Final Post for 2015 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 2016.

Similarly, the social media contributions by both the View and Matthew 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 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 six years, edited to ensure every post is current and organised into chapters for each key area should be available early in 2016.

Very best wishes for Christmas and the New Year period.

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What happens to assets in the estate if a person dies without a will?

A previous post has looked at what happens to assets in the estate if a person dies without a will (see - http://blog.viewlegal.com.au/2011/11/how-do-intestacy-rules-work.html).

If a person dies without a will, the law says that their assets will be distributed to their family, as determined by a set formula (the ‘intestacy’ rules). The set formula is different in every Australian jurisdiction. There are a range of issues which will determine which jurisdiction’s rules will apply.

The intestacy rules will also apply where a person dies without a valid will in relation to all of their assets. In this regard, it can in fact be possible to die ‘partially intestate’. This simply means that there are assets in a person’s estate that are not validly dealt with under the will in place at a person’s death.

The following summary gives a broad example of the way in which the intestacy rules often work. If a person dies leaving:

1. their spouse, but no children: their spouse receives everything; 


2. their spouse and children: their spouse receives the first $150,000 and one half of the balance of the estate if there is one child, or one third of the balance if there is more than one child. The Testator’s children share the balance between them;


3. children but no spouse: their children receive a share each, but only if 18 years of age or married;


4. no spouse or children: the person’s parents will share the estate (if both are alive then equally);


5. no spouse, no children and no parents: their siblings share equally.

A spouse includes a legal and de facto spouse.

The amount received by each person will depend on the value of the estate and whether any other beneficiaries are entitled to the assets of the testator.

If the person does not have any family members who qualify, then the assets may pass to the government.

It is necessary that someone apply to the court to be appointed as the administrator, to ensure that the person’s estate is properly administered. This normally adds time and significant extra costs to the administration of the estate. If the testator has young children and a guardian is needed, an application to the court may also have to be made.

Image credit: Mathias Pastwa cc

Are trusts still useful post Spry?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Are trusts still useful post Spry?’ at the following link - https://www.youtube.com/watch?v=IjcRGemWHyk

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

Certainly, immediately following Spry, for an extended period, the usefulness of trusts was under the spotlight and there was significant nervousness about how robust they actually were going to be.

The reality has been that this conclusion has been tempered by the combination of firstly the fact that Spry is a bit of an outlier decision and actually driven a lot by factual scenario, which is a relatively strange set of circumstances, and the fact that there have been so many cases since Spry that have respected the integrity of trusts.

Therefore, it is generally accepted that all forms of trusts, particularly testamentary trusts, will remain the vehicle of choice in estate planning context at least for the foreseeable future.

Binding financial agreements and trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Binding financial agreements and trusts’ at the following link - https://www.youtube.com/watch?v=dS8CjyW0hUY

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

There is no doubt that a properly crafted binding financial agreement or 'BFA' provides the best protection from an asset protection perspective available.

The difficulty is that even despite the changes that the government has brought in to make binding financial agreements more robust, the reality is there is a level of scepticism about just how useful BFAs are actually going to be, because there seem to be so many ways in which they can be unwound on a technicality.

While the general view is that they are the ideal outcome in terms of protecting wealth, the conservative view would always be that steps are taken to complement the BFA and to try and ensure the assets are ultimately quarantined on a relationship breakdown. One obvious example is to implement testamentary discretionary trusts under the estate plan, regardless of whether a BFA is in existence.

Overseas assets and estate planning

Where a will maker has assets both in Australia and overseas, there are a number of specific estate planning steps that should be adopted.

In summary, these include:

1. It is generally preferable to commence the estate planning process in the jurisdiction that the will maker is currently living. 


2. The completed estate planning documents should be signed in the normal way and then provided to a specialist adviser in any other jurisdiction where substantial assets are held. 


3. While initially the will first prepared should apply to all assets worldwide, generally when documentation is implemented in other jurisdictions, each will should be amended so as to only apply to assets in the relevant jurisdiction. 


4. Wherever possible, the signing and witnessing procedure for the jurisdiction to which the will applies should be followed. Alternatively, it will generally be permissible for the will to be signed and witnessed in accordance with the laws of the country where the will maker signs the document and still be valid worldwide. 

The above approach ultimately ensures that the client has:

1. appropriate estate planning documents for each Country in which they retain wealth; and


2. received the necessary succession and tax advice for each asset in each Country.

