Tuesday, October 17, 2017

Fettering of a trustee's discretion – when will it be ignored? **


Discretionary trusts are regularly used in commercial transactions, and of course tax issues are always present. But, there is a more fundamental issue that deserves attention – fettering of a trustee's discretion.

Take for example an insurance funded buy-sell arrangement that uses options under the contractual arrangement to help facilitate any ultimate buyout. This is a widely used, and generally very sensible, approach to take. A significant difficulty can arise however where the parties to the buy-sell agreement include trustees of discretionary trusts.

There are cases (admittedly dating back many years) which provide that unless a trust deed for a discretionary trust specifically allows the granting or an acquiring of an option, then the arrangement will not be enforceable as the trustee has effectively fettered its discretion.

In order for a discretionary trust to remain an ongoing valid structure, it is necessary for the trustee to always retain its discretion and therefore not enter into arrangements which will remove this flexibility in the future.

Traditionally, entering into option arrangements has been seen as clearly limiting future decision making ability and therefore prohibited - unless specifically allowed under the trust instrument.

Despite the longstanding rules in this area, many otherwise ‘modern’ trust deeds do not have the required powers to in fact allow a trustee to grant options.

Leading case

As mentioned in last week’s post, the principle in relation to the prohibition on a trustee fettering its discretion is arguably best captured in the decision of Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628.

In this case, the key concepts concerning fettering were summarised as follows –
"… a trustee is not entitled to fetter the exercise of a discretionary power (for example a power to sale) in advance: Thacker v Key (1869) LR 8 Eq 408; In re Vestey's Settlement [1951] Ch D 209.

If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 Ch D 447), though the trustee may be liable in damages for breach of contract …".
Arrangement in breach of fettering trustee's discretion enforced

Arguably the leading case explaining when the prohibition on fettering of discretion will essentially be ignored is Dagenmont Pty Ltd v Lugton [2007] QSC 272.

The background in this case was as follows:
  • a family discretionary trust was established to be the owner of a start up business; 
  • a company was nominated as trustee of the trust, with the shares in the company owned by the husband and wife and the husband as the sole director; 
  • the wife’s brother was listed as the sole appointor, with the right to remove the trustee in his sole discretion; 
  • the wife’s brother had no involvement in the business at any stage, and the husband and his wife claimed they had never understood why the brother was nominated as appointor, nor indeed the extent of his ultimate power; 
  • as part of a succession and estate planning exercise, the wife’s brother agreed to relinquish his rights as appointor; 
  • in particular, an agreement was entered into by the wife’s brother as the original appointor of the discretionary trust and the husband, wife and one of their sons, whereby the wife’s brother would resign as appointor of the trust, in return for guaranteed distributions from the trust for as long as he lived; 
  • the distributions were set at an amount of $150,000 each year, indexed for inflation, in priority to any other distributions from the trust, and regardless of the level of profitability of the business owned by the trust; 
  • the agreement by the trustee to make these future distributions was therefore effectively a fetter on its future discretion; 
  • each party received independent legal advice at the time of the agreement, however some years later the trustee attempted to cease the distributions due to the, argued, invalid fettering of its discretion and in turn the apparent inequality of the original bargain struck – the wife’s brother had never had any involvement in any aspect of the business and indeed had never exercised his power as appointor. 
The Supreme Court specifically acknowledged the general prohibition on a trustee fettering its discretion (based on the case law stretching back over hundreds of years), confirming that:
"trustees cannot fetter the future exercise of powers vested in trustees … any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power."
While therefore agreeing that the agreement was at face value void and should be set aside, the court went on to in fact ignore the fettering and uphold the validity of the agreement.

In rejecting the trustee's attempt to avoid the agreement and in turn the obligation to continue to make the trust distributions of $150,000 a year for the rest of the wife’s brother’s life the court confirmed:
  • a provision in a document authorising a trustee to release powers which they would otherwise have a duty to exercise is valid; 
  • here, the document confirming the agreement between the parties was in essence a release by the trustee of the power conferred on it to exercise an unfettered discretion to distribute amongst all potential beneficiaries; 
  • alternatively, the agreement effectively amounted to a variation of the terms of the original trust deed; 
  • this meant that what would otherwise have been an unfettered trustee discretion became reduced in scope, simultaneously with an obligation being imposed on the trustee (created by the agreement with the wife’s brother as original appointor) to distribute the annual amount of $150,000 (indexed); 
  • arguably, particularly where parties receive independent advice at the time, the court should always uphold bargains where it can, rather than destroy them – even where there is longstanding case law suggesting the opposite conclusion. 
Conclusion

As explored regularly in this blog, while reading the trust deed of a discretionary trust (including all valid variations) is necessary, it will not be sufficient by itself. This is because there are a myriad of related issues that need to be considered that may impact on any intended distribution, aside from whatever powers are set out in the trust instrument.

While not necessarily an obvious example, the rules in relation to trustee fettering are longstanding and go to the heart of a trustee’s duties. A failure to understand the impact of the regime can have significant detrimental impacts both from a trust law perspective and the related tax consequences – regardless of whether any purported fettering is ultimately held to be valid or invalid.

As usual, if you would like copies of any of the cases mentioned in this post please contact me.

The above post is based on the article we recently had published in the Weekly Tax Bulletin.

** for the trainspotters, ‘it will be ignored’ is a line from the Black Rebel Motorcycle Club song ‘At my Door’, listen hear (sic) - https://www.youtube.com/watch?v=SFTZot0hPkA


Image courtesy of Shutterstock

Tuesday, October 10, 2017

Leading case about fettering of a trustee’s discretion


Last week’s post considered the issues of a trustee fettering its discretion in the context of an insurance funded buy sell arrangement, see – Fettering (and flies) of a trustee’s discretion **

The principle in relation to the prohibition on a trustee fettering its discretion is arguably best captured in the decision of Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628. As usual, if you would like a copy of the decision please contact me.

In this case the key concepts concerning fettering were summarised as follows –

‘… a trustee is not entitled to fetter the exercise of a discretionary power (for example a power to sale) in advance: Thacker v Key (1869) LR 8 Eq 408; In re Vestey’s Settlement [1951] Ch D 209.

If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 Ch D 447), though the trustee may be liable in damages for breach of contract …’

Next week's post will consider one of the leading cases where an arrangement that would have been a breach of the fettering of the trustee’s discretion was in fact enforced.

