Monday, December 10, 2012

Final post for 2012

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 2013.

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

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.

Additional thanks also to those who have purchased (via donation) the various versions of ‘Inside Stories’ – the consolidated book of posts.  An updated version of this book, containing all posts over the last 3 years should be available in the new year.

Very best wishes for Christmas and the New Year period.

Monday, December 3, 2012

Single v multiple testamentary trusts: The ‘hybrid’ approach

Recent posts have looked at various aspects of the debate in an estate planning context of whether a single or multiple testamentary discretionary trust (TDT) will provide the best outcome.

As highlighted in those posts, there are a myriad of issues that should be taken into account and often the approach that best suits the client may change over time.

One mechanism that we have seen used with increasing regularity is a ‘hybrid’ approach.  Under this model, elements of both the single and multiple testamentary trust solutions are combined.

For example:

1              a set percentage (or certain assets) are distributed to a TDT which includes all lineal descendents as potential beneficiaries (i.e. the ‘head’ trust);

2              the control of this ‘head’ trust is jointly shared amongst various family members and any nominated independent trustees;

3              a separate TDT is also established for each child and their respective lineal descendents;

4              a separate percentage share of the estate, or discreet assets, are then gifted to each of these ‘sub’ TDTs; and

5              normally each child would control (perhaps jointly with a co-trustee) ‘their’ TDT.  Each child would also have the ability to independently regulate succession of control for their trust.

As in any estate planning exercise the appropriateness of the hybrid approach will depend on a range of issues including the exact objectives of the client, the overall family dynamics and the nature and value of the wealth involved.

Until next week.

Monday, November 26, 2012

Single v multiple testamentary trusts: The debate continues

Last week’s post set out a number of reasons as to why a single testamentary discretionary trust (TDT) might be the preferred structure, even if there are multiple family members to benefit under an estate plan.

As noted there are a number of factors that need to be taken into account in any particular estate planning exercise and there are a wide range of the factors that might be relevant in deciding to implement multiple TDTs.

Many of these factors have a practical focus and can include:

1              the different geographical locations of the children - particularly if one or more children live overseas;

2              poor relationships between siblings (or their respective spouses) meaning that jointly controlling wealth is likely to further fragment family dynamics;

3              the risk profiles of each child’s investment outlook;

4              the underlying nature of the wealth – for example, if particular assets are earmarked for the sole control of a particular beneficiary;

5              differences in the ‘life cycle’ of each beneficiary – for example if one child themselves has young (or no) children whereas another child has adult children, their investment objectives can look quite different;

6              the desire to have different control mechanisms in relation to different children – for example one child might be the sole controller of their TDT whereas another child may have one or more co-trustees, or indeed, not be a trustee at all; and

7              there can be a myriad of difficulties that arise if a single TDT is utilised and it is still running in, say, two generations time both in terms of overall management of the structure and how income and capital is ultimately allocated.

In the next post we will look at one further variation on this debate, the so called ‘hybrid’ approach.

Until next week.

Monday, November 19, 2012

Single v multiple testamentary trusts: The debate

One issue that comes up regularly in estate planning exercises where there is more than one family unit ultimately to benefit, is whether a single or multiple testamentary discretionary trusts (TDTs) should be implemented.

For example, if there are three adult children, each to share an estate, should those three children jointly control a single TDT or should each child (perhaps with a co-trustee) control a separate TDT, with each TDT receiving one-third of the estate.

As with many aspects of estate planning, there is no ‘correct’ approach.  This said, some of the factors that would tend to support using a single TDT include:

1              if some (or all) of the children are under the age of 18 – an estate planning exercise should always be undertaken on the assumption that the willmaker dies shortly after signing the document.  Therefore the primary focus should be on the needs of the surviving spouse.  In these circumstances, it is generally not appropriate for the wealth to be held across multiple TDTs where the surviving spouse will likely be in control for many years;

2              if asset protection (for example guarding against a relationship breakdown of any of the children) is critical, then generally a single TDT will be the more robust approach;

3              if the vision of the will maker is to have the next generation (i.e. their children) effectively act as ‘custodian’ for future generations, then this is normally more easily achieved via a single trust; and

4              if the underlying nature of the assets would make a ‘split’ ownership structure unduly complicated – for example if there is, say, one significant asset (such a property or business).

The next post will focus on some of the reasons that a multiple TDT strategy might be more appropriate.

Until next week.

Monday, November 12, 2012

Deferral of property settlements

This week’s post looks at a recent Family Court case - Pratt [2012] FamCAFC 81 (13 June 2012).  A link to the full copy of the decision is as follows:

The husband and wife were graziers.  The main issue in dispute was that a valuer had confirmed there had been a $10 million decrease in value of their two cattle stations over recent years as a result of exceptional circumstances (such as the restrictions on live cattle export).  The parties agreed that as a result, the bank debt over the properties substantially exceeded the value of the land.

The wife sought a three year adjournment under the Family Law Act to enable a ‘just and equitable property settlement’, on the basis of the valuer’s statement that the land should increase in value substantially over the next two years, as market conditions return to normal. 

The husband opposed the delay on the basis that the parties’ debts exceeded their assets and he could not meet the interest owed to the bank.  The adjournment was originally granted but appealed by the husband.

Normally an adjournment is only available where a ‘significant change’ in financial circumstances is likely and the delay will probably do justice, more so than an immediate division of property.

Ultimately, the Court accepted the husband’s argument and ordered that the property settlement be finalised immediately.  A key aspect of the decision to deny an adjournment was the failure in the original decision to factor in the cost of maintaining an increasing debt through interest on the loan facility and the ongoing costs of running the properties.

