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 2023.
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 2023.
Very best wishes for Christmas and the New Year period.
** For the trainspotters, one of my favourite Christmas tunes, Paul McCartney and Simply Having a Wonderful Christmas Time’ see hear (sic):
Previous posts have considered various aspects of warranties and indemnities.
Generally, the scope of recovery and damages that may be obtained will be greater where an indemnity is provided.
This is because an indemnity is effectively a promise to either reimburse or make good relevant issues if they arise.
Furthermore, indemnities:
Do not require the person giving the indemnity to have actually caused the loss – in other words, regardless of how the loss arises, liability will be triggered.
Common law rules that normally limit the scope of liability, such as remoteness or an obligation to mitigate losses, do not apply in relation to indemnities.
In contrast, a warranty only provides a promise that certain statements are correct. Practically this means:
A party seeking to claim in relation to a breach of warranty must do so by seeking damages.
The common law principles mentioned above of remoteness and an obligation to mitigate potential losses do 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 Alabama Shakes song ‘Don’t wanna fight’.
Under the capital gains tax small business concessions, what amounts to ‘control’ of a discretionary trust is an important issue.
In this regard, a key aspect relates to the concept of whether the trustee of a trust ‘acts, or could reasonably be expected to act, in accordance with the directions or wishes of another person or entity’.
Arguably, the leading analysis of these rules is in the case of Gutteridge v Commissioner of Taxation [2013] AATA 947.
Briefly, the case involved sale of assets by the corporate trustee of a traditional family trust (Trust).
The sole director and shareholder of the corporate trustee was Ms McKenzie, who also controlled another company (Company).
The principal of the Trust was as third party professional adviser to the family (Mr Coffey), who provided evidence that he would always follow any directions from Ms McKenzie’s father (Mr Gutteridge) including, if necessary, removing a trustee from that role. In turn Mr Coffey confirmed he would disregard any instructions from Ms McKenzie that were contrary to those provided by Mr Gutteridge.
The Tax Office denied access to the small business concessions on the basis that Ms McKenzie controlled both the Trust and Company.
The court held however that the Trust ultimately acted in accordance with the directions of Mr Gutteridge and therefore Ms McKenzie did not control it.
The Trust was therefore able to access the small business concessions.
The case ultimately reinforces that the rules are highly dependent upon the factual matrix of each 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 of today's post is riffed from the Chemical Brothers song 'Out of control’.
A Wikipedia search confirms what most learn at some stage during schooling; that is a contract is an agreement that meets certain criteria to make it enforceable at law.
In summary, the 4 key aspects of a valid contract are:
offer and acceptance;
all key terms agreed;
the intention of the parties to be bound; and
consideration exchanged.
Whether a contract exists when parties communicate in writing is sometimes difficult.
If the communication to form the (alleged) contract is verbal, the issues tend to become even more blurred. Often trying to prove the existence and terms of an oral contract become a game of ''he said; she said'' - itself a sure fire approach to generating legal fees.
It is perhaps for these reasons that, at least in relation to contracts involving land, each state has rules requiring that the terms of the agreement be documented in writing, for example:
Contracts for Sale of Land to be in Writing
No action may be brought upon any contract for the sale or other disposition of land or any interest in land unless the contract upon which such action is brought, or some memorandum or note of the contract, is in writing, and signed by the party to be charged, or by some person by the party lawfully authorised.
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 Jebediah song 'Nothing lasts forever’.
Following on from last week’s post, a further issue that often arises in the context of division 7A is whether the accounts of a debtor company can be enough to create an acknowledgement by a debtor.
In the case mentioned in last week’s post (VL Finance Pty Ltd v Legudi [2003] VSC 57), an argument that the annual company return of the creditor company was sufficient to create the relevant acknowledgment was rejected even though the returns were signed by the directors who were debtors and when read with the accounts identified the debts.
A key issue in this regard was the fact that the annual return was not a statement 'made' by the directors in their capacity as debtors 'to' the company in its capacity as the creditor.
Instead, the annual return was simply a statement 'by' the company.
In contrast however, the case of Lonsdale Sand & Metal v FCT 38 ATR 384, a statement in the accounts of a debtor company was accepted as being sufficient to amount to an acknowledgement by a debtor.
Despite the decision in Lonsdale, the better argument appears to be that the financial statements of a creditor company cannot, without more, create a valid acknowledgement by a debtor company via its directors, even if those directors sign the financial statements.
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 Underworld song 'Scribble’.
Under legislation in each Australian state, there is a prohibition on bringing a claim on certain actions, generally once 6 years have elapsed from the date from which the cause of action arose.
Generally, loans that are the subject of division 7A under the Tax Act will be at call loans.
As the Tax Act deems loans that become unrecoverable due to the expiration of a limitation period to be automatically forgiven, it is important to determine the date on which a loan is deemed to begin.
Historically, there was at least some support for the argument that the start date for limitation period purposes was the date that a demand was made for repayment of the debt or the last date a formal acknowledgement (including by way of part payment) was made.