Image courtesy of Shutterstock

Tuesday, October 3, 2017

Fettering (and flies) of a trustee’s discretion **


Last week, an adviser contacted us in relation to an insurance funded buy-sell arrangement that used options under the contractual arrangement to help facilitate any ultimate buyout.

As many would be aware, this is a widely used, and generally very sensible, approach to take.

The difficulty here was that the parties to the buy-sell agreement included trustees of discretionary trusts.

There are cases (admittedly dating back many years) which provide that unless a trust deed for a discretionary trust specifically allows the granting or an acquiring of an option, then the arrangement will not be enforceable as the trustee has effectively fettered its discretion.

In order for a discretionary trust to remain an ongoing valid structure, it is necessary for the trustee to always retain its discretion and therefore not enter into arrangements which will remove this flexibility in the future.

Traditionally, entering into option arrangements has been seen as clearly limiting future decision making ability and therefore prohibited - unless specifically allowed under the trust instrument.

** for the trainspotters, ‘fetters and flies’ is a line from Massive Attack’s song ‘Flat of the Blade’, listen hear (sic) - https://www.youtube.com/watch?v=vAIOQMJAzxE




Image courtesy of Shutterstock

Tuesday, September 26, 2017

It’s the end of the professions as we know them …


The Legal Forecast is an innovative community that aims to advance legal practice through technology and innovation. It is a not–for–profit run by early–career professionals who are passionate about disruptive thinking and access to justice.

An interview I gave to The Legal Forecast is below, addressing a number of key issues facing lawyers and the professions more generally.

What is your advice for law students who aspire to work in a virtual law firm like yours? How can they best equip themselves with the skills necessary for the job?

The skills to work in a virtual law firm are arguably no different to any other work environment, however, our experience is that they are brought into more sharp focus, more quickly than what might otherwise be the case.

Our experience has been that those that thrive tend to:
  1. enjoy work as a critical component of achieving flow (as defined by Mihaly Csikszentmihalyi); 
  2. understand that purposeful work is a critical aspect of achieving flow; 
  3. embrace the concept that work-life integration, rather than work-life balance or work-life siloing is the key goal – this seems to be easiest for those that have significant, non-negotiable, other life responsibilities (eg children or parents they are responsible for caring for); 
  4. embrace the concept of making choices in each moment that lead to positive habits. Invariably, this involves choosing to do what must be done, as opposed to what is invariably ‘easier’ from moment to moment. 
What is the biggest challenge facing the legal industry?

Without wanting to be seen to be avoiding the question, my sense of things is that the biggest challenge facing the legal industry is the number of significant challenges arriving almost simultaneously and creating what some might argue is a ‘perfect storm’.

In no particular order, the key challenges are extremely well-known, and while each of them in isolation is a serious issue, the combination of them is arguably unprecedented, namely:
  1. The first time in the modern history of law firms that it is a sustained buyer’s market. 
  2. The pace of technology change outside the industry has for some time now been significantly faster than the pace inside the industry. The number of other adjacent industries where the incumbents have seen their protected position evaporate in a very short period of time means that it is difficult to build a coherent argument that the legal industry will not face a similar outcome in the short term. 
  3. The steadfast refusal of incumbent firms to take any serious steps to adopt a new business model is almost comical for those outside the industry. Any firm that tracks time in any manner (other than the lag time between receipt of instructions and delivery of a usable solution to a client), ultimately, views all aspects of their organisation through a lens of chargeable units. While the industry continues to debate the issue ad nauseam, the firms that are growing exponentially left timesheets behind some years ago. 
  4. There is then a myriad of other related impacts such as offshoring, AI, aggressive entry into the market by accounting firms and online providers, freelancing models, blockchain, augmented reality, big data and growing in-house teams. 
Ultimately the Bill Gates quote is critical – ‘We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.’

How would you describe the difference between technological disruptions and innovative disruptions to the legal industry?

Certainly, in other industries, the technology disruptions have only ever been an enabler to the more innovative business models.

In other words, it is the application of the technology that drives the truly sustainable changes, not the underlying technology itself.

There are countless examples of this. The one that is arguably the most stark and easiest to understand is that Kodak had the technology for digital photography over 30 years before Instagram was created – the technology was not new; the application of it was.

Do you envisage a change to the structure of the legal market; that is a move away from the traditional boutique, mid-tier and top-tier categorisation of law firms?


There are numerous extremely insightful thinkers that have answered this question in great detail. For example, see the work of Richard and Daniel Susskind, Chrissie Lightfoot, Jordan Furlong, George Beaton and Imme Kaschner.

My personal view is that at least in the short term, the firms that will succeed are those that do not fail the ‘Stealer’s Wheel’ axiom – i.e. they are not ‘stuck in the middle’, see – https://www.youtube.com/watch?v=DohRa9lsx0Q


In other words, it is the firms that are extremely nimble (for example, many firms, of which ours is one, have business plans that last no longer than a maximum of 90 days) or exceptionally large firms that essentially ‘own’ the client relationship (the big 4 accounting firms are a good example) should both have sustainable businesses (although for differing reasons).

Firms that are not extremely nimble or absolutely in the very top tier (as defined by buyers, not a firm’s marketing team) are likely to struggle.

You have stated that the ‘disruptive business model requires funding, resource allocation and working environments that are significantly different from those of the traditional firm’. Do you think we will see the larger firms with more funding creating disruptive business models whilst smaller firms struggle with a lack of resources?


Perhaps, counterintuitively, my personal experience has been that access to funding is one of the single biggest impediments to true disruption.

As has been profiled on many occasions previously, Clayton Christensen’s theory of disruption (i.e. the innovators, or perhaps more accurately incumbents, dilemma) is largely based on the concept that incumbents with adequate resources find it impossible to compete with disruptive firms with inadequate resources, because the disruptive firms simply do not play by the same set of rules.

Some large firms in other industries have been able to beat this challenge through a variety of techniques (Apple and Cisco are 2 high profile examples), however all of those techniques require a way of thinking that is (in Christensen’s view) almost impossible for incumbent firms to embrace.

The theories here however arguably are not particularly new – essentially, they are an iteration on Mark Twain’s quote ‘The best swordsman in the world doesn’t need to fear the second best swordsman in the world; no, the person for him to be afraid of is some ignorant antagonist who has never had a sword in his hand before; he doesn’t do the thing he ought to do, and so the expert isn’t prepared for him.’

