Final Post for 2014 and Season's Greetings

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 2015.

Similarly, both the View Legal and Matthew’s Twitter and LinkedIn postings will also largely 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 the various versions of ‘Inside Stories – the consolidated book of posts’ (see - http://www.amazon.com/Matthew-Burgess/e/B00L5W8TGO/ref=sr_tc_2_0?qid=1413149165&sr=1-2-ent).  

The next edition of this book, containing all posts over the last five years, edited to ensure every post is current and organised into chapters for each key area should be available early in 2015.

Very best wishes for Christmas and the New Year period. 



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And another View Legal Apple and Android app launched

Following the successful launch earlier this year of the View Legal Directors Duties, Estate Planning, business succession and binding death benefit nomination apps, we have now developed and launched a further Apple and Android app.

The new app is in relation to Self-managed superannuation funds (SMSF) and can be downloaded via the following links –

1. iPhone - https://itunes.apple.com/au/app/smsf/id931264885?mt=8
2. Android – https://play.google.com/store/apps/details?id=view.legal.smsf

SMSFs can provide a range of benefits and opportunities not available via any other retirement savings approach.  

SMSFs are however heavily regulated and it is vital that fund members have a deep understanding across all relevant areas.

The SMSF app is designed to allow the user to narrow down some of the broad areas that might be relevant in relation to establishing, or updating, an SMSF.

Depending on the answers provided, the app generates a free white paper containing general information in relation to some of the issues that are often relevant.

Until next week.

Family court cases and the Stamps Office

Recent cases have explored various aspects of the Tax Office’s ability to access material lodged as part of family law cases.

The recent family law case of Kern [2014] FCCA 1108 provides an example of where the interest of a State based revenue office can be enlivened. 

If you would like a copy of the decision please email me.

The key components of the case here were as follows:

1. A couple who had a 9-year marriage were engaged in proceedings in relation to the division of matrimonial assets.
2. One of the assets related to some land that was gifted to the wife by her parents.  
3. Stamp duty was paid on the transfer at a value of $110,000.  
4. Evidence given by the wife to the family court was that the true market value of the land at the date it was gifted to by her parents was in the region of $150,000 and indeed, may have been closer to $200,000, particularly given that the final sale price for the land when it was subsequently disposed was $325,000.

While the family court accepted the wife’s arguments that she should receive a disproportionate share of the proceeds of the sale of the land due to the contribution that she made, it was also decided to refer the evidence to the Stamps Office for further investigation.

The family court has the inherent power to make a referral in situations such as this (i.e. effectively fraud) under the Evidence Act 1995.

While that Act does provide some protection for self-incrimination, that protection was not available in this case because:

     (a)  The wife provided the incriminating evidence of her own free will.
     (b)  The evidence provided was done so before a request for immunity was made.


Until next week.


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Another View Legal Apple and Android app launched

Following the successful launch earlier this year of the View Legal Directors Duties, Estate Planning and business succession apps, we have now developed and launched a further Apple and Android app.

The new app is in relation to binding death benefit nominations (BDBN) and can be downloaded via the following links –

1. iPhone – https://itunes.apple.com/au/app/bdbn/id931237201?mt=8
2. Android - https://play.google.com/store/apps/details?id=view.legal.bdbn

BDBNs can be an essential tool for anyone with superannuation savings.  BDBNs are however heavily regulated and there are many aspects that can cause irreversible damage if misunderstood.

The app explores some of the fundamental issues that arise for anyone with superannuation savings considering making a BDBN.

Depending on the answers provided, the app generates a free white paper containing general information in relation to some of the issues that are often relevant.

Until next week.

Extensions to vesting dates – some lessons from Re Arthur Brady Family Trust; Re Trekmore Trading Trust

For those that do not otherwise have access to the Weekly Tax Bulletin, the most recently published article by fellow View Legal Director Patrick Ellwood and I is extracted below.

Often a key reason for seeking to extend the vesting day of a trust will be to defer the likely tax and stamp duty implications that would arise where the trust vests and assets are distributed to the beneficiaries.

The recent Queensland case of Re Arthur Brady Family Trust; Re Trekmore Trading Trust [2014] QSC 244 (see 2014 WTB 42 [1416]), provides a useful illustration of the way in which the Courts respond to applications where deferring revenue costs are arguably the primary driver for the application.

The case follows previous decisions such as Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004 in NSW and Re Plator Nominees Pty Ltd [2012] VSC 284 in Victoria, each of which are discussed below.

Legislation

In each State, the Court has statutory power to vary trust instruments in particular circumstances.
In the Northern Territory, this power can be exercised where the Court “thinks fit”.

In Western Australia and Queensland, the power can be exercised where the Court considers the variation “expedient” or where the transaction is in “the best interests of the beneficiaries”.
In all other jurisdictions, the “expedient” test applies.