This position was at least partially due to the fact that under the relevant limitation legislation in each state, an acknowledgement must generally be made in writing by the debtor to the creditor, and be signed by the debtor
The decision in VL Finance Pty Ltd v Legudi [2003] VSC 57, which has been accepted by the Tax Office, confirms however that the limitation period for the purposes of division 7A begins to run immediately on the date that an at call loan is made, not from the time when the first call for repayment is made.
Furthermore, while at law a loan can be 're-established' by an acknowledgement or part payment even after the expiry of the limitation period, for tax purposes, under division 7A, if the limitation period expires the debt is immediately forgiven permanently at that point in 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 of today's post is riffed from the Pearl Jam song 'Big wave’.
A recent post considered the broad limitations to an attorney's powers.
While a validly appointed financial attorney has extremely wide powers in relation to what they may do on behalf of the donor, one of the key specific restrictions relates to a donor's directorships.
A directorship is a personal role and cannot be delegated.
Arguably the leading case on this point is Mancini v Mancini [1999] NSWSC 799.
The key statement in that decision was as follows -
'The office of a director is a personal responsibility, and can only be discharged by the person who holds the office.
If there is any exception, it must be found in the constitution of the company and in some authorisation there found to act by an alternate or other substitute or delegate.
The office of a director is not a property right capable of being exercised by an attorney or other substitute or delegate of the person holding the office; many rights as shareholder can be distinguished in this respect because they are rights of property.'
It is important to understand from an estate planning perspective that there are three main potential work arounds in this area, namely -
a company may grant an individual a power of attorney to act on behalf of the company;
the company may appoint an alternative director; or
if the director is personally a shareholder and has granted a personal enduring power of attorney, then the attorney may be able to exercise their powers via control of the shareholding to appoint a new director (including themselves).
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 Billy Bragg song 'Waiting for the great leap forward'.
Last week's post considered the ability of a trustee in bankruptcy to exercise the powers of an appointor or principal of a family trust who is bankrupt as their personal property.
A related issue that has been the subject of many years of debate is whether the holder of an appointor role can exercise it so as to appoint themselves.
For many years, the case of Re Skeats' Settlement (1889) 42 Ch D 522 has been seen as the leading decision, and it confirmed that an appointor could not appoint themselves as trustee. In particular the case held that '...the universal rule is that a man should not be judge in his own case; that he should not decide that he is the best possible person, and say that he ought to be the trustee'.
This blanket prohibition has however been iterated over the years and, subject always to the provisions of the relevant trust deed, the position now appears to be that the trustee appointment power is a species of special ‘fiduciary power’ that must be exercised for the benefit of objects of the trust.
This means that an appointor may appoint themselves (or a company they control) as trustee of a trust, as long as it is not for fraudulent purposes and permitted under the deed.
An appointor choosing to appoint themselves as trustee will however only by permitted in ‘exceptional circumstances’, where the court is assured that the trusts will be executed in the interests of the beneficiaries.
The decision in Australian Conservation Services v Liladel Holdings [2017] ACTSC 162, provides a concise summary of the rules in this area.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, 'Sisters are doin' it for themselves' is a song from 1985 by the band the Eurythmics, listen hear (sic) -
Last week's post considered the ability of an attorney to exercise the powers of the donor as an appointor or principal of a family trust.
A key related question is whether a trustee in bankruptcy can act on behalf of a bankrupt for any principal or appointor role held by a bankrupt under a family trust.
As with incapacity (as mentioned last week), generally a well crafted trust deed will expressly address the issue and include a clause along the following lines -
'If the principal suffers the loss of lawful capacity through the committing an ‘act of bankruptcy’, then the principal is the financial attorney of the principal under a valid enduring power of attorney.'
The property of a bankrupt which is available for distribution to creditors includes ‘the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit…’ (see section 116(1)(b) of the Bankruptcy Act).
However, it has been held that the right of a bankrupt to exercise a power of appointment under a discretionary trust is not property of the bankrupt (Re Burton; ex parte Wily v Burton (1994) 126 ALR 557 and Lewis v Condon; Condon v Lewis [2013] NSWCA 204).
Further, the decision in Dwyer v Ross (1992) 34 FCR 463 suggests that a trustee in bankruptcy cannot compel the trustee of a trust to exercise the trustee’s discretion in favour of a bankrupt beneficiary. To do so could be construed as a breach of the trustee’s duty to the solvent beneficiaries of the trust. It would be against the interests of the beneficiaries as a whole to exercise the power in that way.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, ‘Making Plans for Nigel’ is another song by the band XTC, from 1979, listen hear (sic) –
Previous posts have considered the broad limitations to an attorney's powers.
A key related question is whether an attorney can act on behalf of a donor for any principal or appointor role held by a donor under a family trust.
Generally, a well crafted trust deed will expressly address the issue and include a clause along the following lines -
'If the principal suffers the loss of lawful capacity through age, accident, or illness (evidence of which is by certificate of a registered medical practitioner), then the principal is the financial attorney of the principal under a valid enduring power of attorney.'
Where the trust instrument does not address the question, the preferred position appears to be that the principal powers can be exercised by an attorney.
