. Even if advice provided by the independent lawyer is later shown to be incorrect, the criteria that independent advice be sought may still be satisfied.
Until next week.

Monday, July 25, 2011

De facto death duty confirmation

As many will have seen, the lead article in Friday’s Financial Review confirmed that, as far as the Tax Office is concerned, payments made by a super fund, following the death of a member, will be subject to (at least) a 10% capital gains tax bill.

Tax is payable in these circumstances on the difference between the market value of the underlying assets of the fund and the cost base.

While some advisers have tried to adopt approaches to get around what is effectively a death duty, the conservative view as to the likely ATO approach has now been confirmed beyond doubt.

Depending on the exact circumstances of a client, there are still mechanisms to significantly reduce and/or eliminate the capital gains tax liability that might otherwise be triggered on the death of a fund member, however the announcement by the Tax Office further underlines the importance of ensuring a comprehensive, integrated and up-to-date estate plan.

For those interested in reading the full draft ruling, a link is set out below.

Until next week.


Monday, July 18, 2011

Small i Income

A number of posts over the last 18 months have touched on various aspects of the Bamford decision.

One issue that comes up more frequently than otherwise might be assumed is the way in which the word 'income' is used throughout a trust deed.

At times we have seen in deeds a definition of ‘Income’ and the word defined is mentioned in the definition section in a capitalised sense – that is the word income will start with a capital I.

When reference is then had however to the distribution of income provisions, the deed drafter has not in fact used the 'big I' income definition, but rather has simply referred to 'small i' income. This will generally mean that the defined term will not apply and ‘income’ (for the purposes of the relevant clause) will simply have its ordinary meaning.

Obviously, there are a number of potentially complex trust and tax law interpretation issues that can arise in this regard. This said, it is arguably going to be quite clear what position the Tax Office will take to the extent a trustee has misunderstood the trust deed, particularly given the recently released trust distribution legislation.

Until next week.

Monday, July 11, 2011

Lineal descendant trusts post Bamford

As touched on in a recent post, often 'lineal descendant trusts' will adopt a 'hybrid' approach whereby:

1) The capital is protected for lineal descendants.

2) The income may be distributed to a wide range of potential beneficiaries (including non lineal descendants).

We have seen a number of instances lately where trusts that were originally prepared along the lines outlined above where, following Bamford on the recent Government legislation concerning streaming, the client was wanting to redefine income and in particular allow capital gains to form part of the net income of the trust. While (as is the case in many of these areas) there are a number of competing arguments, there is a real risk that this kind of amendment to a 'hybrid' lineal descendant trust would amount to a resettlement for tax purposes.

For regular readers, you will recall that an earlier posting specifically mentions the Tax Office’s Statement of Principles and provides a link to that document.

Until next week.

Wednesday, June 29, 2011

ATO gives some relief in lead up to 30 June for trust distribution resolutions

Extracted below is the announcement the ATO has made this morning confirming the transitional arrangements that will apply for 30 June 2011 in relation to trust distributions.

The comments in relation to IT 328 are particularly interesting.

Other administrative arrangements

The Commissioner recognises that the passage of this legislation so close to the end of the income year to which it will first apply gives trustees and practitioners little time to familiarise themselves with its content and to determine how it might affect the circumstances of a particular trust for that income year (that is, the 2010-11 income year).

Therefore, following representations from practitioners, and in recognition of the practical difficulties faced by them and by trustees as a result of the timing of the new law, the Commissioner will put in place the following administrative arrangements in respect of the application of the new law to the 2010-11 income year.

Specific entitlement to franked distributions

As regards the timing of recording such an entitlement for the 2010-11 income year, the Commissioner has agreed to adopt a similar approach to that set out in Income Tax Rulings IT 328 and 329 in respect of ‘present entitlement’ to trust income.