In circumstances where a trust has been established with a vesting period of less than 80 years, the trustee may vary the trust deed, in accordance with an express power of variation in the trust instrument, to extend the vesting day.

The decision of FCT v Clark [2011] FCAFC 5 provides comfort that in many circumstances, such a variation will not trigger a resettlement of the trust for tax purposes.

However where the trust instrument does not provide the trustee with adequate powers to extend the vesting day, an application to the Court may be necessary.

The Court would therefore need to consider whether the trustee’s reasons for wanting to extend the vesting day are “expedient” or “in the best interests of the beneficiaries”, depending on the jurisdiction.

Cases

Stein v Sybmore Holdings Pty Ltd involved an application under s 81 of the Trustee Act 1925 (NSW) to extend the vesting day of a trust established in 1978, which was to vest in 2007.

The trustee sought an order authorising it to extend the vesting date of the trust, notwithstanding that the variation power in the trust instrument was insufficient to allow such an amendment.

The trustee’s reasons for seeking the authorisation included:

1. the trust had been established for the intended benefit of the applicant’s children and grandchildren, however his adult children were unmarried and without children and unless the application was granted, the trust would vest before his grandchildren could benefit; and

2. the trustee anticipated that capital gains tax of $690,000 and stamp duty of $620,000 would be payable on vesting of the trust, diluting an asset pool valued at approximately $13m.

The Court granted the order requested as it considered the amendment to be “expedient”.  The judgment focused primarily on the first reason for the application outlined above, however the dilution to the value of the trust that would have been caused by the capital gains tax and stamp duty costs outlined above were a relevant factor.

A similar sentiment can be found in the Victorian case of Plator Nominees Pty Ltd.  The case involved a trust established in 1972 which had a 40 year vesting period.  Consequently the trust was due to vest in 2012.

The trustee brought an application under s 63A of the Trustee Act 1958 (Vic) that the vesting day be extended to the date 21 years after the death of the last living relative of one of the primary beneficiaries.

The trustee’s application included the following justifications for the extension:

1. the trust was established as a property investment vehicle intended to survive the primary beneficiaries for the benefit of their children, but if it vested in 2012 it would not achieve that purpose;

2. all of the beneficiaries had consented to the extension;

3. no specific reason could be identified as to why 2012 had been nominated as the vesting day; and

4. if the trust vested in 2012 a “significant capital gain” would be realised.

The Court granted the extension and noted that, consistent with previous judicial authority, the fact that deferral of taxation costs was one of the drivers for requesting the extension did not preclude it from granting the extension.

Re Arthur Brady Family Trust; Re Trekmore Trading Trust arguably further clarifies the position set out in the previous cases.

In that case, the first trust was established in 1977 with a vesting date of 2017.  The second trust was established in 2008 with near identical terms to the first trust (presumably as part of a trust ‘cloning’ arrangement), including the 2017 vesting date.

The applicants sought an order for an extension to the vesting date under the Trusts Act 1973 (Qld).

The sole reason for the application outlined in the judgment was the applicant’s desire to defer capital gains tax and stamp duty costs which would substantially dilute the overall pool of assets to the detriment of the beneficiaries.

The total tax and stamp duty costs across both trusts were anticipated to exceed $1.8m out of an asset pool of $15m.

The applicant submitted that, in order to maintain the property portfolios, the beneficiaries would need to borrow funds to meet the transaction costs.  Each of the contingent beneficiaries supported the application.

After a detailed analysis, the Court granted the requested extensions as it was satisfied the “very substantial impact of taxes and duties upon the trust funds” and the unanimous approval of the beneficiaries supported the exercise of its discretion.

Lessons

A few key lessons can be taken from the cases above.

First, many trust deeds from all eras, and particularly those established in the 1970s and 1980s include vesting periods significantly shorter than 80 years.

Practitioners should be alert to this issue and ensure they methodically check the vesting day of every trust as part of any trust dealing.

Secondly, Re Arthur Brady Family Trust; Re Trekmore Trading Trust provides authority that the Court may grant an order for the extension of a vesting day even where the sole purpose of the extension is to defer the capital gains tax costs and stamp duty costs that would otherwise arise as a result of the vesting, provided it can be shown that those costs would have a material adverse impact on the beneficiaries.

Finally, although any application to Court carries a degree of risk, recent cases indicate the Court will generally react positively to applications for the extension of vesting dates, where there are compelling commercial or family reasons to order the extension.


Until next week.

Latest View Legal Apple and Android app launched

Following the successful launch earlier this year of the View Legal Directors Duties and Estate Planning apps, we have now developed and launched another Apple and Android app.

The new app is in relation to Business Succession and can be downloaded via the following links –

1. iPhone – https://itunes.apple.com/au/app/business-succession/id927283653?mt=8
2. Android – https://play.google.com/store/apps/details?id=business.succession

Business succession is the important process of ensuring a plan is in place for a person’s business assets so they are dealt with, after death, as intended, while minimising the impact of challenges against the arrangements and costs such as stamp duty, tax and administration expenses.

