Refinancing rules: ensure you & your client feel good**

One issue that arises regularly in relation to the taxation of trusts is the incurring of interest expenses by a trustee for external borrowings used to discharge an obligation to pay a monetary distribution to a beneficiary such as a credit loan or unpaid present entitlement (UPE).

The Tax Office has confirmed that the interest expense incurred in this style of situation will not be automatically deductible, even if the borrowed funds allows the trust to retain income producing assets.

Instead, in order for the interest to be deductible, the borrowings must be shown to be ‘sufficiently connected’ with the assessable income earning activity.

The leading case in this area is that of FC of T v. JD Roberts & Smith 92 ATC 4380 (Roberts & Smith). The principles in that decision were further expanded on in the Tax Office Ruling TR 2005/12.

Based on the principles outlined in the Ruling and Roberts & Smith, it is clear that whenever a trust is refinancing any existing loans or UPEs care should be taken to ensure there is the requisite connection to income producing activities; as opposed to, for example, making distributions to beneficiaries.

The key criteria is whether it can be shown that the objective purpose of the trustee in borrowing the funds is to refinance the outstanding amount, however the Tax Office’s position is that each situation will depend on the particular facts of the case.

As usual, please make contact 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 Gorillaz song ‘Feel Good Inc’.

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You got the power** to make superannuation an estate asset?

The decision in Stock (as Executor of the Will of Mandie, Deceased) v N.M. Superannuation Proprietary Limited [2015] FCA 612 is another reminder of the fact that superannuation death benefits are not an estate asset.

Broadly the background was as follows:

1. The member died without making any binding nomination for his superannuation benefits, although binding nominations were permissible.
2. The member had made a non-binding nomination to his wife, however she predeceased him.
3. The trust deed for the fund provided that if there was no binding nomination the trustee retained the discretion to pay a death benefit to the member’s -
1. dependants; or
2. legal personal representative (LPR).
4. The trustee of the super fund resolved to pay the death benefit to the member’s dependants, namely 3 adult children, in equal shares.
5. The LPR challenged the distribution on the basis of comments in the member’s will, including the fact that two of the adult children had entered into a settlement agreement with their father 20 years earlier confirming they would have no entitlement under his estate.
6. Under the member’s will, his estate made provision for grandchildren and the child who was not a party to the settlement the other two children had entered into.

In rejecting the LPR’s challenge it was confirmed that superannuation is not an asset of an estate and a trustee is not bound to follow the directions of a will.

In particular, even if superannuation is specifically mentioned in a will, this does not make it an asset subject to the terms of the will. While a trustee may review a deceased member’s will, it is not the role of a super fund trustee to attempt to resolve issues relating to their estate.

Rather, a trustee must independently determine the distribution of a death benefit, unless there is a valid binding death benefit nomination.

It was also confirmed that in making a determination, a super fund trustee need only show that their decision is fair and reasonable. Any court review of a trustee decision therefore did not need to analyse the trustee’s processes or reasoning.

As usual, please make contact 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 Gorillaz song ‘We got the power’.

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This is the one** important case on language you need to know this week (the 'income and profits' decision)

Following on from last week’s post, another case that applied some aspects of the reasoning in the decision profiled last week is Wilson & Anor v Chapman & Anor [2012] QSC 395.

Broadly the background was as follows:

1. Under the terms of a will, a beneficiary who was essentially a life tenant of a trust under the will was entitled to the ‘income and profits’ of the assets of the trust;
2. On the basis that the use of the word ‘profits’ must have meant the willmaker wanted the beneficiary to receive more than simply income, the court considered whether both realised and unrealised capital gains fell within the concept;
3. Acknowledging that for tax purposes a realised capital gain is effectively treated as income, the court also held that at least under the terms of the trust in this will, ‘profits’ included the net income and the net realised capital gains, but not unrealised capital gains.

Practically, a key reason why ‘profits’ did not include unrealised capital gains was the fact that it would be impossible to determine at what points to make the calculation and the trustee had no ability to distribute the unrealised gains under the trust instrument. Similarly there was nothing that would allow the trustee to factor in unrealised losses.

Weight was also put on the fact that the will was drafted by a lawyer so the inclusion of the word ‘profits’ must have been due to the willmaker’s intention to provide something more than only income to the life tenant.

More generally the case is a reminder of the need to ensure care is taken in drafting any will, particularly in relation to the interplay between tax and trust law principles.

As usual, please make contact 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 Stone Roses song ‘This is the one’.

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