With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2022.
Similarly, the social media contributions by both View and Matthew will also largely take a hiatus until the New Year as from today.
Thank you to all of those advisers who have read, and particularly those that have taken the time to provide feedback in relation to the posts.
The 2022 edition of this book, containing all posts over the last year, edited to ensure every post is current, indexed and organised into chapters for each key area should be available early in 2022.
Very best wishes for Christmas and the New Year period.
** For the trainspotters, my favourite Christmas tune, The Pogues and Kirsty MacColl and ‘Fairytale of New York’:
With the end of year almost here again, it is timely to revisit an estate planning tool often looked at over the festive season, namely the use of letters of wishes or memorandum of directions.
If such a document is to be prepared it should ideally be done so only as part of a comprehensive estate plan.
Generally the following issues should be specifically set out in the document at the time it is signed, namely that:
a last will has been signed;
the memo of directions is intended to provide the trustees with some guidance in the administration of the estate but is in no way intended to change the provisions of the wills;
the trustees should be instructed to take into account that the comments set out in the memo of directions may not be relevant either at the date of death or at any other time in the future. Therefore the trustees should exercise any discretions under the will in the way they believe most appropriate in the circumstances;
to what extent other entities that form part of an overall estate plan (for example, superannuation fund, family trust or company), are to be regulated by the directions;
it is intended to be confidential, and should not be given to anyone other than the trustees and any professional advisers they engage from time to time;
the memo of directions has been completed and is current as at a certain date and that it has been signed.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from Hamilton and the song ‘My shot’. Listen here:
Like many areas of the law, the ability for a disgruntled beneficiary to challenge the provisions of an estate plan depends on a range of factors, not least of which the state where the willmaker lived.
This is because each Australian jurisdiction continues to have unique rules in relation to succession legislation, and in particular, the rules that regulate the ability for eligible beneficiaries to make an application for further provision.
What is consistent in each jurisdiction is that there are rules regulating the category of persons who have standing to bring an application.
One stark example in this regard relates to the ability for stepchildren to challenge a deceased estate.
In broad terms, there are three different regimes that apply.
In summary, these are as follows:
if the stepchild is wholly or partly dependent on their step parent prior to the date of death, then in South Australia, Western Australia, Australian Capital Territory, New South Wales and the Northern Territory, the stepchild may have standing;
if a moral responsibility can be demonstrated, then in Victoria a stepchild may have standing; and
so long as the natural parent and the step parent are married at the date of death, then the stepchild would automatically have standing in Queensland.
In Tasmania, stepchildren have no ability to challenge their step parent’s estate.
** For the trainspotters, the title of today's post is riffed from the Go Betweens song ‘Was there anything I could do’. View here:
While strictly a case that was focused on a tax issue (and the ability to access trading losses), the decision in the AAT case Executor for the late Joan E Osborne and Commissioner of Taxation [2014] AATA 128 also provides useful guidance in relation to a related estate planning issue.
In summary:
The donor under a power of attorney appointed her niece and nephew to manage a share portfolio.
All evidence suggested that the donor treated the portfolio as a capital investment.
Over time, the attorneys grew the share portfolio significantly, partly by leveraging the shares through a margin loan.
At all times during the profit years, the portfolio was treated for tax purposes as a capital asset (i.e. reflecting the donor’s original intention).
When however significant losses were incurred, the attorneys sought to argue that they had been conducting share trading activities and therefore the losses should not be quarantined to only being able to be offset against capital gains.
In denying access to the revenue losses, the AAT confirmed that it was always extremely relevant to consider the actual intention of the donor regardless of whatever intentions the attorneys may personally hold.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Death Cab for Cutie song ‘Styrofoam plates’. View here:
There have been a number of high profile cases in relation to the enforceability of binding financial agreements or ‘prenups’.
Anecdotally, a number of specialist family law firms now refuse to advise on these types of agreements and the case of Parkes [2014] FCCA 102 provides another example of a situation where a binding financial agreement was held to be invalid.
The key factors in the case here were as follows:
The couple had been in a relationship for around six years, and engaged to be married for almost a year.
The husband raised the idea of a prenup three days before the wedding and provided the spouse with a full agreement and the warning that if she did not sign it ‘the wedding was off’.
The wife claimed that she signed it within 24 hours on the basis that she felt she had no other choice, given the investment that had been made by the two of them and the significant number of guests invited to the wedding.
The court analysed the relationship between the parties and said that the husband had a special duty because of the unequal bargaining position and influence that he had over his wife.
Due to this aspect of their relationship, the husband owed a greater duty to the wife to give her sufficient time and space to consider her position. As this had not been done, the agreement was held to be invalid.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Janes Addiction song ‘Three days’. View here:
Last week’s post considered the amalgamation of 2 testamentary trusts ‘post death’.
A further related issue is where a sole individual beneficiary also becomes the sole individual trustee.
Previous posts have explained how section 104-10 of the Tax Act provides that the change of a trustee is not a CGT event of itself.
There is however in these circumstances effectively a merger of the legal and beneficial interest.
Ford and Lee on Trusts confirms this outcome as follows:
‘’Where legal ownership of trust property passes to a person who is absolutely entitled as beneficiary to the beneficial ownership, the beneficial ownership is extinguished in the legal ownership: Selby v Alston 30 ER 1042; (1797) 3 Ves Jun 339; 341; Re Douglas; Wood v Douglas (1884) 28 Ch D 327; Fung Ping Shan v Tong Shun [1918] AC 403 at 411….
The true reason for extinguishment of the beneficiary’s equitable interest is not merger but the impossibility of a supposed sole trustee being subject to any obligation to himself or herself as a sole beneficiary. This is recognised in judicial dicta which treat merger as a consequence of the absence of an obligation. See, for example, Re Turkington [1937] 4 All ER 501 at 504 where Luxmoore J said:
“…where one finds the legal and equitable estate equally and co-extensively united in the same person or entity, the equitable interest merges in the legal interest, on the footing that a person cannot be a trustee for himself’’.”