That is, for trusts with a 30 June balance date the Commissioner will accept that a relevant record made in respect of a franked distribution by 31 August 2011 meets the requirements of the new law for the 2010-11 income year in any case where ITs 328 and 329 would permit the trustee to take steps within that same period to make beneficiaries presently entitled to trust income for the purpose of Division 6.

For trusts that balance earlier than 30 June 2011 (or later than 30 June 2011 but before 31 August 2011) the Commissioner will likewise accept a relevant record made by 31 August 2011.

As the new law (if enacted as passed) will permit relevant records to be made in respect of capital gains no later than two months after the end of the relevant income year, there is no need for this arrangement to be extended to a beneficiary’s specific entitlement to capital gains.

It should be noted that the arrangement outlined above concerning a beneficiary’s specific entitlement to franked distributions will apply only for the 2010-11 income year.

Further, the Commissioner intends withdrawing ITs 328 and 329 for the 2011-12 and later income years.

Compliance action

Staff will also be instructed not to select cases for review or audit in respect of the 2010-11 income year for the sole purpose of determining whether the purported streaming of capital gains or franked distributions by a trustee is effective.

This instruction will not apply where there has been a deliberate attempt to exploit weaknesses or deficiencies in the law. In those cases we will apply the law as we understand it to operate.

We will also apply the law as we understand it to operate in any case that has been selected for review or audit for other reasons, and in preparing rulings or objections, and in arguing cases before the Tribunal or the courts.

At this stage the next post will be Monday week.

Monday, June 27, 2011

Lineal descendant trusts

One of the other queries that has been raised following the last couple of posts concerns lineal descendant trusts.

There are a number of names in the marketplace for this form of trust structure, however in very broad terms, these types of trusts involve narrowing the range of potential beneficiaries that might otherwise be expected under a family trust.

In particular, the range of beneficiaries is often limited to the direct lineal descendants of the primary beneficiaries of the trust.

As has been mentioned a number of times in earlier posts, it is always critical to read the trust deed and lineal descendant trusts are another example of this rule. One of the key issues to be mindful of in this regard is that some trusts 'reserve' only the capital for lineal descendants, while still allowing very wide distribution powers for income.

Next week, we will look at a very practical, post Bamford, implication of lineal descendant trusts that only limit capital distributions.

Until next week.

Monday, June 20, 2011

Wills post Bamford

Following last week’s post, there were some enquiries in relation to whether the Bamford decision meant that wills should be updated.

Very broadly, the position in relation to will updates post Bamford is similar  to discretionary trust deed updates, namely:

1) All wills should at least be reviewed (to the extent that they contain ongoing trust provisions).

2) Our experience is that many wills probably are going to require update. The reason for this is that traditionally wills have been crafted by specialist will lawyers, as opposed to tax specialists.

3) The significant (and very obvious) difference between trust provisions in a standard family discretionary trust and under a will, is that (in comparison) the amending of a will becomes extremely difficult following the death of the will maker.

4) While there can be pathways to achieve an amendment after death, almost without exception it is preferable to have the will document fully in order before it comes into force.

Until next week.

Tuesday, June 14, 2011

When do wills need updating?

In many cases, the need to update a will is obvious due to significant changes in tax or trust laws or a significant change in the circumstances for a client.

Some of the other reasons that a will may need changing are often not as obvious and a brief summary of the potential trigger points is as follows:

(a) there is a change of name of the will maker or anyone named in the will changes their name;

(b) an executor/trustee dies or becomes unwilling or unsuitable to act due to ill health, age or any other reason;

(c) a beneficiary dies;

(d) the family situation or that of any beneficiary changes (e.g. through marriage, divorce, matrimonial problems, children or further children, de facto relationships or interpersonal relationships);

(e) there is a material change in financial circumstances of the will maker or any beneficiary;

(f) the will maker becomes involved in a new business, company or trust.

Until next week.

Monday, May 30, 2011

2011 Federal Budget and deceased estates

Three relatively obscure changes announced in the budget recently have important implications for those in the estate planning space, namely –

1. Legislating the current Tax Office practice (see Practice Statement LA 2003/12) of allowing a testamentary trust to distribute an asset of a deceased person without a capital gains tax (CGT) taxing point occurring.

