Blame it on the Sunshine – why I refuse to listen to Bing Crosby**: Final Post for 2018 and Season's Greetings

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2019.

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 – Reference Guide (the consolidated book of posts) ’.

The 2018 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 2019.

Very best wishes for Christmas and the New Year period.

** for the trainspotters, ‘Blame it on the Boogie’ (riffed for the title of today’s post is the Jackson 5 hit from 1978.

PS: And why I won’t listen to Bing Crosby … after 9 Christmas seasons in a row at Myer, there were many years when Bing’s Christmas album was the only music played all day, every day, for weeks on end. And one Christmas some genius in management thought it smart to play ‘White Christmas’ on repeat all day everyday for the last week of trading … (I won’t be watching).

If 6 was 9 – Trust Naming Conventions – Part IX **

Continuing on from the last post and the type of trust deeds that can be created, this week’s post summarises another five types of trusts:

Special Disability Trust – this type of trust is regulated by government legislation and allows relatives of a family member who has a disability to establish a trust that has concessional income tax treatment, and also allows for any family home owned by the trust to still gain access to the main residence capital gains tax exemption. There are a number of particular rules in relation to how this form of trust must be established and operated.

Employee Benefit Trust – this type of trust is often set up by business owners as a way to provide discretionary bonus entitlements to key staff. The structure was very popular for a number of years, however active Tax Office compliance has meant that the range of circumstances where this type of structure will be useful is now relatively limited.

Business Succession Trust – from a business succession perspective, it is often important to help manage the exit of an ultimate owner by obtaining insurance cover for events such as death, trauma and total and permanent disablement. While there can be a number of complex issues that arise, one way to structure the ownership of the insurance policies is via a special purpose trust, often referred to as a 'business succession trust'.

Blind Trust – a blind trust is one where the trustee is the only party disclosed as being involved in the trust and the standard phrase 'as trustee for [name of trust]' is not disclosed. In a semi-blind trust, the existence of the arrangement is maintained on trust records. With completely blind trusts, there is no documentation in existence supporting the evidence of the trust and everything about the trust relationship is regulated verbally.

Sub Trust – particularly in relation to a discretionary trust that make distributions to beneficiaries, with those distributions remaining unpaid for extended periods, the trust instrument will often automatically create a 'sub trust' that permits the beneficiary to any time call for the payment of the unpaid distributions.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘If 6 was 9’ is a song by Jimi Hendrix from 1969.

NSW implications for all changes of trustee

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a vidcast.

As usual, an edited transcript of the presentation is below:

There is a specific provision of the New South Wales Duties Act which requires that, in order to qualify for the stamp duty exemption where a change of trustee is occurring, the new trustee needs to be excluded as a beneficiary of the trust.

This means the trust deed needs to contain an express provision excluding any new trustee from being a beneficiary.

Advisers practicing in New South Wales are usually acutely aware of that limitation being in most of their trust deeds and of the resulting need to look at who may have been a previous trustee to see whether any beneficiaries are excluded.

The issue comes up quite commonly because several of the popular online trust deed providers use trust deeds from Sydney law firms, meaning that even though the trust deed might be ordered online by an accountant in Western Australia or a lawyer in South Australia, if the deed provider is based in New South Wales, the deed they’re providing probably contains this exclusion without the adviser being aware of it.

There are two reasons we need to know whether the deed contains the exclusion.

Firstly, if we are changing the trustee and we appoint a new trustee who is a beneficiary of the trust, then that change of trustee may be invalid or it may trigger unintended tax or stamp duty consequences.

Secondly, we may have individuals who were previously a trustee of the trust and who at face value appear to be a beneficiaries, but who were actually excluded as a result of the clause.

For instance, if Mum and Dad were individual trustees but they subsequently retired and appointed a corporate trustee, even though they may be named as beneficiaries of the trust, the exclusion clause may have made them ineligible to receive income or capital distributions.

An exclusion like this can have an impact from a family law perspective and also from a tax perspective, if we have been purporting to make trust distributions to individuals thinking they were beneficiaries, not being aware of this exclusion hidden within the trust deed.

Maintaining trust records

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a vidcast.

As usual, an edited transcript of the presentation is below:

It’s surprising how often we are provided with an original trust deed for a trust that’s been around for 10 or 15 years and are asked to give advice on the terms of the trust, only to have it turn out later that there were subsequent deeds of variation or resolutions which amended the terms of the trust, which everyone had lost or forgotten about.

As a practical tip, clients who are establishing a trust should have some form of trust register or trust folder in which they store copies of all of the trust deeds, trust variations, trust resolutions and any other documents which may impact on understanding what rights and responsibilities attach to that trust.

We also need to understand that beneficiaries can make unilateral decisions, such as deciding to renounce an interest as a beneficiary of a trust.

If an individual who is a beneficiary issues a disclaimer or a renunciation, which says that notwithstanding the terms of the trust deed they have chosen not to be a beneficiary of the trust anymore, that will impact on their standing from a family law perspective, bankruptcy perspective and a tax perspective.

Eight (days a week) – Trust Naming Conventions – Part VIII **

Continuing on from recent posts about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

Constructive Trust – this is an equitable remedy resembling a trust imposed by a court to benefit a party that has been wrongfully deprived of its rights by a person obtaining or holding legal right to property which they should not possess due to unjust enrichment or interference.

Resulting Trust – this is the creation of an implied trust by operation of law, where property is transferred to someone who pays nothing for it, and then is implied to have held the property for benefit of the initial transferor.

Bare Trust – this is a trust in which the beneficiary has a right to both income and capital and may at any time call for both to be transferred to them personally. Bare trusts usually have little or no documentation and the trustee is obliged to follow the directions of the beneficiary immediately on them being given.

