Here we go again** - Another reminder - details do matter

Last week's post looked at the way in which the Corporations Act applies to the signing of documents.

A previous post has also considered the decision in the primarily superannuation related case of Re Narumon [2018] QSC 185.

This case also offers a related lesson, relevant for deeds of any form of trust, not simply super funds.

As mentioned last week, a sole director and secretary can bind a company where they sign and specifically note this capacity.

In the case here, a deed of variation was signed by the sole director and secretary of the corporate trustee, however the relevant capacity was noted simply as 'authorised representative'; and thus not in accordance with the Corporations Act.

Some years later the invalid execution of the deed of variation was identified by an adviser and a 'Deed of Ratification and Variation' was, validly, signed.

In apparently accepting that the approach that a deed of ratification can remedy errors in an earlier, ineffective, document the court also confirmed that care must be taken. In particular:

1. Any variation of any invalid document will need to rely on a variation power in the last valid deed in existence;
2. If no specific variation power is mentioned in the document purporting to amend the invalid document it should be possible to assume that the correct variation power is being relied on;
3. In contrast, if the deed purporting to make a variation specifically seeks to rely on a power in the invalid document it will itself likely be invalid; and
4. Practically, there would seem to be merit in retaining all previous versions of a trust deed, even if it is assumed they have been superseded by later variations.

As usual, if you would like access to any of the posts or the case mentioned in this post please contact me.

** for the trainspotters, the title here is riffed from the Whitesnake song, ‘Here I Go Again’.

How many (times) ** and directors does it take to bind a company?

As is generally well understood, section 127 of the Corporations Act confirms a company with 2 or more directors may execute a document by either:

1. 2 directors signing; or
2. a director and a company secretary signing.

Where a company has a sole director and secretary, that director can sign.

Perhaps less well known is section 126 of the Corporations Act that allows for a company to be bound by an individual acting with the company's express or implied authority.

In situations where section 126 is being relied on a company's constitution is also often relevant. For example, a constitution may provide that the directors can resolve that a specified director is authorised to execute documents.

Third parties will of course not necessarily be aware of the internal resolutions of a company. The Corporations Act under sections 128 and 129 therefore provides some protection for third parties confirming that they may rely on certain statutory assumptions as to valid execution.

These assumptions have a number of limitations however, for example they cannot be relied on where:

1. The person seeking to rely on the assumption knew or suspected that the assumption was incorrect.
2. The document is being executed relying on section 126, as opposed to under section 127. In other words, if 2 directors (or one director and one secretary) sign then the assumption can be relied on. However, if one director only signs who is not the sole director and secretary then the protection of the valid execution assumption is unavailable.

Practically, therefore where a sole director signs a document third parties should ideally:

1. obtain confirmation (for example by performing an ASIC search) that the person is the sole director and secretary;
2. obtain an extract of the constitution for the company and a copy of the resolution appointing the director as an authorised sole signatory; or
3. require the company to instead grant power of attorney to the relevant director. A copy of the power of attorney should then be produced at the time of signing.

** for the trainspotters, the title here is riffed from the Bob Dylan song, ‘Blowin’ in the Wind’.

It’s alright** (trust splitting is coming back)

Previous posts have explored in detail the July 2018 release from the ATO and its views on trust splitting in TD 2018/D3.

As explored in previous posts, there were a range of concerns with TD 2018/D3 for all trust advisers.

These issues have only been partially addressed by the final ruling released in December 2019 as TD 2019/14 - a near Christmas release date that continues the (apparent) tradition of the “last ATO officer out the door has to issue an attack on trusts and then turn off the lights”.

Critically, TD 2018/D3 assumed a single factual matrix which is very specific, and it lists a number of line items that may, or may not, be a part of a trust splitting arrangement.

Many trust splitting arrangements involve a change of trustee in relation to specific assets and few (or indeed none) of the other features listed in TD 2018/D3 (for instance, no changes to the appointors, right of indemnity or range of beneficiaries).

Given the extended delays in finalising TD 2018/D3, there must be a legitimate question as to its correctness in relation to the one example included in the draft.

This is particularly the case given the ATO conveniently:

1. ignores both High Court and Full Federal Court authority in decisions such as FCT v Commercial Nominees of Australia Ltd (2001) 47 ATR 220 and FCT v Clark (2011) 190 FCR 206 when making conclusions about trust resettlements;
2. makes unsubstantiated and unexplained assumptions about how a trustee may or may not act following a trust split.

More positively TD 2019/14, does now include two key changes that address other serious issues in TD 2018/D3.

Namely:

1. a second example has been included, which suggests how the ATO believes a form of trust split may be able to be implemented, without causing a resettlement.
2. the ATO has effectively abandoned its previous attempt to make the TD retrospective by acknowledging that its “view of the potential CGT implications of the arrangement discussed in this Determination may have been subject to conjecture prior to the publication of TD 2018/D3 on 11 July 2018. The Commissioner will not devote compliance resources to apply the views expressed in this Determination to arrangements entered into before this date.”

The second example included in TD 2019/14 essentially confirms that a trust split will not be a resettlement, so long as:

1. if each trustee keeps separate accounts in respect of the assets they hold, the results are consolidated for the entire trust fund and a single tax return is prepared for the trust as a whole;
2. there is no attempt to apply for a separate tax file number;
3. there is no amendment of beneficiary classes;
4. there is no narrowing of the trustee’s right of indemnity (ie each trustee must continue to have recourse to all of the assets of the trust to satisfy its right of indemnity);
5. there are no changes to the trustee who remains in control of assets not subject to the trust split; 
6. the trustees of each 'split' trust must still act jointly in relation to issues such as choosing an accountant, incurring joint expenses, amending the trust deed and determining an earlier vesting date. 