This is an important clarification and provides confirmation that there are effectively three CGT rollovers in deceased estates; that is -

(a) will maker to legal personal representative (LPR);

(b) LPR to testamentary trust; and

(c) testamentary trust to a beneficiary.

Unfortunately the stamp duty position is not so clear in relation to this 'third' rollover from a testamentary trust to a beneficiary.

It should be noted that it will be necessary to continue to rely on PS LA 2003/12 for the immediate future as the changes will only apply to CGT events happening on or after the day the legislation receives Royal Assent.

2. The Commissioner will be given a discretion to extend the two-year ownership period in which the trustee of a deceased estate (or beneficiary) must dispose of their interest in the deceased's dwelling to access a CGT main residence exemption.

This is also important as the two-year ownership period is currently the only CGT event where it is the date of completion (as opposed to the date of contract) that is the relevant date for CGT purposes.

3. Finally, as most will have seen, the relatively minor tax planning opportunity in relation to unearned income derived by minors through family trusts (via the low income tax offset) has been removed with effect from 1 July 2011. The indications seem to be that there will be no change however to the excepted trust income rules for minors receiving distributions via testamentary trusts.

Until next week.

Monday, May 23, 2011

Unpaid present entitlement warning

As those of you who sat through our webinars over the last few months in relation to unpaid present entitlements (UPEs) would know, there can be a number of traps in relation to the provisions of a trust deed in the context of the Tax Office’s approach in this area.

Arguably, the most concerning trust deed provision that we have seen in recent times is a clause in the deed of a relatively high profile provider that on a plain reading of the deed automatically causes any UPE to become a loan at call.

Obviously, this provision can have significantly adverse consequences, particularly for those clients wishing to 'quarantine' UPEs that existed as at 16 December 2009.

Until next week.

Monday, May 16, 2011

Business licences

The combination of the Bamford decision and the Tax Office’s attitude in relation to unpaid present entitlements have meant that we have spent a significant amount of time recently looking at optimal structures for business and investment purposes.

One approach that we have seen an increasing number of clients and advisers consider where a business is owned by a discretionary trust, is the licensing of that business to a trading company.

Obviously, there are a number of tax and stamp duty issues that need to be considered in relation to this approach.

A recent case however seems to confirm that at least in relation to the philosophical legal questions, this kind of approach is now available.

For those who are interested to learn more, a copy of the decision is at the link below. One of the most important paragraphs in the decision is number 42, which highlights the distinction between a goodwill licence and a business licence.


Until next week.

Monday, May 9, 2011

UPE deadline day rapidly approaching

Over the last couple of weeks, we have seen a significant increase in the level of enquiry about the appropriate strategies to adopt for clients that have trusts with unpaid present entitlements (UPE) owing to corporate beneficiaries.

For some months leading advisers have recommended that any specific steps be delayed for as long as possible on the basis (and hope) that there might be some relaxation or unwinding of the position adopted by the Tax Office. Indeed, there have also been rumours of a test case being run.

Given that it now appears increasingly likely that there will be nothing of substance changing the current rules before 30 June 2011, advisers and clients in this area now have less than eight weeks to have adopted one of the 'safe harbours' provided by the Tax Office.

Until next week.

Tuesday, May 3, 2011

Keeping it simple with company set ups

Following the last post, I had a question in relation to how the secretary position of the sole director company was resolved.

Interestingly due to relatively recent changes to the Corporations Act, there is now no longer a requirement to have a secretary for a proprietary limited company.

For those interested to explore the provisions in this regard further, the particular section of the Corporations Act is Section 204A(1).

Until next week.

Thursday, April 14, 2011

Sole director companies – An estate planning tip

During the week, due to a rather unfortunate set of circumstances, I was reminded of a very important provision under the Corporations Act.