Absolutely Entitled Trust – when a beneficiary is absolutely entitled to trust property, they are able to call for the asset to be transferred to them by the trustee. Often, this type of trust arises when the original trust is designed to end on a beneficiary attaining a certain age and the age is reached.

Vested Trust – once a trust has passed any perpetuity period defined in the trust (or if it lasts longer than is permitted under government legislation), then it will end or 'vest'. What happens in relation to a vested trust depends on a range of issues and it is always important to review the terms of the trust deed as a starting point.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Eight Days a Week’ is a song by the Beatles from 1964.

Seven Seconds – Trust Naming Conventions – Part VII **

Continuing on from the last post about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

Capital Protected Trust – this type of trust is designed to protect the capital of the trust fund and to preserve the trust assets for the benefit of later generations. This is normally achieved by ensuring the beneficiaries are only entitled to utilise the income of the trust.

Converting Trust – a converting trust traditionally will be a standard discretionary trust that converts into some other form of trust following a triggering event. Often, the trust will convert on the death of (say) the primary beneficiaries so that the trust will become a unit trust with discrete components allocated to each of the children of the initial primary beneficiaries.

Service Trust – a service trust is commonly used to supply the use of equipment, staff, premises and administration services to a related business. Traditionally, this type of trust has been used by professionals who were required to conduct business personally as a tax planning and asset protection strategy.

Borrowing Trust – this is a trust which is established solely for the purpose of borrowing money for the benefit an active related business entity.

Superannuation Instalment Trust­– the superannuation legislation allows self-managed superannuation funds to borrow money, subject to satisfying strict requirements. Most of those requirements are in relation to the type of trust that must be established to facilitate the borrowing.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Seven Seconds’ is a song by Neneh Cherry from 1994.

Trust me I’m six – Trust Naming Conventions – Part VI **

Continuing on from recent posts about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

Life Insurance Trust – this trust allows the owner of a life insurance policy to avoid being liable for tax on the proceeds of life insurance policies post death by setting up a trust to specifically own life insurance policies. All the rights of the life insured are assigned to the trustee, and on death, no tax should be payable on the proceeds of the life insurance policy.

Grantor Retained Income Trust – an irrevocable trust established in a written agreement whereby the grantor transfers specific assets to the trust, however retains the income from or the use of the assets for a stipulated period of time.

Grantor Retained Annuity Trust – a trust where the grantor gifts property to a trust and retains the right to a fixed annual payment for a certain period of time.

Negative Gearing Hybrid Trust – this type of trust is based on the hybrid trust (profiled in an earlier post in this series). It incorporates aspects of a traditional unit trust that entitles unitholders to a fixed entitlement to income of the trust and also the aspect of the discretionary trust that allows the trustee to have a degree of control in the distribution of the capital of the trust to potential beneficiaries. The structure allows for both negative gearing tax deductions and asset protection for any capital gains derived.

Managed Investment Trust – these trusts are essentially unit trusts that carry on passive investment activities on a wide scale. When structured correctly, they can receive a concessional tax rate compared to investments in companies and other types of trusts.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Touch Me I’m Sick’ is a song by Mudhoney from 1996.

Who is a beneficiary?

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a vidcast.

As usual, an edited transcript of the presentation is below:

When we’re dealing with a discretionary trust, one of the first things we need to do is to identify who the beneficiaries are.

Is our client (or their spouse) in fact a beneficiary of the trust that we’re dealing with?

There are some common tricks and common issues that we should be keeping an eye out for, including ensuring we have identified all variations to the deed since establishment.

We also need to be aware of a case by the name of Yazbek, which outlines the approach that the courts take when they are asked to consider who the beneficiaries of a trust are.

Yazbek is significant because the court confirmed that a person who is eligible under a trust deed to receive income or capital from a trust is a beneficiary, notwithstanding that they may not have actually received anything from the trust at that point in time.

The Yazbek decision was handed down in the context of an assessment which had been issued to an individual beneficiary.

The ATO normally has a two-year period after that assessment was issued in which to issue an amended assessment (where they have identified some additional tax they believe should have been included in the taxpayer’s return).

However that standard two-year window is extended to four years where the individual involved is the beneficiary of a trust.

In Yazbek, ATO was trying to issue an amended assessment three years after the original assessment had been issued. So it was outside the two-year window, but within the four-year window.

The taxpayer in Yazbek hadn't received any distributions from the discretionary trust that the ATO contended he was a beneficiary of.

This was a discretionary trust which was controlled by other family members.

He was included in a wide class of discretionary beneficiaries, but had not actually received anything.

His contention was that in order to be a beneficiary of a trust, he needed to have actually received something from it.

Now the court was quite quick to shut that argument down and said that even if a person has not received any income or capital from the trust for the entire period it has existed, if they are within a class of persons who are eligible to receive income or capital at the trustee’s discretion, they are still a beneficiary of the trust.

Five to One – Trust Naming Conventions - Part V **

Continuing on from the last post about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

Testamentary Trust – these are simply trusts established pursuant to a will. The range of different types of testamentary trusts are almost limitless and can include fixed, unit, discretionary, hybrid, resulting (constructive), bare, lineal descendent and superannuation proceeds trusts. The various types of trusts have a number of different features and specific uses, however, fundamentally the legal structures of all testamentary trusts are very similar to any other form of trust established during the lifetime of a person (‘inter vivos’ trusts).

Post-death Testamentary Trust – a testamentary trust for the benefit of minor children that can be set up within three years of the testator’s death to access the excepted trust income tax concessions. Among other rules, the children must be ultimately entitled to the capital of the trust.

Superannuation Proceeds Trust – this trust is established solely to receive superannuation proceeds on the death of a fund member. A superannuation proceeds trust can be established by a will or by deed after the death of an individual.