In other words, it was held that in order to delay a property settlement, all relevant financial issues must be considered.  It is not sufficient for there simply to be a ‘significant change’ in the gross value of the assets.

Until next week.

Monday, November 5, 2012

Wholesale deed updates post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 4th and final one in this series of posts via the following video link under the heading ‘Wholesale deed updates post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

The third idea is the ‘wholesale update’ approach.

The providers around are saying for $x you can go and get all of your deeds across the board 2012 compliant, really adopting the same approach that you do with an SMSF trust deed. People accept that with an SMSF, you're going to have to update it every 5 years probably. That’s just the life that you lead running an SMSF.

We would argue that people have never really had that attitude with family trusts. Whether that’s right or wrong is another question. But by and large, people have not really had that wholesale approach. We'll speak about Clark and why that may be the case from a resettlement perspective.

What we're saying with the third option is that you just go and do the update for all clients. Are you running the risk that you'll have to go and do that again in 3 or 4 years’ time? Absolutely you are. But in the meantime, are you investing in your clients by saying you will read the deed once, make sure that every deed across the entire client base has the exact same provisions, can start getting some efficiencies in terms of resolutions, in terms of the review process.

It may be a little bit of pain upfront, however hopefully, any subsequent changes won't be too prohibitive anyway and many are saying may be this is the way to go.

Until next week.

Monday, October 29, 2012

Deed updates by exception post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 3rd instalment of 4 in this series of posts via the following video link under the heading ‘Deed updates by exception post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

The second approach is ‘by exception’, that is you do something. So on the basis that even if you do nothing, you've got to do something; which is you've got to have someone read the deed.

The by exception approach is if it's a particularly nasty deed, or there is as particularly big capital gain this year we’re going to invest in this and we're going to look at it and we're possibly going to amend it, because of the particular circumstances.

We're going to do that, because even doing nothing, we've actually sat down and looked at the document and we understand it.

The trigger for a lot of people on that, if you're looking for a date, but don’t quote me because again not all deed providers were diligent in doing this, but by and large, any deed after 1993, from any even remotely reputable provider, will have streaming.

So if you're looking for a date to say I would hope to be basically right, you can use 1993 as the date, because that’s when streaming ruling came out or whatever it was and most deed providers across the board went through and did it. Indeed, a lot of them went and did actual updates in 1993. So even your pre-’85 trusts had gone and had that amendment in 1993.

The next post will look at the third main approach we are seeing in this area.

Until next week.

Monday, October 22, 2012

The “do nothing” approach to deed updates

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 2nd in a series of 4 posts via the following video link under the heading ‘The “do nothing” approach to deed updates’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

There are obvious advantages to ‘doing nothing’.

From a cost perspective for a client, you would intuitively think that’s probably the best outcome for them. Our only asterisk that we would put next to that is it does put enormous amount of pressure back on your practice and your team if someone needs to be sitting down and reading the deed.

Even if you've had the same provider for many years, you can almost guarantee that they will have changed their document, and they won't necessarily be able to tell you at what point at time they changed it.

Even if they could tell you, it probably doesn't absolve you under your insurance policy to say that everyone before a point in time will have this style of deed. Someone has to sit down and look at that. Which then means, according to the Tax Office, you can't just be churning out standard resolutions. You've actually got to have a tailored resolution that fits the particular deed and the particular income profile for the particular year.

So yes, the do nothing is attractive on a number of levels, but you need to be aware that it does add compliance costs.

You will see there's a common theme to all of these 3 choices.

Ultimately, our positioning is ‘don’t shoot the messenger’. This is something that has been imposed on us from Canberra. It means the cost of running a trust is more. So first one is to do nothing.

The next post will look at the second main approach we are seeing in this area.

Until next week.

Monday, October 15, 2012

What are the options in relation to deed updates post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the first in a series of 4 posts via the following video link under the heading ‘What are the options in relation to deed updates post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below - 

What it actually means in terms of the trust variations, we think it's one of the following three things. 

The first one, we're probably guess that most of the people we work with adopt this path, is to ‘do nothing at all’. 

Is that still the right thing to do?  The honest answer is we don’t know. 

What we do know is even within the last 6 weeks, this complete review of trusts, that has been threatened forever, has already been pushed out for another year.  So the earliest that we're going to have a new taxation regime for trusts is 2014. 

You wouldn't want to take too heavy a bet for whether that's going to be pushed back again.  I suspect there's every chance you're going to have an election before the next time around and you may well have a change of government. 

So there's a whole range of things that are going to potentially happen between now and 2014 that will push that out. 

The first one is to just do nothing.

The next post will look at this approach in more detail.

Until next week.

Monday, October 8, 2012

‘Deriving’ trust income

This week’s post looks at a recent case from the Federal Court and is of interest for those following the ongoing debate about trust income.

The name of the case was SCCASP Holdings as trustee for the H&R Superfund v FCT (a link to the full copy of the decision is as follows –\).

In summary, the core factual background was as follows:

1    A family trust that had made a capital gain of $14 million sought to have this received by a related self managed superannuation fund (SMSF).

2    The ATO was seeking to argue that in the hands of the SMSF, the income was 'special income' and therefore taxed at 47%, as opposed to the taxpayer who argued that it was only subject to tax at the standard income tax rate for SMSFs (namely 15%).

3    The particular 'technical' argument that the taxpayer sought to rely on was that because the trustee of the family trust had not made a decision to pay or apply any amount of the capital gain, then for the purposes of the tax rules, it could not be said that the SMSF 'derived' the income.