The business succession area is however heavily regulated and it is vital that business owners and their advisers have a deep understanding across all relevant areas.

The business succession app is designed to allow the user to narrow down some of the broad areas that might be relevant in relation to a business succession plan.

Depending on the answers provided, the app generates a free white paper containing general information in relation to some of the issues that are often relevant.

Until next week.

Tax Office denied access to family law documents

Following on from recent posts, another decision arising out of family law proceedings that is worth remembering is International Litigation Partners Pte Ltd v FCT [2014] FCA 671.

If you would like a copy of the decision please email me. In this particular case, the Tax Office had sought access to material filed in the family court proceedings to assist in determining the tax residency of various related entities of the husband.  While the former wife consented to access being granted, the husband opposed access.

In ultimately denying the Tax Office access to the documents requested, the court confirmed:

1. The court must use its discretion to determine whether access to family court documents is appropriate on a case by case basis.


2. The exercise of the discretion involves the weighing of a number of competing interests, and in particular, whether the Tax Office was likely to derive any substantial benefit by breaching the confidential nature of personal documents filed in family court proceedings. 


3. The court should also take into account practical difficulties in separating documents that might be of use to the Tax Office and those that disclose personal issues (including those concerning the children of the relationship). 


4. Also of relevance is whether the spouse to the marriage is party to a Tax Office litigation (in this case, the husband was not a party).  As set out in earlier posts, in the Darling matter, the husband was a party to Tax Office audit activity.

Until next week.


Image credit: Paul Hocksenar cc

Some ramifications of failed trust distributions

For those that do not otherwise have access to the Weekly Tax Bulletin, the most recent published article by fellow View Legal Director Tara Lucke and I is extracted below.

As regularly addressed in the Weekly Tax Bulletin, a methodical approach is needed when preparing trust distribution resolutions to ensure the intended outcomes are achieved.

As explored at 2014 WTB 27 [942], there are a range of issues often overlooked in relation to distribution resolutions.

Where a purported trust distribution is subsequently found to be invalid, several potential ramifications arise, including:

• The "knowing recipient" principle.
• Disallowed deductions.
• Disclaimers.
• Equity and rectification.
• Impact of any default provisions.

Further comments on each of these issues are set out in turn below.

"Knowing recipient" principle

"Knowing recipient" is a principle that evolved out of situations where a trustee (who holds property on trust on behalf of the beneficiaries of a trust) appropriates trust funds for the benefit of a third party who has knowledge of the trust relationship. 

The concept gives the "wronged" beneficiaries the right to make a personal claim against the third party on the basis that the third party received the trust property, whilst having knowledge of the relationship between the property in question, the trustee and the beneficiaries. 

Impact of disallowed deductions

The treatment of disallowed deductions turns largely on the way in which the relevant distribution resolution is crafted. 

Broadly, there are 3 possible outcomes, namely:

• the amounts representing the disallowed deductions will be validly distributed to a particular beneficiary via the provisions of a distribution resolution;
• the default provisions under the trust deed will regulate the distribution (further comments in this regard are set out below); or
• the amount will be treated as an accumulation to the trust and the trustee will be taxed at the highest marginal tax rate is applied.

Disclaimers

In FCT v Ramsden [2005] FCAFC 39, the court held that the purported disclaimers by particular beneficiaries were ineffective.  However, it was confirmed that any interest acquired in the net income of a trust under the default provisions of a deed could be disclaimed by a beneficiary separately from any other entitlements which might accrue to that beneficiary under other provisions of the deed.

It was also confirmed that a disclaimer can be made retrospectively, provided it is made within a reasonable period of time from the beneficiary first becoming aware of the relevant interest that they wish to disclaim.

Equity and rectification

A court may use the equitable remedy of rectification where there is an error in a trust document which does not reflect the intentions of the parties and in turn, results in an invalid distribution. 

In order for rectification to be granted, the party applying for the court to exercise its discretion must establish 3 elements:

• the intention that the parties had in relation to the document up until the time the distribution resolution was executed
• a mistake was made in the document that does not reflect the parties' true intentions; an
• if the rectification order was granted, it would correct the mistake and match the parties' intentions.

Importantly, rectification will not be granted where there is simply an inadvertent financial result that occurred due to a misunderstanding of the consequences of a deliberate act.

Default provisions

From a trust law perspective, default capital provisions, and in some cases, default income provisions, under discretionary trusts are generally seen as important to ensure that the trust is valid at law.

From a tax perspective, the main objective of a default distribution clause, particularly for income, is to ensure that the default beneficiaries are assessed on the failed distribution, rather than the trustee being assessed at the top marginal rate.