Image credit: xlibber cc

Lessons from the Family Court case of Essex

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Lessons from the Family Court case of Essex’ at the following link - https://www.youtube.com/watch?v=McHPGXipl2I

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

While Essex hasn’t probably received as much media attention as the Spry decision, in some respects, it's arguably the leading decision in the family law space in relation to trusts.  As usual, a full copy of the decision is available here http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FamCAFC/2009/236.html?stem=0&synonyms=0&query=essex.

The husband in Essex:

a          was not the trustee of the structure;

b          had not really received any distributions; and

c          had not contributed to the assets of the trust being generated in the first place as they had come down the family line.

Despite these facts, the court still held the assets to be the husband's resource and therefore took into broad account the terms of matrimonial property settlement. 

Importantly though, the assets were not considered property. That was a very important part of the decision, because the court also found that despite the fact that the husband did not have any control over the structure and had yet to receive any benefit, there was absolutely clear evidence that he would ultimately receive it, in the court's opinion. 

While on the face of the decision, Essex was probably a 'loss' for the husband, the reality is that the decision supports this idea that trust structures will only be attacked where the court believes that it is absolutely legitimate in the circumstances and in any other scenario that the integrity of the trust structure will be respected and the assets will, therefore, be protected.

Testamentary trusts and excepted trust income

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article by fellow View Legal Director Patrick Ellwood and me is extracted below.

The recent Tax Office Private Binding Ruling Authorisation number 1012846046513 (Ruling), reported in this Bulletin, considers a number of key issues relating to the distribution of assets via testamentary trusts under deceased estates.

The Ruling largely follows the well-publicised Practice Statement Law Administration PS LA 2003/12 (PSLA 2003/12), which was republished in April 2014 (reported at 2014 WTB 16 [561]), and then updated in August 2015 to the new LAPS format and style.

The Ruling is a timely reminder of the need to ensure care is taken with any intended distributions from a testamentary trust.

Overview of questions answered

The Ruling confirms the following, in each instance largely applying PSLA 2003/12:

• Div 128 of the ITAA 1997 applies to disregard any capital gains tax on the distribution of assets from a testamentary trust directly to individual beneficiaries of a testamentary trust;
• a valid variation of a testamentary trust to allow distributions to inter vivos trusts, that were not originally potential beneficiaries of the testamentary trust, would not trigger a CGT event; and
• Div 128 of the ITAA 1997 also applies to disregard any CGT on the distribution of assets from a testamentary trust directly to inter vivos beneficiaries of a testamentary trust.

Aside from also making comments about the non-application of the anti-avoidance provisions under Pt IVA of the ITAA 1936, the Ruling specifically considers whether s 102AG(2) of the ITAA 1936 would apply to treat any income derived from the assets received by an infant beneficiary via an inter vivos trust as excepted trust income.

Excepted trust income arguments

As is well understood, pursuant to Div 6AA, and in particular, s 102AG(2)(a)(i), excepted trust income is the amount which is assessable income of a trust estate that resulted from a will, codicil or court order varying a will or codicil.

The case of The Trustee for the Estate of the late AW Furse No 5 Will Trust v FCT (1990) 21 ATR 1123 (Furse) is one of the few reported decisions dealing with Div 6AA.

In that case, the Federal Court noted that provided a trust estate was created by a will, then any income of the trust estate (including a testamentary discretionary trust) is excepted trust income. The only particular limitation placed on the provisions by Justice Hill in Furse was that the parties must be dealing on an arm's length basis when deriving the income. Importantly, the requirement was not that the parties must in fact be arm's length but that the income was equal to an amount that would be derived had they been dealing at arm's length.

Section 102AG(1) requires that a trust have a prescribed person (relevantly in most situations, an infant, subject to certain exceptions in s 102AC(2)) as a beneficiary.

Importantly, s 102AG(1) does not expressly exclude an indirect interest as being a beneficiary for the purpose of the provisions.

Therefore, it is often argued that the income of the "trust estate" contemplated in the opening words to s 102AG(2) does not need to be the same trust estate.

This in turn means that any income received by an infant beneficiary derived from assets originally sourced from an estate, via an inter vivos trust (ie after distribution of certain assets from a testamentary trust to an inter vivos trust) should be treated as excepted trust income.

That is, the relevant income will be income that is excepted trust income "in relation to a beneficiary of the trust estate (that is, an inter vivos trust) to the extent to which the amount – (a) is assessable income of a trust estate (that is the testamentary trust) that resulted from – (i) a will (that is the will of the willmaker that created the testamentary trust)".

Section 102AG(4) does provide that an amount will not be treated as excepted trust income if it was derived by a trustee as a result of an agreement entered into for the purpose of securing that the income would be excepted trust income.

Arguably this restriction does not apply in the factual scenario outlined above because the income derived via the assets transferred to an inter vivos trust would have been excepted trust income in the testamentary trust.