The leading case in this regard is generally seen to be Belfield v Belfield [2012] NSWCA 416 where it was held that an attorney could have exercised the principal’s power under the Deed while the principal was incapacitated. In other words, even in the absence of any express provisions in the trust deed addressing the incapacity of a principal, the principal's powers can be exercised by a validly appointed attorney on their behalf.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, ‘Generals and Majors’ is a song from 1980 by the band XTC, listen hear (sic) –
Anecdotally, there appears to be an increasing number of situations where the parents of a spouse are forcibly required to provide disclosure of their personal arrangements as part of their child’s property settlement proceedings.
Arguably, the highest profile case in this regard was MacDowell and Williams [2012] FamCA 479.
In this case, the parents of a woman going through a property settlement allegedly had access to wealth in excess of $20 million.
Following a marriage of around 7 years, the husband as part of the matrimonial litigation tried to get access to the wills of his former in-laws and the deed for a trust, which he believed his wife was a primary beneficiary of.
Acknowledging that each situation would depend largely on the facts, the court in this case decided:
While the husband could get a copy of the trust deed, the court flagged it was unlikely that the trust would be taken into account in any form under the property settlement (i.e. it would be treated neither as an asset or a financial resource), given that the wife was only one of many potential beneficiaries and had received less than $30,000 of distributions from the trust during the entire marriage;
The wills did not need to be disclosed on the basis that the parents had full testamentary capacity and may change their wills, or indeed, may otherwise spend or dispose of a substantial part of their wealth; and
The privacy of the parents’ personal affairs was seen as an important factor in denying access to the wills and estate planning documents.
Interestingly, the court did however note that if the wife’s parents had lost capacity or they were in extremely poor health, then it may have created a situation where the wills would be required to be disclosed.
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 'It’s no reason'.
Last week’s post summarised some of the key issues to consider in relation to agreements documenting arrangements between parents and their children for the provision of elder care.
Where substantive assets, particularly housing accommodation, are to be jointly acquired by a parent and one or more children, best practice is to implement a formal deed setting out the exact terms of the arrangement.
Generally, it will be appropriate to implement a deed that has provisions, which are virtually identical to the type of arrangement entered into by arm’s length parties who jointly own property, or for that matter, family or friends who jointly acquire property where there is no elder care relationship in place.
The exact provisions of any agreement will obviously depend largely on the circumstances.
An example of some of the provisions normally included is as follows:
the exact financial obligations between the parties;
rights of access to the property;
term of the agreement;
events that will trigger an ending of the agreement;
rights of first refusal or pre-emption if a party wishes to sell their interest;
circumstances in which a sale of the entire property is to take place;
whether any existing joint owner can attempt to acquire the entire property if a forced sale takes place;
to the extent the property will be rented in a holiday pool, the basis on which a co-owner can access the property;
how costs are to be apportioned;
what is to occur if a party is in default;
what happens if a party loses capacity or dies; and
dispute resolution 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 of today's post is riffed from the Go Betweens song 'Part company'.
One form of legal documentation that is becoming increasingly prevalent is contractual arrangements between children and their parents where those children are providing support to their parents.
Most commonly, the agreements set out the exact legal basis on which support is provided, whether it be direct financial support (such as paying expenses), indirect financial support (for example, providing accommodation without seeking reimbursement of expenses) or in kind support (for example, caring services).
A comprehensive agreement will deal with a range of matters, many of which can potentially lead to later litigation if not appropriately addressed.
Examples include:
agreed financial values for all support provided;
the timeframe over which support will be provided;
legal ownership of any jointly acquired assets;
impact on the entitlements of each child under their parents’ estate plan;
principal and interest repayment terms in relation to any loans that may have been made;
consequences of death or incapacity;
consequences of any relationship breakdowns (for example, the divorce or separation of a child who is a primary carer of a parent);
consequences of any relationship breakdown between the relevant child and the parent;
dispute resolution provisions; and
consequences of termination (including potentially compensation for any foregone opportunities).
Ideally, although arguably not strictly required in a legal sense, the parties to this style of agreement should include all family members, particularly those who might otherwise have different expectations as to what they might receive pursuant to the estate plan for the parents.
** For the trainspotters, the title of today's post is riffed from the Go Betweens song 'Ask'.
Particularly as people live longer, it is becoming increasingly prevalent that the instructions for someone’s will are provided by a close friend or relative who themselves will be the primary (and in some instance, only) person to benefit under the will.
In order to ensure that the will is not later successfully challenged or held to be invalid, there are a number of critical steps required.
While each situation will depend on the exact circumstances, generally the following steps should be taken:
a specialist lawyer should ideally be responsible for preparing the estate planning documentation;
to the extent possible, that lawyer should tolerance test the integrity of the instructions being received directly with the will maker and without the intermediary being present;
if the lawyer has an ongoing client relationship with the intermediary, then thought should be given to ensuring that the will maker obtains some form of independent legal advice;
if there is any concern in relation to the capacity of the will maker (for example, due to age or mental capabilities), specialist medical advice should also be obtained at the time of signing the documentation; and
comprehensive meeting notes should be prepared in relation to all interactions on the file, ensuring that they are in a format that could be provided to, for example, a court if the will is ultimately challenged.