Superannuation Fund – while referred to as a 'fund', superannuation entities in Australia are all largely founded on basic trust principles. The main distinguishing features of superannuation funds are that they potentially can last forever, unlike most other forms of trusts, unless established under South Australian law. There are also special tax concessions available for most superannuation funds.

SMSF Unit Trust – pursuant to provisions under the superannuation legislation, a superannuation fund can invest in a related unit trust. In some circumstances, the unit trust can in fact borrow money subject to certain rules. Broadly, among other requirements, the form of unit trust generally needs to satisfy the definition of a fixed trust for tax purposes.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Five to One’ is a song by legendary band The Doors from 1968.

Stairway to (trust) heaven – Trust Naming Conventions – Part IV **

Continuing on from recent posts about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

Protective Trust – this type of trust normally consists of two stages. Stage 1: A trust with a fixed income distribution to the principal beneficiary, until a 'termination event' occurs. The termination event can, for example, be the bankruptcy or death of the principal beneficiary. Stage 2: on the 'termination event, the fixed income distribution ends and the trustee instead holds the income to distribute, at its discretion, among a range of potential beneficiaries (normally the principal beneficiary (if living) and members of their family (if they have passed away).

Perpetuity Trust – this form of trust can, in Australia, only be established under South Australian law. While most western jurisdictions require trusts to end within a certain time period (normally a maximum of 80 years), South Australia has effectively abolished this rule and therefore trusts can potentially last indefinitely (i.e. in perpetuity).

Asset Protection Trust – this form of trust is normally established by an individual who is particularly concerned about potential asset protection risks, either from business, personal spousal relationships or family members. Often, the person gifts assets to the relevant trust which does not include the person as a potential beneficiary. The relevant person will also not have any control over the trust via roles such as trusteeship, principal or appointor.

Trust Partnership – primarily due to the flexibility created by the structure and the tax planning benefits, often a number of trusts will form a partnership to conduct business or investment activities. Invariably, while these trusts may individually be largely standard discretionary trusts, they will also often have an identical trustee and other specific control mechanisms.

Offshore Trust – While most western jurisdictions offer some form of trust, specific steps often need to be taken to establish any form of offshore trust and the exact way in which a trust operates will often be regulated by specific provisions in the relevant jurisdiction.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Stairway to Heaven’ is a song by legendary band Led Zeppelin from their self titled album number IV in 1971. One of the greatest cover versions of the song, led by Ann and Nancy Wilson from Heart can be seen here (spoiler alert – Robert Plant begins crying at 4.32, as a choir and orchestra are revealed from behind drummer Jason Bonham, son of original Led Zeppelin drummer John).

Three (days) – Trust Naming Conventions – Part III

Continuing on from recent posts about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

SPV Trust – an SPV trust will traditionally be a discretionary trust, however will be created so as to perform only one discrete activity. Examples include a particular property development project, a certain investment activity or to conduct a discrete part of a wider business, for example, employing staff, owning plant and equipment or undertaking borrowings with third parties.

Unit Trust – often seen as an ideal vehicle for investment activities between unrelated third parties in capital appreciating assets, unit trusts provide unitholders with fixed entitlements to income and capital, however are generally subject to CGT event E4.

Fixed Trust – the definition of a fixed trust for taxation purposes remains uncertain following the Colonial decision in 2011, which concluded that the meaning of a fixed trust is narrower than commonly thought by taxpayers and their advisers. However, generally, the test for qualifying as a fixed trust turns on whether the beneficiaries have a vested and indefeasible interest in the trust property.

Hybrid Trust – a hybrid trust effectively blends particular characteristics of other forms of trusts into one arrangement. Most commonly, a unit trust is combined with a discretionary trust so as to give the ultimate owners a fixed entitlement to capital, and a discretionary entitlement to income. This structure is generally only used in tightly held groups or family investment activity.

Corporate Trust – there are a range of trusts that can be referred to as a corporate trust. In particular, there are specific provisions under the tax legislation that treat particular forms of trusts (for example, public trading trusts) as companies for tax purposes. Subject to satisfying certain rules, it is also possible for trusts to form part of a tax consolidated group, and again, effectively be treated as if they are companies for tax purposes.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Three days’ is a song by legendary/notorious band Janes Addiction from 1991.

Identifying trust types

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’.

As usual, an edited transcript of the presentation is below:

The first step in the process is to identify what sort of trust we’re dealing with.

Discretionary trusts and unit trusts are usually relatively easy to identify. The discretionary trusts will have a range of beneficiaries, but no single beneficiary will have any fixed entitlement to income or capital from that trust.

Therefore, the rights that a beneficiary has against the trustee are limited to the right to be considered for distributions from time to time and the right to ensure that the trustee fulfills their fiduciary obligations.

If you contrast that with a unit trust, the unit trust will usually have beneficiaries with units or fixed percentages, which entitle them to determinable amounts of the trust income and capital.

Therefore, a unit trust will be treated quite differently from a bankruptcy perspective and a Family Law Act perspective in the event something goes wrong for one of the unit owners.

The hybrid trust is quite different again and there is no single agreed definition.

You could talk to 10 different lawyers and probably get 10 different definitions of what a hybrid trust is.

It is a structure that has been evolving a lot over the last 10 to 15 years and there are a lot of different variations around, which each have slightly different provisions or quirks in the way they operate.

In a general sense, a hybrid trust is a trust which has some discretionary entitlements and some fixed entitlements.

One example of a type of hybrid trust that was particularly common in the lead up to the GFC is a negative gearing hybrid trust, where we have an individual unitholder who goes out and borrows funds to buy units in that trust, and that unit gives the unitholder a fixed entitlement to the income from the trust.

The thinking behind these hybrid trusts is that because the individual had borrowed to acquire an income producing asset, being the units, they could therefore claim a tax deduction for their interest on the borrowings.

However the trust deed would then have a separate provision which said any capital gain that may be realised by the trust could be distributed at the trustee’s discretion to a wide range of beneficiaries.