The above arguments are largely supported by Private Ruling authorisation number 1012603789935.

Tax Office position

In rejecting the above arguments, the Tax Office confirms in the Ruling that income distributed by the inter vivos trust would not be excepted trust income.

In particular, the Ruling states as follows –

• Furse is authority for the proposition that excepted trust income can be sourced via a testamentary trust under a will with assets not necessarily the property of the willmaker at the date of their death;
• Furse is also authority for saying that inter vivos trusts can never create access to excepted trust income, unless the relevant trust is mentioned in the will; and
• this essentially means assets would need to be distributed directly under a will pursuant to a specific direction to an inter vivos trust before the income of the inter vivos trust will be considered excepted trust income.

Lessons

A number of lessons can be taken from the Ruling, including:

• The Tax Office, as has been long assumed, is likely to take a relatively narrow view to interpreting the excepted trust income rules under the ITAA 1936.
• This narrow interpretation is despite the longstanding and widely accepted principles set out by Justice Hill in Furse.
• Where possible, if access to excepted trust income is important to a willmaker, personally owned assets should be distributed to a trust created under a will (ie a testamentary trust), not a pre-established inter vivos trust.
• Willmakers not domiciled in South Australia looking to create a "perpetual trust" (ie set up under South Australian law to potentially avoid the need to have a vesting date) need to accept there will be risks with also accessing excepted trust income via the structure, if the Tax Office continues to look for ways to narrow the interpretation of s 102AG of the ITAA 1936 and the decision in Furse.
• Depending on the situation, and in particular the terms of the will, for trustees of existing testamentary trusts wanting to restructure assets and still maintain access to the excepted trust income concessions, a form of trust cloning relying on PSLA 2003/12 may be appropriate.

Image credit: GotCredit cc

Memos of directions in relation to trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of memos of directions, or letters of wishes in relation to trusts at the following link - https://youtu.be/B9NuAE3lIiM

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

Memos of directions, or letters of wishes, are a classic example of the 'continuum's' that the court has to work in and the overall framework of appropriate public policy.

With letters of wishes, what the courts are generally trying to balance on the one hand, is the idea that they should be there to support the trustees and help them reach the right decision, against the argument that trustees are ultimately responsible to answer to the court and not be subject to anyone else's direction.

Many cases in this area have had factual scenarios where the letters of wishes are referred to in the reasons for a decision by the trustee and the beneficiaries have challenged the decision and directions were sought from the court.

Often, the court will release the letter of wishes and make it known to the beneficiaries. However, the decisions observe that the only reason that the letter of wishes even comes into play is because the trustee chooses to disclose the existence of them.

Therefore, from a planning perspective, it may be a conservative and pragmatic approach that letters of wishes, even if they exist, are not actually disclosed anywhere by the trustee.

When will a multiple testamentary trust be preferred?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘When will a multiple testamentary trust be preferred?’ at the following link - https://youtu.be/JXOrmklYY8Y

Again, for ease of reference, earlier posts addressing similar issues are at the following links - http://blog.viewlegal.com.au/2012/11/single-v-multiple-testamentary-trusts.html http://blog.viewlegal.com.au/2012/11/single-v-multiple-testamentary-trusts_26.html

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

Interestingly, the reasons supporting use of multiple trusts are almost a mirror image to those supporting a single trust. The practical reasons include where the underlying beneficiaries are all adults, spread all over the world, or simply don’t get on. For any of these reasons it would often be impractical to lock them inside one structure.

Similarly, if there are different risk profiles or investment objectives for each of the underlying main beneficiaries, that would be another reason that a multiple trust would be preferable.

Again, what the underlying assets of the estate are can also be a big driver towards supporting use of multiple testamentary trusts.

For example, if there are particular assets that need to go into direct control of particular beneficiaries, then again the multiple trust structure will be the preferred approach.

Multiple trusts can be of particular use where there is a need to have different control mechanisms in relation to different components of the estate.

This can be particularly relevant to people who are concerned about the mental stability of a beneficiary or a beneficiary has a physical disability, then this in itself can be a driver to regulate part of the estate in a certain way through a testamentary trust and then have a separate trust to manage other parts of the wealth.

Can an attorney sign a binding nomination?

A recent post looked at the issues surrounding SMSF control on trustee incapacity (see - http://blog.viewlegal.com.au/2015/07/incapacity-and-smsf-control.html)

Adviser feedback raised the adjacent issue of whether an attorney can sign a binding death benefit nomination (BDBN) on behalf of an incapacitated member.

