328-G Rollovers – what’s exempt and what’s not

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/zxI128AOaaE

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

The 328-G rules allow taxpayers to basically roll-over any otherwise taxable asset as part of the concessions. In other words, it is not just capital gains tax assets, it can be trading stock, depreciating assets, and assets on revenue account.

Any tax that would otherwise be triggered in these areas is ignored as part of the 328-G rules. However, the concessions only operate at a federal revenue level, and even then, not across the board.

For example, if you've got GST applicable, which invariably you will, because you'll be a small business turning over less than $2 million, you need to have a strategy to deal with that as GST is not exempted under 328-G.

Stamp duty, as it is state based, is not dealt with at all under 328-G, thus you will need to have a strategy to deal with that.

Land tax is not addressed.

Similarly, payroll tax and any other state taxes are not dealt with at all under the 328-G provisions.

Not dead yet ** but watch this space following Budget attack on excepted trust income

The announcement in the 2018-19 Federal Budget that “the concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from deceased estates or the proceeds of the disposal or investment of those assets” was for many a surprise.

As is usually the case with Budget announcements attacking perceived arbitrage revenue opportunities, the exact impact of the changes will revolve almost entirely around how the legislation is crafted - the 2017 Budget changes to the small business CGT concessions being a recent a high-profile example of what appeared at announcement to be a narrowly focused change that in fact has proven to be significantly wider.

Thus, advisers in the estate planning industry should likely be concerned as to what the Government means by suggesting that the mischief to be addressed is “that some taxpayers are able to inappropriately obtain the benefit of (a) lower tax rate by injecting assets unrelated to the deceased estate into testamentary trusts.’’

In turn, the Budget statement that the “measure will clarify that minors will be taxed at adult marginal tax rates only in relation to income of a testamentary trust that is generated from assets of a deceased estate (or the proceeds of the disposal or investment of these assets)” also has the distinct prospect of having much wider consequences than might otherwise be expected.

Excepted trust income rules currently 

Previous posts have explained that pursuant to Div 6AA of the ITAA 1936 and, in particular, subs 102AG(2)(a)(i), excepted trust income is the amount which is assessable income of a trust estate that resulted from a will, codicil or court order varying a will or codicil.

Where income is excepted trust income and it is distributed to minors, those minors are taxed as adults, instead of the normal penal rates that otherwise apply to unearned income.

Currently, subss 102AG(2)(a)(i) and 102AG(2)(d)(i) of Div 6AA make it clear that the provisions are not limited to income derived from estate assets.

Importantly, the subsections only prescribe how the trust estate is deemed to have arisen and do not place any limitations on the management of the trust estate, or on the assets which the trust may hold.

The fact that estate assets forming part of the trust estate may be realised and others may be acquired has no implications on the validity of a testamentary trust, nor the ability of the trustee of a testamentary trust to treat the income as excepted.

Similarly, if the trustee decides on behalf of the testamentary trust to borrow money and acquire assets which earn income, then it has generally been accepted that Div 6AA applies to that income.

Current limitations 

Section 102AG(3) currently contains an exception for non-arm’s length arrangements. In particular, it provides that if any 2 or more parties to:

1. the derivation of the excepted trust income mentioned in subsection (2); or 
2. any act or transaction directly or indirectly connected with the derivation of that excepted trust income, were not dealing with each other at arm’s length in relation to the derivation of income, or in relation to the act or transaction, the excepted trust income is only so much (if any) of that income as would have been derived if they had been dealing with each other at arm’s length in relation to the derivation, or in relation to the act or transaction. 

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

Furse’s case 

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

In this case, a will made in July 1974 established multiple testamentary trusts, each with capital of $1 after the testator passed away shortly after making the will.

A trustee was then appointed over one of the testamentary trusts and proceeded to borrow small amounts of money and acquire a unit in a unit trust.

The ATO did not consider the income from the unit as excepted income and argued that the income derived by the trustee was not assessable income of a trust estate that “resulted from a will.”

Justice Hill rejected the ATO’s argument and held that it was only necessary that the parties be dealing on an arm’s length basis, and that it was not necessary that they also be arm’s length parties.

The Court noted that provided the trust estate was created by a will and the arm’s length test was satisfied, then any income of a testamentary trust would be considered as excepted trust income.

What might new rules attack? 

Taken at face value, the new rules will simply create an obligation on trustees to track the source of assets in a testamentary trust and ensure the income to be treated as excepted trust income is sourced from assets passing directly to the trust from the willmaker.

In theory, this type of probation would be similar to what is currently the case with post death testamentary trusts (often referred to as estate proceeds trusts) set up to comply with s 102AG. Indeed, this style of tracking mechanism is analogous to that which trustees are meant to undertake in relation to ensuring trust assets vest within the perpetuity period.

Thus, any further assets gifted or settled on a testamentary trust, other than by the willmaker, would be segregated from excepted trust income purposes.