The case of BRK (BRIS) PTY LTD v FCT (2001) 46 ATR 347 is arguably the leading example in this regard.  In this case, the default distribution clause of the relevant trust required, where there was a failure to distribute, that the trustee "divide the Fund equally among the beneficiaries named in the Schedule hereto". 

However, the clause was crafted such that the distribution did not take place until a date after the end of a tax year. 

Based on the drafting of the relevant clause, the court confirmed that while the provisions were valid from a trust law perspective, the trustee was unable to make the required distribution to the default beneficiaries until after the end of each tax year.  This, in turn meant that all undistributed income was in fact effectively accumulated for tax purposes each tax year. Therefore, all undistributed income was taxed to the trustee at the top marginal rate.

Conclusion – start by reading the deed

Given the range of significantly adverse consequences that can result where a purported trust distribution is subsequently found to be invalid, advisers should proactively invest in processes and systems to minimise the risk of such an outcome.

Invariably, best practice dictates that in every situation before preparing a resolution there should be:

1. a comprehensive review of the relevant trust deed including an analysis of every variation or resolution of a trustee or other person (such as a principal, appointor or guardian) that may impact on the interpretation of the trust document;


2.  specific review of the relevant tax legislation applicable to the amounts to be addressed by the resolution; and


3. thought applied to the exact factual scenario that the trustee is addressing, in the context of the trust deed and tax laws.

Until next week.

Tax Office views on accessing Family Court documents

As mentioned in last week’s post, in the case of Darling, the Tax Office was given access to material lodged as part of family law proceedings, to further its audit activities in relation to the husband of the marriage.

The Tax Office has now released a Decision Impact Statement in relation to its intended approach in this area.  As usual, a full copy of the document is available via the following link - http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/M34of2014/00001

In addition to providing a useful summary of the key aspects of the court decision, the Statement confirms –

1. There is an implied obligation on the Tax Office not to make use of documents disclosed as part of a family law case for a purpose not related to the family court litigation (ie to assist the Tax Office with its tax audit activities).


2. Whenever the Tax Office is wanting access to court documents for use other than in relation to the case in which the documents were filed, it will make an application to the court for release from the implied obligation.


3. In making an application to court, the Tax Office will have regard to the factors set out in the Darling decision (as summarised in last week’s post).

 Until next week.

Image credit: Adam Rifkin cc

Tax Office access to family court material

One area of the law that continues to evolve relates to the Tax Office being able to access material lodged as part of family law proceedings.  A further example of this is the case of FCT & Darling [2014] FamCAFC 59.  A full copy of the decision is available via the following link - http://www.austlii.edu.au/au/cases/cth/FamCAFC/2014/59.html

Whereas the original decision prevented the Tax Office from accessing certain information disclosed by the husband in his family court affidavit, the Tax Office was ultimately given access to the material on appeal.

While the court acknowledged that they did not want to create an environment that discouraged those involved in family court proceedings from making full and frank disclosures, it was also the case that, given the family court had an inherent ability to refer matters of tax evasion to the Tax Office, any further access granted on a case by case basis was unlikely to have a significant impact.

The other specific reasons given by the court for allowing access included:

1 there were significant restrictions on the Tax Office in relation to the ability to use the information that they gained, particularly in relation to releasing it publicly;

2 while the husband had argued that it would be inconvenient to have the information released, there was no actual evidence supporting this argument;

3 the Tax Office was engaged in a significant and targeted audit in relation to the husband – i.e. the Tax Office was not engaged in some form of ‘fishing expedition’.

Overall, it was deemed to be in the public interest to allow the commissioner access to the material.

Next week’s post will consider the Decision Impact Statement recently released by the Tax Office.

Until next week.

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What are superannuation proceeds trusts?

Recently, an adviser contacted me in relation to an estate planning exercise they were assisting with.

The lawyer advising the client recommended against establishing testamentary trusts until both the husband and wife had passed away.

The financial adviser was therefore exploring whether it would be possible to establish a 'superannuation proceeds trust' to effectively 'sidestep' the lawyer's recommendations.

For those not familiar with the superannuation proceeds trust structure, it is very similar to an estate proceeds trust (which was profiled in the post from 19 May 2010: http://blog.viewlegal.com.au/2010/05/testamentary-trusts-is-it-ever-too-late.html).

A summary of estate proceeds trusts is available on the View Legal website (www.viewlegal.com.au) via the core services section.

Until next week.

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Cases that have considered Richstar

As set out in many earlier posts, the Richstar case was decided in 2006, and yet, it continues to receive significant attention.

Interestingly, there has not been a substantive case that has accepted the conclusions in Richstar, and indeed, there are now many cases that have effectively rejected the core aspects of the decision in Richstar.