While there are differing views, there has been at least one decision by the Superannuation Complaints Tribunal confirming that an attorney can make a BDBN, namely Superannuation Complaints Tribunal, Decision D07-08\030. As usual, a link to a full copy of the decision is as follows - http://www.sct.gov.au/dreamcms/app/webroot/uploads/determinations/D07-08-030.pdf

The decision of the Tribunal ultimately held the relevant BDBN was invalid for other reasons, it provides at least some authority for the argument that a BDBN need not be made personally by a member.

In this context however it is important to note that the Law Council of Australia, in their submissions to the Australian Law Reform Commission’s Report number 124, confirmed its view that some industry funds will not in fact accept nominations made by an attorney.

Generally, at least for self managed funds, it seems to be accepted that an attorney can at a minimum ‘affirm’ an existing BDBN, if it has lapsed for any reason. This conclusion however is always subject to the terms of the fund’s trust deed and a future post will likely consider this aspect in more detail.

Ideally an express power should be included in a member’s enduring power of attorney to put the attorney (again subject to the trust deed) in the best position to be able to validly make nominations as they determine appropriate, for example using wording as follows –

(a) Any attorney can enter into transactions where their interests and duty could conflict with my interests in relation to the transaction.

(b) Any attorney may sign any form of superannuation nomination (whether binding or non-binding, lapsing or non-lapsing) regardless of whether they may be married to or related to or themselves be a nominee.

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When will a single testamentary trust be preferred?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘When will a single testamentary trust be preferred?’ at the following link - https://www.youtube.com/watch?v=-tI21UwLNnw

For ease of reference, earlier posts addressing similar issues are at the following links -

http://blog.viewlegal.com.au/2012/11/single-v-multiple-testamentary-trusts.html

http://blog.viewlegal.com.au/2012/11/single-v-multiple-testamentary-trusts_26.html

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

The issues around the appropriateness of a single testamentary trust structure are really driven by the practicalities and the exact factual framework that a particular client finds themselves in.

The obvious one and the most common scenario would be where the family is quite young (for example), all children who are beneficiaries are under the age of 18. Another of the reasons is if asset protection is a core goal.

Generally, the conservative view is that using one trust, as opposed to multiple trusts, will provide a stronger level of asset protection.

Other issues include where the overall framework of the people making the estate plan is one where they want to see the beneficiaries more as a custodian of wealth, as opposed to being a direct recipient.

Probably the last main example would be where the underlying assets don’t lend themselves to a structure, other than being inside a single testamentary trust. A classic example would be a business interest or a large property holding. In this type of scenario, it's normally the case that a single trust would be preferred, as opposed to a multiple testamentary trust structure.

Another reminder to ‘read the deed’

As highlighted in last week’s post, the need to ‘read the deed’ before making any variation to a trust deed is critical (see for example http://blog.viewlegal.com.au/2015/09/always-read-deed.html).

The case (Jenkins v Ellett [2007] QSC 154) mentioned in passing, in a previous post (see - http://blog.viewlegal.com.au/2010/09/when-power-to-vary-is-not-power-to-vary.html) and again last week, remains a leading example of this mantra.

As usual, a full copy of the decision is available via the following link - http://www.austlii.edu.au/au/cases/qld/QSC/2007/154.html

Broadly the situation in this case was as follows:

A principal under a trust deed had the ability to remove and appoint the trustee of the trust.

The principal purported to rely on a power of variation to remove himself as principal and name a replacement, which effectively changed the schedule to the trust deed that automatically appointed the principal’s legal personal representative (LPR) as his replacement on death.

When the LPR of the principal purported to exercise the principal powers following the death of the original principal and was challenged, the Court held that the previous attempted variation was invalid, effectively confirming the LPR’s authority to act as the principal.

The attempted variation was held to be invalid because the relevant power in the trust deed was crafted so that it could only be used in relation to the ‘trusts declared’, and in particular did not extend to varying the schedule to the trust deed.

Until next week. 


Image credit: Jenni C cc

Always ‘read the deed’

The recent decision of Mercanti v. Mercanti [2015] WASC 297 again reinforces the mantra ‘read the deed’, which is a theme that has featured regularly in previous posts (see for example - http://blog.viewlegal.com.au/2014/03/death-benefit-nominations-read-deed.html, http://blog.viewlegal.com.au/2013/08/a-further-reminder-read-deed.html, http://blog.viewlegal.com.au/2012/07/ato-reminder-read-deed.html).