** For the trainspotters, the title of today's post is riffed from the Coldplay song 'Another’s arms'.
As set out in the post last week, a Crisp order can be made by courts to vary a life interest or right of occupancy in certain circumstances.
Generally, courts are reluctant to grant a Crisp order as they do not bring complete and immediate closure to a deceased estate.
This said, particularly where the house represents a significant proportion of the overall value of the estate, courts will at least consider a Crisp order.
The key issues that the courts normally take into account in this regard include:
The duration or length of the marriage. Generally Crisp orders are most relevant where the deceased spouse is in a second or subsequent life relationship;
The contribution by the current spouse to the deceased’s welfare;
The overall size of the estate;
The financial stability of the spouse, respecting the spouse’s need for security and independence for the balance of their life; and
The financial status and health of the beneficiaries nominated under the will to receive the capital value of the house on the ending of the (initially designed) right to occupy or life interest.
Clearly, each of these factors are subjective and therefore any litigation where a Crisp order is sought will largely turn on the court’s interpretation of each competing interest.
** for the trainspotters, the title today is riffed from the Radiohead song ‘True love waits’.
The concept of a 'Crisp order' takes its name from the decision of Crisp v Burns Philp Trustee Company Limited [NSWSC, 18 December 1979, unreported].
In that case, a widow who was granted a mere right of residence in a home under her husband’s will challenged the provision as inadequate.
The court decided to allow the former matrimonial home to be treated as if it were an ‘accommodation fund'. This meant that the widow could use the entire value of the home to help meet her accommodation needs for the balance of her life.
In other words, on request, the executor of the estate was required to use the capital value to purchase alternative accommodation for the widow, such as a smaller house, entry into a retirement village or a nursing home.
Ultimately, Crisp orders are intended to provide a form of flexible life interest to a surviving spouse to ensure that they have access to appropriate accommodation until their death.
Any capital remaining following the death of the surviving spouse will then generally pass as originally anticipated under the will of the person whose estate was originally challenged.
The post next week will list out some of the key factors normally taken into account by a court before granting a Crisp order.
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 classic song ‘My favourite things'.
A regular theme in previous posts is how critical it is to ensure that the provisions of a trust instrument are followed precisely when taking steps in relation to the trust.
The SMSF related case of Moss Super Pty Ltd vs. Hayne [2008] VSC 158 is one example of this principle, in the context of a change of trusteeship.
In summary:
As is becoming increasingly common, there were issues around the rightful controller of the SMSF following the death of one of the members;
The surviving member purported to change the trusteeship of the SMSF, so that a company of which she was the sole shareholder and director would be appointed;
The trust deed set out the process by which a change of trusteeship could take place and specifically required the ‘founder’ to appoint any new trustee;
While the sole director of the new trustee company was also the founder, she did not in fact sign the change of trustee documentation in the capacity as founder;
In other words, while she signed as the sole director of the new trustee, there was no provision where she also signed under the founder role; and
Critically, the court found that, as was the case here, legal structures are created where individuals had multiple roles to play, the requirements around those roles must be respected and complied with.
In many respects, the decision reflects a number of analogous situations in the context of family trusts including the case of re Cavill that has been featured previously.
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 Culture Club song ‘Changing every day’.
One issue that arises relatively frequently is whether certain kinds of expenses can be paid by an SMSF.
Previous posts have touched on this issue.
Having recently reviewed one adviser's material on them joining a new licensee group, it was interesting to see that part of the confusion with the rules in this area, particularly for financial advisers and risk advisers, undoubtedly is because of the relatively vague standards that most licensees seem to impose.
In this particular situation, the licensee rules provided that advisers could charge an SMSF for all advice that was either product related or strategically relevant to that particular SMSF.
In turn, the rules stated that charging the SMSF for any other advice that is not so related will potentially breach the sole purpose test and was therefore prohibited.
Unfortunately, the vagueness of the rules under this type of approach can make it difficult for advisers and clients alike to make decisions in relation to areas such as binding death benefit nominations and wider estate planning documentation, and until there is clearer guidance from, for example, the Tax Office, there is likely to be continuing uncertainty.
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 ‘Anyone can play guitar’. View hear (sic):
Following on from posts over the last few weeks concerning gift and loan back arrangements, a question has been raised as to whether the arrangement is proprietary or exclusive to any law firm.
In a word, the answer is: no.
The key case in this regard is Grant v Commissioner of Patents - [2006] FCAFC 120.
In this case the court considered the patentability of the following steps in relation to an asset protection method for protecting an asset owned by an owner, namely:
establishing a trust;
the owner making a gift of a sum of money to the trust;
the trustee making a loan of said sum of money from the trust to the owner; and
the trustee securing the loan by taking a charge for said sum of money over the asset.’
In other words a gift and loan back arrangement.
The court confirmed there was no novelty in the steps. Rather they were best described as a business system or method.