Based on the second example, all other aspects of a trust split are permissible, for example:

1. amending the trust deed to allow the trust split to occur (assuming there is an adequate power of variation);
2. appointing a new trustee (and replacing the previous trustee) to certain assets that are to be subject to the trust split;
3. changing the appointor or principal in relation to the assets the subject of the trust split;
4. updating third party records (eg Land Titles Office, share registries etc) in relation to the change of trusteeship.

** For the trainspotters, today’s title is riffed from the Eurythmics and ‘It’s alright (baby’s coming back)’.

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SMSF trusteeship: Individual v Corporate ... every 1s a winner**

The debate about whether to use a company or individuals as the trustee of a self-managed superannuation fund (SMSF) is longstanding and arguably ongoing.

Here are the 9 top reasons we see most specialist advisers recommending there is only one winner to the debate, namely - always use a corporate trustee.

1. Costs
Often, cost is used as the key reason for not having a corporate trustee.

The reality is that the company establishment cost and relatively nominal ongoing ASIC fees (particularly if a special purpose company is used, allowing access to the concessional ASIC annual fee for SMSF trustees) are significantly less than the costs associated with individual trustees.

This is especially stark in an estate planning context - the death of a director results in one ASIC form being lodged. The death of an individual trustee causes the need for a formal deed of change of trustee and then the subsequent notification to every asset register. This process must be repeated on the death (and likely also any capacity) of every trustee.

2. Limited Liability
The liability of a company is limited to its paid up capital - a properly structured SMSF special purpose trustee company will have an exposure of $2.

Individual trustees have unlimited liability, jointly and severally.

This can be particularly important if the SMSF owns real property given the inherent risks with that class of asset.

This reason on its own makes corporate trustees compelling.

3. Penalties
The administrative penalty regime generally applies at the trustee level.

Therefore, a single company trustee has one penalty imposed for each contravention.

An SMSF with (say) 3 individual trustees has triple the penalty - one imposed for each trustee.

4. Sole member funds
A sole member SMSF with a corporate trustee can have the one individual as both the sole member and the sole director.

A sole member SMSF with individual trustees must have 2 people appointed - thereby opening up many of the issues outlined above.

Furthermore, even if the SMSF starts as a 2-member fund, when one trustee dies it often forces the appointment of a corporate trustee – again, triggering many of the difficulties mentioned above. Arguably, the mantra 'begin with the end in mind' is relevant.

5. Administration ease
Title in the assets of the SMSF remains permanently in the name of the corporate trustee, regardless of how many changes to directorship (or indeed shareholding) are made.

In contrast, every admission or cessation of a member (not only on death) triggers the need to have a formal change of trusteeship - as well as the transfer of title to all assets of the SMSF.

6. Compliance

Generally, in terms of what the auditor (and ultimately the Tax Office) expects to see, the use of a special purpose corporate trustee more easily facilitates appropriate levels of record-keeping, overall governance and legislative compliance.

7. Perpetual existence
Companies have no ending date (unless specifically resolved to the contrary).

This fact is generally seen as allowing far greater certainty and ease of managing control of the SMSF as compared to individual trusteeship.

8. Control strategies
As a company acting as the trustee of an SMSF need only ensure all members are directors, there are a number of strategies available to otherwise regulate management and control of the company (and in turn the SMSF).

For example, there is complete autonomy on who the shareholders of the company are and how shareholder decisions are to be made.

The rights of the shares on issue can also be tailored to (for example) automatically end on the owners death or incapacity, ensuring control passes seamlessly and without the prospect of challenge under an estate plan.

9. Maximum numbers of trustees
The maximum number of individual trustees at law is 4.

For SMSFs considering larger numbers of members following the 2018 Federal Budget announcement of allowing 6 member funds they will need to have a company as trustee, as there are no similar limitations on the number of directors of a trustee company.

** for the trainspotters, name check to Hot Chocolate and their song 'Every 1s a Winner'.

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Frozen (body) warnings** and disposal - getting into the detail

One of the estate planning war stories we have shared regularly over the years involves how we assisted a man who was wanting to be cryogenically preserved for 350 years and the complex estate planning issues that arose.

One example of the type of issue to be considered - how do testamentary trusts assist when they can generally only last 80 years from the date of death (Answer: use an inter-vivos trust established under South Australian law, as there is no perpetuity period there).

One of the few reported decisions in this area is the UK case of Re JS (Disposal of Body) [2016] EWHC 2859 (Fam). As usual, if you would like a copy of the case please contact me - although please note the factual matrix is a particularly sad one involving a terminally ill young lady aged 14.

In granting the child's wish to undergo cryonic preservation, the court made a number of relevant comments in relation to body disposal, including:

1. A dead body is not property and therefore cannot be disposed of by will.
2. The legal personal representative of the deceased has the right to possession of (but no property in) the body and the duty to arrange for its proper disposal.
3. While the concept of 'proper disposal' is not defined, it is clear that customs change over time.
4. Under English law, there is no right to dictate the treatment of one's body after death - regardless of testamentary capacity or religion.
5. While the wishes of the deceased are relevant (and perhaps highly so), they are not determinative and cannot bind third parties nor the court.
6. Ultimately, the role of the court is not to give directions for the disposal of the body but to resolve disagreement about who may make the arrangements.

** for the trainspotters, the title here is riffed from a John Cale song, first recorded by Nico, namely ‘Frozen Warnings’. 

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