Ultimately, the Court agreed with the Tax Office and held that the word 'derived' extended to effectively capture anything that was ultimately received by the SMSF, and in particular, extended to the concepts such as money being 'attributed' or ‘imputed’ to the SMSF.

Until next week.

Monday, October 1, 2012

What are some of the advantages of a professional partnership incorporating?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the advantages of a professional partnership incorporating?’. If you would like a link to the video please let me know.

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The biggest thing I guess with incorporation is that, if only from a perception perspective, but in reality from many other perspectives as well, the ability to facilitate the entry and exit is significantly easier.

Probably the greatest example of that is in relation to transaction costs. In most Australian states already - and in those that haven't done it, it's not very far away – there has been the abolishment of stamp duty on the transfer of shares in unlisted companies.

So what that means in a very practical sense is that shares can be moved without any immediate transaction costs between current owners and future owners. That obviously significantly simplifies and reduces the transaction costs that would otherwise be involved.

Conceptually as well, the ability to create employee share type arrangements or have partial sell downs is significantly easier in a corporate environment than it has historically been in a trust environment, or if there's individual partners involved.

In relation to the stamp duty side of things, it is an important consideration to take into account. Basically every Australian state now has abolished stamp duty. Victoria and Tasmania actually led the way originally by abolishing stamp duty on transfers of unlisted shares. The only major Australian state now that hasn’t done it is New South Wales and the government has released a timetable that would see the abolishment of that duty very soon.

Until next week.

Monday, September 24, 2012

Penalising the under insured

With thanks to co View Legal director Patrick Ellwood, this week’s post looks at a situation we had recently under an insurance funded buy sell arrangement where the parties were wanting to craft the agreement in order to penalise a business owner if they were under insured.

In particular there was a desire to ensure that the agreement discounted the purchase price that was otherwise payable under the agreement if the insurance payout was less than the market value of the interest in the business at the relevant date.

For a number of reasons we recommended against this approach, including:

1.   The overall aim of any business succession agreement is to achieve as smooth a transition of the business as possible.  If a party to the transaction believes that they are not getting fair value then the prospects of a smooth transmission are significantly decreased.

2.   The exiting owner (or their estate) will still be required to pay tax on the transfer of the interest at full market value (even though the price under the agreement would be less than market value) due to the way in which the market value substitution rules under the Tax Act operate.

3.   Practically, if the exiting party had sold their interest the day before the triggering event, they would have received market value.  It is arguably inequitable for an owner to be disadvantaged because of a sudden involuntary exit event, as opposed to a planned voluntary exit.

4.   Generally most agreements (ours included) cater for any shortfall in insurance funding by ensuring that the remaining owners are still required to pay the difference but have an extended period of time (for example, three years) to repay the difference.

Until next week.

Monday, September 17, 2012

Assets of a family trust not necessarily at risk on a matrimonial breakdown

With thanks to team member James Ford, the post this week focuses on another recent decision of the Family Court concerning trusts.

The case is Morton V Morton [2012] FamCA 30. If you would like a copy of the case please email me.

Essentially, the case confirms that, where appropriately structured, the assets of a family trust will not be considered matrimonial property on a relationship breakdown.

Until next week.

Monday, September 3, 2012

When will ‘master’ trusts be uncommercial?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘When will ‘master’ trusts be uncommercial ?’ at the following link -

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The issue in relation to when the traditional master trust might not in fact be entirely commercial is probably very similar to many other issues in this area in so much as there's a myriad of reasons why it might not be entirely sensible. 

Three common themes that I would probably encourage people to keep an eye out for would be – firstly, that the overall value of the estate just doesn't justify any form of testamentary trust. 

In other words, the ongoing administrative cost and the actual costs to actually set the structure up just don’t make it economical, and part of it might be that because the will makers’ are ultimately wanting to spend the kids’ inheritance, so they're actually going to make sure that it's all gone in the first place.

That would be the first category. 

The second category would be what we would describe as an estate where there is ‘enough wealth to be dangerous’ – so in other words, not wanting to put any actual numbers around it, but if there are, say, ultimately 3 or 4 children that are going to take a benefit, but the overall portfolio of the estate makes it unwise to be trying to lock that into one particular structure, and it would be in fact better for everyone concerned that they each get their own piece of the pie as it were, then that can be another big reason to sort of trend away from master trusts. 

That can often be driven not just by the financial numbers involved, but also practically, if you've got children spread all around the world, it may not be the absolute smartest thing to be trying to lock them into one structure. 

The third big reason tends to be actually at the other end of the scale where you've got significant wealth involved, serious wealth involved, and you've got the will maker sitting there and saying look, at the end of the day, while we're very happy to have the master trust as a big part of what we're trying to achieve here, we need to be able to allocate some money off directly to the ultimate beneficiaries.  So that they actually can have something they can touch and feel - I guess it's called the ‘beer money’ trust on the side.

In those cases, it's not so much that the master trust is uncommercial overall, it's more that if you only had a master trust, that would be an unwise way to go in a particular set of circumstances.

Until next week.

Friday, August 24, 2012

Insurance premiums & FBT

As many regular readers would be aware, one particular innovation in recent times in relation to insurance funded business succession arrangements is the so-called 'debt reduction' strategy.
One aspect of the arrangement that is often raised concerns the fringe benefits tax (FBT) implications of the premium payments.
Broadly, there are a number of reasons as to why FBT will normally not apply to the payment of insurance policy premiums.
Generally the accountant for the business will always be best placed to give the guidance, however some of the reasons FBT will not apply can include –

1.    the arrangements not having anything to do with employment;
2.    in some instances, the otherwise deductible rule; or
3.    while for administrative ease the premiums might be paid by the business, the actual tax position is that the amount is included as part of other payments made (for example, a dividend).
It is important to remember that aside from FBT, there are a number of other tax issues that may also be relevant (for example division 7A or capital gains tax) so it is also best to ensure the exact circumstances are considered by the accountant for the particular client.