View Legal is completely virtual and all team members enjoy flexibility around their work arrangements. How important do you think flexibility is to the delivery of legal services?

For us, flexibility is a necessary, although of itself not sufficient, requirement.

While there is obviously a myriad of very important interrelated concepts, we generally refer to the ‘3 Fs’, being flexibility, fun and flow. Unless team members are regularly accessing each of the 3 Fs, then our ability to deliver outstanding solutions for customers is going to be tenuous.

What is a quote you often live by?

Yes – too many to list out here (indeed, every week, I publish at least one quote on Twitter, see – https://twitter.com/matthewwburgess?lang=en). Two of my books are also focused around key quotes, namely The Dream Enabler Reference Guide (see – https://www.amazon.com/Dream-Enabler-Reference-Guide-ebook/dp/B01BHOAJX0/ref=asap_bc?ie=UTF8) which is in essence the original business plan for View Legal, and ‘Laws for Life’ – the link here takes you to a free download for this book – https://viewlegal.com.au/laws-for-life/, the password is – laws4life, (please delete any pre-populated password).
This said, I was reminded recently of the quote that I put in the yearbook on graduating high school, which arguably remains relevant, from Friedrich Nietzsche, namely ‘Without great suffering, there can be no great excellence.’ In other words, if disruptive innovation was easy everyone would be doing it.

When you think of the word ‘successful’, who is the first person who comes to mind? Why?

This question is similar to the quote question – extremely difficult to answer.

In saying this, the first person I thought of was my wife Dyan. Whenever I think I may have too much going on, I never have to look very far to realise that I have it very easy. She successfully combines her own business, running our personal investment partnership, raising our 4 children (aged 7 to 13) and mentoring me.

Tuesday, September 19, 2017

1% **


Last week we were assisting with an asset protection and structuring re-arrangement & the referring adviser asked - why would an at-risk spouse retain a 1% interest in a property? As explained by an earlier post, the reasons can include: 
  1. Protection against spouse or relationship difficulties. 
  2. Protection against the majority owner seeking to encumber the property - no mortgage may be taken out over the property without the consent of the 1% spouse 
  3. For ease of security arrangements – a financier may prefer to see the at-risk spouse’s name on title documentation. 
  4. Stamp duty savings. It should be noted that in most states there are concessional provisions which apply where one spouse who owns 100% of a family home and transfers 50% (but no more or less) to their spouse. Indeed, some states, such as Victoria, allow the transfer of more than 50% of a home without any duty costs. 
** for the trainspotters, the title of this week’s post may remind some of legendary/notorious early nineties band Jane’s Addiction – see - https://vimeo.com/3867179


*** the visual this week is designed to remind - there are other ways to learn life lessons than destroying entire ecosystems 

Tuesday, September 12, 2017

Changing an appointor - just like changing a trustee; simple! (in theory ...)


A previous post explored the key revenue issues in relation to changing the trustee of a discretionary trust (see - 'Changing trustees of trusts – Simple in theory … not so simple in practice').

An equally important and related issue concerns a decision to change the principal or appointor role of a family trust. That is, the person, people, or company having the unilateral right to remove and appoint a trustee.

As regular readers of this blog will know, there does not necessarily need to be an appointor or principal provision under a trust deed. However, where there is one, a trust deed itself will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Where there are no provisions in relation to the succession of the appointor role, it is often necessary to try and rely on any power of variation under the deed to achieve an equivalent outcome.

Generally, from a trust law perspective, it is possible for the appointor provisions to be amended. However, any intended change must be permitted by the trust instrument, meaning the starting point must always be to 'read the deed' – a mantra regularly profiled in this blog. The decision in Mercanti v Mercanti [2016] WASCA 206 (this Court of Appeal judgment stands following the High Court's refusal to reject an appeal) being a leading example of the principle in the context of purported changes to appointorship.

The tax and stamp duty consequences of changing an appointor can be similarly complex.

Stamp duty costs on changing an appointor

In broad terms, the stamp duty consequences of changing an appointor provision can normally be managed in most Australian states.

This said, care always needs to be taken, particularly where the trust deed simply defines the appointor by reference to some other named beneficiary in the trust.

For example, it can often be the case that the appointor is defined as being the primary beneficiary of the trust and that primary beneficiary may also be a default beneficiary.

In these circumstances, depending on how the deed is crafted, there may be stamp duty consequences of implementing any change.

Tax Office views on changing an appointor

In relation to the tax consequences of changing an appointor, there are a number of private rulings published by the Tax Office which support the ability to change an appointor role, particularly if it is part of a standard family succession plan.

Arguably the 2 leading private rulings concerning the tax consequences of changing an appointor are Authorisation numbers 1011616699832 and 1011623239706. Broadly, these each confirm that there should be no tax resettlement on the change of an appointor where –

  • The relevant trust deed provides the appointor with the power to nominate new appointors and also allows for the resignation of an appointor; 
  • The intended change complies with the trust deed (the "read the deed" mantra again highlighted); 
  • The proposed amendment is otherwise analogous with the changing of a trustee and is thus essentially procedural in nature; and 
  • The original intention of the settlor is not changed such that there will not be any change to the beneficiaries, the obligations of the trustee or the terms or nature of the trust. 
Clark case

The conclusion that there should be no adverse tax consequences on changing an appointor is also supported by the decision in FCT v Clark [2011] FCAFC 5 ("Clark") and which has been profiled previously in this blog.

In particular, the Full Federal Court in Clark held that significant changes to a trust instrument would not of themselves cause a resettlement of the trust for tax purposes, so long as there is a continuum of property and membership, that can be identified at any time, even if different from time to time. That meant that, in Clark, although there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years, this did not trigger a resettlement for tax purposes.

Rather, it is only where a trust has been effectively deprived of all assets and then 're-endowed', that a resettlement will occur.

While the Tax Office released a Taxation Determination (namely TD 2012/21) following Clark, it unfortunately does not provide any specific commentary around when the Tax Office will deem changes to an appointor or principal of a trust to amount to a capital gains tax event under CGT events E1 and E2 (ie a resettlement).

Rather, in broad terms, the Tax Office simply states that unless variations cause a trust to terminate, then there will be no resettlement for tax purposes.

While a number of examples are provided, which give some guidance around issues such as changes of beneficiaries and updates to address distribution of trust income, the examples ignore issues such as changing appointors and multiple changes (for example, changing beneficiaries, the trustee and the appointor as part of an estate planning exercise).