While arguably complex, the CGT consequences of the merger depend on whether the sole beneficiary was absolutely entitled at all relevant times. If the answer is yes, then there should be no CGT triggered.
Another example of this trust law rule is under the superannuation laws which prohibit self managed funds having a sole individual trustee and sole member.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Church song ‘Destination’. Listen here:
Last week’s post considered the amalgamation of 2 testamentary trusts ‘post death’ and a Tax Office ruling.
Following that previous ruling there have been more detailed private binding rulings issued by the Tax Office, including Authorisation Number 1013038270642.
The ruling particularly focuses on arguably the leading decision in relation to testamentary trusts and excepted trust income, namely - In Re Trustee of the Estate of the Late AW Furse; A/C Jessica N Delaney and A/C Skye Nea Delaney) v the Commissioner of Taxation [1990] FCA 470 (Furse), which has featured in previous posts.
The ruling confirms that, in a sentence, Furse is authority for the conclusion that provided a testamentary trust meets the requirements of subsection 102AG(2) of the Tax Act (which sets out the requirements to access the concessional taxation regime), income from the trust will be excepted trust income regardless of what other factors are present.
In the ruling here, although one testamentary trust was intending to transfer assets to another, it was confirmed that there were no non-arm’s length dealings in relation to the derivation of trust income. This meant that the anti-avoidance provisions in subsection 102AG(3) would not apply.
In particular, subsection 102AG(3) limits access to the excepted trust income regime where the parties -
‘were not dealing with each other at arm's length in relation to the derivation, or in relation to the act or transaction, (such that) the excepted trust income is only so much (if any) of that income as would have been derived if they had been dealing with each other at arm's length in relation to the derivation, or in relation to the act or transaction.’
The further anti-avoidance provision under subsection 102AG(4) that operates to exclude assessable income derived by a trustee under or as a result of an agreement that was entered into or carried out by a person for the purpose of securing excepted trust income was also held to be irrelevant.
Although all income received from the ‘merged’ testamentary trust would be treated as excepted trust income, the Tax Office confirmed that there was no agreement entered into for the purpose of securing that assessable income as excepted trust income.
Rather it was agreed that the true purpose was to reduce administration and yearly compliance costs.
Furthermore it was noted that if the taxpayer did not enter into the arrangement of merging the two trusts, the trust income from both trusts would be excepted trust income in any event.
In other words, there was no additional tax benefit resulting from the merger, the only substantive benefit was the saving of administration and compliance costs.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the J Mascis (of Dinosaur Jnr fame) song ‘And then’. Listen hear (sic):
Following last week’s post I was reminded of a further Tax Office private ruling that looked at the amalgamation of 2 testamentary trusts ‘post death’, namely ruling number 1012622867641.
Broadly the situation was as follows:
Two separate trusts were created for two minors using cash sourced from a superannuation death benefit paid when their parent passed away intestate.
Primarily to reduce the administration costs, the trustee wanted to merge the two trusts, with the entitlements of the beneficiaries’ in the new trust maintained.
The Tax Act creates access to ‘excepted trust income’ in a range of situations, including where:
‘… the assessable income of a trust estate…in relation to a beneficiary of the trust estate to the extent to which the amount…is derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiary… directly as the result of the death of a person and out of a provident, benefit, superannuation or retirement fund…’
Here the Tax Office confirmed that the combined trust could not change the status of the excepted trust income, primarily because it continued to satisfy the above quoted provisions.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the Spice Girls song ‘2 become 1’. View hear (sic):
Last week’s post focused on a scenario where additional testamentary trusts can potentially be established unnecessarily, particularly where a couple passes away in close proximity to each other.
In this scenario, if each spouse has established a testamentary trust under their respective will, then it is likely one of the testamentary trusts will be commercially inappropriate.
If there is no power under the wills to effectively sidestep one of the trusts (as explored in last week’s post) there may still be the ability to ensure that all assets pass to a single testamentary trust.
An example in this regard is set out in the private ruling released by the Tax Office under authorisation No. 1012603789935.
In this ruling, where two testamentary trusts had been established in a scenario where only one was required, the Tax Office confirmed:
Due to the range of beneficiaries under the testamentary trusts and the powers given to the trustees, the assets of one trust could be, at trust law, distributed to the other.
While the distribution of assets from the first testamentary trust to the second was a capital gains tax (CGT) event, no CGT was payable due to the longstanding administrative approach adopted under Law Administration Practice Statement PSLA 2003/12 (this statement is explained in more detail in a previous post).
Any income distributed from the continuing testamentary trust (even if it was derived from assets that had been distributed to the testamentary trust from the other estate) would be treated as excepted trust income (and in particular, allowing distributions to infant children to be taxed at the normal adult rates).
While the private ruling is obviously only binding on the Tax Office in relation to the particular taxpayer it was issued to, it does provide very useful insight as to the approach that is likely to be taken in similar scenarios.
This said, it is important to also consider the stamp duty consequences of any restructure as there is a significant risk that stamp duty may be payable, again as touched on in a previous post.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the Smiths song ‘This charming man’. View hear (sic):
One issue that potentially arises whenever spouses embark on an estate planning exercise is the prospect of there being testamentary trusts established unnecessarily.
In particular:
As there is never a way to know with certainty which spouse will die first, best practice dictates that each spouse establishes a testamentary trust under their respective will (assuming testamentary trusts are otherwise appropriate).
If one spouse dies, then often steps are taken by the surviving spouse to remove the testamentary trust from their will, and instead ensure that the remaining estate passes to the testamentary trust established under the deceased spouse’s will.
If however both spouses die in close proximity to each other, or alternatively, the surviving spouse fails to update their will, then two testamentary trusts are established (one under each estate).
In many cases, particularly where there are young children, the establishment of two testamentary trusts can be unnecessary and cause significant additional complexity and costs.
To help avoid this outcome, most specialist estate planning lawyers will ensure that they draft provisions into the wills to allow the legal personal representative of the estate of the second spouse to die to distribute assets directly to the testamentary trust established under the will of the first spouse to die.
