Right by your side** - Commercial issues with trustees performing many roles

As mentioned in last week's post, it is possible for the same company to act as trustee for a number of trusts.

Such an arrangement should not change the indemnity position if a liability is incurred, however there are a number of commercial reasons that need to be considered before having the same company act as trustee for multiple trusts.

Some of the issues in this regard include:

1. While the current legal position is that the assets of each trust will be segregated if a liability was to arise, this position in theory could be changed by future cases or legislation. For obvious reasons, most clients do not want their arrangements to become a test case.
2. If litigation was to arise in relation to one trust, this would force the parties involved to change the trustee of the other trusts not otherwise subject to the litigation. This can be practically an unnecessarily difficult process that in some instances is actually challenged by the relevant creditors.
3. The costs for maintaining separate trustee companies are relatively nominal.
4. From an ease of administration perspective, having separate trustee companies for each separate trust can minimise the risk of confusion.
5. From a land tax grouping perspective, separate trustee companies can, in some jurisdictions, provide a planning opportunity to reduce the overall tax rates that apply.
6. If the company is acting as a trustee of a SMSF concessional ASIC annual fees are only available if the company performs this role solely.

** for the trainspotters, the title here is riffed from the Eurythmics song ‘Right by your side’.

Trustee companies and multiple plays**

Previous posts have looked at various issues that arise in relation to trustee companies (let me know if you would like access to any of these posts).

One issue that comes up relatively regularly is the way in which the trustee indemnity provisions work where the same company acts as trustee for multiple trusts.

Briefly, the strict legal position is that the right of indemnity of a trustee is limited to the assets of the trust in relation to which the liability was incurred.

In other words, where a company is a corporate trustee for multiple trusts, a claim or liability in relation to one trust should not expose the assets of the other trust.

Practically however, if the trustee becomes insolvent it can be difficult to establish the beneficial ownership of particular assets to the liquidator’s satisfaction, particularly given some third parties such as ASIC and the NSW Titles Office do not record the name of the beneficial owner.

There are a number of commercial issues that arise in relation to the same company acting as trustee for multiple trusts and some of these will be considered in next week's post.

** for the trainspotters, the title here is riffed from the John Lennon song that has a line mentioning multiple plays, namely ‘Beautiful Boy’.

No purging** Non-lapsing interposed entity elections

Last week's post highlighted the fact that in a practical sense, interposed entity elections (IEEs) are very difficult to revoke.

For example, the Tax Office has confirmed in an Interpretive Decision (ID2013/21 – as usual, let me know if you would like a copy of this decision) that IEEs remain in force even if the trust that is a subject of the related family trust election (FTE) ceases to exist.

In particular, where an entity makes an IEE in relation to a family trust to be within the family group of that family trust, it will be taken to be revoked where the FTE for that trust is revoked.

According to the Tax Office, where a family trust is simply wound up and no steps are taken before the wind up to revoke any FTE, then both the FTE and IEE continue to remain in force indefinitely.

This means that the penal rate of tax will continue to apply to the entity that has made the IEE for any distributions it makes outside the family group of the family trust that has been wound up.

While the ability to revoke an FTE is also relatively narrow, whenever considering the windup of a trust that has made an FTE, specific thought should be given to whether the FTE should be revoked before finalising the wind up.

** for the trainspotters, the title here is riffed from the Midnight Oil song that has a line mentioning elections, namely ‘When the generals talk’.

Revoking an interposed entity (in the year of) election**

Arguably one of the more complex areas in relation to family trusts relates to interposed entity elections (IEE).

We have had a number of advisers contact us recently in relation to the exact way in which IEEs operate, and unfortunately, preferred distribution arrangements are often effectively prevented due to historical elections that, with the aid of hindsight, were arguably were unnecessary.

While there are some circumstances where an IEE can be revoked, at least in the situations we have looked at recently, the ability to access the revocation provisions is limited.

This is because, among other requirements, a revocation is only available where:

1. It is done within 4 years of the original IEE being made.
2. The IEE must not have been relied on at any time.

Next week's post will look at an Interpretive Decision from the Tax Office, which further highlights the restrictive nature of IEEs.

** for the trainspotters, the title here is riffed from the U2 song ‘Desire.