Hallo Spaceboy** - Distributions ‘outside’ a family group

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’.

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

One strategy we are seeing implemented by an increasing number of clients is the amending of a trust instrument to reflect what the position is due to the family trust election that has been made for that particular trust.

See here for a visual of the family tree as it is defined under the legislation as to what forms part of the family when a family trust election has been made.

This can mean that following the mantra of reading the deed can be misleading. This is because if you have looked at the trust instrument and you have decided that a particular party is a potential beneficiary, then that should always be overlaid with what the family trust election permits.

In other words, simply because a party is a potential beneficiary under the trust instrument, this doesn't mean that it’s necessarily a smart idea to distribute to that entity. This is because if the distribution is outside the family group, then the tax is effectively at 50 cents in the dollar.

Indeed, even if the distribution is otherwise a discounted capital gain, the penal family trust distribution tax is triggered.

Historically, the concept of quite radically redrafting a trust deed to ensure that it reflects what the family trust election says has not been popular.

Now however, we see an increasing number of clients amending their trust deeds to minimise the risk of distributions outside the family group.

** For the trainspotters, 'Hallo Spaceboy' is the lead single from the David Bowie’s 1995 album ‘Outside’.

Presumption** of disclosure of beneficial share ownership

Recent posts have considered a number of aspects of the ASIC requirement that the beneficial ownership of shares in a private company be disclosed.

1. (Stripped) Bare** trust share ownership;
2. Updating ASIC records – Simple (Simon); and
3. Relationships of share ownership and the ASIC.

One potential difficulty in relation to ASIC’s requirements in this regard involves situations where the legal owner holds the share on an undisclosed trust for another party or entity.

In this type of situation reading of the relevant ASIC provisions suggests that the company report should disclose the fact that the legal owner holds the share non beneficially.

This said, in a true undisclosed trust situation most advisers will recommend that the ASIC records in fact are completed in a way that shows the legal owner is also the beneficial owner.

If this approach is adopted then full supporting documentation should be retained by the legal owner to rebut the presumption created by the way in which the ASIC records are completed.

** For the trainspotters, ‘presumption’ is a key word from Midnight Oil’s song from 1998, ‘Blot’.

(Stripped) Bare** trust share ownership

Recent posts Updating ASIC records – Simple (Simon) and Relationships of share ownership and the ASIC have looked at the various issues in relation to notifying the ASIC of the beneficial ownership of shareholdings in a private company.

One aspect of this style of situation that arises relatively regularly relates to companies that were incorporated prior to 1997. Before this date, every private company was required to have at least two shareholders.

In order to provide a practical solution where a person was wanting to be the sole shareholder a practice developed whereby a second party would be listed as a legal shareholder, however they would simply hold that share on a bare trust for the intended sole shareholder.

Where such a structure exists, assuming that the articles of association or constitution have now been updated, it is generally possible to vest (or bring to an end) the bare trust arrangement and have the ASIC records updated to simply list the sole shareholder.

** For the trainspotters, ‘stripped bare’ is a line from the U2 song from 1983 ‘October’. 

Updating ASIC records – Simple (Simon)**



Last week’s post touched on some of the issues in relation to disclosure of beneficial ownership of shares on ASIC records.

In situations where the beneficial ownership is incorrectly recorded there are three broad alternatives available, namely:

1) Leaving the ASIC records unchanged. From a compliance perspective while this approach is possible, it is not recommended.

2) Simply lodging an annual return or ASIC form 484 that updates the ASIC records from that date. In many cases this approach will be pragmatically appropriate and is certainly the easiest and most cost effective approach. There is a risk however that there may be adverse revenue consequences or challenges from a third party (for example a trustee in bankruptcy).

3) The final approach involves effectively rectifying ASIC records from the date the error first occurred and then arranging for the annual returns for every subsequent year to also be amended. Obviously, this approach can be a significant exercise and is generally only adopted where there are concerns from a tax, stamp duty or asset protection perspective.

** For the trainspotters, the title today is riffed from INXS’ first ever single, from 1980.

Relationships of share ownership** and the ASIC

Up until the early 2000’s, the ASIC required only very basic information in relation to the share ownership in companies.

From around 2002, the ASIC began requiring that all private companies disclose the basis on which shares were owned, in particular whether shares were owned beneficially or non beneficially.

Broadly the distinction is as follows:

1) If a share is owned beneficially this means that the legal owner listed in the ASIC records also has full beneficial ownership.

2) If a share is owned non beneficially then the legal owner holds the share subject to the terms of some form of trust arrangement (often this trust will be a standard discretionary trust).

Unfortunately the disclosure of beneficial ownership is an area of significant confusion and often the confusion does not arise until resolution of the issue is time sensitive (for example in lead up to a sale transaction or as part of an asset protection audit).

Some of the issues that arise in this regard include:

 (a) anecdotally, it appears that when ASIC was first imputing this data following the change of approach, many companies had their notifications reversed during the data entry process (that is shares that were owned beneficially were noted on ASIC records as being owned non beneficially);

(b) similarly many companies were confused about the distinction and therefore provided incorrect notification to ASIC; and

(c) in some instances a full search of all company records was not performed (for example all aspects of the company register) so the company provided incorrect information to ASIC.

Next week’s post will consider the three main alternatives for rectification where the beneficial ownership of shares is incorrectly recorded on ASIC records. 

** For the trainspotters, ‘relationships of ownership’ is a line from the Bob Dylan song from ‘Gates of Eden’.