In concluding the approach was not patentable the court confirmed as follows:
“It has long been accepted that "intellectual information", a mathematical algorithm, mere working directions and a scheme without effect are not patentable. This claim is "intellectual information", mere working directions and a scheme. It is necessary that there be some "useful product", some physical phenomenon or effect resulting from the working of a method for it to be properly the subject of letters patent. That is missing in this 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 a line in The Talking Heads song ‘Mr Jones’.
Following on from posts over recent weeks concerning gift and loan back arrangements, a question has been raised as to what in fact is a loan.
In theory the definition of a loan should be simple, however it has over time caused some level of debate.
This said, the leading decision is generally accepted as the case of Federal Commissioner of Taxation v. Radilo Enterprises Pty Ltd (1997) 34 ATR 635. In this case it was confirmed that:
A loan involves an obligation on the borrower to repay the sum borrowed.
It is a simple contract whereby one person ('the lender') pays or agrees to pay a sum of money in consideration of a promise by another person ('the borrower') to repay the money upon demand or at a fixed date.
The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid.
The essence of the transaction is the promise of repayment.
Ultimately therefore, a loan is a payment of money to or for someone on the condition that it will be repaid. Thus it is clear that an obligation to repay forms an integral and indispensable characteristic of a loan.
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 Black Rebel Motor Cycle club song 'Took out a loan’.
Following on from posts over the last few weeks concerning gift and loan back arrangements, a question has been raised as to how the funding of any gift (and subsequent loan) can occur.
Certainly, the conservative view is that there is the physical transfer of funds by way of electronic transfer or bank cheque. Where this is not possible there are generally two other approaches that can be utilised.
The first is simple endorsement of a cheque. If this approach is taken it is critical that the original cheque (or at least copies of it) is retained indefinitely.
The other approach is the use of promissory notes.
The Bills of Exchange Act 1909 (Cth) defines a ‘promissory note’ as follows:
‘A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer.’
It has been accepted by the courts that promissory notes are considered equivalent to cash at law.
Arguably the leading confirmation of this position is the decision in Fielding & Platt Ltd v Selim Najjar [1969] 1 W.L.R 357, where relevantly it was held –
'We have repeatedly said in this court that a bill of exchange or promissory note is to be treated as cash.
It is to be honoured unless there is some good reason to the contrary.'
Therefore, the endorsement of promissory notes can legally discharge the financial transactions contemplated by a gift and loan back arrangement.
Further assurance about the effectiveness of a validly created promissory note can be found from the Tax Office in relation to superannuation contributions and its ruling TR 2010/1.
This ruling lists a range of methods for the making of valid superannuation contributions, including cash, electronic funds transfer, money order, bank cheque, personal cheque, post dated personal cheques that are presented promptly and promissory notes.
In relation to promissory notes, the Tax Office confirms its view that the two key requirements (in a superannuation context) are that the payment demand is proximate to the issuing of the note and that the note is then honored.
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 Sugarcubes song 'Cold Sweat’.
For those interested, following recent posts, the High Court further explored the issues in relation to shams, rejecting the argument that ‘real money’ must change hands before a loan is said to exist in the case of Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55.
In reaching this conclusion the court confirmed that the critical aspect was that there was no evidence to suggest that the parties to arrangements were not intending for any outcome other that what was documented.
This was despite the fact that what was essentially a round robin of transfers was evidenced with documentation only.
The decision also see the High Court provide a succinct definition of a ‘sham’, as ‘steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences’.
As explored in other recent posts therefore, in relation to a gift and loan back arrangement, properly drafted and validly signed promissory notes, loan and mortgage documents should therefore be legally effective.
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 John Lennon song the surviving Beatles worked up during the Anthology project.
Geoffrey Edelsten has been involved in a number of litigation cases over the years.
Following on from last week’s post which considered the impact the rules concerning sham transactions have on gift and loan back arrangements, it is useful to revisit the decision in Max Christopher Donnelly As Trustee of the Bankrupt Estate of Geoffrey Walter Edelsten v Geoffrey Walter Edelsten and Ors [1994] FCA 992.
Essentially, the case focussed on whether property allegedly acquired by Edelsten during bankruptcy via a series of company structures should have been made available to Edelsten’s creditors.
During the bankruptcy period, these entities were said to be controlled by Edelsten in breach of the Corporations Act 2001 (Cth), before then being formally transferred to him once he was discharged.
Reiterating the key aspects of what amounts to a sham (as summarised in last week’s post), the court confirmed that in this case –
A transaction is not a sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it should not be deemed to be ‘undone’ merely because there was an ulterior purpose in doing it;
Here, the companies involved were real corporations in that they were properly incorporated and administered in accordance with the requirements of the law relating to corporations;
Therefore, the key question was whether the acquisition or creation of the businesses of the companies was a sham. In other words, was it in fact agreed and intended that the legal and beneficial ownership of those businesses should be and remain with Edelsten, not the companies;
In holding that the structure was valid, the court confirmed a key aspect of the case featured last week, namely, that a structure will not be automatically characterised as a sham because it was undertaken for the purpose of ensuring that any property acquired after bankruptcy did not fall into the hands of a trustee in bankruptcy.
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 'When you were mine’.
