Tuesday, February 23, 2021

Granny flats and rights to occupy ... now what kind of mess have you gone and gotten yourself into?**

Previous posts have considered the creation of life estates under an estate plan where a willmaker is wanting to allow a particular beneficiary the right to reside in a property without gifting it to them directly. 

As set out in the earlier post, the creation of a life interest is rarely appropriate as part of a modern day estate plan. 

One potential pathway mentioned in the previous post was using a right to occupy under a will. 

While a right to occupy under a will can be a tax effective solution, creating a right to occupy during a person’s life is often very tax ineffective. 

With the increasing interest in (for example) having parents live in a ‘granny flat’ style arrangement on the property of one of their children, the issues in this regard are important to be aware of. 

In very broad terms (that is, there are a number of potentially different outcomes depending on the factual matrix), the key issues to be aware of in this regard include: 

  1. Any payment of money for the right to occupy a granny flat gives rise to a capital gains tax (CGT) event, namely CGT event D1.
  2. CGT event D1 is triggered even if the granny flat may have previously formed part of the main residence of the children.
  3. The CGT is payable with reference to the consideration provided for the grant of the right to occupy, regardless of whether the arrangements are documented or not.
  4. Where consideration is paid that is less than market value, the market value substitution rule can apply as the parties will generally not be seen to be dealing with each other at arm’s length.
  5. If there is truly nil consideration, there should be no CGT payable.
  6. The termination of a right to occupy on the death of the parent will not cause any CGT event.
  7. Similarly, if the person holding the right to occupy relinquishes that right, there will be no CGT consequences as long as they receive no consideration and the property was their main residence during the term of the occupancy.
  8. Finally, the right to occupy the granny flat should not impact on the ability for the owner of the main dwelling to access the CGT main residence exemption.
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 You Am I song ‘Hourly daily’. View hear (sic): 

Friday, February 19, 2021

Don't know what you got 'til it's gone** - testamentary trusts and ETY

Thank you to all those who were part of our Estate Planning 2021 webinar this week.

A key question discussed related to the way in which the new restrictions on excepted trust income (ETY) via testamentary trusts operate.

In particular, in the context of a husband and wife preparing wills incorporating Testamentary Trusts, are there any tax consequences that flow from preparing the husband and wife’s wills to reflect that in the event the husband predeceases the wife (for example) the wife’s will provides that her assets will be gifted into the Testamentary Trust previously set up under the husband’s will.

Focusing solely on the ETY position, the new rules unfortunately make it clear that in this situation the income earned on the wife’s assets gifted to the husband’s Testamentary Trust will not give rise to ETY.

The reason for this is that the legislation mandates that the ‘property (must be) transferred to the trustee of the trust estate to benefit the beneficiary FROM THE ESTATE OF THE DECEASED PERSON concerned’ (emphasis added).

View made submissions on the draft legislation on this point (which were ignored ...) as follows:

‘The draft legislation is focused on “the deceased person concerned”, and it is unclear why this restriction is relevant.

For example, for most couples who both implement testamentary trusts, it will be the case that they will die at different times and there will often be a desire to transfer assets between testamentary trusts.

It is clearly the case that the excepted trust income rules should continue to apply in situations where a couple both implement testamentary trusts.

To argue otherwise would again see the proposed amendments extend significantly beyond the stated intent of the announced measure and impact taxpayers in a range of circumstances where there is no inappropriate tax benefit received by a beneficiary.’

** For the trainspotters, the title of today's post is riffed from the Joni Mitchell song ‘Big Yellow Taxi'.

View here: 

Tuesday, February 16, 2021

People are strange** … When SMSF trustees disagree

Today’s post considers the situation of where the trustees of a Self Managed Superannuation Fund (SMSF) cannot agree. 

This situation arose perhaps most starkly in the New South Wales Supreme Court decision of Notaras v Notaras [2012] NSWSC 947. 

In this case, two brothers were the trustees and members of an SMSF. Over time, one of the brothers (Brinos) made withdrawals from the SMSF, of which around $60,000 were alleged to be in excess of his entitlement. 

Brinos’ brother (Basil) had no knowledge of the withdrawals and thus had not provided consent. 

Basil approached the court to seek an order that Brinos be removed as trustee of the SMSF due to his failure to act jointly and replaced with a corporate trustee (Bazport) of which Basil was the sole director and shareholder. 

The court accepted Basil’s arguments and appointed Bazport as the co-trustee in the place of Brinos leaving the SMSF with both an individual and corporate trustee. 

The Court confirmed Basil would (as a result of the decision) need approval from the Tax Office for its failure to comply with the superannuation law requirement of all members of an SMSF also being trustees. 

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

** for the trainspotters, ‘People are strange’ is a song by The Doors. View hear (sic): 

Tuesday, February 9, 2021

Sometimes** there are limitations on a trustee’s right of indemnity

A recent enquiry from an adviser was a timely reminder about the limit of a trustee’s indemnity from a trust fund.

In particular, the case from 2010 of Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) [2010] FCA 978 clearly explains the relevant principles.

Generally, a trustee discharging their duties will always be entitled to an indemnity for any liabilities incurred out of trust assets. The indemnity can be enforced by way of a charge or right of lien over trust assets that the trustee will have automatically at law.

Trustees must, however, show that the expenses or liabilities incurred were done so properly in the conduct of the business of the trust, including preserving and realising trust assets.

Where an entity is acting as bare trustee, their duties, powers and rights are however limited solely to protecting trust assets and then conveying them on demand from those ultimately entitled.

In Bruton, the trustee was not able to recover the costs out of trust property for running a Court case unrelated to merely protecting trust property, because at the time the liabilities were incurred (i.e. when the court proceedings took place, and the costs of the proceedings were incurred) the corporate trustee was acting as a bare trustee.

In other words, pursuant to a change of trustee document, the trustee was simply holding the trust property without any actual interest in it, pending the newly appointed trustee fully taking over management of the trust, and thus, the costs went beyond what the trustee was authorised to incur and be reimbursed for.

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 from Stevie Nicks. View hear (sic): 

Tuesday, February 2, 2021

Divorce as a (last) exit** event under a shareholders’ agreement

With the annual spike over the festive season in family law issues, it seemed timely to consider the issue of how the divorce of an individual principal of a company can be addressed under a shareholders’ agreement (or similarly under a partnership or unitholders agreement).

Broadly we see the 2 main approaches as being:
  1. having divorce as a specific triggering event allowing the other owners to buy the divorcing shareholder’s interest; or
  2. drafting a right of first refusal and pre-emption arrangement broadly enough to capture any proposed transfer as a result of a divorce of a shareholder.
Our approach generally is the second alternative outlined above, unless there are specific reasons to adopt some other process.

Normally there would not be any vendor financing arrangements included into the agreement, although these can always be agreed between the parties at the date of sale, if they are on amicable terms.

It is important to note that any shareholders’ agreement should not be intended to avoid complying with any obligations under a property settlement, rather it should make sure that the non divorcing owners can continue to run the business in the most effective way without being in business with a principal’s spouse or an unrelated third party.

** for the trainspotters, ‘Last exit’ is a song from Pearl Jam. View hear (sic):