The situation broadly was as follows:

1. The sole director of a number of companies suddenly passed away.

2. A number of third parties (including a financier) questioned representatives of the deceased director’s estate about the authority for the company to continue to act and in particular, requested copies of the deceased’s will.

3. The deceased director in fact died without a will.

While there will be a number of issues that arise in relation to the director dying intestate (including the way in which the shares in the various companies are to be distributed amongst the family members), the immediate issue concerning who had authority to act as director of each company was resolved by a particular section of the Corporations Act.

In particular there is a section that allows the legal personal representative of a sole director company to take steps to appoint a new director.

While a fairly significant amount of additional paperwork has been required because of the absence of the will, the various concerns of the financier have at least been managed for the time being.

Given the number of public holidays over the next 10 days or so, unless a particularly time sensitive issue comes up, there will not be a post for a couple of weeks and today’s post is made ‘early’ (normally it would be posted next Monday).

Monday, April 11, 2011

Government review of trusts – the journey continues

As most will know, the ongoing saga in relation to the taxation of trusts took another turn last week with Bill Shorten retracting his previous promise to ensure that post Bamford amendments would be implemented before 30 June 2011.

The government has now indicated that other than in relation to the streaming of income all other issues will not be considered further until the wider taxation review scheduled for October. This review has already been postponed once.

Practically the latest announcement may cause trust advisers to proceed with ‘core’ amendments (for example, ensuring that trustee minutes can be made after the end of a financial year) to trust deeds before 30 June 2011.

Two other important issues to note from last week in relation to trusts are that:

1. it now appears unlikely that there will be any change to the unpaid present entitlement rules released by the Tax Office before 30 June 2011.

2. the announcement that the Coalition will look to re-invigorate entity taxation (i.e. taxing trusts as companies) if they win the next election.

Until next week.

Monday, April 4, 2011

Important stamp duty changes in Queensland

For those advisers who provide guidance to trusts with assets in Queensland, relatively important changes have been announced to the Duties Act.
Previous posts have mentioned the difficulties surrounding corporate trustee duty, particularly in relation to the Commissioner’s discretion in determining whether it applies.

This discretion has now been removed.

Similarly, the discretion surrounding whether a trust is a 'family trust' and therefore able to get access to various concessionary provisions has also been removed.

At least on the face of the new provisions, it should be easier to implement rearrangements of family trusts (particularly in succession situations), however due to the vagaries of how many trust deeds are drafted, advisers will need to be extremely careful to ensure that any particular change does in fact comply with new rules.

It should be noted that the changes are only in bill form at this stage – in other words, they are not formally legislated as yet.

Until next week.

Monday, March 28, 2011

ATO Discussion Paper on buy-sell agreements

Following last week’s post, we had a number of people contact us in relation to the, withdrawn, ATO Discussion Paper on business succession arrangements (i.e. buy-sell agreements).

As mentioned in last week’s post, the ATO has unequivocally stated its belief that the Discussion Paper is not current and that advisers in this area should be deterred from relying on it.

This said, the Discussion Paper remains (even 11 years after its initial circulation) the only comprehensive attempt by the ATO to articulate its view of the various business succession models.

For those interested in the issues addressed by the Discussion Paper, please email me. 

Please note the copy of the paper I have access to is shown in 'marked up' format as this was the final version released by the ATO before it was withdrawn from circulation.

Until next week.

Monday, March 21, 2011

Insurance funded buy-sell arrangements - ATO commentary

A number of earlier posts have considered various taxation aspects of insurance funded buy-sell arrangements.

Some minutes recently released from the National Tax Liaison Group meeting towards the end of last year provide an interesting insight to the latest ATO views in this area.

For those who have not seen a full copy of the minutes and would like a copy please email me.

As you will see, in summary:

1. The status of taxation ruling on absolute entitlement (TR2004/D25) remains unclear.

2. The ATO considers its finalisation intricately linked to how it will deal with bare trusts, which again remains an unresolved issue.