Previous posts have looked at various aspects of gift and loan back arrangements, including arguably the leading case in the area Atia v Nusbaum [2011] QSC044 (Atia).
Further case law support for the position outlined in Atia, is provided by the earlier decision Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530 (Sharrment).
In this case it was held that for a transaction to be considered a sham, the parties must intend that the acts or documents giving rise to the transaction ‘are not to create the legal rights and obligations which they give the appearance of creating’.
Essentially this means the courts examine ‘whether the act or document was never intended to be operative according to its tenor at all but rather was meant to cloak another and different transaction’.
In Sharrment, a series of complex transactions were implemented that were designed to place assets out of the reach of creditors, with the outcome being an at risk individual owed a debt to the trustee of a family trust.
The court held that the transactions did not constitute a sham arrangement. This was the case despite the following factual matrix:
The transactions were essentially circular and arguably lacked an objective commercial purpose;
There was a ‘round robin’ of cheques (as opposed to a physical transfer of funds) and not all parties had sufficient funds to make good on the payments anticipated by the cheques;
The loans created were interest free and repayable at call;
The at risk individual could essentially control any loan repayment requirements in his discretion, given he had ultimate control (via an appointor role) of the family trust that made the loans;
It seemed reasonable to assume there was ‘ulterior purpose’ of the arrangements of protecting the at risk individual’s wealth from creditors, which created an ‘unpleasant aura’;
If an ulterior purpose was present however it counterintuitively supported the validity of the arrangement, given the ulterior purpose would only be achieved if the transactions were intended to be valid and not a sham.
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 from their ‘Further/Deeper’ album and 'Miami’.
Last week's post explored the case of Callus v KB Investments - [2020] VCC 135.
The decision also provides a useful summary of the approach a court must take when considering the evidence from opposing litigants.
In summary it was stated:
Human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the process of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience (see: Watson v Foxman (1995) 49 NSWLR 315 at 319).
The best approach for a judge to adopt in the trial of a commercial case is to place little if any reliance on witnesses’ recollection of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts (see: Blue v Ashley (No 2) [2017] EWHC 1928).
Where there is conflicting evidence, the court will place ‘primary emphasis on the objective factual surrounding material and the inherent commercial probabilities’ together with documentation tendered in evidence' (see: Bullhead Pty Ltd v Brickmakers Place & Ors [2017] VSC 206).
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 Michael Hutchence/Ollie Olsen song 'Rooms for the Memory’.
Many previous posts have considered the overriding duty of trustees of trusts - and the fact that a trustee must exercise its discretion in good faith, upon real and genuine consideration and for a proper purpose.
Again with 30 June rapidly approaching, the decision in Callus v KB Investments - [2020] VCC 135 provides a useful example of the approach the courts will take in this area.
Relevantly the factual matrix involved:
A family trust set up by the parents of the family (on apparently standard terms);
Over time, all adult children benefited in various ways from the assets of the trust;
Some years after the trust was established, a new trustee company was appointed, with one of the adult sons the sole director of the company;
Around 3 years later the trust distributed one of the properties of the trust to the sole director in his personal name;
On discovering the transfer some years later, a sister brought proceedings to unwind the transaction and have the trustee replaced.
In letting the transfer stand, however also removing the trustee, the court confirmed:
While the trustee did not give any reasons for its decision to transfer the asset, it was not required to under the trust deed.
In any event, no record was provided of the decision – and even if there had been a document disclosing the reasons produced, the trust deed provided that the trustee was not bound to disclose any document setting out any reasons for any particular exercise of the trustee’s power.
The trustee was entitled to transfer the property to the son under the terms of the trust deed, which provided that the trustee may in its absolute discretion transfer any property ‘to any beneficiary for his own use and benefit in such manner as it shall think fit’ - with specific provision also confirming the trustee did not have any obligation ‘to consider competing claims of beneficiaries’.
The trustee also had no obligation to tell other potential beneficiaries of the trust of the transfer.
In contrast, due to the clear hostility between the son and one of his sisters (their relationship had deteriorated significantly following the transfer) the court was of the view that the trustee should be replaced, applying the rules explored in many previous posts centred on the test that 'the only guide is the welfare of the beneficiaries, and a trustee may be removed if the court is satisfied that its continuance in office would be detrimental to their interests'.
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 Human League song 'Love Action (I believe in love)'.
Previous posts have considered various aspects of a trustee's powers.
Given another 30 June is on the horizon, it is timely to remember that the scope of a trustee's powers is often limited when relying on the provisions of the state based legislation in the area - reinforcing the preference to have comprehensive powers set out under the trust deed wherever possible.
The decision in G v G (No. 2) - [2020] NSWSC 818 is a useful point of reference in this regard.
The case involved the powers of a trustee of a protected estate (where the underlying sole beneficiary had lost capacity to manage their own affairs). As there was no trust deed regulating the trust, the relevant trusts act applied.
The key question in contention was whether the trustee had the power to invest assets of the trust in a retail superannuation fund (as opposed to a self managed superannuation fund).
The reason for the proceedings being the view that a payment by a trustee (which it was argued that by analogy, included a protected estate manager) into a superannuation fund is not an 'investment' of trust property by the trustee.
