Redline changes

At the moment, we are assisting a client in relation to the sale of shares in their trading company.

Last week, we received suggested changes to the share sale agreement for the lawyers acting for the purchaser.

As is usual commercial practice, this top tier law firm provided the document to us confirming that all of their suggested changes were made in 'redline'. While we had no particular reason to doubt that all changes would have been shown in mark-up, we used the 'DeltaView' (i.e. document comparison) function in Word to be certain of this before commencing our review.

The DeltaView confirmed that while almost all changes were shown in redline, there were a handful of words changed to one particular clause in the warranties that had not been marked up. These words (if gone undetected) would have potentially left our client in an unnecessarily weak position following settlement.

As we understand it, the oversight of not marking up these changes was a simple mistake, however it highlights the importance of always using the DeltaView function (or another document comparison program) regardless of whether the amendments are otherwise promised to have been marked up.

Until next week.

Stamp duty on changes of trustee

One issue that is coming up increasingly regularly is changing trustees of either family trusts or self managed superannuation funds.

Generally, there are no tax consequences on the change of trustee for any form of trust (including a superannuation fund).

In each Australian State, there are also provisions that provide a stamp duty rollover on the change of trusteeship.

Care must always be taken however to review at least two issues from a stamp duty perspective.

Firstly, care must be taken to ensure that the correct state law is being applied. There can be complications in this regard where a trust is setup under one jurisdiction, but it has substantial assets in another state.

Once this threshold issue has been resolved, the exact provisions of the relevant stamp duty legislation need to be considered. While each state has similar provisions, there are differences. One example in this regard is that in New South Wales (among other things), any new trustee cannot be a potential beneficiary under the terms of the trust.

Until next week.

Read the deed - another reminder re invalid distributions

A structure diagram of the trust in Harris v Harris [2011] FamCAFC 245 

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week extracted below.

Practitioners will be aware, from many previous articles in this Bulletin (and elsewhere), of the critical importance that trust deeds should be read before making any distribution of income or capital. While the "read the deed" mantra should be indelibly etched in practitioners' minds, regular reminders of the dangers of not doing this are not out of place.

One example of a family law case of Harris v Harris [2011] FamCAFC 245 where the range of potential beneficiaries was critical was profiled in our article at 2012 WTB 39 [1586].

In that case, the trial judge in a family court matter noted that the recipient of trust distributions (being a company), who was being challenged, was not in fact an eligible beneficiary of the relevant trust. If the company had been simply nominated as a potential beneficiary, then the distributions would have most likely been valid.

A more common example of where difficulties with invalid distributions arise, however, relates to where particular potential beneficiaries are in fact expressly excluded by the trust deed. The most common example in this regard is the exclusion of the trustee, be that the current, former or even a future trustee, from being a beneficiary of a trust.

These types of clauses are often found in deeds prepared by New South Wales advisers. This is primarily because s 54(3) of the Duties Act 1997 (NSW) limits the nominal duty exemption for a change of trustee to trust deeds that contain provisions ensuring that:

1. none of the continuing trustees remaining after the appointment of a new trustee are or can become a beneficiary under the trust; 
2. none of the trustees of the trust after the appointment of a new trustee are or can become a beneficiary under the trust; and 
3. the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person. 

An example of a clause adopting an approach that ensures access to the stamp duty relief is as follows:

"The Trustee for the time being of the Trust can not be a beneficiary of the Trust. None of the continuing Trustees remaining after the retirement of a Trustee is or can become a beneficiary under the Trust, and none of the Trustees of the Trust after the appointment of a new Trustee is or can become a beneficiary under the Trust."

New South Wales is the only Australian jurisdiction that has this type of restriction on accessing the duty concessions for a change of trustee and, understandably, clauses drafted in this manner are extremely prevalent with deed providers or lawyers based in New South Wales.

In many instances, however, there may in fact be no other connection with New South Wales for anyone associated with the trust.

The risks created by this drafting approach will, therefore, often be less than obvious. Anecdotally, there would seem to be an increasing number of situations where invalid distributions are being discovered that stretch back over many years and involve significant levels of invalid distributions.The exact ramifications of this type of situation will depend on a range of issues, including how any default provision under the relevant trust deed is crafted. This said, an embracing by all advisers involved with the administration of the trust of the mantra "read the deed" would avoid the issue ever arising in the first place.

Until next week.

Using court drafted wills to achieve asset protection and tax planning

Photo Credit: Joe Gratz via Compfight cc

Last week's post focused on the recent case of Re Matsis. This recent decision was one of the first situations where a court permitted a new will to be prepared for someone who had lost capacity where the primary reason for the application was not that the person had no will. Instead, the catalyst was that the beneficiaries were wanting to ensure the appropriate level of commercial asset protection and tax planning would be available.

The decision is particularly important because there are other cases where, in the past, similar requests have been denied.

Arguably, the important factors here included:

1. evidence was able to be shown that the will that was in place before the will maker lost capacity was largely seen by him as an 'interim' document; 
2. the only person who could have brought a challenge against the estate was the will maker's daughter, who indicated in the proceedings that she was independently wealthy and had no intention of challenging the estate; 
3. the ultimate beneficiaries of the estate (and the people bringing the application) were the will maker's grandsons. While each of them potentially had asset protection risks, none of them were aware of any potential litigation; 
4. the change to the existing will did not alter any of the provisions in relation to, for example, executorship or any specific gifts; 
5. while the grandsons lost direct entitlement by the inclusion of the testamentary trusts, they were still ultimately the likely potential beneficiaries via the trust structures; and 
6. the court accepted evidence that the will maker may well have himself implemented testamentary trust provisions, had he not lost capacity. 

Until next week.