Depending on the drafting approach adopted, however, some areas that may be impacted (potentially unintentionally) by the new rules include:

• Assets that form part of a testamentary trust that are not owned outright by the willmaker (that is, are subject to existing borrowings) – what happens as the level of debt changes? 
• Even if assets that initially form part of the testamentary trust are debt free - what are the consequences if further assets are acquired using the initially contributed assets as security? 
• If an asset class at the date of death of the willmaker is cash at bank – does the tracing of the assets acquired continue indefinitely? 
• If assets acquired using borrowings no longer generate access to excepted trust income – is it appropriate that tax laws essentially directly impact the investment decisions of trustees? 
• If an asset acquired is itself tax advantaged (one obvious example in that regard being insurance bonds) - how will the proceeds from the investment be treated? 
• In relation to shares - how will dividend reinvestment arrangements be treated? 
• How will assets that are acquired by the testamentary trust as a consequence of the willmaker’s death, however, are not directly from the willmaker, be treated – for example will superannuation death benefit payments and insurance policy payouts to an estate be considered to be legitimate capital from which to source excepted trust income? 
• Particularly for those in life spouse relationships, it is common for testamentary trusts to be established under each person’s will and for there to be a subsequent merger of the trusts some years later – what will be the approach in relation to wealth that passes to a testamentary trust sourced from another testamentary trust? 

In conclusion: some further questions 

Testamentary trusts (and, in turn, access to excepted trust income) only arise because someone has died.

Traditionally, in Australia, death has not been seen as a tax planning strategy.

The 2018 Budget announcement arguably changes the position in this regard.

If there is, in fact, widespread abuse of the existing rules in this area, it must be asked why there is essentially only one reported case in the area that is now over 25 years old and remains unchallenged, and in turn what aspects of the offensive arrangements are not already addressed by s 102AG itself or, in the alternative, Part IVA.

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

** For the trainspotters, ‘Not dead yet’ is a quote from the ‘Bring Out Your Dead’ scene in Monty Python’s ‘The Holy Grail’.

Deductible debt, trust cloning and 328-G rollovers

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/S8gy1ZMhIzA

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

One factual scenario we have explored utilising the 328-G rollover concessions involves where there is an original trust and a cloned trust and the transfer of assets between the two trusts will satisfy all of the rules that need to satisfied.

If having setup the new trust, it goes to the bank to borrow money, it is necessary to analyse what that money is being used for to determine if any interest expense is deductible.

If the debt is to fund the acquisition of the business from the original trust, that is, the original trust is selling the business to the cloned trust, then the nature or the purpose of the borrowings is going to be income generating.

That is, the debt expense will be deductible.

The cash flow will be funds coming from a third party bank into the cloned trust, and then as part of the sale transaction, the payment is made to the original trust.

The cash received by the original trust will because of the 328-G provisions, be a tax free receipt.

At that point, the original trust can essentially make a form of ‘eligible termination payment’ to the ultimate controllers of the original trust.

myprosperity and View Legal partner to offer automated estate planning services

myprosperity, Australia’s leading personal wealth portal, is partnering with Australian estate planning firm, View Legal to provide free, standard wills.

A personal wealth portal, myprosperity is a white-label desktop and mobile app that advisers and accountants can enable for their clients. The platform provides a consolidated, real-time view of a client’s entire financial world, thanks to live integrations with leading financial services providers.

When enabled by an adviser, myprosperity’s estate planning functionality will allow a client to generate a standard View Legal will and automatically populate the relevant data from their personal wealth portal, including all their assets and liabilities. This legally binding will is then stored on myprosperity, delivering greater utility through the portal.

Chris Ridd, CEO of myprosperity, said of the partnership “It’s estimated that nearly 50% of Australians will die without a will, and our own data shows that over 70% of myprosperity clients do not have an up-to-date will. Yet predictions say $2.4 trillion in wealth will be passed on over the next three decades.”

Ridd continued “View Legal are recognised experts in estate planning and their standard will is miles ahead of any equivalent that can be found commercially. By leveraging their expertise to provide a standard, pre-populated will, we’re helping our clients to achieve peace of mind and taking our first step towards redefining estate planning.”

Matthew Burgess, Founder of View Legal, said “Estate planning and wills especially haven’t changed much in the last hundred years. View Legal has a history of leveraging technology to solve complex legal issues like estate planning. Together with our technology partner, NowInfinity we’ve designed a technology solution that will break down some of the traditional barriers of entry that have resulted in so many Australians not having a valid will. To be able to share this journey with myprosperity is exceptionally exciting for us.”

About myprosperity
myprosperity is a cloud-based personal wealth platform that makes it easy for accountants and advisers to help their clients get their financial world – sorted. Available on desktop and as a mobile app, myprosperity is a whitelabel wealth portal that boasts live data feeds and digital doc signing, as well as budgeting, cashflow and goal setting tools for an integrated all-in-one approach to personal finance. Founded in 2011, the company is now the leading personal wealth platform in Australia, with over 550 adviser partners and 23,000 end users.

About NowInfinity & View Legal
NowInfinity is a leading financial technology company providing a raft of solutions for accountants, bookkeepers, financial planners, and lawyers. In collaboration with View Legal, NowInfinity can cover the myriad legal solutions required across all aspects of financial advice, compliance and structuring. The outcome of this relationship is a cost-effective proposition that empowers accountants, financial advisers and other advice practitioners to transform their client relationships, deliver better service, client centric outcomes – all the while saving time and money.