This was said to be because, by the payment into the fund, the trustee divests itself of trust property, loses control of that property and puts the property beyond the protective control of the court, albeit that, as a member of the fund, but without a property interest in the fund, the beneficiary (not the trustee) obtains a right to future benefits.
Furthermore, the trustee had arranged a binding death benefit nomination in favour of the legal personal representative of the estate of the beneficiary.
The court confirmed:
The trustee had the power under the relevant legislation to invest, or to authorise a private manager to invest, a protected estate into membership of a Regulated Superannuation Fund (although perhaps not a self managed superannuation fund, without deciding that issue).
This was at least in part because a protected estate manager stands in the shoes of the protected person and is the substitute decision maker. A protected estate manager does not hold property for the benefit of the protected person. Rather the protected estate manager controls the property which always remains in the name of the protected person.
There was however no power under the legislation for the making of a binding, or indeed any other form of nomination, for the payment of a death benefit payable by the trustee of a superannuation fund.
This was despite the fact that the court acknowledged that the prevailing view in Australia is that a binding death benefit nomination is not a testamentary act either because it is merely the exercise of a contractual right or the rules of the fund pursuant to which the nomination is given to the trustee confer a discretion on the trustee as to the identity of the person, or persons, to whom the benefit is to be paid.
Rather it was held that the management of an estate terminates on the death of the protected person and therefore the manager's power to make a decision about what happens to the protected person's funds after their death cannot be valid.
Thus, here, the proper course of action in relation to the nomination was there to be a separate court application authorising the effective making of a gift out of the estate of a protected person, and (perhaps) also an application for a statutory will (another topic considered regularly in View posts).
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 Human League song 'Mirror Man'.
In the lead up to (another) 30 June, it is worth remembering that up until the early 2000s, there were a number of planning opportunities available in relation to maximising accessibility to pension payments.
Due to perceived abuses of the system, the government and Tax Office developed extremely comprehensive anti-avoidance provisions.
While some felt that the extent of the crack down was an over reaction, by and large, all of the historical strategies were permanently removed.
While there are some, comparatively minor, planning opportunities still available, none of these can be implemented within any narrow timeframes.
In other words, for example, there is the ability to gift assets to family members or structures such as trusts, however these transfers must take place many years before access to the pension is intended.
There are specialist advisers that continue to assist in the area.
Perhaps, counter intuitively, department and government advisers are however often the best starting point to get a full understanding of the rules as they apply in any particular set of circumstances.
** for the trainspotters, the title today is riffed from the Beck song ‘Broken Train’.
Previous posts have looked at various aspects of what a 'spouse' is, particularly for family law purposes.
Often, however a definition of a spouse under a discretionary trust deed is crafted in a way that is materially narrower than what might otherwise be the case for either family law or tax law purposes.
In particular, if a wide definition is adopted under a trust deed, it can potentially mean that even short term de facto spouses may have some rights as a beneficiary of the trust, particularly in relation to a trustee's obligation to provide an account to beneficiaries of their administration of trust assets.
Where a narrow definition under a trust deed is adopted, there would normally still be the ability for the trustee or appointor to nominate people who do not otherwise satisfy the definition of spouse under the deed, by way of a specific process 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, the title today is riffed from the Blues Brothers song ‘Groove me’.
Las week’s post looked at the original Ioppolo decision.
This post considers the subsequent appeal decision in Ioppolo & Hursford v Conti [2015] WASCA 45.
In broad terms, the appeal decision confirmed the original case, in particular:
It was confirmed that section 17A(3)(a) of the Superannuation (Industry) Supervision Act 1993 (SIS Act) does not obligate the trustee of an SMSF to appoint the legal personal representative of a member following that member’s death.
In other words, section 17A(3)(a) is a ‘permissive rather than mandatory' provision.
This meant that the surviving trustee was within their rights to appoint a corporate trustee (of which he was the sole director) and still comply with the SIS Act.
It was further confirmed that as the appointment took place within 6 months of the member’s death, then the fund was still complying for SIS Act purposes.
In also confirming that there was no lack of bona fides in the trustee’s decision, the court expressly commented that the subsequent signing by the deceased of a binding nomination (in favour of her husband) meant that it was reasonable to assume that the earlier made comments in her will (requesting that the death benefit pass to her children) had been superseded.
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 Pixies song ‘Hey’.
Previous posts have considered the key aspects of the Ioppolo decision.
One aspect of the decision, which is potentially very relevant for advisers and clients alike, relates to the plaintiff's argument that the trustee (being effectively the surviving husband) had not exercised his discretion in paying the entirety of his deceased wife's death benefit to himself in a 'bona fide' (or in good faith) manner, and therefore, should have been forced to repay the benefit to the fund.