In conclusion - 1 related issue


Subject to the terms of the relevant trust deed, a change to the appointor or principal provisions should have no adverse revenue consequences. Any change should, even if not expressly required by the deed, be done with the consent of the incumbent appointor. This is because of the significant ultimate powers retained by the appointor.

This conclusion about the extent of an appointor's powers however does not mean that where an appointor or principal is declared bankrupt, their power of appointment is considered 'property' which vests in and can be exercised by the trustee in bankruptcy.

Historically, there has been some confusion around this issue, given that the property of a bankrupt under the Bankruptcy Act which is available for distribution to creditors includes "the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit…".

However, it has been held that the right of a bankrupt to exercise a power of appointment under a discretionary trust is not property of the bankrupt (see Re Burton; ex parte Wily v Burton (1994) 126 ALR 557).

In that case, the argument of the trustee in bankruptcy centred on the fact that Mr Burton was the appointor and a discretionary beneficiary of a family trust. He could in theory therefore appoint himself (or an entity that he controlled) as trustee.

In rejecting the argument, it was held that the powers of an appointor are fiduciary powers that must be exercised accordingly, in the interest of the beneficiaries.

In other words, the powers of an appointor must be exercised solely in furtherance of the purpose for which they were conferred.

This means that the powers of an appointor do not amount to 'property' that passes to a trustee in bankruptcy.

The powers are also not something that can be exercised by the bankrupt for their own benefit.

The above article is based on an article that we originally contributed to the Weekly Tax Bulletin.

Image courtesy of Shutterstock

Tuesday, September 5, 2017

How to publish your own book in 48 seconds

As mentioned last week (9 reasons you should give away your IP in books) we have invested significantly in the ‘publish or perish' mantra.

Indeed, at last count, we had over 1.5 million words of published technical content. Our goal to ‘write the textbook' in each core specialisation has been achieved with books published in:
  1. estate planning; 
  2. trusts; 
  3. taxation of trusts; 
  4. testamentary trusts; 
  5. SMSFs; 
  6. structuring; and 
  7. asset protection. 
The majority of our books are independently published. This means that we retain complete control over every aspect of the publishing process and it provides us with significant flexibility to share our content with advisers.

When combined with our ‘why’, which most succinctly is simply ‘for friends', it creates interesting opportunities – hence the title of this post referring to the ability to publish your own book within 48 seconds, as opposed to taking 48 weeks, 48 days or even 48 hours.

For us, being for friends, means that all of our published content is able to be utilised by advisers however they feel may be valuable.

For example, in relation to our weekly blog posts, advisers can use this content as often as is relevant and, as long as an adviser checks with us, it can generally be entirely rebranded as an adviser sees fit.

More recently, we have helped advisers instantly create their own books using one of three broad approaches. Each approach simply takes one of our previously published books as the base content and then we either:
  1. Design the cover and branding specifically for the relevant adviser. The adviser creates a foreword (and indeed any other content the adviser wishes to contribute) - and our publishing team is able to help with any, or all, aspects of this process. 
  2. The next alternative retains the existing cover design and branding, however the adviser creates the foreword and any other content they wish to include for a ‘special print run’. 
  3. The final approach retains the relevant existing book ‘as is’, however a specially designed bookmark promoting the adviser is created for the adviser to hand out with every copy of the book. There is a significant amount of flexibility in relation to the ‘bookmark’ it can be a traditional bookmark, a postcard, trifold flyer or even a dust jacket. 
Regardless of which approach is adopted, our experience is that within around 48 seconds, an adviser can make a decision that best suits their objectives and have access to what we believe is the new standard in a ‘business card’ being one that cannot be easily thrown away.

To learn more about the books we currently have published, click here – https://viewlegal.com.au/product-category/books/, or have a look at our 25 second promo video here - https://youtu.be/a2ot00NAb24.


If you would like to explore how to publish your book, email events@viewlegal.com.au or phone 1300 843 900.

As mentioned last week, for those interested, our book ‘The Dream Enabler Reference Guide’ explores a number of the themes explaining our approach, see – https://viewlegal.com.au/product/the-dream-enabler-reference-guide/

Again - all comments or likes of this week’s post will go into the draw to win a copy of the book.


Tuesday, August 29, 2017

9 reasons you should give away your IP in books


At View we have produced over 1.5 million words of published technical content via a series of over 20 books.

Indeed we have ‘written the book’ (and in some cases more than one book) in each of our core areas of specialisation – estate planning, trusts, tax, smsfs, asset protection and estate administration.

There is a nominal price point to access the intellectual property (IP) in our books; indeed often we give interested advisers copies for free.

Why do we do this and why do we encourage all advisers who are interested in our approach to do the same with their IP?

The key reasons, in no particular order, are as follows –
  1. ZMOT (being the Google theory of ‘zero moment of truth’ before a buying decision is made) says that generally there must be 7 hours of free content, on 11 separate occasions, across 4 medias before a buying decision is made. 
  2. Books are the best way we know of to achieve the ‘7/11/4 rule’ and allow easy leverage into multiple channels (as one example, at last count, we had over 30 iterations sourced from our book content with podcasts, seminars, white papers, webinars, apps, online university level courses etc). 
  3. It has been argued that every CEO or business owner should have published at least one book. 
  4. Yes it is possible to achieve leverage without a book, however for most it would be like (for example) trying to succeed in the music industry without releasing recordings. 
  5. LinkedIn Influencer Ron Baker says ensuring he gives away all his intellectual capital each year forces him to replenish and this keeps him relevant – publishing a book helps achieve this aim. 
  6. There is a positioning with handing over a book that can not be easily replicated – it is a business card that is not easily thrown away. 
  7. The discipline, habits and learnings created by writing a book can not be underestimated – they have a huge impact on all aspects of your business and indeed life. 
  8. As has been observed widely – there is no greater ‘ROI’ than a good book. Books change lives and rarely cost more than $100. What other platform delivers this much value for such a nominal investment. 
  9. Books demonstrate that the author knows that information in the age of Google can, and indeed must and inevitably will be, free. Knowledge workers understand that the wisdom of understanding information is what is valuable. They also know that the insights of a wise and knowledgeable adviser are even more valuable. 
For those interested, our book ‘The Dream Enabler Reference Guide’ explores a number of the themes explaining our approach, see – https://viewlegal.com.au/product/the-dream-enabler-reference-guide/ 

All comments or likes of this week’s post will go into the draw to win a copy of the book. 