A selection of the subsequent cases is summarised below. If you would like access to the full copies of the decision, please email me:

1. Tibben & Tibben [2013] FamCAFC 145 - The only ‘entitlement’ of the beneficiaries under the Deed of Settlement was a right to consideration and due administration of the trust: Gartside v Inland Revenue Commissioners;
2. Deputy Commissioner of Taxation v Ekelmans [2013] VSC 346 - The applicant relied on the decision in Richstar to contend that the cumulative effect of the role and entitlement of Leopold Ekelmans under the trust instruments amounted to a contingent interest in all of the assets of the trust, making those assets amenable to a freezing order as if the assets of Leopold Ekelmans. The Court found that the applicant could not in this matter rely on Richstar;
3. Hja Holdings Pty Ltd and Ors & Act Revenue Office (Administrative Review) [2011] ACAT 91 – notwithstanding that beneficiaries under a ... discretionary trust have some rights, such as the right to have the trust duly and properly administered, generally a beneficiary of a discretionary trust, who is at arm's length from the trustee, only has an expectancy or a mere possibility of a distribution. This is not an equitable interest which constitutes "property" as defined;
4. Donovan v Sheahan as Trustee of the Bankrupt Estate of Donovan [2013] FCA 437 - a beneficiary of a non-exhaustive discretionary trust has no assignable right to demand payment of the trust fund to them (and nor have all of the beneficiaries acting collectively) and that the essential right of the individual beneficiary of a non-exhaustive discretionary trust is to compel the due administration of the trust;
5. Simmons and Anor & Simmons [2008] FamCA 1088 – the court and parties referred to Richstar on a number of occasions and confirmed that a beneficiary has nothing more than an expectancy.

Until next week.

Future of TDTs Post Richstar

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Future of TDTs Post Richstar’ at the following link - http://youtu.be/fUe8aX5DghI

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

The reality is that even despite decisions such as Richstar, testamentary trusts have always been a very strong vehicle from asset protection perspective.  

They're not a recent vehicle - they go right back into early English law, over hundreds of years.  While there has undoubtedly been an amount of white noise around them in recent times, the reality is that they are by far and away the most robust structure from an asset protection perspective. 

Importantly, they also ‘tick the box’ in terms of issues such as flexibility, tax planning and overall estate and succession planning objectives can almost always be achieved via a tailored testamentary trust.  

Ultimately, despite the Richstar decision, it is absolutely the case that testamentary trusts remain the choice structure for most estate planning exercises.

Until next week.

Important considerations when establishing a TDT

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Important considerations when establishing a TDT’ at the following link - http://youtu.be/D8HwIGVu8kk

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

Probably the two main components, although there's a myriad of things to be taken into account, but the two main components in light of Richstar would be firstly around control issues.

Particularly looking at things like who the trustee is of the trust, if there's going to be a corporate trustee, which is not unusual nowadays in relation to testamentary trusts, who will be the directors of the corporate trustee, who will be the shareholders of it, will there be  any restrictions or prohibitions on who can fulfil those roles. 

Similarly in that control context, exactly who will have ultimate control if there's going to be an appointor power?  So that would be the first main category and obviously there's a range of issues that sit around that.

The second category is exactly how regulated the trust is going to be in a mechanical sense in terms of the provisions of the will.  The particular things that advisers should be focusing on are issues like:

(a)         are there automatic disqualifications for particular roles;

(b)         if there are automatic disqualifications, do they apply permanently, or is it just during a period where a particular beneficiary or a particular appointor is in strife from creditors. 

Combining these two core components and there’s obviously a range of issues in between them, but generally as long as you can get those two broad silos right, that will set a good framework for a very strong structure. 

Until next week.

Cascading testamentary trusts and stamp duty risks

With thanks to co-director View Legal Patrick Ellwood, today’s post looks at an estate planning approach that is often raised, namely the use of ‘cascading’ testamentary trusts.  The structure usually involves a single testamentary trust being established upon the death of one spouse, which then ends and ‘cascades’ into multiple testamentary trusts (usually one for each child) upon the death of the surviving spouse.

This strategy is intended to avoid the issues that can arise where clients ultimately want their children to receive control of separate shares of their estate, while minimising the potential burden for their spouse with the administration of multiple trusts while they are alive.
Previous posts confirm that there should be no tax consequences of the cascading trust approach, for example see Do ‘cascading’ testamentary trusts cause a tax problem and Taxation consequences of testamentary trust distributions - Part II.

Although the ‘cascading’ trust structure can be useful in some circumstances, it is vital to consider the risk that stamp duty will normally apply on the transfer of assets from the original testamentary trust to the separate trusts for the children. The stamp duty rules are different in each jurisdiction, however will usually be around 5% of the value of the assets being transferred.

An alternative approach is to establish a single trust on the death of the first spouse, and ensure the terms of that trust are broad enough to allow capital distributions to be made to other trusts.  This means that, if the stamp duty cost can otherwise be managed, the trustees can ‘split’ the assets of the trust into separate trusts at the appropriate juncture by way of a capital distribution.