View Legal is built around the disruptive mantra of being a law firm that friends would choose. To achieve this vision, View Legal has fundamentally and radically revolutionised access to quality legal advice, in the highly specialised areas of structuring, tax, trusts, asset protection, business sales, estate and succession planning. Using technology as an enabler, View Legal has taken each of the tenets of the traditional delivery model – and turned them on their heads.

To learn more about this exciting collaborative arrangement as well as how myprosperity can assist you in creating lifelong engagement with your clients, be sure to attend the free myprosperity 2018 Roadshow commencing on 30th May, which will include more details about the estate planning product launch.

See: http://www.myprosperity.com.au/roadshow

Media Contacts
Alice Chauvel, Marketing Manager, myprosperity - alice.chauvel@myprosperity.com.au; 0416 798 205
Tracy Williams, COO, NowInfinity – tracy@nowinfinity.com.au; 0437 647 937

PRENUPS VS. WILLS – winner takes all? **

Previous posts have explained the various aspects of binding financial agreements (often referred to as 'prenups').

On a number of occasions recently, we have had cause to review binding financial agreements in the context of wider estate plans, and in particular, have had to consider whether, in the event of a death of a spouse, the binding financial agreement takes priority or whether the will applies.

As is the case in many estate planning areas, the rule of thumb to remember is that the issue must always be reviewed on a case by case basis.

This said, generally, a prenup should at least expressly set out whether it is intended to apply on the death of either spouse.

Ideally, the document should be crafted in any event to complement the provisions of the estate plan.

In some situations the provisions can also regulate what should occur if one of the spouses seeks to challenge the provisions of their former spouse’s estate plan.

** For trainspotters, ‘Winner takes it all’ is song by Abba from 1980, learn more here –

https://www.youtube.com/watch?v=92cwKCU8Z5c

Image courtesy of Shutterstock

Half your age, plus seven

Many family lawyers will relay that there appears to be a disproportionate level of relationship difficulties where there is a significant gap in the ages of the spouses - hence the above quoted rule of thumb to ensure the age gap is no more than half you age, plus seven years, see - https://commons.wikimedia.org/wiki/File:Half-age-plus-seven-relationship-rule.svg

In Alderton v C of T [2015] AATA 807) the rule of thumb was breached by around 10 years (the de facto husband, Trapperton, was 42 to and the de facto wife, Alderton, was 18 when the relationship commenced).

Alderton was financially dependent on Trapperton.

For some years, a trust that Trapperton was trustee of made distributions to Alderton. Alderton had no knowledge of the existence of the trust nor that withdrawals from her debit card and online banking were in fact trust distributions.

After the relationship ended, a trust return was filed that based on the distributions caused an assessment for Alderton.

Alderton then, some years later, attempted to disclaim the income she had, unwittingly, received from the trust.

The Tax Office, and in turn the court, ignored the attempted disclaimer and Alderton remained liable to pay the tax assessed.

The fact that Alderton had no knowledge of the conduct or operations of trust was irrelevant as to her liability to pay tax on the distributions she had effectively been made presently entitled to.

As set out in earlier posts (see for example - http://blog.viewlegal.com.au/2014/10/some-ramifications-of-failed-trust.html) in order for a disclaimer to be made retrospectively, it must be done so within a reasonable period of time from the beneficiary first becoming aware of the relevant interest that they wish to disclaim.

The disclaimer must also be an absolute rejection of the gift. Here, although the disclaimer was likely made 'in time', Alderton had in fact used the funds distributed to her and was therefore unable to provide an effective disclaimer.

This conclusion stood despite the court questioning the 'discreditable' conduct of the trustee in taking advantage of Alderton's naivety.

Image courtesy of Shutterstock

Can trusts last forever now? **

As set out in an earlier post, 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/iIjJGoq7L1c

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

Following on from an earlier post ((Don’t ask me) why do trusts have vesting dates? **) it is useful to understand that the majority of Australian jurisdictions decided that a life in being plus 21 years was too complicated. Instead, the rule was replaced with a statutory provision which allows up to 80 years as the maximum length of trust in Australia.

As mentioned in an earlier post, there are exceptions to this rule. In relation to discretionary trusts, the highest profile exception is in South Australia where the rule has effectively been abolished.

Another exception is in relation to superannuation funds.

Superannuation funds are simply a form of trust instrument, although a highly regulated form of trust due to the Superannuation Industry Supervision Act which imposes a whole range of specific rules.

In relation to the core of the underlying structure of a superannuation fund however, it is simply a trust structure. Importantly however there is no concept of an ending period. In other words, in theory superannuation funds can last forever.

There are obviously tax issues for self-managed superannuation funds meaning maintaining the structure indefinitely may not be a particularly smart idea. However in the context of trust vesting, superannuation funds are a clear and obvious exception to the vesting rules.

** For trainspotters, ‘Forever now’ is song by legendary Australian band Cold Chisel from 1982, learn more here – https://youtu.be/Hhnp3td-UHU