Tuesday, December 5, 2017

Final Post for 2017 – Simply have a wonderful Christmas Time **


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 2018.

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 ‘Inside Stories – the consolidated book of posts 2010-2016’ (see - https://viewlegal.com.au/product/inside-stories-reference-guide/).

The 2017 edition of this book, containing all posts over the last year, edited to ensure every post is current, indexed and organised into chapters for each key area should be available early in 2018.

Very best wishes for Christmas and the New Year period.

** for the trainspotters, with Paul McCartney in AUS, listen to his Christmas song ‘Simply Having a Wonderful Christmas Time’ hear (sic) - https://www.youtube.com/watch?v=hMhMekfIyos


Image courtesy of Shutterstock

Tuesday, November 28, 2017

Just Beat It - the notional estate rules & a lesson from Mr Pratt **


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/sVKhCJ87BpI

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

Mr Pratt allegedly died with a wife, some kids with that wife, and then perhaps two other spouses that were based in New South Wales. Those two spouses then made various challenges against Pratt’s estate.

One of the challenges related to assets owned via a family trust.

The structure involved a trustee company that had no individual shareholder.

The shareholder of the trustee company was another trust. That trust was ostensibly for Richard Pratt. The parties accepted that this was the case and that he had ultimate control of the trust beneficially and probably legally.

Importantly, that trustee company was setup in Victoria.

The trustee company was then a trustee of a standard family trust, other than this point, and that is Richard Pratt himself was not a potential beneficiary of the trust.

This trust then owned shares in a holding company.

That holding company was also a Victorian-based company.

That holding company owned 100% of the shares in a further subsidiary company. That subsidiary company owned New South Wales property, being I think an apartment where one of the additional spouses was living at Richard Pratt’s expense.

The argument of the spouse focused on the fact that in New South Wales, if you’ve got any asset in New South Wales, even if you died in another jurisdiction, the notional estate provisions can apply.

Like many business owners, Richard Pratt didn’t have many assets that passed under his will. Thus, there wasn’t a lot to be gained from trying to challenge the will, unless the notional estate provisions applied. If they did, then assets of the trust (being the shares in the company group that owned the apartment) would essentially be deemed to form part of the will.

What the court did was went through the notional estate provisions and methodically stepped through each aspect of the structures Pratt had put in place.

Despite the apartment being located in New South Wales, the structure used meant there was nothing else that created a nexus between the deceased, being Mr Pratt, and the New South Wales notional estate rules. In other words, the assets could not be attacked.

** for the trainspotters, ‘Beat It’ should need no introduction - watch hear (sic) and ask yourself if you can sing the chorus without swapping the lyrics to ‘eat it’ (also watch Weird Al’s remake below) -

MJ - https://www.youtube.com/watch?v=oRdxUFDoQe0


Weird Al - https://www.youtube.com/watch?v=ZcJjMnHoIBI

Tuesday, November 21, 2017

How to innovate: Think what BigLaw would do; and do the opposite


A previous post profiled the contribution I made to an eBook published by LegalTrek (see - Insights on the Journey to Value Pricing). For those that do not otherwise have access to the LegalTrek blog, a further article I have provided to them is extracted below.

While the article focuses on the legal industry, arguably the principles apply to all professional service firms.

Recently, we at View Legal started ‘Foundations for the Future’, webinars and one-day events, with the aim of broadening perspectives of how to structure professional service firms. The format is pretty straightforward.

The presentation is delivered by me, Matthew Burgess, with significant audience participation, in the form of questions and answers. The content is focused on optimising the business model of professional service firms. During the workshops, we usually discuss specialisation, productisation, resourcing, and pricing models.

This article explains why we at View Legal feel these talks are important.

Before that:-

For those who don’t know, in 2014 I exited ‘biglaw’. My sense is that most of biglaw is very similar in its thinking, regardless of how many partners are in a firm.

In biglaw, very few people are thinking anything other than the traditional model, charging in increments, and billing the hours.

Many believe that small is the new big. From the start, View has known we can think and act differently.