In other words, we have some discretionary entitlements in relation to capital and some fixed entitlements in relation to income.

Trust (Waltz) #2 – Trust Naming Conventions – Part II **

As mentioned in the last post, there are a myriad of approaches for creating any form of trust.

The first five profiled in this series are summarised below:

2nd Generation Family Trust (or a 'GST' – generation skipping trust) – this is an estate planning technique whereby assets are placed in trust for the benefit of grandchildren and later generations, rather than passing to the benefit of living children . From an asset protection viewpoint, the net unallocated assets in this type of trust should be outside the scope of a challenge to a deceased estate in states and territories other than NSW.

Lineal descendant, bloodline or capital reserved Trust – the deed establishing this type of trust typically limits the capital of the trust for the ultimate benefit of the specified beneficiaries (such as lineal descendants) but allows income distributions to a wider class of discretionary beneficiaries (such as spouses).

Estate Proceeds Trust – this is a trust established following the death of a parent of a minor child structured to qualify for excepted trust income tax concessions. Where there are two or more children to benefit from the estate proceeds income tax concessions, either a separate trust deed can be established for each child or a single deed is established benefitting all children.

Child Maintenance Trust – this is a trust established as part of a family law settlement which qualifies for the excepted trust income concessions. The main purpose is to fund all or part of the child support obligations associated with the upbringing of children. These obligations would otherwise be met personally in after tax dollars by the obligated parent.

Discretionary Trust – this is the most common trust, often referred to as a family trust. The trustee has a wide discretion to determine which of the beneficiaries are to receive the capital and income of the trust and how much each beneficiary is to receive.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Waltz #2’ is a song by Elliot Smith from 1998

Don’t you trust me baby? – Trust Naming Conventions – Part I **

At least in theory, the concept of a trust is relatively simple and involves one party (the trustee) holding assets for the benefit of others (the beneficiaries).

Trusts in one form or another have existed for hundreds of years in the English legal system and the basic components of a trust have essentially remained unchanged throughout that period.

A succinct overview of a trust relationship is set out here. 

Given there are only a few core elements which must be satisfied to have a valid trust relationship, overtime 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.

In future posts, brief summaries will be given about a number of the various approaches to creating trusts.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Don’t you love me baby?’ is a song by the Human League from 1981

‘Where’s the proof man?’ Powers of Attorney and Conflicts of Law **

Continuing the theme over recent weeks of conflicts of law between various jurisdictions, the way in which the powers of attorney provisions operate in each Australian state are very relevant.

Effectively, while each state has its own legislation (and completely unique forms) for powers of attorney, there is also legislation that is designed to ensure that each state will acknowledge each other state’s documentation.

While this theoretical position is comforting, practically the situation is anything but satisfactory.

For example, the enduring power of attorney document in New South Wales is less than five pages. The equivalent document in Queensland runs to around 20 pages.

For third parties (including banks), who are used to (in New South Wales) seeing a very short document, they will often be quite unsettled to be presented with the much longer Queensland version.

In a practical sense, we quite often therefore arrange for enduring powers of attorney to be prepared in each state where the client has substantive investments, particularly if they own real property in more than one jurisdiction.

A more detailed explanation of how to craft multiple, complementary, powers if attorney is explored in a previous post.

** For the trainspotters, ‘Where’s the proof man?’ is a line from Lou Reed’s song from 1989, ‘Dirty Boulevard’

Remember the days of the ‘old (school) law’ **

Following on from last week’s post concerning conflicts of law, a similar area of potential difficulty relates to where governments replace existing legislation with a new act.

For example, in many states of Australia, the state governments have removed the previous 'Stamp Acts' and replaced them with 'Duties Acts' in recent years.

In very simple terms, the new Duties Acts effectively replace the previous Stamp Acts in their entirety as and from a particular date.

Practically however there can often be difficulties with this approach.

Recently, for example, we had a situation where a client became aware of an historical transaction that, while not subject to duty under the current Duties Act, would probably have been subject to stamp duty under the relevant Stamp Act.

It appeared that the only reason duty had not been paid was because the relevant documentation had not been lodged with the Stamps Office at the time.

Even though the relevant Stamp Act has been repealed for over ten years, it became necessary to review the provisions of that Stamp Act in detail as well as various court decisions that we had otherwise assumed had been consigned to the history books.

** For the trainspotters, ‘Remember the Days of the Old School Yard’ is a song by Cat Stevens from 1977

Shake it off and Conflict of Laws **

The concept of ‘conflict of laws’ is one that comes up regularly in estate planning exercises and essentially relates to is determining which rules apply when there are two or more potential jurisdictions in relation to a certain set of circumstances.

Conflict of law issues can come up in a wide range of situations. One recent example related to a trust where the controllers of the trust wanted the laws of South Australia to apply, even though there were no substantial assets held in South Australia and the trustee company was registered in New South Wales.

The attraction of having the South Australian laws apply was that it would mean (potentially) that the trust could last forever due to the effective abolishment of the perpetuity rules in South Australia some years ago.

Broadly, so long as certain steps are followed, it is generally possible to have a trust with assets in any other Australian state regulated by South Australian law.

** For the trainspotters, ‘Shake it off’ by Taylor Swift is the number one hit on Google for songs about from 2014

Go your own way - The Rinehart Ruling – a key aspect **

Following last week’s post in relation to the, suspected, Tax Office Ruling in relation to the Rinehart trust dispute matter there was some discussion about one key aspect of the reasoning.

In particular, the question of when a beneficiary becomes absolutely entitled to a particular capital asset as against the trustee is generally seen as critical.

The position appears to be that, where a trustee has a right of indemnity (and lien over) the relevant asset, it is not enough that the beneficiary has a ‘vested and indefeasible’ interest in the trust capital.

