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.