Here are some examples of what we do differently from the biglaw model:
  • We don’t bill by the hour and we have no timesheets; 
  • We don’t have any offices, so don’t spend $millions on fancy office space; 
  • We don’t do performance reviews; 
  • We have no holiday policy – we are a results-only company. If you think you can take 12 weeks leave and still deliver what we want as an organization: go for it; 
  • Our longest business planning cycle is 90 days. 
And how did we go about thinking differently? Sounds difficult, right? When, in fact, it is the opposite. There’s not a lot of actual rocket science in what we’ve done. It’s public information, what the biglaw model is. We have just said…
“Whenever we are in doubt, we say what would a big law firm do, or a traditional law firm; and then we do the opposite…” – Matthew Burgess 
Disclaimer: It hasn’t always worked. But we keep experimenting.

Why did we start the ‘Foundations for the Future’?

In short: because it is important.

The change in the business of law landscape is already taking place. Our overriding objective is to be part of the conversation, that we believe is very important.

I felt we should not simply wait for others to initiate the discussion. So, we decided to do something about it.

We didn’t want to be in a situation where we had an opportunity to share what we knew and did not act.

Imagine us, reflecting in five or ten years’ time, only to find the industry has completely imploded and all of us are left with nowhere to go. That’s what’s happened in other industries (e.g. taxis and Uber and driverless tech).

However, I feel that the overarching question ‘How to face the future in a professional service industry’ is conceptually wrong. What we should ask ourselves is – What value does the legal profession bring to the community?

It seems there is a wide acceptance that – ‘in the future’ – the legal profession will need to change significantly, to deliver a compelling value proposition. However, our concern is that the future is already here.

So, we feel there is really no time to lose. This is why we have already started the discussion.

What changes can you expect in the next three years?
Let’s see if we can make some analogies, and learn from previous examples.

The impact of technology has been seen across most other industries. It has been most dramatic in industries that are adjacent to professional service firms. Examples include the music, publishing, and consulting industries.

Our view, however, is that technology is only ever an enabler for change, a catalyst in all industrial transformations. The work of thinkers such as Clayton Christensen (in the book The Innovator’s Dilemma) reinforces this concept.

The solutions that are already gaining traction, at an ever-increasing rate in the professions, focus on the delivery of outputs to end-users.

This type of business model is diametrically opposed to incumbent providers, that focus almost exclusively on input-generated value creation (in other words, recording time and selling it, according to an arbitrary hourly rate).

We have a clear client trend toward those professional services firms that have changed their business model and stopped selling time.

How should lawyers position their law firm for the “new normal”?
My answer is simple – just focus on the results of your work, instead of your inputs. In other words – charge for the value you create, rather than the processes that you use (and the time that you spend).

In our example, the starting point for our firm has been to focus our entire business on the outputs that we deliver, as opposed to the inputs that we create. This one change has had the single biggest impact on our ability to demonstrate our value as a firm.

Based on our experience (and what we observed in other successful firms), until all participants focus fully on outputs, it is very difficult to achieve any substantive innovation.

Let me give the example of Kodak. We all know what happened to Kodak. Kodak was doing a lot to remain the market leader. Except for one thing – they did not change their business model.

They got stuck with their premise that people will ALWAYS want to print photos.

Kodak used to say “We are in the film business”. Arguably, all they had to do to be successful was to say “We’re in the memory business”.

Likewise, the only thing law firms need to do is to say “We are selling solutions” – and peace of mind – not hours recorded.

What should the business model of modern law firms be?
Without question, a business model that is focused exclusively on outputs created for clients is the only business model that is likely to be sustainably successful.

Certainly, in all other industries, there is no role for providers wishing to charge clients based on inputs, as opposed to outputs. On this basis, we believe that ‘timeless’ law firms should be the universal pricing model for every firm.

But it is actually not that difficult at all to think outside of the box here. Take thought leader Ron Baker, for example. Every year, he wants to either give away or discard, all the knowledge that he has, by the end of the year.

But why!?

Ron Baker says the only thing that keeps him relevant is if he is constantly renewing the way he thinks. So, letting go of his knowledge will force him to renew his learning, and he will continue to be relevant.

The point here is that if you’re not disrupting, or trying to destroy, your current most successful business, somebody else will be.

If you’re not disrupting or trying to destroy your most profitable, most successful part of your business, that’s fine. But accept that somebody else is doing that, right now.

