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 -

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.