Instead, the beneficiary must have the right to force the trustee to transfer to them the asset, subject only to the payment of the trustee's expenses.

In order for this to be the case the better view appears to be that one of the following tests must be met, despite some suggestions to the contrary in the Tax Office’s Taxation Ruling 2004/D25 (TR 2004/D25), mentioned in last week’s post –

1. If the trust is over particular assets, then the trustee has a clear duty to transfer those assets to the beneficiary, without the trustee having any express or implied power of sale under the trust instrument.

2. Alternatively, if the trustee has a power of sale, the beneficiary must have demanded a particular asset be transferred to them and must tender sufficient funds to the trustee to satisfy the trustee’s right of indemnity.

3. Finally, absolute entitlement may be created by a trustee resolving to exercise a power under the trust deed (or at law) that a particular asset be immediately distributed to the beneficiary.

Importantly, and as flagged by the Tax Office in TR 2004/D25, a trustee’s right of indemnity of itself is irrelevant to the question of whether absolute entitlement exists. Rather it is a trustee's power of sale that will generally prevent a beneficiary being able to demonstrate absolute entitlement. However this point is unfortunately not clear in TR 2004/D25, despite the Ruling running to over 100 pages.

** For the trainspotters, ‘Go Your Own Way’ is another song by legendary band Fleetwood Mac from 1977, learn more here

Little lies? The Rinehart Private Ruling **

Obviously, there has been an enormous amount of interest in relation to the Rinehart trust dispute matter over an extended period of time.

Interestingly, the centrepiece of the dispute, at least from a tax perspective, does not always receive a significant amount of attention.

Given what has been disclosed publicly, there are many who believe that Ms Rinehart successfully obtained a private ruling from the Tax Office in relation to whether there were any capital gains tax (CGT) consequences of the trust, which is the focus of the dispute, vesting when Ms Rinehart’s youngest child turned 25.

While it cannot be certain, it appears that private ruling authorisation No. 1012254771092 relates to the Rinehart matter. 

The private ruling carefully considers whether CGT event E5 occurs on the vesting of a trust. CGT event E5 is said to occur when a beneficiary becomes ‘absolutely entitled' to a CGT asset of trust as against the trustee.

The ruling then goes onto explore in some detail the broad position that the Tax Office adopts in these areas based on Taxation Ruling 2004/D25 (TR 2004/D25). The Tax Office confirms that while TR 2004/D25 remains in draft, so long as it is not withdrawn, it does represent its view of the law.

Based on the analysis of TR 2004/D25, the ruling concludes that because no beneficiary was able to call for any one or more of the assets to be transferred to them, they were not entitled to any assets as against the trustee, and therefore, CGT event E5 did not occur on the vesting of the trust.

** For the trainspotters, ‘Little Lies’ is a song by legendary band Fleetwood Mac from 1987, learn more here

#itsthevibe and other #estateplanningwarstories

Arguably one of the most quoted scenes from the famous documentary ‘The Castle’ (at least lawyers generally see it as a documentary …) is when lawyer Dennis Denuto closes his court room appearance with the claim that ‘it’s the constitution, it’s Mabo, it’s justice, it’s law and it’s the vibe and ehhh – no that’s it – it’s the vibe'.

While the scene has undoubtedly inspired many lawyers in a variety of situations, our experience is that in an array of estate planning situations, the ‘vibe’ is a fundamental principle.

Indeed, the concept of ‘the vibe’ has been given its own chapter in a recently released estate planning book by View.

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, asset protection and business succession, we have now developed and launched another book – ‘Estate Planning War Stories’.

Story telling is often seen as the cornerstone of explaining any principle. Certainly we have seen in the estate planning area that there are few approaches as impactful as learning based on ‘war stories’.

The book collects court decisions and client based scenarios that explain 10 key estate planning principles.

The 10 key principles are –

1. Don’t become a war story

2. It’s the ‘vibe’

3. Let’s kill all the lawyers

4. Estate planning is more than a will

5. Don’t get stuck in the middle

6. Murphy’s Law

7. Iterate & update

8. Just do it

9. No estate plan, means you have an estate plan

10. It depends

All of the View books (over 20 at last count) can be accessed via our website.

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

Game over for trust splitting? The ATO embraces Revisionist History

 

The ATO has released its views on trust splitting in Draft Taxation Determination (TD 2018/D3).

 

There are a range of concerns with TD 2018/D3 for all trust advisers.  

 

A summary of the key issues is set out below. 

 

Examples

The factual matrix provided in TD 2018/D3 is very specific and lists a number of line items that may, or may not, be a part of a trust splitting arrangement. Many of the arrangements we have seen historically have involved a change of trustee in relation to specific assets and few or none of the other features listed in the draft ruling (for instance, no changes to the appointors, right of indemnity or range of beneficiaries).

 

For TD 2018/D3 to be credible, it will be imperative that more examples are included highlighting the range of potential trust splits, and in turn, highlighting the types of trust splitting arrangements that will not give rise to any CGT consequences.

 

For example, the ATO appears to place significant weight on issues such as varying the trustee’s right of indemnity and adjusting the range of potential beneficiaries together with a decision to change appointorship.

 

It is well settled law (and the ATO has long accepted - for instance, in the withdrawn Statement of Principles on Trust Resettlements and subsequently in TD 2012/21) that each of these changes in isolation do not cause any CGT event to arise. It is therefore critical to highlight what combination of changes, in the ATO’s view, amount to a resettlement.

 

Flawed assumptions

Unfortunately, in concluding that trust splitting will cause CGT event E1, it appears the ATO has ignored most case law and legislation in the area, and indeed its most recent private ruling and earlier private rulings.

 

Arguably, TD 2018/D3 turns entirely on an assumption that, without any analysis, concludes how a court may respond to the application of an aggrieved beneficiary of a discretionary trust the subject of a trust splitting arrangement.