As usual, a full copy of the decision is available via the following link – http://www.austlii.edu.au/au/cases/wa/WASC/2015/297.html

Broadly the background was as follows –

1. As part of a family succession plan, two family discretionary trusts were amended by deleting the original definition of ‘appointor’ for each trust.
2. This resulted in the father being replaced by his son as appointor of the two trusts.
3. The appointor power under each trust gave the person nominated the power to unilaterally change the trustee of each trust.
4. A later family dispute saw the son purport to exercise the appointor powers under each trust deed (as amended) to replace the trustees with a company he controlled.
5. The father attempted to resist the changes, in part on the basis that the earlier deeds of variation were not in accordance with the variation power in the trust deeds and therefore invalid.

In deciding that the change of appointor was valid under one trust deed, and invalid under the other, the court highlighted the overriding importance of reading the relevant trust instrument.  In particular –

(a)    One deed had a variation power that relevantly provided the ability to ‘vary all or any of the trusts, terms and conditions’. The scope of this provision was sufficiently wide to allow the original change of appointor and therefore the son was able to use his power to change the trustee.

(b)   The power under the second deed however only provided the ability to ‘vary all or any of the trusts’.  In other words, there was no express power to amend the terms and conditions of the trust deed.

(c)    The concept of ‘trusts’ does not ordinarily, and did not here, extend to the appointor clauses, meaning the purported variation of appointor was invalid and in turn the son’s attempted change of trusteeship ineffective.

In many respects the decision here is simply the application of principles explained in detail in the case of Jenkins v Ellett [2007] QSC 154, which will be the subject of next week’s post.

Until next week.

Image credit: Anders Bachmann cc

At last some clarity with the streaming of franking credits? But trust law re-write still urgently needed

For those that do not otherwise have access to the Weekly Tax Bulletin, the further article from earlier this month by fellow View Legal Director Patrick Ellwood and me is extracted below.

For ease of reference, an earlier post addressing a previous decision in this matter is at the following link - http://blog.viewlegal.com.au/2010/11/streaming-decision-released.html

The recent case of Thomas v FCT [2015] FCA 968, reported in this Bulletin, considers a number of key issues relating to the distribution of franking credits by the trustee of a discretionary trust, including the ability to stream franking credits as a separate class of income.

It follows the well-publicised decision of the Queensland Supreme Court in Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417 (reported at 2010 WTB 49 [1884]), which relevantly held that franking credits could form part of the income of a trust estate for trust law purposes and be streamed to particular beneficiaries.  The Commissioner was not a party to that earlier decision.

The Thomas case explores the interaction between s 95 and s 97 of the ITAA 1936 dealing with trust income and Div 207 of the ITAA 1997 dealing with the imputation system.

The decision is a timely reminder of the need to ensure that trust distributions are made in compliance with the trust deed, the ITAA 1936 and the ITAA 1997, and of the complexities that can arise when streaming different classes of income.

Facts

A more detailed summary of the facts of the case are set out separately in this Bulletin, however in brief, the trustee of Thomas Investment Trust purported to distribute the trust's income in several consecutive financial years as follows:

• Around 90% of the franking credits and foreign income and 1% of the remaining net income to an individual beneficiary.
• The balance of the net income to a corporate beneficiary.

The Commissioner challenged the effect of the distributions and in essence, argued that the franking credits could not be distributed to a beneficiary independently of the franked dividend to which those franking credits related.

The taxpayer contended that the franking credits were in fact a class of income capable of being streamed to particular beneficiaries in accordance with the trust instrument.

A number of other matters relating to the trust instrument and distribution resolutions were considered by the Court, which are beyond the scope of this article.

Outcome

The judgment, which the Commissioner at least is likely to believe is a thorough and well-crafted decision, rejects the earlier conclusion in Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417 and provides significant guidance in relation to the streaming of franked dividends and franking credits.

It is widely understood that Div 207-55(3) of the ITAA 1997 provides that a beneficiary's share of a franked distribution is equal to the amount included when determining the beneficiary's share of the trust's income under s 95 of the ITAA 1936.

Div 207 also recognises and permits a trustee to stream some or all of a franked dividend to one or more beneficiaries to the exclusion of others, subject to the requisite powers under the trust deed.

Provided the relevant trust instrument expressly permits streaming of franked dividends as a separate class of income, a trustee can choose to make one or more beneficiaries specifically entitled to franked dividends, while distributing other classes of income to different beneficiaries.

Any beneficiary who is made specifically entitled to franked dividends is then entitled to the benefit of the franking credits attaching to those dividends.

In Thomas, the trustee purported to stream franking credits as a separate class of income from the dividends themselves.  This approach, permitted under the trust deed, saw one beneficiary receive the benefit of the tax offset under the imputation system at their marginal tax rate, while another beneficiary paid income tax on the dividend at the corporate tax rate.