Depending on the terms of the testamentary trusts, it may be possible to achieve the same outcome without the relevant clause and the post next week will explore a private ruling released by the Tax Office where such an outcome was able to be achieved without any taxation consequences.
** for the trainspotters, the title today is riffed from the Paul Weller song ‘Kosmos’. View hear (sic):
Last week’s post touched on statute barred loans from a Division 7A perspective.
The issues in relation to statute barred loans are often highly relevant in the context of estate planning and asset protection exercises.
In particular, amounts that have often built up over many years can in theory become unrecoverable automatically six years after they were initially made.
In a practical sense, so long as all parties to the arrangement are aware of the automatic forgiveness, steps can normally be taken to ensure that there are no unintended consequences triggered.
For example:
If the existence of the loan is acknowledged at any point, this automatically restarts the 6-year period.
Acknowledgement can be achieved simply by making even a nominal repayment of the loan or charging of interest.
There is also the likelihood that if the parties to the loan have signed the financial statements where the loan is evidenced, this will be sufficient to create the requisite acknowledgement.
Care must however be taken in relation to the previous point, for example, if there is a loan between a trust and a beneficiary, and that beneficiary is also a director of the corporate trustee of the trust, then there would appear to be a valid argument that notification has been given.
In contrast, if the loan is between the trust and a beneficiary, who is not otherwise in any way involved in the trust, then proving that they were aware of the loan and acknowledged its existence may be impossible.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the David Bowie song ‘It’s no Game (Part 2)’. View hear (sic):
Where a debt owed by a taxpayer to a company is forgiven, this will generally trigger the operation of Division 7A. This means that the amount will be included in the assessable income for the debtor as a dividend in the year the forgiveness occurs.
Importantly, as the amount will be neither a payment nor a loan, it is not possible to rely on the more standard approach to comply with Division 7A of repaying the balance with the requisite amount of statutory interest.
One way in which a debt can be forgiven is pursuant to the rules that cause debts to become statute barred.
In most states, a debt that is not secured will become automatically unrecoverable after six years, unless steps are taken to acknowledge the existence of the loan.
The Tax Office in practice statement LA 2006/2 confirmed that it did not intend to apply the provisions of Division 7A to loans that became statute barred where the loans were originally made prior to the commencement of Division 7A.
While in the context of Division 7A (given that it was introduced in 1997), there should not be many situations where the issue remains relevant, for loans otherwise not caught by Division 7A, the automatic forgiveness caused by the provisions of the statutes of limitations in each state are often highly relevant.
** for the trainspotters, the title today is riffed from the Metallica song ‘The unforgiven’. View hear (sic):
Recent posts have considered various aspects of the rules in relation to assets owned as joint tenants.
Another aspect of the rules in this area that continues to cause debate relates to the manner in which shares in a company may be owned.
Often a constitution of a company will mandate that shares registered as owned by 2 or more people may only be owned as joint tenants. Often the constitution will also state that the name first listed on the share register will have all voting rights in relation to the shares.
Where a constitution of a company does not set out that joint share owners must own as joint tenants the issues are more complex if a will does not distribute a discrete number of shares to separate people. That is, instead of (say) giving 100 shares to A and B, giving 50 shares to A and 50 shares to B.
Despite there being a number of conflicting cases, it appears as though the long standing decision in McKerrell [1912] 2 Ch 648 continues to apply. In that case it was held that despite a will stating that the recipients of the gift of shares were to take as tenants in common – ‘That is not possible. At least, it is not possible that a chose in action, such as shares, can be held as tenants in common at common law’.
In other words, the only assets that can be owned as tenants in common at law are real property and chattels. This means, as one example, bank accounts in joint names are deemed to be owned as joint tenants. This is because there is essentially a chose in action, being the contractual right of the account holders against the bank, for recovery of a ‘debt’ (being the balance from time to time in the bank account).
Another example in this regard is the well known case of Equititrust Ltd & Anor v Franks [2009] NSWCA 128, where it was held in relation to a debt (and related mortgage), that the common law presumption of a joint tenancy applied despite the deeming provisions under legalisation that would have otherwise seen the parties hold as tenants in common.
As usual, if you would like copies of any of the abovementioned cases please contact me.
** for the trainspotters, the title today is riffed from the Breeders song ‘Lord of the thighs’. View hear (sic):
Last week’s post considered various aspects of the rules in relation to assets owned as joint tenants.
At law there is a presumption that where property is gifted to two or more people, they receive that property as joint tenants (subject to any contrary intention).
A number of jurisdictions have also enacted legislation confirming this outcome, including Western Australia, South Australia and Victoria.
In New South Wales and Queensland however there is legislation that ‘flips’ the position at law.
This means that where real property is gifted to two or more people in those jurisdictions it will be deemed to pass to the parties as tenants in common, in equal shares.
** for the trainspotters, the title today is riffed from the Midnight Oil song ‘Blot’. View hear (sic):
Previous posts have considered the distinction between owning an asset as joint tenants compared to tenants in common.
One aspect of the rules in relation to joint tenancy that can arise in tragic circumstances is where two (or more) people die in the same incident, or indeed in unrelated incidents, and it is not possible to determine the order of deaths.
In these circumstances, in all Australian states other than South Australia, there is legislation deeming the deaths to have occurred in order of oldest to youngest. This means the youngest person will be entitled to 100% of the assets formerly owned as joint tenants.
These rules apply where the court determines that the order of death is uncertain (for example, see Re Comfort; Re Tinkler; Equity Trustees Executors & Agency Co Ltd v Cameron [1947] VLR 237).
South Australia also has a unique approach (in Australia) in relation to perpetuity periods, having essentially abolished the rule against perpetuities (which is generally 80 years) and allowing trusts to potentially last indefinitely.
The decision of In the Estate of Graham William Dawson (Deceased) and Teresa Veronica Dawson (Deceased) [2016] SASC 89, arguably best summarises the position in South Australia where multiple joint tenant owners of an asset die.