Until next week.

Monday, August 13, 2012

Difficulties with Advanced Health Directives

In last week’s post, an overview of Advanced Health Directives (AHDs) was provided.

As mentioned in that post, there are a number of significant practical difficulties with AHDs, and in summary, the main issues in this regard include:

1.       The person making the AHD tends to want to be able to have a ‘turn off the switch’ type provision (or perhaps even euthanasia).  No AHD allows this.  Unless the donor has specific religious or personal objectives, many of the questions are somewhat irrelevant.

2.       The attitude of a donor when signing the AHD is not necessarily any indication of their attitude in say, ten years time, when the issue arises.  Anecdotally many doctors are unwilling to rely on a document from years earlier in the heat of the moment (even if they find that document on an urgent basis).

3.       As the document needs to be completed with a GP it is unlikely that the GP is actually going to be involved in any sort of emergency situation in any event – again, another reason why the doctor actually performing the medical treatment etc, would be very unlikely to either try and find the AHD or even if it is found, look to rely on it.

4.       In contrast, doctors will generally place significant weight on whoever is appointed as the enduring power of attorney.  If that enduring power of attorney is also a next of kin and if there is no hint of any dispute in the immediate family group, then the wishes of the person seeking medical treatment will generally be respected.

In next week’s post, there will be links provided to the relevant government websites for AHDs in every Australian State.

Until next week.

Monday, August 6, 2012

What are Advanced Health Directives?

One issue that comes up relatively regularly in estate planning exercises relates to Advanced Health Directives (AHD).

In most jurisdictions, an AHD is essentially a document addressed to a person’s medical practitioner setting out the level of care that they would like to receive in a series of specific situations.  Normally, the document is crafted as a 'multiple choice' questionnaire listing out dozens of typical medical scenarios.  The document is normally completed in conjunction with a client’s GP.

As the document is a medical, not legal, one, most lawyers simply provide access to the standard document rather than providing advice on it.

One important issue to note is that in no Australian state does an AHD create the ability for euthanasia style directions to be articulated.

While a person has legal capacity they may revoke their AHD at any time. 

In an upcoming post, we will look at some of the practical difficulties of AHDs.

Until next week.

Monday, July 30, 2012

What roles do ‘quasi-ownership’ arrangements play in succession planning

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What roles do ‘quasi-ownership’ arrangements play in succession planning ?’ at the following link -

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

This is probably a really developing area in terms of what we've seen in recent times, because out of the GFC, the changes to trust law that many of us have experienced first hand in terms of the impact of relationship breakdowns and/or the intergenerational transfer that goes wrong; you find in many family scenarios they are effectively wanting to, if not fully rule from the grave, at least do a very good impersonation of it.

In that scenario, as much as we've spoken earlier today about secured loan arrangements and actually transferring assets down and securing those under a loan arrangement; a more ‘bespoke’ version of that is never having the asset leave the master trust in the first place and using tools such as letters of wishes or the way in which the trustee company constitution is crafted to allow the underlying beneficiaries to have indirect access to the assets, whether they be business assets or investment assets.

Beneficiaries will probably still have to meet KPIs in relation to their performance and running of those assets, but they never actually get the physical ownership or the legal control of them.

It may be overtime that beneficiaries do ultimately receive legal ownership or legal control, but for an interim period, which may last for many years, what this final form of structure does is effectively keep the assets within the initial master trust structure and really only have a synthetic or notional allocation of assets made, at a trustee level, for the underlying beneficiaries.

Until next week.

Monday, July 23, 2012

War stories

As many regular readers will be aware, examples are often used in these posts and our various seminar presentations based on client situations.

This said, unless the particular client scenario has gone through the court system (and is therefore publicly available information), we are always very careful to not base our examples entirely on any one particular client so as to ensure client confidentiality is maintained.

In this context then, we are also always supportive of any adviser that wants to use (and where appropriate embellish) case study examples that we may have historically shared when they are positioning concepts with clients.

Until next week.

Monday, July 16, 2012

Prohibitions on trust deed variations

As mentioned last week, we often find trust deeds have prohibitions on a trustee’s ability to vary the document.

Some of the issues to be aware of in this regard include:

1    Often variations can only be made with the consent of someone other than the trustee, for example an appointor, guardian or even the settlor.

2    In some cases, variations can only be made to the core (or trust) provisions of the deed, as opposed to the more general powers, which will usually limit the ability to vary the income provisions.

3    Alternatively, while powers can be added to a trust, a deed will sometimes provide that any existing powers cannot be varied – this can be particularly problematic where there is a desire to update the income distribution provisions.

4    There are countless other examples of restrictions on variations and indeed, we have come across deeds where there is a blanket prohibition on making variations to the deed, or at least on variations to particular clauses in the deed.

While there are often workarounds no matter what restriction is imposed, the fundamental rule to remember is that each and every deed must be read before embarking on a variation.

Until next week.

Monday, July 9, 2012

ATO reminder – read the deed

Following on from the recent posts about the ATO draft determination on resettlements (TD2012/D4), today's post is in effect a further reminder of an earlier post that focused on the catch phrase 'Read the Deed', again with thanks to co View Legal director Tara Lucke.