A further alternative is to simply establish multiple testamentary trusts on the death of the first spouse and ensure the trustee of each trust (normally the surviving spouse) is empowered to administer all trusts as if they were a single trust.  This approach generally provides the most flexibility and ensures there will be no unnecessary stamp duty costs.

The perceived complexities of using multiple trust are normally not significant if the same trustee acts as trustee of each trust certainly no more complex than (say) 2 individuals owning a house, which is obviously very common.

Until next week.

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Accessing disablement proceeds via superannuation

This week’s post addresses an issue recently raised with us by an adviser, focusing on the ability to access insurance proceeds from a superannuation fund on an event of permanent incapacity.


The particular issue raised involved the fact that best practice often dictates that clients should obtain insurance protection on the basis of an inability to work in their ‘own’, as opposed to ‘any’ occupation.

The satisfaction of the ‘own’ occupation test is obviously easier than the condition of release set out under the superannuation legislation, being that a member must be incapable of working in ‘any’ occupation.

Where insurance is owned via a superannuation fund there is therefore a risk that while the fund will receive an insurance payout, it will be unable to release it to the member until some other condition of release is satisfied (for example, reaching the retirement age).


Historically therefore, the conservative view was undoubtedly that own occupation insurance should always be owned outside super.  Importantly, since 1 July 2014, own occupation insurance is no longer available via superannuation, subject to a grandfathering for arrangements already in place before that date.

For those pre-existing arrangements, there appears to be a pragmatic approach adopted, particularly by those with policies via a self-managed superannuation fund.  This approach involves assuming that a trustee (who will also be a member of the relevant fund) will adopt a liberal interpretation of the ‘any’ occupation definition under the superannuation legislation and therefore always allow the release of insurance proceeds.

 Until next week.

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Age of entitlement

Following last week's post some questions were raised about at what age a person can be entitled to receive benefits under a will.

The issues in this regard are a little more complex, however broadly:

1. If a specific entitlement under a will passes to anyone under the age of 18, the trustee of the will effectively holds it for them on a bare trust until their 18th birthday. 
2. If an age is nominated in the will for a beneficiary to receive their entitlement, it will be held on trust until that age, unless the will is not drafted correctly (there are some complex issues that can apply in this regard). If the will is not drafted correctly, then regardless of the age nominated, the beneficiary can get access to the gift on their 18th birthday. 
3. Generally, none of the above rules are applicable where the asset passes to a testamentary trust – in this instance, the assets normally remain indefinitely within the trust structure, regardless of the age of the beneficiaries. 

Until next week.

Age of majority

Last week an interesting issue arose with the child of a client who was about to travel overseas on an exchange. 

The child was a part time employee and member of a superannuation fund. Under the superannuation fund, they were automatically entitled to a life insurance policy which gave a payout of $200,000 on death. The fund required that any payout be made to the legal representative of a deceased member.

The parents of the child felt that it would be prudent to ensure that on receipt of these insurance proceeds the estate would be able to administer them easily – the obvious answer in this regard was the creation of a will.

Unfortunately, in these circumstances, no will is able to be made because in order to make a will, the individual involved must be 18 years of age.

The only substantive exception to this rule is if the will maker, being under the age of 18 years, has lawfully married.

Until next week.

Two View Legal iPhone and Android apps launched

Based on feedback from advisers, View Legal has recently developed and launched two new iPhone and Android apps.

Each app can be downloaded via the following links –

1. iPhone Directors’ Duties – https://itunes.apple.com/us/app/directors-duties/id902289581?ls=1&mt=8
2. Android Directors' Duties - https://play.google.com/store/apps/details?id=director.duties 
3. iPhone Estate planning – https://itunes.apple.com/us/app/view-legal-estate-planning/id902301642?ls=1&mt=8
4. Android Estate planning – https://play.google.com/store/apps/details?id=view.legal.estate.planning 

Directors’ Duties App

Acting as a director of a company imposes many obligations and duties.

The directors’ duties app is designed to allow the user to help narrow down some of the broad areas that might be relevant in relation to their current or any intended directorships.

Depending on the answers provided, the app generates a free white paper that sets out general information about numerous aspects of the duties directors have.

Estate Planning App

Estate planning is the process of ensuring wealth is dealt with, after death, as intended, while minimising the impact of challenges against the arrangements and costs such as stamp duty, tax and administration expenses.

The estate planning app is designed to allow the user to help narrow down some of the broad areas that might be relevant in relation to implementing, or updating, an estate plan.

Again, depending on the answers provided, the app generates a free white paper that sets out general information about a range of estate planning strategies.

Until next week.