While acknowledging that the law in this area has essentially been ‘frozen’ for over 100 years, the court held that the existing rules continued to apply because no legislation had been introduced in South Australia changing the position. This meant the assets owned as joint tenants passed undivided into the respective estates for the 2 owners.
Interestingly, again due to legislation in states other than South Australia, companies can also own assets with other parties as a joint tenant.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the Silverchair song ‘Young modern station’. View hear (sic):
As previous posts have touched on, in order to be in a de facto relationship, two people need to ‘live together as a couple’.
The case of NSW Trustee and Guardian v McGrath & Ors [2013] NSW SC 1894 highlights that in order to live together as a couple, you do not necessarily have to share a particular residence.
As is often the case in disputes about whether a de facto relationship existed, following the death of one of the parties, the facts in this case were relatively complicated.
In summary:
The couple, with their respective life spouses had been friends for around 20 years.
When the respective life spouses passed away, the couple formed a close bond, which they shared for around 13 years.
They never lived together as such, however the relationship was often described as ‘boyfriend/girlfriend’.
They spoke every night on the phone.
They would meet at least a couple of times a week.
They would often holiday together.
the couple also attended all family functions (for example, birthdays, Christmas day etc.) together for one side of the family - in relation to the other side of the family, there was significant estrangement and no family functions were attended.
Following a dispute about the distribution of the estate on the first of the couple to die, the entitlement of the other party to the relationship turned on whether he satisfied the definition of a de facto.
The court decided that although the case was borderline, there was sufficient evidence to support the existence of a de facto relationship, given how devoted the couple seemed to be to one another, even though they never chose to share a residence for a lengthy period of time.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the Paul Kelly song ‘Before too long’. View hear (sic):
One issue that often arises is the liability of non-practicing lawyers and those advisers without any legal qualification who facilitate the provision of legal documentation.
Arguably, the leading case in this area is Legal Practice Board v Computer Accounting and Tax Pty Ltd [2007] WASC 184.
In this particular case, an accountant arranged for a trust deed to be bought for a client over the internet. The base trust instrument had been written by lawyers however, the accountant then populated the template.
In doing so, the court held that practically this meant that the accounting firm was breaching the relevant legislation. In all likelihood, the accountant would not be covered by their professional indemnity insurance in relation to any issues that arose out of the trust instrument.
Despite the proliferation of online providers, the decision in this case remains a very important one for any adviser facilitating legal solutions.
In many respects, it reinforces the approach adopted by firms such as ours who, while leveraging significantly off technology driven solutions, still ensure that all documentation is reviewed by a fully qualified, specialist lawyer, and where relevant, a certificate of compliance is provided confirming that all legal advice has been provided by the firm, and not the facilitating adviser.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the Art of Noise song ‘Backbeat’. Listen hear (sic):
Following the post last week I was reminded of a related issue from the case of Harris v Rothery [2013] NSWSC 1275 that provides useful guidance in relation to the role of an appointor.
In many respects, the main focus in the decision was on the issue of whether the role of an appointor was a fiduciary one.
While the court held that for the purposes of the relevant deeds the role was not a fiduciary one (even though generally it will be), a number of other issues were addressed by the court that are important to the interpretation of trust deeds.
In summary, these included the following:
a later inconsistent document to a purported variation, including where the later document is set out in the will of a party can validly amend a trust instrument, depending on the provisions of the original document;
where a trust deed is prescriptive about the steps that must be taken (for example, providing written notification to a trustee) any purported change will only be valid on satisfying the relevant requirements;
similarly, if there are timeframes set out in the deed for the provision of notices, unless they are complied with strictly, the notice will be held to be ineffective;
unless a trust instrument requires original notices to be provided, then copies will suffice;
similarly, notices that are undated will not of themselves be invalid unless the trust instrument requires dated documents;
the provisions of a trust deed must be interpreted by reference to a reasonable objective construction, as opposed to how the parties subjectively interpreted them; and
the nomination of a replacement appointor will only take effect when the incumbent appointor is no longer able to act, unless otherwise expressly provided in the instrument of nomination.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the Teenage Fanclub song ‘Guiding Star’. View hear (sic):
A common theme of posts over time has been the critical need for trustees (and their advisers) to read the provisions of any trust deed.
One issue that arises regularly under trust deeds is a variation power that may only be used in relation to certain clauses in the trust deed.
Where a trustee wishes to amend clauses that are protected from variation, one strategy that is often considered involves preparing:
an initial deed of variation, which amends the power to vary under the trust deed to remove the prohibitions; and
a second deed of variation implementing the desired changes.
Obviously, this approach is only available where the variation power itself is not one of the clauses that the prohibition on variation applies to.
Even where the approach, is on the face of the trust deed available, there are cases that would suggest this 2-step process is void for being a fraud on the power to amend.
The leading case in this area is Jamaica Ltd vs. Charlton [1999] W.L.R. 1399.
In particular, the decision confirms that the trustee cannot look to achieve by two steps, what was unable to be achieved by one step.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the Radiohead song ‘2+2=5’. View hear (sic):
One of the key trustee duties of any form of trust is to know the terms of the trust deed and keep the original wet (not electronically!) signed trust instrument safe and secure. This duty is very difficult to discharge however if the trust deed is lost.
The case of Jowill Nominees Pty Ltd v Cooper [2021] SASC 76 ("Jowill") provides a recent insight into the issues a court will consider where a trust deed has been lost. Court application being the only pathway to achieve a solution that is binding on beneficiaries and third parties such as revenue authorities, as well as protecting the trustee where an original trust deed has been lost.
While Jowill involved a discretionary trust, many of the principles are applicable for self-managed superannuation funds (SMSFs).
Factual matrix
Broadly, the factual matrix involved a trust that was established in 1976 and for many years had as its substantive asset shares in Coopers Brewery Limited. The original trust deed was unable to be located and there was also no copy of the document.
There was however an advice letter from a lawyer in 2007, based on a review of the original trust deed that explained a number of key provisions including the range of beneficiaries. Other aspects were also able to be reverse engineered, such as the probable perpetuity period and the fact that the deed likely permitted capital distributions.