One of the key themes in the recent ATO determination is that a trust variation must be made within the scope of the variation power in the trust deed.

If a purported variation is made outside the scope of the particular variation power, the ATO has provided guidance that this may result in the termination of a trust (i.e. a resettlement for CGT purposes).

We are constantly encountering deeds that have significant limitations on the variation power, particularly with the regular amendments we are doing for clients of accounting firms to ensure that trust deeds are up-to-date for all recent changes in law.

Next week’s post will focus on some of the common variation prohibitions we come across.

Until next week.

Monday, July 2, 2012

More comments on ATO resettlements determination

As mentioned in the last post, the ATO has released a draft determination, TD2012/D4, in relation to resettlements.

With particular thanks to View Legal director Tara Lucke, today’s post focuses on the interplay of the draft determination with the ATO’s previous published position on resettlements – the Statement of Principles.

In summary, according to the determination:

1.        The ATO has withdrawn its Statement of Principles as of April 2012.

2.        The ATO accepts that although the Clark and Commercial Nominee cases were decided in perhaps slightly different contexts to many of the issues dealt with in the Statement of Principles, the conclusions reached in each of those two cases do have a broader application.

3.        Provided an amendment to a trust is valid at trust law and is in accordance with the terms of the trust instrument, CGT event E1 should not be triggered.

4.       The ATO will expect any deed of variation to be made in accordance with trust law principles and the particular requirements of the trust instrument in order for the amendment to be effective.
Until next week.

Friday, June 22, 2012

ATO releases draft determination on trust resettlements

Posts from last year looked at the Clark decision.  In that case, the court held that significant changes to a trust instrument would not of themselves cause a resettlement of the trust for tax purposes.

As mentioned in last week’s post, the Tax Office has now released draft determination TD2012/D4 which provides some further clarity around when the Tax Office will deem changes to a trust to amount to a capital gains tax event under CGT events E1 and E2 (i.e. a resettlement).

In broad terms, the Tax Office states that unless variations cause a trust to terminate, then there will be no resettlement for tax purposes.

A number of examples are provided, which give some guidance around issues such as changes of beneficiaries and update to address distribution of trust income.

Unfortunately, the examples provided are not particularly comprehensive and issues such as changing appointors and multiple changes (for example, changing beneficiaries, the trustee and the appointor as part of an estate planning exercise) are not specifically addressed.

This said, the draft determination should provide a level of confidence that relatively significant changes to trust instruments can be made without adverse tax consequences, although it remains necessary to also consider the separate stamp duty and trust law implications of any such change.

A full copy of the draft determination is at the following link –

Until next week.

Monday, June 18, 2012

Discretionary trust deeds health check

Over time, View Legal has developed a 'trust review checklist' that outlines some of the key issues which should be considered as part of a general ‘health check’ of a discretionary trust deed to ensure it aligns with the constantly evolving legal requirements regarding trusts and tax implications.

An adviser after reading the document made contact in relation to the potential outcomes in the event a trustee fails to make a resolution. 

We confirmed that there are the two main potential outcomes; namely that the trustee is taxed or the default beneficiaries are taxed.  Which of the two outcomes applies will depend on how the trust deed is crafted.

In this regard, the leading case in this area is Ramsden. 

The deed in Ramsden provided that a purported default distribution did not actually operate on its face and therefore the trustee was taxed at the top marginal rate.  This can be a particularly poor outcome where there are capital gains given there is no entitlement to the 50% discount.

Conversely, we have seen many situations where the default provisions apply such that all distributions are made to a corporate beneficiary.  To the extent that there are capital gains that would otherwise be entitled to the 50% discount, this outcome will trigger adverse (and unnecessary) tax costs.

One other issue to be aware of, which again reinforces the importance of reading a deed, is that the actual timing of the resolution must be in accordance with the deed, even if legislation or Tax Office practice otherwise permits a later date.

For those interested to review the abovementioned summary, go to the 'core services' section of the View Legal website (

The next post will look at the Tax Office Determination released last week on trust variations.

Tuesday, June 12, 2012

When do ‘gift and loan’ arrangements need to be refreshed?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘When do ‘gift and loan’ arrangements need to be refreshed?’ at the following link -

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

There's two real reasons that the top up arrangement can come into effect. 

The first one, and hopefully for most people, even in a post GFC environment, is that the actual underlying asset has gone up in value. 

So in other words, you end up with a gap between the amount that was originally forwarded and the underlying asset value.  So in that instance, there is obviously a desire to ‘catch up’ that gap or to remove that gap and that can be done by effectively recycling or regenerating a debt back to the trust and then making sure that the mortgage arrangements are updated to catch that additional amount. 

The other reason that it might take place, and this particularly can arise in relation to master trusts, is where there's a feeling amongst the family unit that all arrangements are to be on a commercial basis.

In that instance, it's quite often the case that there are interest and principal repayments.  So in that scenario, you'll start to get a gap between the level of security that the trust might have over the particular asset and the debt that’s actually outstanding. 

The critical point in relation to either of those scenarios, so in other words the asset going up in value or the debt being reduced, or for that matter, both things happening at once, is that whenever that gap is removed, you will generally find that there is wealth being moved away from an at-risk individual into a protected environment being the trust.  Obviously in that scenario, in each and every instance that it takes place, you've potentially got to be aware of and advise the client, in relation to the application of the bankruptcy clawback provisions.

Until next week.

Monday, June 4, 2012

Valuations for the small business CGT concessions

There have been a number of court decisions in recent times focused on the way in which valuations are conducted for the purposes of satisfying (what is currently) the ‘$6M net asset test’ for the small business capital gains tax concessions.