Can lawyers use outsourcing, and if so, from where?
The model that best explains our views about outsourcing is known as the Stan Shih ‘Smile Curve’. Stan Shih is the founder of Acer, a technology company headquartered in Taiwan.

Shih noted that in the personal computer industry both ends of the value chain have higher values added to the product, than the middle part of the chain. To illustrate:

Measuring Smile Curves in Global Value Chains, page 5

How does this apply to law firms? Simply put, firms should focus all of their internal energies, and resources, on the activities that are least able to be outsourced. In order of priority, this means firms should focus on:-
  • conceptualisation and sales; or
  • branding and marketing; or 
  • design and distribution; or 
  • manufacturing and production.
In other words, law firms should focus on strategies that will bring them more business. Including (without limitation) finding their right niche, positioning, putting the business development team and/or lead generation system in place, designing products, and experience around the service delivery.

The middle part of the Curve illustrates lower effort on the law firm’s end in terms of the actual service “manufacturing’’ (or rather, delivery).

This means law firm still must be hands-on in terms of controlling the process, but it would be wise to outsource most of the elements, if not all, from this value chain segment.

Based on these principles, in our business, we actively look to outsource (whether to computers, onshore providers or offshore providers) everything other than conceptualization and sales.

Indeed, even with conceptualization and sales, we also seek specialists, with non-legal backgrounds, to assist us to achieve best practice.

Why is P3 (process, product, and pricing) important for law firms?
P3 is widely recognized as the cornerstone of any successful professional services firm.

Somewhat ironically, however, in a firm that focuses on inputs (time billing, or even time recording), the level of innovative thinking that is applied to any of the P3 tends to be limited.

Arguably, it only makes sense to focus on processes, pricing, and productisation, once you have decided to move away from the billable hour.

Where a professional services firm focuses on the value it creates, then this tends to create significant improvements in each aspect of the P3 areas.

Again, once you focus on value-based pricing, in the true sense of that meaning, you will have no obstacles to improving any of the P3 areas.

Let me give an example. If you opt to charge based on value (and not use hourly rates), then:-
  • Process, particularly around project management, becomes very important; AND
  • Productisation of solutions becomes a core competency (if not immediately, then over time).
The journey from time billing to fixed pricing, to value pricing, to segmented and tiered value pricing, is a natural evolution as the firm’s skills in pricing continue to develop.

Disruptive innovation and ultra-specialisation is the perfect storm

What do I mean by that?

The science in relation to disruptive innovation (as first explained by Clayton Christensen, in The Innovator’s Dilemma) is compelling.

In short, the theory explains that disruptive entrants to a legacy business model tend to start at ‘the bottom’ of the industry.

The theory describes how incumbents get taken by surprise. Let me illustrate:


The disruptive firms use technology to undermine ‘low hanging fruit’, in the businesses of the incumbent firm. You can draw parallels here and see that this is exactly how NewLaw act today.

NewLaw has focused on the legal work at the bottom of the value chain. That is the work which can be most easily productised.

At the same time, incumbent law firms simply start disengaging from those practice areas, on the basis that they are becoming less profitable, and they wish to focus on more profitable areas.

In other words, law firms forego those standardized areas. However, they do not change their business model. As a result, they remain large inefficient machine, but with a smaller market share.

In time, the NewLaw will start to move up the value chain. The range of practice areas, that have been subjected to disruptive forces, continues to grow quickly, across areas such as conveyancing, general commercial work and even more specialized areas, such as intellectual property, estate planning, and industrial relations.

Also, at least some (if not many) of the highly specialized ‘best in show’ lawyers are becoming disenchanted with life inside the ‘biglaw’ machine.

These highly talented lawyers are leaving larger firms at an ever-increasing rate. Similarly, the number of international firms entering even the smallest markets means that much of the talent that is not setting up their own firms is joining these large multinational firms.

Essentially, many incumbent firms are ‘stuck in the middle’; losing talent and work at the very high end of their client base, and losing work at the bottom end also.

What is our experience with value pricing?

For us, value pricing has been a journey, with a destination we accept we will never arrive at. A threshold question of pricing is: How do you fixed-price litigation work?

Now, I’ve never done any litigation work, but we do M&A work, and I would argue that an M&A transaction is largely analogous to a litigation matter. You’ve got no idea where it’s going to go. You’re totally in the hands of both the client and the other side. There’s no definite timeframe. It can change on an hourly basis.