The capital distribution power was assumed to exist by the court on the basis of the lawyer's evidence that if it did not, this would have been flagged in the advice letter, particularly because the lawyer confirmed no trust deed read in 45 years of practice failed to contain such a provision.
Decision
The court confirmed that under the relevant state based Trustee Act it could vary the trust deed (effectively adopting a new deed here), so long as the following tests were met (all of which were, primarily due to the evidence of the lawyer that provided the 2007 advice letter):
there is good reason to make the proposed exercise of powers;
the proposed exercise of powers is in the interests of beneficiaries;
the proposed exercise of powers will not result in 1 class of beneficiaries being unfairly advantaged to the prejudice of another class (here it was critical that all beneficiaries were represented before the court);
the proposed exercise of powers accords as far as reasonably practicable with the spirit of the trust;
the proposed exercise of powers will not disturb the trust beyond what is necessary to give effect to the reasons for the revocation or variation; and
the application is not substantially motivated by a desire to avoid or reduce the incidence of tax.
The deed approved by the court was based on a precedent as at 1978 of the firm that had likely drafted the trust deed, adjusted to align with the advice from 2007.
While the court did consider a request to simply revoke the trust, it ultimately confirmed its preference to approve the, varied, adopted trust deed as it was the least disruptive approach. The court confirmed the trustee could choose to exercise its discretion to make a capital distribution of the assets of the trust (which was its intention) and subsequently vest the trust, relying on the terms of the court approved deed.
Vesting issues
If a trust deed cannot be found, commercially with discretionary trusts it can often be the case that the most responsible approach is for the trustee to wind up the trust. Indeed, there may be disgruntled beneficiaries or third parties that essentially force a trustee to adopt this course.
Any vesting of a trust and subsequent distribution of assets, with or without court approval, is likely to trigger a range of revenue consequences, particularly taxation and stamp duty.
Most of these can generally be ignored however in relation to SMSFs as a result of the leading case in relation to trust resettlements, namely FCT v Commercial Nominees of Australia Ltd (2001) 47 ATR 220 and subsequent Tax Office statements (for example, see Private Ruling Authorisation Number 14613, which confirmed that amendment of an SMSF deed, that was not lost, by deleting all the operative provisions and inserting the terms of an updated trust deed did not cause a CGT resettlement).
Adopting a new deed
In the context of SMSF trust deeds (and indeed other forms of fixed trusts with a narrow range of known beneficiaries, who can be proved via other evidence), a court application for adopting a new trust deed is generally seen as being unlikely to be necessary from a trust law perspective.
That is, the trustee and interested beneficiaries can simply adopt a new deed.
However the federal court decision in Kafataris v DCT [2008] FCA 1454 highlights that even for trusts with an ostensibly narrow range of potential ‘beneficiaries’ care must be taken.
In this case a husband and wife established separate SMSFs appointing themselves as sole members. They declared a property owned by them as property of their respective SMSFs.
In considering who the ‘beneficiaries’ of each SMSF were, it was held that upon construction of the SMSF deeds, the class of beneficiaries was broader than each single member. This was because the trust deed allowed the trustee to pay benefits to the member’s dependants and even relatives (if there were no dependants, as defined under the superannuation legislation) of the member.
As such, in this case, the potential class of beneficiaries included 21 different people.
Best practice therefore dictates that each person who can enforce the due administration of the trust should be a party to and sign a deed of variation that seeks to implement a replacement for a lost SMSF trust deed (see also Re Bowmil Nominees Pty Ltd [2004] NSWSC 161, which confirmed that where all potential beneficiaries agree to a variation, there is no need for the court approval).
Other approaches
Alternatively, a conservative approach (that may be appropriate if a court application is not commercially viable) can be to adopt a replacement deed and then establish a new SMSF and immediately the roll assets of the fund that had the lost deed into the new structure. The heritage SMSF would then be wound up.
Regardless of which approach is adopted, other than court application, if an SMSF trustee is adopting a new deed without any evidence as to the original terms, specific specialist advice should be obtained as to whether this will amount to a CGT resettlement. Fortunately, from a stamp duty perspective, most states have a concessional regime that any variation of an SMSF trust deed (even if it causes a duty resettlement) will be liable for only nominal stamp duty.
Conclusion
While it is possible to reconstitute the terms of a lost SMSF trust deed, the process is generally time consuming, commercially difficult and unnecessarily costly.
As with many similar areas, despite the potential triteness of the statement, when considering the implications of lost trust deeds, prevention is the best cure.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the U2 song 'New Year’s Day’.
One issue that arises fairly regularly for advisers is whether they will act in fiduciary roles for their clients, for example, as trustees or executors of a will or as an attorney under some form of enduring power of attorney document.
At law, there is no reason that an adviser is automatically prohibited from accepting this type of role.
There are however a number of rules that need to be understood and complied with, not least of which the duty to avoid a conflict of interest.
Practically however, many financial and risk advisers are prohibited from taking on these roles, unless they are able to obtain the prior written consent of their licensee.
** for the trainspotters, the title today is riffed from the Bob Dylan song ‘Queen Jane Approximately’. Listen hear (sic):
Recent posts have considered the various issues that can arise in relation to the payment of superannuation entitlements following death.
The case of Ioppolo & Hesford v Conti & Anor [2013] WASC 389 provides another example of how unintended consequences can arise where the control of a self managed superannuation fund (SMSF) is not carefully considered as part of a comprehensive estate plan.
The background of the case was as follows:
1) the husband and wife originally established an SMSF and were the individual trustees;
2) following the wife’s death, the husband appointed a corporate trustee (not the legal personal representative of his wife’s estate) of which he was the sole director and shareholder in order to comply with the relevant superannuation legislation;
3) the corporate trustee (with the husband as sole director), then resolved to pay the entirety of the wife’s superannuation entitlements to the husband, as opposed to her legal personal representative pursuant to her will;
4) the executors of the will sought to unwind the distribution, partly because of a direction in the will that related to the superannuation entitlements;
5) in particular, the executors argued that the husband failed to act in a bona fide manner because of the provision in the will. In dismissing the executor’s claim and allowing the husband to retain all of the wife’s superannuation entitlements, the court confirmed that there is no obligation under the superannuation legislation for a surviving trustee to automatically appoint the executors of a former co-trustee as replacement trustees of an SMSF.