The Court held that, although franking credits will generally have a clear commercial value to a beneficiary (as a result of the beneficiary's ability to claim a tax offset from the credit), a franking credit is not "income" for trust law purposes.

Specifically, although franking credits constitute statutory income for the purposes of the gross-up provisions, they are a notional, statutory creation in this regard and do not constitute "ordinary income" under trust law principles.

As a result, the operation of Div 207 makes it clear that franking credits can only "attach" to the franked dividend and cannot be streamed as a separate class of income, notwithstanding any other provision that may indicate to the contrary within the trust instrument.

The outcome of the case can perhaps be best summarised by the following quote from the judgment:

"What cannot occur if the tax offset is to be preserved…is an allocation of the s 95 net income amongst beneficiaries on a particular basis and a distribution of the franking credits otherwise attached or stapled to the franked dividends on an entirely unrelated basis, amongst the same beneficiaries." [Court's emphasis]

Lessons

A number of lessons can be taken from the case, including:

• As regularly highlighted in this Bulletin, it is critical to "read the deed" before purporting to exercise trust powers, particularly in relation to trust distributions.

• While reading the trust deed (including all valid variations) is necessary, it will not be sufficient by itself.  There are a myriad of related issues that need to be considered that may impact on the intended distribution, aside from whatever powers are set out in the trust instrument.  Examples include renunciations and disclaimers by beneficiaries, purported changes that are not permitted under the relevant trust instrument (see for example the article at 2015 WTB 37 [1373] in relation to amending trust deeds) and the effective narrowing (for tax purposes) of permissible beneficiaries due to the impact of family trust and interposed entity elections.

• The wording of the distribution minute or resolution will be critical for determining the consequences of the distribution.  Terms like "income" and "net income" will be defined differently depending on the trust instrument (even deeds that have been sourced from the same provider) and failing to understand those distinctions can result in inadvertent adverse outcomes for the trustee and beneficiaries.

• Distribution resolutions must also be crafted with reference to the trust instrument, trust law principles, the ITAA 1936 and the ITAA 1997.  For example, with increasing regularity, we are seeing trust deeds that require distributions take place before they are otherwise needed under the ITAA.

• Trustees should act with significant care when dealing with "notional" amounts such as franking credits, to ensure the intended tax and commercial objectives are achieved.

• Trustees have a duty to ensure they are aware of their rights and responsibilities under the trust deed and the limitations under the ITAA 1936 and the ITAA 1997.  A failure to discharge this duty can mean a trustee is personally liable.

Ultimately however the latest installment in this series of cases (so far) also highlights the need for the Government to prioritise the long awaited re-write of the legislation governing the taxation of trusts in order to simplify what continues to be an unnecessarily complex area of the taxation law.

Image credit: Dwayne Bent cc

2015 Legal Innovation Index

As has been publicised elsewhere, Matthew Burgess on behalf of View, has won a place on the prestigious 2015 Legal Innovation Index announced by LexisNexis and Janders Dean.

The award was in recognition of the View Intellectual Property (or VIP) platform – see - http://viewlegal.com.au/view-vip-subscription-platform-2/

The VIP platform creates a compelling value proposition for virtually every professional service adviser who does any work in the estate planning, tax planning, asset protection, structuring and superannuation areas.

Importantly, it particularly creates access for advisers below partner, director and principal levels inside firms that traditionally have had no direct access to high quality legal solutions.

In turn, there is a ‘ripple effect' for each of the advisers that subscribe that flows to their respective client base due to the increased access to quality and legal content from recognised specialists.

The platform also pays homage to its original inspiration such that every subscription sees View make charitable donations to the B1G1 platform (see - https://www.b1g1.com/buy1give1/) and projects such as education support, clean water and medical attention in communities around the world.

B1G1 (Business for Good) is chaired by 4 times TEDx speaker Paul Dunn who has also been a passionate supporter of the VIP platform since learning of the original inspiration for it and the platform’s ongoing commitment to giving back. Until next week.

Structuring trusts for intergenerational transfers

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Structuring trusts for intergenerational transfers’ at the following link - https://www.youtube.com/watch?v=E9Sna2eXvag

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

Probably the biggest risk when structuring trusts is to look at any particular issue in isolation.

Obviously, asset protection from a family law perspective is critical and fundamental in many situations. However, it is also important to be factoring in a myriad of commercial and revenue issues, such as tax, stamp duty and GST.

There's also related issues in terms of asset protection from a bankruptcy perspective, and the overall estate and succession planning objectives.

There are a number of adjacent issues that mean whenever an arrangement is put in place, it must be reviewed regularly.