The answer to pricing this type of work is all about the scope, in other words, competent pricing is all about competent scoping.

One way to look at value-pricing, is to decide what is a fair price to be charging the client? The fair price is the most that you can charge the client with the client still endorsing your firm to their friends, and actually coming back and using you again – Not necessarily happy, but willing to be an advocate.

That, in a sentence, is what value-pricing is about.

This is just a journey. Don’t ever feel as though you’re getting close to being perfect about value pricing because you never actually get there.

Should law firms burn the timesheet? What is the substitute?
Until we, at View Legal ‘burnt the time sheets’, our sole focus was on what would be ‘chargeable’.

Having abandoned timesheets and embraced a timeless organization, our focus immediately changed to “what is valuable”.

While the journeys of other firms may be different, when we look at the industry, the common theme about the firms making real and tangible progress is that they do not track time on timesheets in any manner.

The substitute for timesheets is, in our experience, a very personal one.

The three KPIs we use are:-

Number one is the “Shipping”. This concept has been popularized by leading thinker, Seth Godin.

Counter-intuitively, even though we do not track any time spent on a task, we religiously track the time it takes for us to fulfill a promise to a client. In other words, how long it takes between agreeing a tranche of work and completing it?

Next, we regularly conduct “After action” reviews. Since we constantly want to improve our overall performance, after action reviews are the only tool that allow us to capture the key conclusions from any piece of work in real time.

Finally, we have “Fun and flow”. The concept of flow is an entire topic in itself. It focuses on achieving excellent levels of performance, and ultimately provides the foundation for a more easily understood concept – i.e. having fun.

Are you having fun at your law firm? How about your employees?

Tuesday, November 14, 2017

Privilege (on privilege) in family law matters **


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/E69HxwaO3A4

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

The decision in Nolan (email me if you would like a copy of the judgement) is interesting because former parents-in-law of a spouse actually released all of the material around the estate plan to the former son-in-law, before their lawyer raised that the material might actually be privileged.

When the issue was reviewed, the court held as a general rule, estate planning material of the parents of a couple is privileged. In Nolan however, the court held the parents had already released the information and therefore no privilege attached to it. This is because privilege is the client’s privilege. Once they waive it, that's the end of the discussion.

Another privilege case in the family law space to remember is Kern. As usual, if you would like a copy of the judgement, please email me.

In Kern, the parents had arranged for vacant land to be transferred to their daughter and the son-in-law.

The daughter’s argument during the litigation with the former husband was that clearly the asset had come down ‘her’ side of the family and clearly that needed to come back to her benefit under the family law settlement. Not an amazingly complex argument and one that the court was comfortable to agree with.

Where it started to get somewhat more interesting was that the daughter then argued she and her parents had transferred the land to her for (say) $100,000, when it was actually worth (say) $400,000.

The reason for the transfer being significantly undervalued was to minimise the tax and stamp duty otherwise due and payable. The family court gave the wife the uplift to $400,000.

However, the undervalued transfer breached specific provisions under the stamp duty legislation. So while the court acknowledged the argument and gave an effective benefit under the family law settlement to the wife, the court also immediately sent the matter to the criminal investigations division at the Stamps Office.

Again, generally this information would be protected by privilege. However, as the wife was the one that submitted it into the court, she waived the privilege.

** for the trainspotters, ‘privilege on privilege’ is a line from the Church song ‘Myrrh’ (as I recall it I got an A+ when doing my grade 9 English assignment analysing the lyrics for this song … just sayin’) listen hear (sic) - https://www.youtube.com/watch?v=h6T_BtPSRL0

Tuesday, November 7, 2017

The new (Matthew) - 40 Forms of Trusts workbook release **


One of key goals at View is ensuring that we have ‘written the book’ for every aspect of the law we specialise in.

Following the successful launch of books in estate planning, tax, trusts, entity structuring, testamentary trusts, SMSFs and business succession, we have now developed and launched another book – 40 Forms of Trusts – workbook.

The concept of a trust is in theory relatively simple – one party (the trustee) holds assets for the benefit of others (the beneficiaries).

Counterintuitively, the relative simplicity of there being only a few core elements has meant there are almost a limitless number of forms of trusts.