 

The assumption is unfortunately fundamentally flawed in at least 3 areas: 

• Despite a virtually identical factual scenario, TD 2018/D3 assumes that in 1 instance, the court will be resistant to an application, and yet in another instance, will support an application. There is no authority provided for either conclusion.
• More fundamentally, the paragraphs are based on a significant misunderstanding of the law in this area. There is substantive and longstanding case law confirming that the beneficiary of a discretionary trust does not have a proprietary interest in the trust assets and their rights against the trustee are limited. In particular, while a beneficiary has a right to proper administration and a right to be considered in relation to distributions of income or capital, a discretionary beneficiary does not have any legal or equitable right to distributions. TD 2018/D3 completely ignores this position.
• Finally, TD 2018/D3 fails to acknowledge that the mere amendment of a range of potential beneficiaries is highly unlikely to of itself cause a resettlement (as acknowledged by the ATO in TD 2012/21). Therefore, if a trust splitting arrangement takes place, and as part of the arrangement, the range of beneficiaries of the split trust is narrowed, then the conclusions in the abovementioned paragraphs are irrelevant. 

 

Furthermore, the conclusions in TD 2018/D3 are such that it would mean every single change of trustee or even a change of appointor (or principal) of a family trust would be liable to trigger (if the ATO felt the arrangement was not usual) CGT event E1 – a clearly unsustainable position. In particular, the logic of the ATO would imply that at any time the trustee of a trust is changed, it automatically means that the new trustee (and their family) would benefit from the trust to the exclusion of the old trustee (and their family) and that a court would with certainty intervene if ever requested by a disgruntled beneficiary.

 

Frustratingly TD 2018/D3 also contains long winded paragraphs, unsupported with any authority. Some of these statements are indeed arguably irrelevant to the subject matter. See for example the entire section under the heading ‘Settlement of assets on terms of a different trust’ – and in particular the sweeping generalisations at paragraph 28 about ‘practical problems’ with trust splits. At what point did ‘practical problems’ become a key factor in triggering CGT events? 

 

Resettlement?

Similarly, the ATO essentially ignores both High Court and Full Federal Court authority in decisions such as FCT v Commercial Nominees of Australia Ltd (2001) 47 ATR 220 (Commercial Nominees) and FCT v Clark (2011) 190 FCR 206 (Clark) when making conclusions in TD 2018/D3 about resettlement.

 

In particular, both Commercial Nominees and Clark acknowledged that it is completely expected that over the life of an 80-year discretionary trust, there will be changes, at times significant changes, in relation to the conduct of the trust. This is reflective of a continuing trust. 

 

Indeed, given current life expectancies of humans, it would be impossible not to have fundamental changes to the make-up of a trust over an 80-year period.

 

It appears that TD 2018/D3 is implicitly predicated on a belief that, despite superior court authority, a separate set of rules apply to discretionary trusts as compared to unit trusts and superannuation funds.

 

Such a belief is unsustainable in the context of both High Court and Full Federal Court authority and in the context of the ATO’s own publications. It is similarly unsustainable that steps as simple as changing an appointor, trustee and the potential range of beneficiaries could be said to amount to a resettlement.

 

This conclusion is further reinforced by a failure in TD 2018/D3 to coherently address why the specific tax exemption available for discretionary trusts on a change of trusteeship, that being the rollover relief available under s 104-10 of the ITAA 1997, can be ignored.

 

Nor is the requirement under s 102-25 of the ITAA 1997 mentioned – that is, that if there are multiple potential tax events, the most specific must apply.

 

Aside from the specific exemption for changes of trustee, applying the principles from Commercial Nominees, Clark and TD 2012/21, it is clear that at law that a change in the terms of any trust (ie including a discretionary trust) pursuant to the exercise of an existing power will not result in the termination or establishment of a new trust.

 

Therefore, the example provided in TD 2018/D3 that the proposed amendment to appoint separate appointors and trustees of the sub-trust, pursuant to an express power under the trust deed allowing the appointments to be made, is incorrect.

  

In a sentence, none of the changes in the example in TD 2018/D3 give rise to a separate charter of rights and obligations so substantive that could give rise to the conclusion that assets have been settled on terms of a different trust.

 

Case law

In some instances, TD 2018/D3 refers to the decision in Commissioner of State Revenue v Lam and Kym Pty Ltd [2004] VSCA 204 (Lam & Kym), however reference to this decision is not helpful to the ATO’s arguments.

 

In particular:

• Lam & Kym involved an express declaration of trust over specific assets, which does not appear to be the case in the factual scenario considered in TD 2018/D3;
• In any event, Lam & Kym was a Victorian Supreme Court case which has been largely superseded by the High Court in Clark; and
• Clark confirmed, as acknowledged by the ATO in TD 2012/21, that a variation of a trust by the trustee in accordance with an express power in the trust instrument can generally not result in the establishment of a new trust. 

Furthermore, while the case of Oswal v FCT [2013] FCA 745 (Oswal) is referenced, it again is not helpful to the position that the ATO is trying to sustain as Oswal specifically related to assets being held for the benefit of 1 beneficiary of a trust – in our experience, it is never the case that a trust split occurs in the manner that is analogous to the Oswal decision.

 

The ATO reaches the quite extraordinary conclusions without any supporting argument in relation to the case law or legislation in this area that despite an identical trust instrument applying, there are somehow circumstances that lead to the conclusion that the trust powers of the split trust are suddenly distinct. 

 

Even relying on the well-known legal principle from the 1997 film ‘The Castle’ (‘it’s the vibe’) would fail to support such a conclusion. Indeed, there would appear to be no legislation or case law which would support the conclusion reached.