In addressing this issue, the court specifically commented as follows:
The husband had sought specialist advice in relation to his rights and obligations as the trustee;
The husband deliberately waived his right to confidentiality (or privilege) in relation to this advice;
The court on reviewing the advice agreed with the conclusion given, that being that the husband was able to make the payment to himself;
Where a trustee is acting on advice of a specialist, it will be generally very difficult to successfully argue that the trustee lacked good faith in making a decision;
Even whereas here, there was a provision of the deceased’s will that contradicted the decision ultimately made by the husband, this of itself did not automatically mean that the husband was acting without good faith, particularly when there was no other evidence to support the allegation; and
Ultimately, a court will only review the way in which the discretion of a trustee is exercised in very limited circumstances.
Next week’s post will provide commentary on the outcome of an appeal of the original decision.
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 James song ‘Ring the bells’.
The case of Schweitzer & Schweitzer [2012] FamCA 445 considers the disclosure of documents claimed by one spouse to be in the possession, or under control, of the other.
The specific facts of this case were that the husband was a director of two corporate trustees, but not the sole director. In one corporate trustee, the husband's father was the other director. In the other corporate trustee, the husband's father and mother were the other directors.
While the husband was not a shareholder of either of the trustee companies, however he was a discretionary beneficiary of both trusts.
The appointor of both trusts was the husband's father.
The wife applied to the court asking that the husband disclose the financial statements, tax returns, bank statements and the minutes of meeting relating to trust distributions by the corporate trustees.
The wife’s request was rejected on the grounds that the husband had a fiduciary obligation in relation to the holding and use of trust and corporate trustee documents.
The court also held that the documents were not under the husband’s ‘control‘ for the purpose of the Family Court rules. The decision confirms that directors of corporate trustees have no right to 'possession' or 'control', but only to 'access' trust documents and that such access must be used strictly for the trust or company purposes.
The documents might have been accessible if the wife was able to join the corporate trustees as parties to the proceedings, although this was not necessarily something the court would approve; and even if they were joined, disclosure of the documents would still be subject to the court’s discretion.
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 Badfinger.
Many previous View posts can be filed under the heading ‘trust horror stories’ – and indeed every year we run seminars solely on this topic (with entirely new content each year).
Recently we were reminded of a Tax Office private ruling (being Authorisation Number 1012450031835) that was a horror story, at least with reference to the interplay between the property law regime and tax law.
Briefly the factual matrix was as follows:
A firm (presumably a law firm) prepared and supplied four copies of the trust deed to the settlor of the trust.
The settlor paid the settlement sum to the trustee and it was banked in the trust bank account.
The accountant involved provided the four unsigned copies of the trust deed to the trustee for signing.
The trustee executed all four copies of the deed and returned them to the settlor for signing.
The accountant held the trust deeds in safe keeping for a few years and then returned three copies of the trust deed to the trustee. On receipt, the trustee discovered that the settlor had not signed any of these three copies of the trust deed.
The sole signed copy was retained by the accountant and not returned to the trustee. However on that document, the settlor had signed in the witness space, and the signature was not witnessed.
A Deed of Confirmation was drafted to show that a trust was created and the parties intended to create the trust, however while the trustee and beneficiaries were willing to sign this document, the settlor refused.
The Tax Office confirmed:
The trust deed was invalid under the Property Law Act 1974 (Qld) due to the failure of the settlor to validly sign the document.
This said, the 4 key elements of a trust (being a trustee, trust property, beneficiaries and obligations on the trustee) were all present.
That is, as explained in Harmer v FCT (1989) 20 ATR 1461, a trust is the relationship which arises wherever a person called the trustee is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustee, but to the beneficiary or other object of the trust.
Unlike under the Property Law Act which requires trusts in relation to real property to be documented in writing, a formal trust deed is not a specific requirement under tax legislation, so long as there is a clear intention - which there was here.
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 song by Queens of the Stone Age and ‘Make it Wit Chu’.
Previous posts have explored various aspects of insurance funded buy sell arrangements
Based on adviser feedback, 5 of the most often asked questions during the planning process for implementing an insurance funded buy sell arrangement – with View’s short form answer – are set out below.
In no particular order, View generally asks for access to the following information before providing recommendations on the optimal way to structure the buy sell legal documentation:
the insurance policies for each principal – why: to ensure the agreements align with the ownership structure of the insurance;
copies of the most recent financial statements for each business entity (including any notes to the statements) – why: there is a material risk that loan accounts are not properly considered as part of the business succession arrangements. Certainly at a minimum, we would recommend that the legal documents specifically regulate how loans are to be treated on the various triggering events;
copies of the trust deeds for each of the trusts involved in the structure – why: many trusts do not permit the entering of buy sell arrangements (due to the rules against fettering of trustee discretion – concept explored in previous View posts);
the most recent ASIC statement (showing all shareholders and directors) for each business entity – why: to ensure the documentation is binding there should be an audit of the structure of shareholdings and directorships as against the records of the statutory authority; and
any existing legal agreements – why: if the existing documents are appropriate our preference is to leave them as is, as opposed to amending simply to ensure they align with View’s approach.
View’s initial review of the material provided is at no cost or obligation and is so that we can ensure we have a proper understanding of the circumstances before suggesting the best way to progress.
All information provided is only retained with authority and is otherwise treated in strict confidence.
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 Spandau Ballet song 'Only when you leave’.