In many ways, the decision simply reinforces the principle from the Katz v Grossman case some years earlier.
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** for the trainspotters, the title today is riffed from the Elliott Smith song ‘Bled White’. View hear (sic):
Last week’s post considered the case of Katz v Grossman.
Earlier posts have considered the various types of superannuation death benefit nominations that can be made.
Clearly if the father in Katz v Grossman had utilised a binding death benefit nomination, then there would likely have not been any successful challenge to the ultimate payment of the superannuation entitlements
Some of the other planning strategies that can be utilised to regulate how superannuation benefits are distributed on death include:
1) incorporating automatic adjustment clauses under the terms of a will, to take into account benefits that are received directly from a superannuation fund;
2) mandating the succession of trusteeship of the superannuation fund; and
3) entrenching approval mechanisms for death benefit payments, for example, by prohibiting a payment until trustee receives consent from a trusted third party.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the INXS song ‘What you need’. View hear (sic):
Superannuation entitlements are regularly one of the most significant assets in any estate planning exercise.
Critically however, superannuation benefits need to be regulated in a way that complements a wider estate planning exercise. Arguably, one of the leading cases in relation to superannuation death benefit planning remains, after more than 15 years, the decision in Katz v Grossman [2005] NSWSC 934.
The case involved Katz bringing an action against his sister Grossman (and her husband), claiming an interest in their father’s self managed superannuation fund (SMSF).
A summary of the facts is as follows:
originally, the father and mother were the individual trustees of the SMSF;
the mother died some years before the father, and subsequently Grossman was appointed as a co-trustee with the father (this was to ensure that the SMSF continued to comply with the relevant superannuation legislation);
when the father later died, Grossman appointed her husband as a co-trustee with her;
during his lifetime the father had made a non-binding nomination indicating that he wanted his superannuation entitlements divided equally between Katz and Grossman; and
Grossman and her husband ignored the nomination and paid the entirety of the superannuation entitlements for the benefit to herself.
The Court held that all the trustees of the SMSF had been validly appointed at the relevant times, and that as a result, the challenge by Katz was unsuccessful and Grossman was entitled to keep the superannuation entitlements.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the INXS song ‘Original Sin’. View hear (sic):
Previous posts have looked at some of the key issues to be aware of in relation to renunciations and disclaimers by beneficiaries of a trust.
The stamp duty aspects of any such renunciation or disclaimer must be considered carefully on a state-by-state basis. As with many aspects of stamp duty law, frustratingly, there is little consistency across the various jurisdictions.
Fortunately, in relation to the capital gains tax consequences, the position is somewhat clearer.
In particular, the Tax Office has set out their view is in Tax Determinations 2001/26 (in relation to renunciations) and TR 2006/14 (in relation to disclaimers).
Broadly, the Tax Office confirms its view that from a tax perspective outcome of disclaimers (which operate retrospectively from the commencement of the trust) and renunciations (that operate from the date the renunciation is made – ie prospectively) in relation to discretionary entitlements are the same.
The Tax Office has confirmed that a renunciation or disclaimer of a trust interest will not normally have any capital gains tax (CGT) consequences for the trustee of the trust.
In particular the Tax Office confirms that:
an interest in a trust is a CGT asset; and
a renunciation by a beneficiary of an interest in a trust will give rise to CGT event C2 (the abandonment, surrender or forfeiture of an interest).
However, whether the CGT event has any practical consequence depends on whether:
the CGT asset has any value at the time of the CGT event; and
if there is any exemption that may be available.
The Tax Office considers that if a beneficiary who renounces their interest is a purely discretionary beneficiary of the trust (that is, the beneficiary has no interest in either the assets or income of the trust before the exercise of any trustee discretion as to the allocation of such income or assets), then there is likely to be no CGT (as the market value of the beneficiary’s interest will be nil).
If however the beneficiary who renounces their interest is a default beneficiary (that is, the beneficiary will receive a distribution of either income or capital in default of the exercise of a discretion by the trustee), then this kind of trust interest may in fact have some value. This means that CGT is more likely to be triggered by that beneficiary as a result of their renunciation.
Similarly, where a beneficiary disclaims (as opposed to renounces) their trust interest, the disclaimer is effective retrospectively and has the effect that the beneficiary is deemed to have never held the interest or entitlement which has been disclaimed. Consequently, there is no asset to which a CGT event could apply.
Whether CGT is payable will be determined on a case by case basis, depending on issues such as:
1) the terms of the particular trust deed and its purpose; and
2) the past history of distributions made by the trustee in favour of the default beneficiary; and
3) all other circumstances of the particular case.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from one of the coolest song titles ever, namely the Kaiser Chief’s song ‘Na na na na naa’. View hear (sic):
And a reminder some things never change - for example, the Tax Office don’t like trusts.
Previous posts have considered the Tax Office’s views about distributing from a testamentary trust to a family trust, that (at least in part) offered an (arguably) unnecessarily narrow interpretation of the tax rules.
In the context of the 2018 budget changes to the excepted trust income regime, it is timely to revisit PBR 1051238902389 that considers the situation where an inter vivos family discretionary trust was distributing to a testamentary trust.
In contrast to the approach of the changes, the ruling sees the Tax Office adopt a more collaborative approach.
Briefly, to the extent relevant, the factual matrix was as follows:
a willmaker was the ultimate controller of a family trust;
the willmaker's estate plan attempted to mandate that the assets of the family trust be sold and the cash distributed directly (and equally) to four testamentary trusts established under the will;
it was acknowledged by the parties that the directions of the willmaker were an attempted fettering of the trustee's discretion. Therefore, while they could be taken into account, they were not be binding;
this said, the assets of the family trust were sold and the intention was to then have the cash distributed to the testamentary trusts – who were potential beneficiaries of the family trust (an approach adopted by default by all View trust documents).