 

The ATO also concludes that trust splitting occurs by declaration of trust, without any attempt to justify its conclusion. This is another concerning assumption given that in our experience, we are unaware of any trust splitting that takes place in a manner other than by way of a change of trusteeship.

 

To argue that a change of trusteeship amounts to a declaration of trust over assets is nonsensical – the whole commercial framework of the change of trusteeship is that the existing trust remains in place and there is simply a change in the legal owner of the trust assets, with that trustee however being completely bound by the terms of the original trust instrument.

 

Furthermore, to reach these conclusions, again without any reference to the legislative position outlined above and the specific CGT exemption available for changes of trusteeship, is inappropriate.

 

Retrospective

The ATO states that the ruling is to apply on both a retrospective and prospective basis. 

 

To issue a ruling with retrospective effect when there have been positive rulings issued by the ATO over an extended period is arguably irresponsible and will likely cause unnecessary and significant taxpayer and industry backlash.

 

Conclusion

As noted above, there are private rulings previously published by the ATO (as recently as 2016) confirming that trust splitting arrangements on similar terms did not constitute an E1 event.

 

It is extremely concerning that the ATO is purporting to now retrospectively change its approach to a longstanding, and tax benign, arrangement.

 

At a minimum, there should be an explanation as to why the position adopted by the ATO historically has been abandoned and not considered relevant.

 

TD 2018/D3 also fails to explain why the change in approach by the ATO was not implemented when the trust cloning exemption was abolished for discretionary trusts by the Government without warning on 31 October 2008.

 

Trust splitting was extremely prevalent at the time of the removal of the trust cloning rollover relief.

 

Indeed, a cursory level of research would have demonstrated that leading tax specialists recommended trust splitting as the preferred approach to trust cloning for years before and after 2008 due to its effectiveness from a stamp duty perspective in some States.

 

Ultimately, there is a material risk that TD 2018/D3 will cause significant damage to the reputation of the ATO for failing to address these issues 10 years ago, if it truly felt an argument that trust cloning and trust splitting was essentially the same was sustainable. As Malcolm Gladwell might ask, is TD 2018/D3 another example of the ATO unilaterally embracing its own version of Revisionist History?

 

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

 

Some things don’t change – division 7A and contracts 101 **

Following on from last week’s post, today’s post considers another aspect of where company constitutions have the terms of a Division 7A loan or facility agreement embedded in them.

In most circumstances, it is generally the case that the Tax Office will accept that the terms of the facility agreement will regulate any debit loans made by the company from time to time.

One difficulty however that can arise in this regard is that from a simple contractual perspective, these loans will not be effectively created unless the recipient of the loan is in fact a party to the constitution.

Under the Corporations Act, the constitution is a contract between the members and directors.

This means that if, for example, a loan is made to a non- member or director by the company, then the facility agreement contained within the constitution will not be able to be relied on.

** For the trainspotters, ‘Don’t change’ is a song by INXS from 1982, learn more here

Only one thing ? – constitutions + division 7A provisions **

A previous post has considered the various trust deed providers that have from time to time contained a clause which seems to automatically convert an unpaid present entitlement into a loan. This week I was reminded of a similar difficulty with some constitutions offered by similar providers.

In particular, while the Tax Office has for some years accepted the ability for a company's constitution to set out the terms by which any loan by the company is made for Division 7A purposes, care must always be taken to ensure that the provisions of this loan (or facility) agreement do in fact reflect the intent of the parties.

A number of these types of facility agreements require compliance with the Division 7A provisions, regardless of the financial status of the relevant company. For example, even where a distributable surplus does not exist (and therefore the tax rules would not otherwise apply), many of these constitutions can in fact require compliance with the Division 7A rules.

While perhaps not so memorable as the ‘read the deed’ mantra for trusts, similarly we have a mantra of ‘read the constitution (& Tax Act)’ when considering company related issues.

** For the trainspotters, ‘The One Thing’ is a song by INXS from 1982, learn more here  

How are Windfalls after the Date of Separation Treated in Property Settlements?

One issue that arises relatively regularly in relation to personal relationship breakdowns is the way in which assets acquired by one spouse following the date of separation, but before the property settlement, are treated under the property settlement.

The issues in this regard can be particularly sensitive where the financial windfall is as a result of, for example, the death of a parent of one of the spouses or a windfall gain such as a lottery win.

Unfortunately, as is often the case in relation to family law matters, the one consistent theme is inconsistency.

In other words, the family court has stated strongly on a number of occasions that how financial windfalls received after the date of separation will be allocated under the property settlement will depend almost entirely on the particular factual circumstances.

For example, the family courts have adopted the following approaches:

1) completely segregating all of the financial windfall so that it is only accessible by the spouse who received it, while also not penalising the spouse in terms of what they are otherwise entitled to receive from the joint matrimonial property;

2) segregating the financial windfall to the benefit of the spouse who received it, however reducing that spouse’s entitlement to the joint matrimonial property;

3) including the financial windfall in the pool of assets to be distributed between the spouses, but adjusting the pool to provide a greater weighting to the spouse that received the financial windfall;

4) including the financial windfall in the matrimonial pool and essentially ignoring the source of the funds.

Broadly speaking, where a financial windfall or a significant financial contribution, has been made by a spouse prior to a property settlement, then the longer the time period between the windfall or contribution and the separation, the more likely it is that the family court will ignore the source.

Again however, this conclusion is subject to the overriding theme that the court will ultimately assess each situation on a case by case basis.

Take the money and run – interest deductions and succession planning **

Last week, we had cause to revisit a Tax Office ruling that is often overlooked in the context of family and business succession plans.

In particular, we were reviewing the handing on of control of a family trust, where as part of the overall arrangement, the intention was to pay down the credit loans owed by the trust to the parents of the individual taking control.

The trust was intending to use external bank funding in order to finance the pay down of the loans to the parents.

