(out of) ‘Control’** of family trusts

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’.

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Oral contracts: don’t prove me wrong, they are not worth the paper they are written on**

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:

1. offer and acceptance;
2. all key terms agreed;
3. the intention of the parties to be bound; and
4. 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’.

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Does a scribble** amount to the acknowledgment of a debt?

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’.

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Statute of limitations** and division 7A

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’.

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A great leap forward?** Attorneys acting as director

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 -

1. a company may grant an individual a power of attorney to act on behalf of the company;
2. the company may appoint an alternative director; or
3. 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'.

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