Adopting a holistic approach is absolutely critical if steps are being considered immediately before a relationship actually breaks down, because arguably the one key principle, not just out of Spry, but out of all the family law cases in recent times, is that the courts will look very dimly on any such steps.

Party de-identification in court decisions

As a general statement, one of the key principles of the court system in Australia is that of open justice. The vast majority of cases are held in an open court, and the decisions when released, provide a full factual background and detailed analysis of the relevant legal issues.

This said, the principles of open justice do not automatically require the publication of the identity of the parties involved.

Particularly where the court believes that an individual involved in the case would be impacted on adversely in terms of their privacy and dignity, their personal details are often de-identified when the decision of the case is released.

The three primary techniques used in this regard are:

a. referring to the parties by reference to initials;

b. referring to the case simply by reference to a number; and

c. particularly in family court cases, a protocol is often adopted where the first initial of the parties’ names is used and the same number of letters are also used, however an entirely new word is created. For example, a case involving a party named 'Burgess' may instead be referred to as the case of 'Boseman'.

Image credit: Jack cc

Spry enforcement proceedings

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Spry enforcement proceedings’ at the following link - https://www.youtube.com/watch?v=6ewuWIpJE3g

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

Stephens is the case about the actual enforcement proceedings of the Spry case and it reinforces just how wide powers of the court are, in terms of making and implementing decisions under the property settlement regime.

In the particular case of Stephens, there were aspects of the judgment that saw transactions that took place after the relationship had broken down, completely ignored and unwound.

What the court also did was unwind transactions that had taken place before the relationship had broken down as well as those which related to third parties. For example, independent trustees and the children of the relationship who had been involved in those transactions were actually forced to comply with orders, that on the face of it just applied to Dr and Mrs Spry.

Apple iTunes Podcasts launched by View

Leveraging our successful webinar series, View is excited to announce the launch of our iTunes podcast channel. 

In creating this new service we have joined the thousands of public and commercial broadcasters, renowned celebrities and independent podcasters on iTunes giving you immediate free access via your iphone, ipad or computer to specialist content across a range of topics. 

Each podcast contains 60 minutes of audio content from View’s various webinar and seminar programs.  The podcasts can be found on our website at the following link – http://viewlegal.com.au/view-legal-podcast/ or directly on iTunes – simply search ‘View Legal’.

Podcasts already released include –

(a) Failed Trust Distributions

(b) Estate planning and asset protection

(c) Superannuation and estate planning

(d) Are you ready for June 30?

(e) Testamentary trusts - the fundamentals

Making our webinars available as podcasts offers yet another mode of accessing specialist content and the ability to ‘try before you buy’ – recordings giving access to the full video presentation of each webinar and seminar are also available via our website in DVD, USB and streaming formats – see http://viewlegal.com.au/recorded-webinars/ 

New View podcasts will be released on iTunes every few weeks, so consider subscribing for automatic notification.

Sham trusts and the Family Court

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Sham trusts’ at the following link - https://youtu.be/ERpGAlIf_ro

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

Sham Trusts are probably the most interesting aspect of what is otherwise a very interesting topic in terms of structuring of trusts from an asset protection perspective under the family law provisions.

Ultimately, a sham trust will be held to exist where there has been a deliberate and focused attempt by the people behind the trust to actually completely mislead and deceive anyone else that might have come into contact with it, whether it be other beneficiaries, former spouses or indeed the court.

Where a sham trust is held to exist, what the court is empowered to do is just completely ignore it as if the trust is a complete nullity. Obviously this is a very radical power given to courts, in that despite the legal documentation, the court can just completely ignore it.

What the cases have shown is that while the Family Court certainly has the power to deem a trust to be a sham, they are very reticent to do so, unless there is very clear evidence to support such a finding.

Superannuation proceeds trusts: Tricks and traps

For those that do not otherwise have access to the Weekly Tax Bulletin, the further article from earlier this month by fellow View Legal Director Patrick Ellwood and me is extracted below.  It provides a more technical analysis of the various issues surrounding superannuation proceeds trusts, building on the discussion in recent posts.

A superannuation proceeds trust (SPT) is a trust established solely to receive superannuation proceeds on the death of a fund member.  A SPT can be established by a will or by deed after the death of an individual, although establishing the structure post death can be problematic and is outside the scope of this article.

The ITAA 1997 provides that a superannuation death benefit, paid to a death benefit dependant as a lump sum, is not assessable income.  A death benefit dependant (defined under s 302-195 of the ITAA 1997) is a:

• spouse or former spouse of the deceased;

• child, aged below 18, of the deceased;

• person with whom the deceased had an "interdependency relationship", as defined by s 302-200 of the ITAA 1997; or

• person financially dependent on the deceased just before they died.