In this particular scenario, the conclusion was reached that the interest on the borrowing expense should be deductible – this conclusion was reached on the basis of Tax Ruling 2005/12.

The ruling is worth reviewing whenever interest deductibility is in issue as there are a number of fairly similar situations where the interest expense would not in fact be deductible, according to the analysis of the Tax Office.

As usual if you would like a copy of the ruling please contact me.


** For the trainspotters, ‘Take the Money and Run’ is a song by The Steve Miller Band from 1976, listen here

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I fought the law … **

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/KyZWIQLE4dk

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

As set out in last week's post Trust distributions and the Domazet decision, this week's post considers some possible solutions to the issues that arose in the Domazet decision.

The first work around is probably the easiest and the best one in some respects. Simply, the No.2 trust could have included a clause that said, “Our trust automatically ends the day before the No.1 trust.” This one sentence would have arguably avoided the issue.

The second idea would have been to amend the trust deed for No.1 trust and remove the prohibition. In other words, amending the terms of the No. 1 trust instrument so that it required any other recipient trust end before the No.1 trust.

This idea, would have essentially relied on the wait and see rule which has been explored in previous posts.

The third idea is that the No.1 trust could have skipped distributing to No.2 and simply distributed directly to the relevant beneficiary. Many might however say, “Well Matthew, that sounds nice, but I suspect there would have been a lot of wider tax planning strategies that were being utilised by the No.2 trust.” Thus, there should be an asterisk next to this idea because in many instances this style of approach may not have actually worked.

The fourth idea is in fact what they actually did in the Domazet case, which is they applied to the court for rectification.

The rectification adopted the first approach outlined above (that is the variation to amend the vesting date of the No. 2 trust).

Thus, while the taxpayer 'won', they had all the issues that go with a rectification. They had pain, they had suffering, they had delays, they had vastly increased costs, and they had significantly more attention.

** For the trainspotters, see early punk outfit The Clash perform the Sonny Curtis (of 'The Crickets' fame) song 'I fought the law and the law won' – listen here – https://www.youtube.com/watch?v=tR3XY6wfSBw

Trust distributions and the Domazet decision

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/VG1Bh5XQOoY

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

Domazet is arguably, one of the highest high profile trust vesting-related cases. As usual, if you would like a copy of the decision please contact me.

The factual matrix in board terms was as follows.

The original trust was set up in the 1970s, named here as the No. 1 trust.

Many years later there is a desire to distribute to another trust (named here as the No.2 trust). The No.1 trust was set up in the 1970’s. The No.2 trust set up in the 2010s - in other words, many years later.

The provisions in the trust deed for the No.1 trust provided that distributions to another trust as beneficiary were possible, as long as the receiving trust ended before the vesting date of the No.1 trust.

Here, No.1 trust, or the trustee and its advisers assumed that the vesting date of the No.2 trust would be 80 years.

The reason they assumed that is because the Australian Capital Territory (ACT) had at one point introduced the statutory 80-year perpetuity period and the No. 1 trust was established in the ACT.

It was therefore assumed that the legislation applied. The problem was that they had misunderstood the way the statutory limit had been implemented.

In particular, each Australian jurisdiction implemented the 80 years statutory limit at different points in time. The adviser for the No.1 trust was Queensland-based.

The Queensland legislation had come in before the No.1 trust was set up. So, they just assumed that would be the case in the ACT. In fact, the ACT legislation came in after the No.1 trust was set up.

They then amended the No. 2 trust to ensure it ended with 80 years of the No. 1 trust being set up.

What this meant in the practical sense was that when the distributions took place, the No.2 trust in fact had a vesting date after the No.1 trust because the No. 1 trust did not with certainty have an 80 year life.

This was a big problem because it meant that distribution was void according to the terms of the No. 1 trust.

What that meant was that the No.1 trust would be assessed, as if there was no trust distribution at all, which triggers a flat rate of tax of 48.5 cents. To the extent there were any capital gains, the 50% general discount would also be completely ignored. These issues are explored further in an earlier post, see Trust distributions – three reminders.

Next week's post with consider some possible solutions given the factual matrix here.

Within you; without you - When is a Trust not in fact a Trust? **

The ability of third parties to attack arrangements on the basis they are void because they are a sham has been looked at in previous posts (see - Sham trusts and the Family Court and Leading gift and loan back case).

Arguably one of the leading cases which explores the ability of a trustee in bankruptcy to attack trust assets using the rules in relation to sham transactions is Lewis v Condon; Condon v Lewis [2013] NSWCA 204. As usual, a link to the decision is as follows – http://www.austlii.edu.au/au/cases/nsw/NSWCA/2013/204.html.

Although the facts were somewhat complex, at the centre of the dispute was a trust that had been established by a lady who subsequently became bankrupt and admitted that the structure facilitated ‘her purpose to deceive her former husband, the Family Court and to avoid tax’.

In considering whether the assets of the trust were exposed to attack from a trustee in bankruptcy on the basis that the trust was a sham the Court held relevantly as follows –

1. Before any trust will be held void as a sham, it is necessary to show that there was an intention that the structure created not bear its apparent legal consequence. That was not the case here; 
2. Even where a trust is established with an admitted purpose of deceiving, this is not enough to mean it is a sham, indeed here such an intention was in fact ‘entirely consistent with the creation of a genuine discretionary trust’; 
3. Once it was established that the trust on creation was not a sham, subsequent events cannot turn the structure into a sham. 

The decision also confirmed that in a practical sense, a new trustee holds office from the time of their appointment replacing the previous trustee and not from the time trust property is formally transferred.

** For trainspotters, ‘Within you; Without you’ is the only George Harrison written song on the Beatles release ‘Sgt Peppers Lonely Hearts Club Band’, listen here – https://www.youtube.com/watch?v=q2dMSfmUJec&list=RDq2dMSfmUJec&t=34

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