Tuesday, August 22, 2017

Document witnessing - measure twice; cut once


The rules in relation to witnessing wills (see the following post - Signing estate planning documents) and power of attorney documents are mandated by legislation.

This said, the rules for witnessing power of attorney documents are frustrating given each state has its own regime (see further comments in our earlier post - Witnessing powers of attorney). At one end of spectrum NSW essentially mandates that lawyers must witness whereas in WA there are dozens of categories of eligible witnesses including virtually all professions.

With other legal documents the rules are less certain and unfortunately will often depend on the application of internal rules by third parties.

Generally with most deeds they may be witnessed by one or more witnesses, not being a party to the instrument. While generally not strictly the position at law, the witness should ideally also not be related to anyone in the deed (for example, spouses should not witness each other signatures).

Practically, if documents are provided to (for example) a bank, the bank will generally require an independent 3rd party witness, regardless of the legal position.

Indeed, often financiers will refuse to accept any document where a witness has the same surname as the person whose signature is being witnessed.

Furthermore, often the bank’s position on refusing the validity of the witnessing does not come up until very inconvenient moments; often triggering significant time delays and unnecessary costs.


Image courtesy of Shutterstock

Tuesday, August 15, 2017

The most important tax tip for family law matters you will learn this week


As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/XZx3PozjtTg

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

If you go back many years to the introduction of the Division 7A regime in the late 1990s, early 2000s, one of the anti-avoidance provisions that they brought in was ultimately set out in subdivision EA of the Tax Act.

These rules said regardless of any other provisions, if a distribution was made out of a trust and it was left as an unpaid present entitlement (UPE) to a company and there was then a debit loan made by the trust, that debit loan has to comply with the Division 7A rules.

In this type of situation, some advisers try to argue that if the funds are lent out for income generating purposes and the interest on the debt is deductible, then the loan is not caught by Division 7A. The reality however is that the loan is a significant tax problem.

In this particular case study scenario, there were two key problems. Firstly, there was an EA problem because the trust had made debit loans when there were UPEs to a corporate beneficiary. In addition to the EA loans, there had been purported distributions by the trust to the wife over many years.

However, the wife was not a beneficiary.

So not only was there the big EA problem, there also had been a whole raft of distributions over many years that were completely invalid on the face of the trust instrument.

Ultimately, the parties entered into a settlement where the husband took over control of the trust, the wife got paid out all of her loan accounts, and was entitled to keep all of the historical distributions.

Now the interesting aspect is that the wife and her family lawyers asked for a tax indemnity in relation to both the failure to comply over the years in relation to EA and the inability to read the deed and thus the invalid distributions to the wife.

Then, three months after the wife had been paid out, the husband by chance gets a tax audit. The wife didn’t have to worry about the outcome of the tax audit because she was fully indemnified.

Tuesday, August 8, 2017

How long can deceased estates run?


A recent post looked at the requirement that following the death of a member, an SMSF must ensure that it pays a member’s death ‘as soon as practical’ (see - How soon is now ** (or ‘as soon as practicable’)?)

Following last week’s post in relation to the liability of executor’s for a deceased’s tax debts, one related issue is worth considering – namely - how long can a deceased estate remain in ‘administration mode', following someone’s death?

Assuming there are no complications with the deceased estate due to, for example, a challenge against a will, it is generally the case that the Tax Office accepts a maximum period of three years for an estate to be administered.

The administration of the estate, from the Tax Office’s perspective involves the ultimate distribution of assets to beneficiaries if there is no formal testamentary trust under a will, or the distribution of assets to a testamentary trust if the deceased has incorporated that into their will.

This effectively means that for the purposes of the excepted trust income rules (these are the rules that allow children to be treated as adults for tax purposes), all wills contain a form of testamentary trust.

Where the will provides for the assets to pass directly to beneficiaries, the length of time the ‘testamentary trust’ lasts for tax purposes will be equal to the maximum period of time it takes to administer the estate. In contrast, where a traditional testamentary trust is established, the standard vesting date rules for trusts apply (broadly up to 80 years from the date of death).

It is important to note that while the Tax Office allows a maximum of three years, often they will in fact expect that the deceased estate is administered within 12 months from the date of death, and therefore may deny access to the excepted trust income provisions despite the fact that the estate has not been fully administered.

The Tax Office has confirmed its broad position in this regard via taxation ruling IT2622. As usual, if you would like a copy of the ruling please contact me.

The above post is based on an article originally published in the Weekly Tax Bulletin.

Image courtesy of Shutterstock

Tuesday, August 1, 2017

At last some tax clarity for legal personal representatives of deceased estates(?)


Practical Compliance Guideline 2017/D12 (PCG 2017/D12) contains guidance from the ATO in relation to the liability of an executor or legal personal representative (LPR) of a deceased estate for the deceased’s tax debts.


Background

Historically, the leading decision in this area has been seen as the case of Barkworth Olives Management Ltd v DFCT [2010] QCA 80 (Barkworth).

Broadly Barkworth acknowledged that, subject to some limitations (such as the application of s 99A ITAA 1936), the trustee of a trust has a right of indemnity for trust tax debts and under s 254 ITAA 1936 is generally not personally liable for those debts.

In the context of a deceased estate, this means the LPR will generally not be personally liable for the deceased’s tax debts.

Personal liability will however arise (to a maximum of the original assets in the estate) where the assets of the estate have been fully distributed, or distributed to an extent that means there are still unsatisfied tax debts outstanding.

In contrast, if a tax debt arises during the course of the administration of the deceased estate, the LPR can automatically be personally liable, regardless of the assets in the estate.

Importantly, beneficiaries of deceased estates can never be liable for the tax debts of the deceased, unless there has been fraud or evasion.

Historically, where an LPR was concerned that there may be taxes that they might ultimately be personally liable for, best practice was to obtain clearance from the ATO that there were no outstanding tax liabilities. However, the ATO no longer issues letters of clearance.

Therefore, if there are genuine concerns that the ATO may audit the estate, then the conservative approach is generally for the LPR to retain sufficient assets to cover any possible tax liability for either two or four years (depending the nature of assets in the estate and therefore the potential audit period) following the lodgement of the final tax return for the deceased.

