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
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
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.
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 –
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;
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’;
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.