The Tax Office has recently released a Decision Impact Statement following one of the cases from last year (for a full copy of the statement, please email me).

In the statement the Tax Office has confirmed that its publication ‘market valuation for tax purposes’ provides the guidance that it believes should be followed in order to establish a market value for tax purposes.

In particular, the Tax Office states that it believes market value should be determined with reference to the ‘highest and best use’ of each asset being assessed.

While generally the sale price of an asset will be its market value, the Tax Office believes that each situation must be considered on a case by case basis to determine the most appropriate methodology for determining market value.

Often this will lead to reference to the long standing concept of ‘what a desirous buyer would have paid as a fair price to a willing vendor who was not necessarily desirous (or over anxious) to sell’.

Until next week.

Monday, May 28, 2012

Void trusts

Following on from recent posts, a further issue has come up over the last few days which relates to where a discretionary trust does not have any default provisions that apply for the distribution of capital.

The issues in this regard are quite complex, however like earlier posts, the conservative position is clear – i.e. every discretionary trust should ideally have clear provisions that apply for the distribution of capital in the event that a trustee fails to make a valid distribution.

The position in relation to default provisions for income is not as clear – often where there are no fallback provisions for income, an undistributed amount will simply form part of the capital of the trust.

This said, particularly following the High Court’s decision in Bamford, we have seen a number of advisers focus very carefully on all of the core provisions of their client’s trust deeds and the complete absence of a default distribution of capital, or in some instances, a purported default distribution that does not operate effectively, can be a trigger for looking to at least minimise the assets that are acquired in a trust moving forward.

Until next week.

Monday, May 21, 2012

Family court case on the distinction between a loan and a gift

We are increasingly seeing advisers and clients alike, focussing (very deliberately) on the way in which they advance monies to their children to assist with, for example, the purchase of a family home.

Today’s post looks at a recent case, which was decided last year, and provides a useful example of the distinction between gifting and lending monies from a family law perspective, particularly in the event of a relationship breakdown.

The case of Pelly & Nolan [2011] involved a situation where the husband’s father advanced approximately $520,000 to ‘help his son out’. The initial advance was $320,000 to assist the son and his young family purchase a property. Additional advances were also made to assist with general living expenses totalling approximately $200,000.

The evidence in the case suggested that the father sought repayment for only the $320,000 advanced relating to the property acquisition and not the monies advanced for general living expenses.

As the initial advance was facilitated by a loan agreement and for the purpose of assisting with the property purchase, the court held that such advance was enforceable, even though no interest on the loan had been demanded nor paid.

In relation to the additional $200,000 advanced, there was no evidence to suggest that a repayment would be enforced by the father.

In the circumstances therefore, the court held that the $320,000 advance was indeed a loan and thus a liability that needed to be deducted from the matrimonial assets; whereas the $200,000 advance would be included as property for distribution to the wife (although the fact that it had been contributed by the husband’s father would be taken into account).

A link to the full decision is as follows –[2011]%20FMCAfam530.rtf

Until next week.

Monday, May 14, 2012

What are some of the steps taken in relation to regulating control of testamentary trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the steps taken in relation to regulating control of testamentary trusts?’ at the following link -

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The reality I think for many people in this area at the moment that estate planning as a whole, and particularly the use of more bespoke forms of testamentary trusts, is the ‘new black’. 

What that has meant I think for a lot of advisers in this area, particularly for those with legally trained advisers is that many of the concepts that you see in wider corporate law or corporations law are now actually being filtered back into traditional estate planning.

What we're finding, particularly where people are wanting to use trusts that are going to last at least 2 generations, possibly even 3 or 4, is that the regulatory regime, if you like, sitting around the control of those structures is becoming far more sophisticated.

Probably the biggest thing we're seeing in that area is the use of specifically set up trustee companies. Not in terms of the government setup structure, but in terms of the actual client setting up a corporate structure and being very particular about the way the constitution of that company is crafted, the way shareholders can be nominated, the way directors are appointed and the way voting takes place within that structure all overseeing the way in which the actual trust is going to be run moving forward.

Until next week.

Wednesday, May 9, 2012

What are the stamp duty consequences of assets passing via testamentary trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the stamp duty consequences of assets passing via testamentary trusts?’ If you would like a link to the video please let me know.

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

One of the great difficulties in this area, and I think it's an often used phrase, is that in many respects, a lot of these issues, sort of you take one step forward and 2 or 3 steps backwards.

As much as we've touched on already, the great step forward in terms of legislative certainty around the way in which the Tax Office is going to interpret Division 128 from a capital gains tax perspective, conversely what we're seeing from a stamp duty perspective is almost the exact opposite.

So obviously, we still have a situation across Australia where every single state has different stamp duty tests and different stamp duty rules in relation to how they apply distributions under a deceased estate.

It can be said that in every jurisdiction there is certainly an alignment between Division 128 under the Tax Act for the transfer of assets from the will maker to the legal personal representative and from the legal personal representative down into a trust structure.

From there, unfortunately, it really does start to unravel quite significantly, because even in the states that historically allowed assets to be distributed out of an initial trust into a sub trust or out of an initial trust directly to an individual beneficiary, those states are starting to wind back from that position and we've got a situation for many clients where if they're going into the structure, the conservative and prudent advice will probably be that they should expect to pay stamp duty when ultimately taking assets out of the initial trust.

Now I guess that line of reasoning or line of argument needs to be counterbalanced against, and the discussion about whether in fact there will be dutiable property inside the trust; and to the extent that the assets are likely to centre around cash or managed funds or shares, then it may well that for many clients the fact that there's a potential stamp duty risk down the track is in fact irrelevant.