Practically, in this type of situation it therefore means that the estate can only be fully administered and final lodgements made to the ATO after the two or four year period has lapsed. This is because until the final notice of assessment has been received by the LPR (listing no outstanding amounts owing by the estate), they are not relieved of personal liability.

This conclusion also relies on the assumption that there is no fraud or evasion involved, as if there is, the ATO is not restricted by time limits on the ability to issue amended assessments.


PCG 2017/D12 – Overview


PCG 2017/D12 is broadly consistent with the approach outlined above, although (as is often the case with this style of release from the ATO) there some important caveats.

In particular, the guidelines outline the circumstances where the LPR will be treated as having notice of a claim or potential claim by the ATO, which could result in personal liability should the assets of the estate be distributed without leaving sufficient funds to discharge the ATO claim.

The ATO adopts the view that the LPR will have a notice of the claim (or potential claim) where:
  • the deceased had amounts owing to the ATO at the date of their death (including any additions to those amounts such as interest); 
  • the deceased had an outstanding assessment from an income tax return which had been lodged but not yet assessed by the ATO; 
  • the ATO notifies the LPR within 6 months of the lodgement of the deceased’s last return that it intends to review the deceased person’s tax affairs; or 
  • further assets come into the hands of the LPR after what was thought to be completion of the estate’s administration (the ATO takes the view that the identification of further assets might suggest the deceased’s income was understated previously). 
In each of the above circumstances, the LPR should take a conservative approach and delay the distribution of some or all of the estate assets, until the estate’s potential tax exposure can be quantified.


‘Smaller and less complex estates’

Arguably the most significant caveat with PCG 2017/D12 is that it is expressly stated to only apply to ‘smaller and less complex estates’.

Assuming an estate satisfies the concept of being ‘smaller and less complex’, PCG 2017/D12 confirms the basis on which a wind up can proceed without concern that the LPR’s personal assets may be exposed to a claim by the ATO.

In particular, the following elements must all be present:
  • in the 4 years before their death the deceased did not carry on a business or receive distributions from a trust; 
  • the estate assets consist solely of shares or interests in widely held entities (such as public companies), superannuation death benefits, Australian real property, cash and personal assets; 
  • the total market value of the estate assets was less than $5 million; 
  • none of the circumstances outlined earlier in this article where the LPR is deemed to have notice of the claim (or potential claim) arise; 
  • the LPR acted reasonably in lodging the deceased person’s outstanding returns; and 
  • the ATO has not given the LPR notice that it intends to examine the deceased person’s tax affairs within 6 months from the date of lodgement of the last outstanding return. 

Conclusion


As a result of PCG 2017/D12 (and assuming the draft guidelines are issued in final form on broadly similar terms), it should be possible for smaller and simpler estates to be wound up in a shorter period of time, without the LPR creating personal exposure in relation to tax debts.

While the guidelines are a welcome initiative in a fast growing area for many adviser practices, they also highlight that where clarity is most needed – that is larger and more complex estates – significant risks remain for LPRs.

Any person currently an LPR, or considering accepting an LPR role, in situations outside the scope of PCG 2017/D12 should continue to proceed with caution in relation to tax debts.

The above post is based on an article originally published in the Weekly Tax Bulletin.

Image courtesy of Shutterstock

Tuesday, July 25, 2017

Another way to convert water into wine - trust to company rollovers


The vast majority of rollovers available under the Tax Act relate to transactions between companies.

There is however a series of transactions that effectively allows one form of structure to be converted into another.

Following last week’s post, I was reminded of one of the very few rollovers that allows the iteration from one legal structure to another. In particular, the tax rollover available for a discretionary trust that allows a trust to transfer all of its assets into a company, so long as the shares in the company are owned by that same discretionary trust. This form of rollover is available under Subdivision 122A of the 1997 Tax Act.

Obviously, there are stamp duty considerations in many states still that often need to be taken into account, however the rollover can be a very useful one in a wide range of circumstances to ensure no tax is triggered.

We have particularly seen it used proactively as part of a succession plan – it is often seen as easier to facilitate the transfer of shares in a company, as opposed to managing the control of a discretionary trust.

For those interested, our book ‘The Seven Foundations of Business Succession’ explores each of the key company and trust rollover concessions used in estate and succession planning see - http://viewlegal.com.au/product/the-seven-foundations-of-business-succession/








Image courtesy of Shutterstock

Tuesday, July 18, 2017

Converting water into wine (or family trusts into fixed trusts)


Recent posts have considered various aspects of fixed trusts, see - Unit trusts and fixed trusts.

For a myriad of structuring issues, one issue that appears to be raised more regularly is whether it is possible to convert a family discretionary trust into a fixed trust.

This issue was considered by the Tax Office in Private Ruling Authorisation Number: 1012991136582. As usual, if you would like a copy of the ruling please let me know.

Broadly the factual matrix was as follows -
  1. a 'standard' family trust held an asset; 
  2. the trust had a widely crafted power of variation; 
  3. the trustee resolved to make a capital distribution of the balance in the unrealised capital profits account to certain beneficiaries, with this amount left unpaid (ie meaning it was a debt owed by the trust to the beneficiaries); 
  4. by agreement there was then a conversion of the debts (and some other outstanding loans) to equity such that each of the relevant beneficiaries had a certain percentage of ‘equity’ in the trust; 
  5. relying on the power to vary, the trustee then amended the terms of the trust deed to convert it into a fixed unit trust. 
After analysing the provisions of its Tax Determination in relation to resettlements (namely TD2012/21, see our previous post that explores this - ATO releases draft determination on trust resettlements) the Tax Office confirms that so long as the amendments are within the powers of the trust deed, the continuity of the trust will be maintained for trust law purposes.

This is because the ultimate beneficiaries of the trust after the proposed amendments would be the individuals who were the objects of the trust before the variation. The fact that the extent of the interests of the beneficiaries in the trust change as a result of the variation was seen as irrelevant.

Therefore, the amendments to the terms of the trust did not trigger capital gains tax (CGT) event E1 or CGT event E2, being the 'resettlement' CGT events.

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement.

CGT event E2 happens if a CGT asset is transferred to an existing trust.

The Tax Office further confirmed that CGT event E5 was not triggered by the conversion of a family trust to a fixed trust.

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee despite any legal disability of the beneficiary.

CGT event E5 does not however happen if the trust is a unit trust and thus this exemption was held to apply here.