Scope of the Richstar decision

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Scope of the Richstar decision’ at the following link -  http://youtu.be/N2VpKrws93c

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

It’s fair to say Richstar is seen as probably the high watermark in relation to how the assets of a trust may be exposed in the context of some sort of bankruptcy litigation. Interestingly, it has remained almost as an outlier decision.

There really haven't been any decisions that have supported the landing the court reached in relation to Richstar. On top of that, the cases like Smith which have come down since Richstar, effectively completely ignore Richstar and go to the extent of saying it doesn't actually represent good law.

Ultimately, pragmatically and practically what the position seems to be is as long as a trust is structured appropriately it will provide a very good level of asset protection from creditors and should be seen as probably the choice structure in an estate planning exercise under a will - in other words, the use of a testamentary discretionary trust - in order to provide an adequate level of protection.

Until next week.

Impact of Richstar on discretionary trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Impact of Richstar on discretionary trusts’. If you would like a link to the video please email me.

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

Probably the most interesting part of Richstar is that in some respects counter-intuitively, it confirms that trusts remain a very robust structure from an asset protection perspective.

If you actually take a helicopter view of where the court landed in Richstar, it certainly supports this idea that just because an individual happens to be the trustee and beneficiary and appointor will not of itself mean that the trust is ignored and that the assets of the trust will automatically be deemed to be those of the relevant individual.

In contrast however, and the flipside to this argument is that if you do fulfil a number of those roles and the court feels as though that’s enough in combination to create a scenario where a person is effectively the alter ego of the trust, then indeed the trust structure will not provide you any asset protection and the assets will be potentially exposed.

Until next week.

Image credit: Jasper Nance cc

Is appointorship an asset?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Is appointorship an asset?’ If you would like a link to the video please email me.

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

Whether the appointor role is an asset on the holder’s bankruptcy is probably one of the most contentious issues to have arisen in recent years. Certainly, the feeling amongst lawyers that act on behalf of trustees in bankruptcy or creditors is that absolutely the role is a potential asset.

If it is an asset, then it forms part of the bankrupts’ estate. The reality however when you actually look at the decisions that have been handed down is the exact opposite. So in other words, the role of an appointor is a personal role, akin to a directorship. Therefore, that’s not an asset that can be handed onto creditors.

Having said this, the issue does not seem to be going away and the conservative view would be that you would try, when setting up this type of structure, to ensure that you do one of a myriad of things.

So for example, making sure that if there is an at risk person that is needing to fulfil the role of appointor or principal, that they don’t fulfil that role individually and solely, that ideally there's some other person acting with them.

Secondly, the way in which the role is structured, it's embedded under the trust instrument, whether it be a family trust or a testamentary discretionary trust, the appointor is automatically disqualified in the event of committing an act of bankruptcy.
Until next week.

Importance of minimising loan accounts to at risk beneficiaries

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Importance of minimising loan accounts to at risk beneficiaries’.  If you would like a copy of the video link please email me.

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

The reality in relation to beneficiary loan accounts is that sometimes they're unavoidable.

If distributions are being made by the trustee down to an at risk beneficiary and those amounts aren't physically paid, then they’ll sit on the balance sheet either as a credit loan or an unpaid present entitlement.

In either scenario, that’s clearly an asset of the at risk beneficiary. So it’s really important that on a regular basis those potential assets are reviewed and steps are taken to ideally quarantine them away into a protected environment.

The simplest approach, assuming that you can't avoid the distributions coming down to that person, will be to forgive that debt, or as an alternative, making sure that the outstanding amount is gifted across to a protected environment whether that be a spouse, some other family member or perhaps some other related structure.

The critical thing in all of that, quite aside from the pure bankruptcy issues is however that there must be a particular effort applied to the related issues. That is, things like the commercial debt forgiveness rules, wider tax planning issues and the stamp duty rules, that are unfortunately different in every jurisdiction around the country, are all potentially relevant before any step can be taken to quarantine the loan account wealth. 

Until next week.

Segregating assets via multiple TDTs

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Segregating assets via multiple TDTs’ at the following link - http://youtu.be/9_dgi85kC0s

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

TDTs or testamentary discretionary trusts have historically been considered almost immune from anything in relation to wider asset protection issues, simply because they're set up under the will of the will maker.

What we've seen over time however is that what has been a fairly traditional approach in terms of having very passive assets sit inside the trust has gradually expanded. It’s not unusual to have business run through a testamentary trust or a partnership interest through a testamentary trust. In any of those scenarios, all of the normal principles that apply to asset protection and limited liability equally apply to testamentary discretionary trusts.

As there's no extra protection provided by the testamentary trust, basic structuring issues such as utilising a corporate trustee to provide limited liability for the structure, or more importantly, ideally, using separate special purpose vehicles to undertake each uniquely risky business activity is strongly preferred.

Until next week.

Trust distributions – 3 reminders for 30 June 2014

Getting ready for 30 June.

