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.