Indeed, over time advisers and clients alike have largely only been limited by their imagination in terms of the way in which they craft any particular trust deed.

The workbook practically explores 40 different trust structures, including:
  1. The increasingly popular ‘GST’ structure 
  2. All key forms of protective trusts 
  3. Secret trusts 
  4. International structures 
  5. Perpetuity trusts 
  6. Legitimate tax advantaged trusts 
The workbook also has a number of key checklists for use when establishing a new trust or reviewing an existing trust.

All of the View books (over 15 at last count) can be accessed via our website – see - https://viewlegal.com.au/product-category/books/

Everyone who likes or shares this post will go into the draw to win a free copy of this book.


** for the trainspotters, ‘The New Matthew’ is a song by BrisVegas band Custard, watch hear (sic) – the video was in fact not the winner of the best video award at the ARIAs back in 1999 (despite the revolving ‘ARIA’ at the bottom of the screen … instead they had won it for ‘Girls like that’) -

The New Matthew - https://www.youtube.com/watch?v=DoEfnqbBC7k

Girls like that - https://www.youtube.com/watch?v=MoW_fqr86JU

Tuesday, October 31, 2017

(It has) access now - estate planning documents & family law cases **


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/GyqLtNpPv_8

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

A classic case study example is where there is a mum and dad with adult kids. The parents have set up their estate plan and one of the adult kids then goes through a relationship breakdown.

The type of argument that can be run by the estranged spouse is as follows –

‘I’ve got reason to believe that under the estate plan of my former in-laws that my ex-spouse will be getting a fair entitlement under their estate plan. So on that basis, I want to get access to the documentation that sets out how the estate plan works and I want to get access to how any family trust they may have is setup.

I also want to get access to all the distribution resolutions overtime. Even though none of this is a direct asset or something that is directly within the portfolio of my former spouse, it is all within the overall family unit, and therefore, I am entitled to get access to those documents.’

The case law in this type of situation is somewhat unclear. There are certainly cases to support the fact that parents’ estate planning documentation can be accessed.

Indeed, there are examples where in the actual trial, the parents-in-law are called into the courtroom, the doctors are called in, and there’s a medical assessment of how the mum and dad are tracking, and whether they are actually going to die anytime soon.

All of this is done to allow the court to put a monetary value on what a spouse’s entitlement might be out of their parents’ estate plan.

** for the trainspotters, ‘it has access now’ is a line from the At the Drive-In song ‘One Armed Scissor’, watch hear (sic) - https://www.youtube.com/watch?v=7NYbojdoAQE

Tuesday, October 24, 2017

(A sea of) permutations on reading the deed - regulating family trust assets via wills **


Recent posts have considered aspects of the prohibition on a trustee fettering its discretion, see -
Fettering of a trustee's discretion – when will it be ignored? ** and Leading case about fettering of a trustee’s discretion

One related issue that we see arise from time to time is an attempt to regulate the distribution of the assets of a trust via a will direction. Generally this approach is adopted on the basis that some argue that a will can have legal force over a trust.

The idea that a willmaker can mandate that a company take certain steps in relation to its assets is clearly untenable (even if the will maker is the sole director and shareholder of the company). The analogous argument that a will maker can somehow force a trust to take certain steps seems (at least conservatively) similarly without basis.

In any event, if the outcome of mandating certain trust distributions is required, a simple deed of variation, with an effective date of the willmaker’s death arguably achieves the same outcome, without any of the esoteric debate about whether a willmaker can regulate trust distributions.

While we do from time to time adopt the ‘delayed commencement’ deed of variation approach we generally recommend against it as it goes against virtually all the benefits of having a discretionary trust in the first place (quite aside from the significant tax and duty risks of such a variation).

Instead, our strong preference is to use one or more of strategies such as memorandums of directions, crafting control roles (such as appointor or principal powers), family councils, bespoke constitutions, trust splitting, trust cloning, independent trustees or gift & loan back arrangements to achieve the required objectives.

** for the trainspotters, ‘a sea of permutation’ is a line from the John Cale/Brian Eno song ‘Lay my Love’, listen hear (sic) - https://www.youtube.com/watch?v=pYvXp7_9GPE



Image courtesy of Shutterstock

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.

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