For any adviser working in this space, the ability to give complete signoff from a tax perspective is very much counterbalanced against the fact that from a stamp duty perspective there has to be seen to be a real risk moving forward that there will be double stamp duty potentially.

Until next week.

Tuesday, May 1, 2012

What are the tax consequences of assets passing via a testamentary trust

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘what are the tax consequences of assets passing via a testamentary trust ?’ at the following link -

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below -

The reality has been that ever since the Practice Statement was released in around 2003, there has been a really implicit acceptance across the industry, and one would hope from the Tax Office as well, that the interpretation of Division 128 that allowed the transfer of assets, not only from a legal personal representative down into a testamentary trust, but then from that testamentary trust to another testamentary trust under some form of cascading arrangement, would be free from capital gains tax.

More importantly, any ultimate transfer out of the testamentary trust, whether it be the initial trust or a subsequent trust, would also be free of capital gains tax.

What that Practice Statement did was effectively give that approval from the Tax Office that that approach, that really had been the approach across the industry for many, many years, was not going to be challenged by the Tax Office.

What we've seen in very recent times, particularly with the 2011 federal budget, is that even though that approval seemed to be there from the Tax Office, the level of uncertainty that was created when you read that back with Division 128, meant that legislative reform was required.

We're seeing that coming through the system now with the announcement in the 2011 federal budget, which effectively looks to replicate the position under the Practice Statement from 2003.

Until next week.

Monday, April 23, 2012

Do ‘cascading’ testamentary trusts cause a tax problem

With thanks to the Television Education Network, there will be a series of posts over the next period of time where excerpts from a recent video presentation I have provided will be the basis of the post.

Each week, I will also include a transcript of the presentation for those that cannot (or choose not) to view the presentation.

The first excerpt posted today is under the title ‘Do ‘cascading’ testamentary trusts cause a tax problem’ at the following link -

As explained at the above link -

Under Division 128 of the 1997 Tax Act, the concept of an asset passing from a will maker or the executor into the estate is absolutely certain that that transfer of wealth is not subject to any capital gains tax.

Where some confusion arises, particularly in relation to cascading trusts or master trusts, is that the language under Division 128 is a little bit obscure or a little bit uncertain as to exactly what is going to happen once the assets have passed into the estate. So in other words, the transfer from the will maker to the legal personal representative, absolutely no capital gains tax.

The transfer from the legal personal representative or the executor down into an initial testamentary trust, again absolutely no capital gains tax.

The confusion then arises that is it the case that from the testamentary trust to a beneficiary, particularly if that beneficiary happens to be another testamentary trust, will that transfer be without capital gains tax?

On a plain reading of Division 128, there is little question that that transfer of subsequent assets, even if it is to another trust, will be free of capital gains tax. But there has been, I guess for many years now, a level of uncertainty about that, simply because of the language used under that particular division.

Until next week.

Tuesday, April 17, 2012

Settlement sums

Last week, following on from the post before Easter, we had a enquiry about the consequences of a failure to deposit the settlement sum on the establishment of a discretionary trust.

This area of the law is potentially complex, however ultimately the conservative position is that the settlement sum should always be deposited into the trust’s bank account, and ideally, it should in fact be the first deposit.

The approach of placing the settlement cheque (or a cash equivalent of it) on the file for the trust can be problematic for a range of reasons, including:

1. Where the settlement sum is by way of cheque, the cheque will normally go stale after 13 months; and

2. Even where cash is stored with the trust, it is difficult to provide documentary evidence of the settlement sum forming part of the trust if the cash is lost.

Ensuring that the settlement sum is deposited into the bank account of the trust at least avoids each of these two issues.

Until next week.

Friday, March 30, 2012

Trust establishment 101

With thanks to co View Legal director Patrick Ellwood, this week’s post concerns a recent land tax case (Aston (Aust) Properties Pty Ltd v Commissioner of State Revenue, for a full copy of the judgment follow this link – that highlights how critical it is to ensure that new structures are established correctly.

In this particular instance the taxpayer was arguing that group land tax assessments were incorrect due to the ownership of various landholdings being via separate trusts.

The trusts that were alleged to exist were prepared by the taxpayer himself and he gave evidence that he had ‘become convinced that the process of creating multi tiered trust structures could be undertaken in an efficient manner without the need to purchase off the shelf trust deeds from solicitors’.

For a myriad of reasons the court held that the grouped land tax assessment was valid and that the purported trusts simply did not exist.

Some of the reasons the court concluded no trusts existed included:

1. there was no evidence of any settlement sum being contributed on the initial creation of the trusts;

2. no evidence could be shown in relation to funds changing hands or creation of bank accounts;

3. while the trusts were purported to be created via schedules that were recreated on numerous occasions with reference to ‘standard terms’, the link to the standard terms could not be shown;

4. of the documents that could be produced, there were a significant number of errors and inconsistencies; and

5. some transactions that had purportedly been entered into were by entities that did not exist.

With the aid of hindsight each of these difficulties identified by the court could have been very easily addressed by getting some level of specialist advice prior to the creation of the trusts.

Given the Easter break there will be no post for the next two weeks.

Monday, March 26, 2012

Contribution assessments in family law cases

The posts for the last 2 weeks have focused on the decision from the end of 2011 of Harris.

One final aspect of the case that it is worth highlighting involved the comments made by the Court about the ‘contribution’ that the parties to the marriage, and their respective families, made to growing the asset base during the course of the relationship.