The Tax Office also confirmed that there are no other CGT events that happened when the family trust was converted into a unit trust. This is because the amendments were within the trustee's powers contained in the trust instrument. This means that the continuity of the trust was maintained for trust law purposes.

The above post is based on an article originally published in the Weekly Tax Bulletin.

Turning comments into wine and books



All those who interact with the post this week with any comments or likes on LinkedIn will go into the draw to win a bottle of View wine (which we are excited to confirm is now drinkable) or a paperback copy of our workbook ‘40 Forms of Trusts’.

Image courtesy of Shutterstock

Tuesday, July 11, 2017

Fixed trusts – what exactly are they?


A recent post explored some threshold issues around the distinctions between unit trusts and fixed trusts (see - Unit trusts and fixed trusts).

Whether a unit trust is in fact a fixed trust is an area that has been the subject of significant uncertainty.

In 2016, the Tax Office did release Practice Compliance Guidelines on its view of what is a fixed trust. Unfortunately, the release by the Tax Office is problematic for at least three reasons, namely:
  1. it only considered the meaning of ‘fixed trust’ for the purpose of the trust loss provisions under the Tax Act; 
  2. the drafting approach of the Tax Office is non-definitive; in other words the Tax Office confirms it will retain the discretion to deem a trust not to be fixed despite what it sets out in the guidelines; 
  3. furthermore, the guidelines are not themselves binding on the Tax Office. 
Subject to the above comments, broadly it seems to be accepted that the following factors will be relevant to supporting that a trust is a fixed trust: 
  1.  the trustee cannot create different rights or different classes of units; 
  2. all units on issue must have the same rights to receive income and capital of the trust; 
  3. units must be allotted for market value; 
  4. all income and capital of the trust must be distributed in proportion to the unitholdings, i.e. there is no discretion held by the trustee; 
  5. partly paid units cannot be issued; 
  6. the trust deed requires all unitholders to agree on the redemption of units and any redemption must be at market value; 
  7. all valuations of the trust fund, and in turn the determination of unit values, must be conducted by a valuer in accordance with ‘applicable Australian accounting principles’; 
  8. the trustee cannot make gifts;
  9. the unanimous consent of all unitholders is required to vary the trust deed and the variation power should prohibit amendments to any of the above provisions.
The above post is based on an article originally published in the Weekly Tax Bulletin.

Image courtesy of Shutterstock

Tuesday, July 4, 2017

Tyre pumping, timesheets and The Force

Last week’s shout out to #oldlaw (or #BigLaw as the case may be) and #burningtimesheets caused a significant amount of discussion.

Some will recall our long held view (no pun intended) that if you are not part of the solution, you are part of the problem* – particularly in relation to sustainable business models for professional service firms.

Creating a #timeless solution was a key foundation for the launch of View 3 years ago this week.

The #starwars inspired 90 second video we created to explain our vision can be viewed (again no pun intended) here – https://youtu.be/g965Sz8n9uc


Best wishes for the new financial year ahead, particularly if you have suddenly been asked to be somewhere between 5% and 23.6% (depending on your firms definition of current CPI rates**) more valuable to your customers …

* For trainspotters this is the Eldridge Cleaver (of Black Panther Party fame) quote

** For trainspotters the actual CPI in Australia over the last year is somewhere around 1%-2%

Tuesday, June 27, 2017

Unit trusts and fixed trusts


One area that seems to be receiving an increasing amount of interest from the Tax Office in recent times concerns the distinction between a unit trust and a fixed trust.

Often, the differences between these two types of trusts can be quite subtle and the interpretation of the trust deed can be critical in this regard.

As has been mentioned in numerous previous posts, the starting point in any trust related matter is to read the trust deed.

Where a trust deed is reviewed and the instrument does not reflect the intention of the parties, it is generally possible to convert what would otherwise be a unit trust into a fixed trust for tax purposes (and vice versa) without any adverse tax or stamp duty consequences.

Obviously, care does always need to be taken in this regard, and due to the potentially significant tax differences between the ownership structures, particularly in relation to issues such as trust losses, capital gains tax events and valuation requirements. It is therefore generally recommended that the trustee obtains specific written advice before implementing any intended change.

Image courtesy of Shutterstock

Tuesday, June 20, 2017

Taxpayer 2 v Commissioner 1 – the continuing story of streaming franking credits via trusts


For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article is extracted below.

The recent case of Thomas & Anor v FCT [2017] FCAFC 57 (as usual, if you would like a copy of the decision please contact me), contains some particularly interesting comments in relation 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. That decision held that franking credits could form part of the income of a trust estate for trust law purposes and be streamed to particular beneficiaries.

There then followed the Commissioner's subsequent (successful) application in Thomas v FCT [2015] FCA 968 (see the following post - http://blog.viewlegal.com.au/2015/09/at-last-some-clarity-with-streaming-of.html), which concluded that franking credits were not net income of the trust and therefore could not be "streamed" independently from the net income.

Facts and original decision

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. 
In the original decision, the taxpayer successfully obtained a declaration from the Supreme Court of Queensland in relation to the proper construction of the trust resolutions distributing the income in the manner summarised above.

In particular, the taxpayer commenced proceedings seeking directions under s 96 of the Trusts Act 1973 (Qld) as to the manner in which the trust deed and trust distribution resolutions should be interpreted.

The Commissioner was notified of the application but informed the taxpayer's solicitor that it did not consider it appropriate for the Commissioner to be a party to the proceedings.

The Court granted the orders requested by the taxpayer, largely on the terms requested, which included that the proper construction of the trust deed and resolutions resulted in the majority of the franking credits passing to an individual, notwithstanding that the balance of the net income went to the corporate beneficiary.

Commissioner's appeal

Following the decision above, 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 judgment issued by the Federal Court rejected the earlier conclusion of the Queensland Supreme Court and provided significant guidance in relation to the streaming of franked dividends and franking credits.

In particular, it confirmed that Div 207 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.

However, the Court held that, while 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.

Consequently, 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 Court held 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 and found in favour of the Commissioner.

Taxpayer's subsequent appeal

The taxpayer's appeal Thomas & Anor v FCT [2017] FCAFC 57 essentially hinged on the nature of the original decision issued by Applegarth J in Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417.

The taxpayer argued that the nature of the orders issued by Applegarth J regulated the rights of the beneficiaries and the trustee and had conclusively determined each beneficiary's share of the trust's net income.

