Losing it** over losing it ... pre capital gains tax assets owned by trusts

Division 149 of the 1997 Tax Act is an anti-avoidance provision aimed at preventing access to tax free disposals of assets otherwise assumed to have been acquired before 20 September 1985.

Broadly Division 149 applies most commonly where a company has acquired assets prior to 20 September 1985, however at a later date there is a change of 50% or more of the underlying ownership of the assets evidenced by a change of 50% or more of the shares in the company.

One aspect of Division 149 that is often overlooked is the application of the provisions to assets held by trustees of family discretionary trusts.

Arguably the clearest explanation of the way in which the rules operate in this regard is set out in Taxation Ruling IT 2340. As usual, if you would like a copy of the ruling please contact me.

While the IT was issued under the 1936 Tax Act version of Division 149 (namely, section 160ZZS) it continues to apply.

In summary the Tax Office confirms:

1. As the trustees of discretionary trusts have wide powers as to the distribution of trust income or property to beneficiaries, the question of whether majority underlying interests have been maintained in the assets of the trust will depend on the way in which the discretionary powers of the trustee are in fact exercised.
2. If a trustee continues to administer a trust for the benefit of members of a particular family, it will not trigger Division 149 merely because (for example) distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of its discretion.
3. However, if due to the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets Division 149 will be triggered. In other words, if it is the case that the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions then the assets will be deemed to have become post CGT assets. 

** For the trainspotters, ‘losing it’ is the key line from The Alabama Shakes song ‘Dunes’ from 2015.

Post death super trusts; a fine time in a time of need **

Previous posts have explored the approach to superannuation proceeds trusts (SPT) for infant beneficiaries by the Tax Office (see for examples - Superannuation and skirting the shoals of bankruptcy, Don't Stop Believin' - Tax Office & superannuation proceeds trusts and Just Can't Get Enough tax wins).

As explained in previous posts, the factual matrix for where SPTs are relevant are generally tragic - infant children who lose a parent who had not implemented a competent estate plan that was fully funded and incorporated testamentary trusts.

A regularly posed question in relation to establishing a SPT however is whether the payment of superannuation death benefits to the trust is in fact permitted under the relevant legislation.

In this regard, under section 307-15(2) of the Tax Act a payment can be made 'for the benefit' of the intended beneficiary, including to another person or entity.

Where a death benefit payment is made to the trustee of an SPT, this can satisfy the requirements in section 307 where, for example:

1. the only beneficiaries of the SPT are infant children of the deceased;
2. those children have an absolute beneficial entitlement to any amounts held in the SPT;
3. the trustee of the SPT cannot amend the trust deed to vary or defeat the beneficial interest of any child. 

In this type of situation then, in accordance with section 302-60 of the Tax Act, the death benefits payment made from a superannuation fund to the trustee of the SPT is not assessable income.

The above conclusions are confirmed in Tax Office Private Ruling Authorisation Number 1013007176699. As usual if you would like a copy of the Private Ruling please contact me.

** For the trainspotters, the title of today's post is riffed from New Order's song 'Fine Time'.

Automatic** disqualification clauses for trustees and appointors

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 -

Question: How do ‘automatic disqualification’ clauses work and are they effective from a family law perspective?

Answer: This is an interesting question.

Many of the trusts that we (and other law firms) establish contain a provision in them that we call an ‘automatic disqualification’ provision.

The provision is drafted to ensure that anybody in a key role, such as an appointor or trustee, will get automatically removed from that role upon certain events happening to them.

The most common disqualification scenario is death or incapacity.

If you’ve got a trustee who becomes incapacitated or dies, then obviously they need to be removed and someone else needs to step into that role to manage the trust.

However, those triggering events can also include a family law breakdown. We can have a clause in our trust deed or our will saying that if the appointor or the trustee separates from their spouse, then they are automatically disqualified from that role and somebody else steps in in their place.

I’m not aware of any instances where the effectiveness of that type of clause has been tested before a Court, but I think it has reasonable grounds of being successful if it is tested.

As a general rule we include this type of provision in all of our documents on the basis it gives our client a fighting chance of retaining the trust if anything goes wrong for them personally, since they didn’t actually make that change to the control of the structure themselves.

** For the trainspotters, ‘Automatic’ is a song by The Pointer Sisters from 1983.

Seems like all that is ever wanted is (no) markings on wills**

Following last week’s post concerning codicils, an adviser contacted me about why we were so pedantic concerning wills, for example, wanting to ensure that no paperclips or other markings are made on an original will.

This question follows neatly from the codicil discussion.

In particular, where there are markings on a will, that might indicate something else has been attached to the will, then the law creates a number of obligations to investigate this potential issue.

For example, it could be assumed that a paperclip may have attached a codicil to a will.

Obviously, in many instances, the paperclip will in fact have only attached, say, a 'with compliments' slip.

This therefore can create a significant amount of wasted resources, hence our very strong recommendation that nothing be attached in any way, shape or form to a will (or codicil).

** For the trainspotters, the title of the post today is riffed from a line from The Foo Fighters song ‘This is a call’ from 1995.