In determining that income of a prescribed person (eg including a minor) as a beneficiary of a testamentary trust, even if sourced from a distribution made by a family trust, is excepted trust income (ie minor's are taxed at adult rates) of the beneficiary, the Tax Office confirmed:
Following the decision in Furse (another case regularly explored in View posts), all that is necessary for the assessable income of a trust estate to be excepted trust income is that the assessable income be the assessable income of the trust estate and that the trust estate be as a result of a will.
Thus, any amounts representing a distribution from a family trust to a testamentary trust are 'assessable income of a trust estate that resulted from a will’, and therefore will be 'excepted trust income’, unless otherwise excluded.
Again largely following the analysis in the Furse decision, the main exclusions (namely either that the parties are not dealing at arm's length or the arrangement is one predominately driven by achieving the tax benefit) were held not to be applicable and thus access to the excepted trust income provisions was confirmed.
While the outcome in this private ruling is a positive one, distributions by family trusts to testamentary trusts are clearly denied access to the excepted trust income regime under the new legislation, regardless of how they are made.
Practically, the capital gains tax consequences of the distribution from the family trust would also need to be considered, given none of the rollover concessions otherwise available on death under division 128 of the Tax Act would be available on either the sale of the assets by the inter vivos trust, nor a straight distribution of the assets in specie. Similarly, to the extent the distributions were of dutiable property, the exemptions available for deceased estates would also not apply.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Regurgitator song ‘I like your old stuff better than your new stuff’.
View here:
PS and the image the quintessential lock down WFH set up.
With only one more sleep until another 30 June is upon us, it seemed timely to remember that all Australian jurisdictions except for South Australia have a statutory perpetuity period of 80 years. In Victoria, Tasmania, Western Australia and the Northern Territory, the common law perpetuity period may also be adopted, that is ‘a life in being plus 21 years’.
Despite South Australia essentially abolishing the rule against perpetuities, section 62 of the Law of Property Act 1936 (SA) allows the court to dispose of any remaining unvested interests after 80 years on the application of a beneficiary.
Generally, when trust to trust distributions are made, the vesting date of both trusts should be considered. Where a recipient trust has a vesting date which is later than the distributing trust, the risk that the rule against perpetuities is breached is a particularly relevant issue.
Historically, many advisers believed that if the vesting date of the recipient trust was later than the distributing trust, then this automatically caused a breach of the rule against perpetuities, making the purported distribution void.
However, the case of Nemesis Australia Pty Ltd v Commissioner of Taxation [2005] FCA 1273 confirmed that the ‘wait and see rule’ in each jurisdiction can be relied on in a situation where a trust distributes to another trust with a later perpetuity date.
The ‘wait and see’ rule means the initial distribution will not be void when made, and will not become void until such time as there is a failure to distribute out of the recipient trust before the vesting date of the original distributing trust.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, ‘Sometimes’ is a song by the Carpenters. View hear (sic):
Following recent posts, some of the additional questions considered by the court in Beeson v Spence in deciding the assets of a trust were property of the marriage are set out below.
1. Can beneficiaries be removed or added, and if so by whom?
The beneficiaries could be removed or added by the trustees, only with the consent of the appointor.
2. Is there any risk that the trustee may be seen as simply the ‘alter ego’ of some other person?
The Court found that the trust was created with the wife in control of the appointment of those with the duty of administering it and it was never created to benefit the children alone. The assets of what was essentially a 'standard' discretionary trust were controlled by a party to property proceedings who ultimately had the power to legitimately determine at any point to whom income and/or capital was to be distributed, including herself.
3. Does someone (e.g. an appointor, guardian, principal) have the power to unilaterally change the trustee?
Yes. The appointor was the wife initially. Whilst she subsequently relinquished control and appointed her sister as replacement appointor in 2003, the steps taken via the deed of variation were seen as having been taken at the wife’s direction. This conclusion pointed towards the trust being the alter ego of the wife, and thus the property of the marriage and not the property of the children.
4. If the appointor ceases to act, do their powers pass to anyone else, and if so, who?
The deed provided for the appointor powers to pass to Mr Beeson, the wife’s father and trustee of the trust, upon her death. The deed also allowed for the wife as the original appointor to name a successor appointor (which she did, namely her sister).
5. For an existing trust, has there been a pattern of income or capital distributions?
Distributions were made from income in both 2002 and 2003 to the specified beneficiaries being the children. Distributions were also made to the wife in this period, which she applied, among other things, to payment of her legal costs. Whilst the wife argued the legal costs incurred showed the fund was used for the children’s benefit, it was held that the legal costs should be seen as being incurred on her own account. This supported the conclusion that the trust was not the sole benefit of the children.
Further, there was nothing improper about the trustees distributing funds in the wife’s favour, as she was a potential beneficiary up until the variation in 2003, and continued to be entitled to receive distributions as a ‘parent’ of the specified beneficiaries after the variation.
** for the trainspotters, ‘Sometimes’ is a song by the Brand New Heavies. View hear (sic):
As flagged in last week’s post, some of the key questions the court in Beeson v Spence took into account when deciding the assets of the trust were property of the marriage are set out below.
1. Who is the trustee of the trust?
The trustees of the trust were the wife’s father and her solicitor. They had the discretion to administer the trust.
2. Does the trust deed restrict the range of beneficiaries who can receive income or capital distributions?
The specified beneficiaries were the children of the husband and wife, and the husband and wife were initially potential beneficiaries as parents of the specified beneficiaries. By the deed of variation (instigated by the wife) in 2003 the husband and wife were removed as potential beneficiaries. After the deed of variation the wife and husband were entitled to receive distributions, not as potential beneficiaries, but as ‘parents’ of the specified beneficiaries.