In particular, the Full Federal Court noted:

"The application before his Honour [(ie Applegarth J)] required the Court to make sense of what may, perhaps not unfairly, be described as confused resolutions. The resolutions purported to do something and an ultimate intention could fairly be discerned however ineptly the two resolutions may have been drawn.

However the rights of the beneficiaries flowing as against the Commissioner from Div 207 of the 1997 Act depended wholly upon the effect of the rights created as between the trustee and the beneficiary by whatever the resolutions may have achieved.

The rights to be created by the trustee as against the Commissioner were a matter wholly within the control of the trustee and it was in the jurisdiction of the Supreme Court to make declarations concerning the proper construction of what the trustee had done pursuant to a domestic trust."

The Court went on to say:

"The Commissioner was not obliged to participate in that proceeding, and may not be bound by the construction of Div 207, but the Commissioner is bound by a declaration concerning the effect of the resolutions if the declaration conclusively determines that a beneficiary has a share of the trust's net income for a year of income that is covered by s 97(1)(a) of the 1936 Act."

Consequently, the Court found in favour of the taxpayer for the income years in which the original orders had been granted (2005-2008) and, "reluctantly", also for the 2009 resolutions, which had not been expressly considered by Applegarth J.

Although the taxpayer was successful, the Court appeared unimpressed by the reasoning of Applegarth J in his original decision on a number of occasions.

For instance, Pagone J commented:

"Applegarth J's declaration in 1(b)(iii) is, perhaps surprisingly, that the resolutions which the trustee had made in the years ended 30 June 2005 to 30 June 2008 had conferred upon each of the beneficiaries a vested and indefeasible interest in the distributable income consistent with the intended flow of franking credits."

More bluntly, Pagone J said:

"It is difficult to embrace the conclusions of Applegarth J ... The franking credit distribution resolution is explicable only by a fundamental confusion in the mind of the person drafting the resolution … Applegarth J, however, was persuaded …"

Perram J also noted:

"Like Pagone J, I am, with respect, sceptical about the construction of the resolutions adopted by Applegarth J, but that scepticism simply does not matter whilst the declaration remains on foot. It is what it is. That it might be attended by reasoning which may be erroneous is irrelevant whilst it exists."

It seems clear from the decision that the taxpayer has enjoyed an extremely fortunate outcome, essentially leveraging the interplay of a number of technicalities to engineer an unlikely win.

Indeed, it can also arguably be assumed that, with the aid of hindsight, the Commissioner would be regretting his decision not to be included as a party to the original application to the Queensland Supreme Court.

Position in relation to streaming franking credits

While the case is at face value a victory for the taxpayer, it far from authority for the conclusion that franking credits can be streamed as a separate class of income from the dividends giving rise to those credits.

Indeed, in the absence of construction orders like those granted here by Applegarth J in the Queensland Supreme Court, the correct interpretation of Div 207 is that outlined by Greenwood J in Thomas v FCT [2015] FCA 968.

That is that while 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.

Pagone J makes this abundantly clear by stating that the trust resolutions here, and in turn Applegarth J's analysis:

"…proceeded upon the same misunderstanding of the proper operation of Div 207; that is, upon the misunderstanding that franking credits could be distributed separately."

Lessons

Ultimately, as explained in our previous post (see - http://blog.viewlegal.com.au/2015/09/at-last-some-clarity-with-streaming-of.html), there are a number of lessons that can be taken from these decisions.

Certainly, as a starting point, there is 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.

As set out previously, the other key lessons include the following:
  • 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 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. 
Finally, many of the themes in this post were featured in our recent Estate Planning Roadshow.

Download the brochure to purchase a full recording of the event here - https://viewlegal.com.au/product/recorded-webinar-package/

Tuesday, June 13, 2017

How soon is now ** (or ‘as soon as practicable’)?


Last week’s post considered the phrase ‘as soon as practicable’ in light of the 2017 superannuation changes (see - Estate planning and the 2017 super reforms – the six post death strategies you must be aware of).

Regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) requires death benefits to be cashed ‘as soon as practicable’ following the death of a member.

Unfortunately, ‘as soon as practicable’ is not defined in the Regulations and has not been otherwise defined.

Generally in our experience the Tax Office has historically expected death benefits to be paid within 6 months of a person's death, or earlier if possible.

While perhaps not directly relevant, part of the reason for this approach is likely to be because under section 17A(4) of the Superannuation Industry (Supervision) Act 1993 (Cth), any replacement trustee (or replacement director of a corporate trustee) must resign within 6 months of the death benefits commencing to be paid. In other words, 6 months is legislated in a manner that is arguably analogous to the concept of ‘as soon as practicable’.

This said, if there are objectively reasonable circumstances preventing payment for more than 6 months, this is unlikely to cause a breach of the rules, so long as the payment occurs as soon as practicable once the relevant circumstances have been resolved.

Some examples of where a payment after 6 months may still meet the ‘as soon as practicable’ test include -
  1. it may be that probate of a member's estate is seen as required before paying a death benefit, and generally probate will take longer than 6 months; 
  2. if there is a risk that an estate may be challenged or the potential recipients of a death benefit challenging the trustee's decision, confirming that the risk has passed will generally take longer than 6 months; 
  3. similarly, if there is an actual challenge to a deceased estate this may warrant delaying paying of a death benefit; 
  4.  if there is uncertainty about the validity of any purported binding death benefit nomination this may take longer than 6 months to resolve; 
  5. the nature of the assets in a fund may make distributions within 6 months impossible, for example illiquid assets such as real estate or investments in platforms that have large penalties for early withdrawal; 
  6. it may also be that the values of assets that are will form part of the cashing take an extended period to value; 
  7. surrounding circumstances, such as poor health of a surviving fund member may also justify a payment commencing later than 6 months. 
Interestingly, the 2017 superannuation reform legislation permits a reversionary beneficiary 12 months to decide if they wish to cash their benefit before it is automatically credited to their transfer balance. This allowance may (again by analogy) support the argument that a death benefits payment within 12 months will meet the ‘as soon as practicable’ test, even without other explanatory reasons.

** for the trainspotters – check out iconic 1980s new wave band The Smiths perform ‘How soon is now?’ here - https://www.youtube.com/watch?v=hnpILIIo9ek


Finally, many of the themes in this post were featured in our recent Estate Planning Roadshow.

Download the brochure to purchase a full recording of the event here - https://viewlegal.com.au/product/recorded-webinar-package/