For the fourth time in recent weeks we have been fortunate to have an article featured in the Weekly Tax Bulletin. This time it is by fellow View Legal Director Patrick Ellwood and I and is extracted below for those who do not otherwise have easy access.

As regularly addressed in the Weekly Tax Bulletin, a methodical approach is needed when preparing trust distribution resolutions to ensure the intended outcomes are achieved.

With another 30 June fast approaching, it is timely to consider 3 key issues often overlooked, namely:

1. ensuring that the intended recipient of a distribution is in fact a valid beneficiary of the trust;
2. avoiding distributions to beneficiaries who appear to be validly appointed under a trust deed, however are in a practical sense excluded; and
3. complying with any timing requirements under a trust deed, regardless of what the position at law may otherwise be.

Further comments on each of these issues are set out in turn below.

Is the intended recipient a beneficiary?

A beneficiary is a person or entity who has an equitable interest in the trust fund. A beneficiary has enforceable rights against a trustee who fails to comply with their duties, regardless of whether they have ever received distributions of income or capital from the trust. 

The range of eligible beneficiaries will generally be defined in the trust deed and the first step in any proposed distribution should be to ensure that the intended recipient falls within that defined range.

Once the range of eligible beneficiaries has been determined, the next step is to identify classes of specifically excluded beneficiaries.

These exclusions will usually override the provisions in a trust deed which create the class of potential beneficiaries and some common examples include:

• persons who have either renounced their beneficial interest or have been removed as a beneficiary of the trust fund;
• the settlor and other members of the settlor's family;
• any "notional settler"; and
• the trustee.

A comprehensive review of a trust deed must include an analysis of every variation or resolution of a trustee or other person (such as an appointor) that may impact on the interpretation of the document.

The range of documents that could impact on the potential beneficiaries of a trust at any particular point in time is almost limitless. Some examples include:

• resolutions of the trustee to add or remove beneficiaries pursuant to a power in the trust deed;
• nominations or decisions of persons nominated in roles such as a principal, appointor or nominator; and
• consequential changes triggered by the way in which the trust deed is drafted (eg beneficiaries who are only potential beneficiaries while other named persons are living).

Does the intended recipient appear to be a beneficiary, yet practically is excluded?

It is important to remember that the unilateral actions of a potential beneficiary may impact on whether they can validly receive a distribution. For example, a named beneficiary may disclaim their entitlement to a distribution in any particular year, or may in fact renounce all interests under the trust.

There are also a number of potential issues that can arise in relation to beneficiaries that appear to have been nominated as beneficiaries, as to whether the nomination is effective. These issues can include:

• whether the appointment needs to be made in writing;
• whether the appointor has been validly appointed to their role;
• at what point the nomination needs to take place in the context of the timeframe within which a distribution must be made; and
• are there any consequential ramifications of the nomination, eg stamp duty, resettlement for tax purposes or asset protection.

Family trust election

In addition to the traditional trust law related restrictions on the potential beneficiaries of a trust, it is important to keep in mind the consequences of a trustee making a family trust election or interposed entity election.

Where such an election has been made, despite what might otherwise be provided for in the trust instrument, the election will effectively limit the range of potential beneficiaries who can receive a distribution without triggering a penal tax consequence (being the family trust distribution tax).

A family trust election will generally be made by a trustee for one or more of the following reasons:

• access to franking credits;
• ability to utilise prior year losses and bad debt deductions;
• simplifying the continuity of ownership test; and
• eliminating the need to comply with the trustee beneficiary reporting rules.

While a full analysis of the impact of family trust elections and interposed entity elections is outside the scope of this article, it is critical to consider the potential implications of any such election on what might otherwise appear to be a permissible distribution in accordance with the trust deed.

Complying with any timing requirements under the trust deed

Historically, the Commissioner permitted resolutions to be made after 30 June each year via longstanding ITs 328 and 329, however as practitioners will recall, these were withdrawn in 2011.

The current law does allow resolutions in relation to capital gains to be made no later than 2 months after the end of the relevant income year. Any other distributions, including in particular franked distributions, must be made by 30 June in the relevant income year.

Notwithstanding the general position above, the ATO has regularly confirmed its view that regardless of any timing concessions available under the tax legislation or ATO practice, these concessions are subject always to the provisions of the relevant trust instrument.

In recent times, we have reviewed a number of trust deeds by different providers that require all resolutions to be made by a date earlier than 30 June, eg no later than 12pm on 28 June in the relevant financial year. Unfortunately, in every situation we have seen, all distributions for previous income years were dated 30 June, meaning each resolution was in fact invalid under the deed, regardless of the fact that the resolution otherwise complied with the law.

In these situations, arguably the only practical solution is to proceed with lodgment of amended returns, relying on the default provisions under the trust deed – assuming there are adequate default provisions.

Until next week.

Image credit: Steve Corey cc via Flickr