Tuesday, September 29, 2015

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 -



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.

Tuesday, September 22, 2015

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

Tuesday, September 15, 2015

Always ‘read the deed’

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

Tuesday, September 8, 2015

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.


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.


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]


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

Tuesday, September 1, 2015

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.