3. Does the trustee need consent/approval of any other person for distribution?
No. However, the trust deed gave the wife ultimate control of the distribution of income and capital by giving her power of appointment and removal of trustee, who in turn had the discretion to distribute to the wife and the husband to the exclusion of the children. This level of control pointed towards the trust being an alter ego of the wife, and the conclusion that the assets were property of the marriage, not the children.
4. Does the trustee effectively/practically control the trust in an unfettered way?
No. Up until her resignation under the deed of variation in 2003, the wife as appointor had complete control over the appointment and removal of the trustee. The consent of the appointor was required for the trustee to vary the terms of the trust deed. Nothing, including a request by the trustee, obliged the wife as appointor to relinquish control of the Trust.
5. Does the trustee exercise its powers independently or are they controlled or subject to approval by any other person or entity?
While the trustee had the discretion to make distributions, the power to vary the deed was subject to approval by the appointor and the appointor could remove the trustee at any time.
** for the trainspotters, ‘Sometimes Always’ is a song by the Jesus and Mary Chain. View hear (sic):
Following recent family law related posts, this week, an adviser reminded me of the case of Beeson v Spence [2007] FamCA 200 which highlighted the importance of the factual matrix on how exposed the assets of a trust are. The decision is still regarded as one of the most important in relation to trusts and family law.
Briefly the case involved a wife and husband who met in 1996 and married in 1997. They had two children and subsequently divorced in 2004. In 2001 the wife had established a trust known as the S Trust.
On establishment of the trust, the wife’s father and her solicitor were appointed as trustees and the wife was the appointor. The specified beneficiaries were the two children of the marriage and the wife and husband were within the class of potential beneficiaries.
In 2003, at a time when the husband was going through financial difficulties, and when the wife and husband had separated, the deed was varied to exclude the wife and the husband as potential beneficiaries of the trust, as well as to resign the wife as appointor. A new appointor, being the wife’s sister, was nominated in her place.
After the variation, the deed practically still entitled the wife and husband to receive distributions, not as potential beneficiaries, but as ‘parents’ of the children who remained specified beneficiaries.
In the property settlement proceedings, the husband argued that the trust was established for the benefit of the family as a whole and not just the children.
In contrast, the wife suggested that the trust was ultimately established for the purpose of benefitting the children of the relationship and therefore the assets should not be treated as property of the marriage.
Having reviewed all of the available facts, the Court ignored the release of direct control by the wife (through her resignation as the appointor and the removal of beneficiaries) and held that the wife still retained sufficient control of the trust to support a conclusion that the assets should be treated as property of the marriage.
Posts over the next two weeks will look at the key questions the court took into account in reaching this conclusion.
These posts will show that the factual matrix is decisive in determining whether the property is matrimonial property. This is because the assets of the trust are more likely to be matrimonial property where, among other things, the trust is essentially the alter ego of one of the parties to the marriage.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, ‘Sometimes’ is a song by Ash. View hear (sic):
Today’s post looks at the Family Court decision where property proceedings were adjourned to allow for the wife’s allegations against the husband for fraudulent tax evasion to be investigated.
In Pisani & Pisani [2012] FamCA 532, the main two main issues were:
whether it was appropriate to adjourn the property proceedings given the potential impact on the asset pool?; and
whether the Court should bring to the attention of the Australian Tax Office (ATO) evidence of the husband's alleged fraudulent tax evasion, as disclosed by the wife?
The court held that given the potential liability, if the allegations of tax evasion were proven, would have been considerable, it was appropriate to adjourn the property proceedings until the allegations were resolved by the ATO. Until the issues had been resolved, it would be virtually impossible to determine the true asset pool of the parties.
In relation to the duty of the Court to disclose the allegations to the ATO, the court held it was obligated to take action to bring the issue to the attention of the ATO. This said, the court also confirmed that the question of this type of disclosure was one that needed to be determined balancing all relevant issues on a case by case basis.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, ‘What do you want from me?’ is riffed from the Billie Eilish song ‘Bury a friend’. View hear (sic):
Today’s post looks at a Family Court decision regarding beneficial interests in property proceedings following a matrimonial breakdown.
In the case of MacDowell & Williams and Ors [2012] FamCA 479, the court denied the request for disclosure of the wills and documents relating to the corporate and trust structures of the wife’s parents.
The wife and the husband married in April 2004 and separated on a final basis on 12 July 2010. The husband had submitted that the documents requested were relevant to the marital property pool and in determining the financial resources available to the wife.
The wife’s parents filed an objection to the husband’s request on the basis that:
the documents sought from them in their personal capacity were not relevant as they maintained testamentary capacity; and
the documents sought from them in their capacity as directors were not relevant as neither the wife nor the husband had any proprietary interest.
In relation to the parents’ wills, the court said the request was a ‘fishing expedition’ by the husband. Although there may be compelling circumstances which warrant the disclosure of will documents (for example, when a parent has lost capacity), here, both parents were alive, in good health and possessed full testamentary capacity.
In relation to the financial and corporate documents, it was held that there was no evidence to suggest that the wife had control over any of the entities, or that control was likely to arise in the future.
This lack of control was contrasted with the case of Keach (which has featured in previous posts) where the husband did have significant involvement with a trust and it was held to be his financial resource.
The court then considered the previous distributions of one trust where the wife was both the primary and default beneficiary. Given, however, that the wife had only received $28,000 over the ten years of the existence of the trust, and during that time, distributions had also been made to other beneficiaries of the trust, the court held that it was clearly ‘discretionary’ in nature.
The husband also sought to rely on purported interpretation of Kennon v Spry [2008] HCA 56 (again see previous posts) and argue that the wife’s interest in the trust were property, that being her ‘right to consideration’ and ‘due administration’.
The court held in favour of the wife’s parents that this was a misstatement of the law on this point and that while such rights could be taken into account, they would generally be very difficult to value.
The court also bluntly distinguished Spry by noting that Dr Spry had total ultimate control of the trust in question, which was not the case here.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, ‘Gone fishing’ is riffed from the Stereophonics song ‘Bartender and the thief’. View hear (sic):