As many will be aware, once the court has determined the property that satisfies the definition of being an ‘asset’ of the marriage and then in turn the property that is a ‘resource’, there is a need to determine the contribution the parties have made to creating the wealth.

In the Harris case, the appeal court expressly directed that in the retrial (which is yet to take place) the judge must be careful to ensure that adequate weight is given to the husband and his parents in terms of building up the value of the business that was owned by the family trust at the centre of the dispute.

This direction was as a result of the initial trial judge’s decision to simply ignore the contribution that had been made by the husband and his parents over many years, both before the marriage and during the course of it.

Until next week.

Tuesday, March 20, 2012

Trust distributions 101

Last week’s post touched on the Family Court decision from the end of 2011 concerning the way in which a family trust was treated as part of a matrimonial settlement.

One other aspect of the case that is worth mentioning involved the conclusion by the Court about the, purported, use of a corporate beneficiary.

In particular a ‘bucket company’ was set up some years after the initial establishment of the trust. The evidence that seemed to be accepted by the Court was that the company was established for ‘tax minimisation or reduction purposes’.

Unfortunately, to the extent that a disgruntled third party (including the Tax Office) may wish to challenge the distributions, the company was not in fact a beneficiary of the trust.

While the ‘wrongful’ distributions (in the words of the Court) were not explored further in the context of this family law case, the comments highlight the theme of many earlier posts – that is in almost every area where structures are used (whether they be trusts, companies or super funds) it is critical that someone takes responsibility for reading the establishment documents before any step is taken.

Until next week.

Monday, March 12, 2012

Another family law case on trusts

Posts made in October 2011 focused on a high profile family law case involving a family trust (Keach).

In that case, the assets of a family trust were essentially protected on a property settlement.

Towards the end of last year, the case Harris v Harris (for a full copy of the decision follow this link -
) provided further context to the general attitude of the Family Court in relation to traditional trust structures.

The outcomes of both cases can be contrasted with the outcomes in cases involving arrangements that the Court believes are unconscionably designed to hide assets (for example, the case of the Kennon v Spry, also featured in the posts during the latter half of 2011).

In brief terms, the Harris case involved a trust established by the husband’s father.
At the relevant time, the appointor of the trust was the husband’s mother and the controllers of the trustee company were the husband’s mother, a son from a previous relationship and a friend.

The main asset of the trust was a business which it was accepted was run on a day-to-day basis by the husband and wife.

The main beneficiaries of the trust were the husband’s parents and their children (i.e. the husband and his siblings).

Distributions from the trust had been amongst the entire family group (including the wife), although the distributions to the wife ceased on separation with the husband.

In summary, the Court held:

1. The trust and its assets were not an asset of the marriage.
2. At most, the trust should be considered a significant financial resource for the husband.
3. If a party to the marriage is not directly the appointor or in control of the trustee, then they do not have direct control.
4. In order for there to be indirect control by a beneficiary, there must effectively be a situation where someone who has direct control is the mere puppet of the beneficiary.
5. In order to demonstrate indirect control (e.g. through a ‘puppet’ scenario), there must be clear evidence to support the argument and merely reviewing a history of trust distributions of itself will not be sufficient.

Until next week.

Monday, March 5, 2012

Anti avoidance rules to be amended from 1 March 2012

Towards the end of last week the Federal Government announced that changes would be made to the general anti avoidance tax provisions under part IVA.

The announcement was made in the context of the government’s view that the provisions needed to ‘be effective in counteracting tax avoidance schemes that are carried out as part of broader commercial transactions’.

In particular the proposed amendments are said to be designed to ‘confirm that part IVA always intended to apply to commercial arrangements which have been implemented in a particular way to avoid tax. This also includes steps within broader commercial arrangements’.

The changes are said to be required because ‘in recent cases, some taxpayers have argued successfully that they did not get a 'tax benefit' because, without the scheme, they would not have entered into an arrangement that attracted tax. For example, they could have entered into another scheme that also avoided tax, deferred their arrangements indefinitely or done nothing at all. Such an outcome can potentially undermine the overall effectiveness of Part IVA and so the Government will act to ensure such arguments will no longer be successful.’

The government has said that to ensure that the changes do not interfere with what are otherwise genuine commercial activities it will consult extensively as to how to best implement the new rules.

Specialist advice is also likely to be sought before preparing the first draft of the new legislation and throughout the redrafting process.

A full copy of the media release is at the following link:

Until next week.

Monday, February 27, 2012

PPSA and company charges

The long awaited transition to the personal property security regime has continued to evolve since the official ‘live’ date of 30 January 2012.

While there are an ever increasing number of war stories, for anyone involved in advising companies, arguably one of the most tangible changes has been the abolition of ASIC forms in relation to registering company charges.

Today’s post focuses on some of the critical aspects of the new company charge regime.

On 30 January 2012, ASIC ceased to register company charges and ASIC forms 309, 311 and 312 are no longer relevant.

No forms - The difference between the PPS register and the ASIC register of company charges is that there are no physical forms that are lodged with the PPS register. All registrations, amendments and releases are done online using the PPS register (i.e. no forms are signed).

How do I find out if a company has charges against its assets? - ASIC searches will no longer show details of current registered charges. You will need to search the PPS register to reveal these details. As the PPS register search function has experienced a number of technical difficulties, you should always search a company by ACN, ABN and company name until these issues are resolved.

How do I register a security interest? - In order to register a security interest on the PPS register you need to register a financing statement.

How do I release a security interest? - As the ASIC form 312 is no longer relevant, parties will need to agree on a way to document the release in another fashion e.g. a deed of release.

Until next week.