3. The ATO confirms that the product ruling released last year in relation to one provider’s insurance trust arrangement is based entirely on the assumption that absolute entitlement was created. As my post from last year indicated, this assumption may be an unwise one to make given the ATO’s apparent attitude in this area.

4. While the ATO is flagging that they will further consider providing appropriate guidance, they have specifically confirmed that the Discussion Paper from 2000 on business succession arrangements cannot be considered current.
Until next week.

Monday, March 14, 2011

Do prenups actually work?

The above question was posed to me during the week and, unfortunately, when I was told to make my answer succinct, the only thing that easily came to mind was 'it depends'.

Many advisers will be aware that prenups (or as they are more technically termed in Australia 'binding financial agreements') have been available for around 10 years now.

There have been a number of changes to the way in which the rules in this area work and the most significant of these changes occurred towards the end of last year.

While there were a number of quite heavily publicised cases where what otherwise appeared to be binding agreements were held to be invalid, the changes made towards the end of last year have generally been seen to be positive steps to ensure that disgruntled spouses cannot extract themselves from previously made promises on the basis of a legal technicality.

Until next week.

Monday, March 7, 2011

Witnessing powers of attorney

Following last week’s post, I had a number of people raise concerns about the witnessing requirements for powers of attorney.

Unfortunately, this is yet another example of inconsistencies between each Australian state.

Certainly, in each state, legal practitioners are authorised witnesses for most forms of powers of attorney.

Having this said, documents that are directly related to medical issues can normally only be witnessed by a medical practitioner.

In some states, the financial related power of attorney documents can be witnessed by a relevantly large range of authorised signatories.

Ultimately, as I recommended to the advisers who contacted me, the safest pathway is to carefully read the relevant documentation to ensure all witnessing provisions are complied with. While there are numerous inconsistencies between the various states, each state does at least set out in some detail the witnessing requirement for each document as part of the standard government form.

Until next week.

Monday, February 28, 2011

How many powers of attorney does it take to create authority?

With increasing regularity, we are seeing issues arise in relation to the authority for people to act under powers of attorney.

Like many laws, the power of attorney legislation is frustratingly inconsistent, with different acts applying in each Australian state and territory.

In theory, there is also legislation requiring each jurisdiction to recognise the documentation prepared in each of the states. In practice however, it is often extremely difficult to convince third parties that a power of attorney document that looks completely different to what they normally expect to see is in fact legally binding.

One solution (although admittedly not a particularly efficient one) we are seeing more people implement is to have a separate power of attorney prepared under each jurisdiction where they are likely to spend significant periods of time. While not a perfect solution, this approach can provide significant practical benefits.

There is an ongoing push, as part of having uniform succession laws across Australia, for the power of attorney laws to also be made consistent. The timeline for achieving such an outcome is difficult to predict given the number of vested interests involved.

Until next week.

Monday, February 21, 2011

ATO attacks Division 7A planning strategy

In what is only a slight variation of the Division 7A planning approach of trusts distributing income to a limited partnership, in order to attain a capped rate of tax of 30% and avoid any application of Division 7A on loans made by the limited partnership, the ATO has released a further taxpayer alert last week.

The use of limited partnerships to avoid Division 7A was an approach that the ATO was on record as having concerns about long before the legislation in this area was changed a couple of years ago.

Following the change, a number of advisers were quick to realise that companies limited by guarantee could offer a similar pathway to the limited partnership approach – in other words:

1. Potentially receive trust distributions, with the tax payable on those distributions capped at the corporate rate of 30%.

2. The company limited by guarantee could then subsequently make loans that would not, on the face of the legislation, be caught by Division 7A.

In their first taxpayer alert for the year (taxpayer alert TA2011/1), the ATO lists its concerns with the above strategy.

The full alert is set out at the following link - http://law.ato.gov.au/atolaw/view.htm?docid=%22TPA/TA20111/NAT/ATO/00001%22.

Until next week.