Payments to the estate

Where there are death benefit dependants under a deceased estate who are potential recipients of superannuation benefits, it is often an appropriate estate planning strategy to allow for a separate SPT under the will in addition to any testamentary trust (TT), so that a tax-free distribution of the superannuation proceeds can be achieved via a protected structure.  Other estate assets can be distributed to a TT that has beneficiaries who are not death benefit dependants.

When the superannuation proceeds are paid to a SPT, the legal personal representative (LPR) is taxed in accordance with how the person or persons intended to benefit from the estate would be taxed were they to have received the payments directly.  That is, ATO will generally adopt a "look through" approach as if the death benefit had been paid directly to the recipient.

To ensure that any receipt of superannuation proceeds is tax-free, the LPR should ensure that, at least at the time of receipt of the superannuation proceeds by the SPT, the only capital beneficiaries of the SPT are those who meet the definition of "death benefit dependant" under s 302-195 of the ITAA 1997.

In practical terms, this means that where there is more than one death benefit dependant, the terms of the SPT should provide that they receive the trust capital in specified shares on vesting.

In particular, ATO Interpretative Decision 2001/751 (which has since been withdrawn on the basis that its view has been subsumed into s 302-10 of the ITAA 1997) confirms that it appears to be the clear intention of the legislation that the fact that a payment is made to a trustee, rather than directly to the dependant, should not obscure the fact that the payment is ultimately for the benefit of the dependant.

In the facts considered in ATO ID 2001/751, the death benefit dependant was the sole beneficiary of the trust and, therefore, absolutely entitled to the income and capital of the trust.

Income beneficiaries of a SPT

The requirement that death benefit dependants receive the capital on the ending of the trust is also driven by the requirements of s 102AG(2) of the ITAA 1936, which sets out the basis on which trust property must be regulated when the trust ends, in order to access the excepted trust income provisions.  The excepted trust income provisions effectively allow infant beneficiaries of income distributions to be taxed as adults.

There is limited guidance about whether the ATO will require all the income beneficiaries of a SPT to be death benefit dependants.

The conservative position would be to limit the income beneficiaries of the SPT to death benefit dependants only.  In particular, the guidance available in relation to whether tax will be payable on receipt of the superannuation proceeds under s 302-10 of the ITAA 1997 indicates that the income and capital beneficiaries should be limited to death benefit dependants.

It is arguable however, based on the ATO's comments in Taxation Ruling TR 98/4, that a SPT can include a broad range of discretionary income beneficiaries.  While TR 98/4 sets out the ATO's view in relation to child maintenance trusts (see 2015 WTB 11 [287]), it can by analogy be argued that the comments apply to other similar types of trusts (including SPTs).

Furthermore, in practical terms, it appears that the ATO only tests the range of potential beneficiaries of the SPT at the date at which the superannuation proceeds are received by the SPT (for example, see private ruling authorisation number 1011741138466). 

Therefore, even if a trustee takes the conservative approach, that is, to limit the range of potential income beneficiaries to death benefit dependants, following receipt of the proceeds, it may be possible for the range of beneficiaries to be expanded to include non-death benefit dependants.

Below is a diagram giving an example of making distributions under a will to a TT and a SPT.

Provisions of a will

For completeness, as superannuation proceeds do not automatically form part of the estate of the deceased member, it may be necessary to ensure that appropriate nominations are made by the member to direct that the superannuation death benefits are paid to the LPR for distribution under the will, and if appropriate, to any SPT established.

Assuming proceeds are paid under a will, the LPR should have the power to ensure that the range of potential beneficiaries can be limited to persons: 

• within the provisions of s 295-485(1)(a) of the ITAA 1997; and
• who satisfy the definition of "death benefits dependant" under s 302-195 of the ITAA 1997.

The main reason both these provisions should be mentioned is due to the requirement under s 295-485(4) that regard needs to be had to the extent to which a death benefit dependant can reasonably be expected to benefit from the estate.

In particular, s 295-485 of the ITAA 1997 gives superannuation funds the ability to claim a tax deduction based on an increased amount of superannuation lump sum death benefit paid under the "anti-detriment" rules, with reference to the tax paid on contributions.

Conclusion

In many respects, the ability to utilise a SPT under a will incorporating a TT is a simple, yet powerful, strategy that practically is useful in a large range of circumstances.

There are however some fundamental threshold issues that need to be addressed to ensure the expected income tax concessions can be validly accessed.  Furthermore, given the significant number of estate planning related issues aside from tax that are potentially relevant, it is critical that a methodical approach is adopted.

Image credit: Martin Howard cc