Monday, February 14, 2011

An estate planning tip

Following last week's post, an adviser contacted me to relay a critical issue to keep in mind whenever looking to move an asset (such as a family home) into the name of a spouse.

Broadly the chain of events was as follows:

1. An at-risk spouse moved the family home into her husband’s name paying a substantial stamp duty bill.

2. The husband subsequently died with a very simple 'I love you' will.

3. Under this will, all of the husband’s wealth passed back to the wife.

4. The wife then had to pay another round of stamp duty to move the asset into a family trust.

5. Aside from the double stamp duty bill (and the second bill was actually significantly larger than the first as duty was payable on 100% of the asset with no concessions available), the second transfer to the family trust has also meant that the house will probably be subject to capital gains tax on any subsequent disposal and the 4-year clawback period under the bankruptcy rules starts again from the date of the second transfer.

6. Both of these adverse outcomes could have been avoided if the husband had ensured testamentary discretionary trusts were established under his will.

Until next week.

Monday, February 7, 2011

Trust resettlements

Following on from last week's post concerning the long awaited 'Colonial' decision, another decision released by the Federal Court in the last couple of weeks is of significant interest.

In a similar vein to the high profile tax cases last year of Bamford and Thomas, the taxpayer here was largely successful.

For those interested the full title of the case is - FCT v Clark [2011] FCAFC 5 (Full Federal Court; Dowsett, Edmonds and Gordon; 21 January 2011).

In brief terms, the key aspects of the decision (which was given by way of a 2 to 1 majority) were as follows:

1. What is required to constitute a resettlement (i.e. the disposal and reacquisition, for tax purposes, of all assets of a trust at market value) is significantly more than what the Tax Office has traditionally suggested, and indeed argued in this case;

2. The High Court decision of Commercial Nominees confirms that to avoid a resettlement occurring, there only needs to be a continuum of property and membership, that can be identified at any time, even if different from time to time;

3. The Commercial Nominees case, while it related to a superannuation fund, is relevant in relation to trusts more generally;

4. In the circumstances of this case the fact that there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years did not trigger a resettlement; and

5. Where a trust has been effectively deprived of all assets and then 're-endowed', a resettlement will probably occur.

Until next week.

Monday, January 31, 2011

'Colonial' decision released

Earlier in the month the long awaited 'Colonial' decision was released by the Federal Court.

Although, unlike other tax cases last year (such as Bamford and Thomas), the taxpayer was largely unsuccessful, the Colonial decision again reinforces that the provisions of the trust deed are critical.

For those interested the full title of the case is 'Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16' (Federal Court of Australia, Stone J, 18 January 2011).

In brief terms, the key aspects of the decision were as follows:

1. The main interest in the decision will be for the Australian funds management industry as it focussed on the tax effect of provisions in a unit trust that sought to allocate part of the taxable income to a unitholder redeeming units.

2. The tests that must be satisfied to meet the definition of a 'fixed trust' for tax purposes will be difficult for many unit trusts. Here the unit trust was held not to constitute a fixed trust, primarily due to the wide amendment power that allowed changes to be made to unitholders' entitlements. The ability to satisfy the Tax Act definition of fixed trust is important in a number of areas including -

(a) to carry forward tax losses;
(b) passing through franking credits to unit holders; and
(c) where superannuation funds are unitholders, avoiding application of the ‘non-arm’s length income’ rules (note that prior to 1 July 2007, these rules were called ‘special income’).

3. The attempt by way of variation to provide the trustee the discretion to allocate discounted and non-discounted capital gains to unitholders on redemption was ineffective.

As set out in the post on 17 December 2010, it has been confirmed that there will be a full review of the way in which trusts are taxed.

The Colonial decision further highlights the need for a comprehensive review of the existing rules and Stone J mentions the need for legislative change in this regard.

A number of commentators also believe the proposed managed investment trust attribution regime (due to take effect on 1 July 2011) may address many of the concerns raised in Colonial.
Until next week.