Tuesday, May 27, 2025

How soon is now ** (or ‘as soon as practicable’)?

View Legal blog – How soon is now  (or ‘as soon as practicable’) by Matthew Burgess

Last week’s post considered the phrase ‘as soon as practicable’ in light of the 2017 superannuation changes.

Regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) requires death benefits to be cashed ‘as soon as practicable’ following the death of a member.

Unfortunately, ‘as soon as practicable’ is not defined in the Regulations and has not been otherwise defined.

Generally in our experience the Tax Office has historically expected death benefits to be paid within 6 months of a person's death, or earlier if possible.

While perhaps not directly relevant, part of the reason for this approach is likely to be because under section 17A(4) of the Superannuation Industry (Supervision) Act 1993 (Cth), any replacement trustee (or replacement director of a corporate trustee) must resign within 6 months of the death benefits commencing to be paid. In other words, 6 months is legislated in a manner that is arguably analogous to the concept of ‘as soon as practicable’.

This said, if there are objectively reasonable circumstances preventing payment for more than 6 months, this is unlikely to cause a breach of the rules, so long as the payment occurs as soon as practicable once the relevant circumstances have been resolved.

Some examples of where a payment after 6 months may still meet the ‘as soon as practicable’ test include -
  1. It may be that probate of a member's estate is seen as required before paying a death benefit, and generally probate will take longer than 6 months;
  2. If there is a risk that an estate may be challenged or the potential recipients of a death benefit challenging the trustee's decision, confirming that the risk has passed will generally take longer than 6 months;
  3. Similarly, if there is an actual challenge to a deceased estate this may warrant delaying paying of a death benefit;
  4. If there is uncertainty about the validity of any purported binding death benefit nomination this may take longer than 6 months to resolve;
  5. The nature of the assets in a fund may make distributions within 6 months impossible, for example illiquid assets such as real estate or investments in platforms that have large penalties for early withdrawal;
  6. It may also be that the values of assets that are will form part of the cashing take an extended period to value;
  7. Surrounding circumstances, such as poor health of a surviving fund member may also justify a payment commencing later than 6 months.
Interestingly, the 2017 superannuation reform legislation permits a reversionary beneficiary 12 months to decide if they wish to cash their benefit before it is automatically credited to their transfer balance. This allowance may (again by analogy) support the argument that a death benefits payment within 12 months will meet the ‘as soon as practicable’ test, even without other explanatory reasons.

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

** for the trainspotters – check out iconic 1980s new wave band The Smiths perform ‘How soon is now?’.

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Tuesday, May 20, 2025

To cut a long story short** In conclusion - 1 related issue

View Legal blog – To cut a long story short In conclusion - 1 related issue by Matthew Burgess

Subject to the terms of the relevant trust deed, a change to the appointor or principal provisions should have no adverse revenue consequences. Any change should, even if not expressly required by the deed, be done with the consent of the incumbent appointor. This is because of the significant ultimate powers retained by the appointor.

This conclusion about the extent of an appointor's powers however does not mean that where an appointor or principal is declared bankrupt, their power of appointment is considered 'property' which vests in and can be exercised by the trustee in bankruptcy.

Historically, there has been some confusion around this issue, given that the property of a bankrupt under the Bankruptcy Act 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…".

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 (see Re Burton; ex parte Wily v Burton (1994) 126 ALR 557).

In that case, the argument of the trustee in bankruptcy centred on the fact that Mr Burton was the appointor and a discretionary beneficiary of a family trust. He could in theory therefore appoint himself (or an entity that he controlled) as trustee.

In rejecting the argument, it was held that the powers of an appointor are fiduciary powers that must be exercised accordingly, in the interest of the beneficiaries.

In other words, the powers of an appointor must be exercised solely in furtherance of the purpose for which they were conferred.

This means that the powers of an appointor do not amount to 'property' that passes to a trustee in bankruptcy.

The powers are also not something that can be exercised by the bankrupt for their own benefit.

By analogy, the power to remove an appointor is also considered to be a fiduciary power (see Ash v Ash [2016] VSC 577).

This means that equitable relief may be imposed upon a third party who knowingly receives some benefit from the fiduciary's wrongful conduct or is knowingly involved in that wrongful conduct (see Barnes v Addy (1874) LR 9 Ch App 244).

An attorney may be able to exercise the powers of an appointor, if this is anticipated by the trust deed or attorney document (and indeed, ideally, both documents in a complementary and considered manner).

An attorney may also be able to exercise an appointor's powers where there is informed consent. Such consent must however involve more than inference from an alleged plan of the principal, particularly where that plan is vaguely defined and based on inference itself. That is, there must be clear evidence of the salient details of the transactions affecting the principal's interests being provided to them before their incapacity (again see Ash v Ash [2016] VSC 577).

Like last week, the above post is again based on an article that we originally contributed to the Weekly Tax Bulletin.

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 Spandau Ballet song ‘Cut a long story short’.

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Tuesday, May 13, 2025

Changing an appointor - just like (starting over**) - or changing a trustee; simple! (in theory ...)

View Legal blog – Changing an appointor - just like (starting over) - or changing a trustee; simple! (in theory ...) by Matthew Burgess

A previous post explored the key revenue issues in relation to changing the trustee of a discretionary trust.

An equally important and related issue concerns a decision to change the principal or appointor role of a family trust. That is, the person, people, or company having the unilateral right to remove and appoint a trustee.

As regular readers of this blog will know, there does not necessarily need to be an appointor or principal provision under a trust deed. However, where there is one, a trust deed itself will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Where there are no provisions in relation to the succession of the appointor role, it is often necessary to try and rely on any power of variation under the deed to achieve an equivalent outcome.

Generally, from a trust law perspective, it is possible for the appointor provisions to be amended. However, any intended change must be permitted by the trust instrument, meaning the starting point must always be to 'read the deed' – a mantra regularly profiled in this blog. The decision in Mercanti v Mercanti [2016] WASCA 206 (this Court of Appeal judgment stands following the High Court's refusal to reject an appeal) being a leading example of the principle in the context of purported changes to appointorship.

The tax and stamp duty consequences of changing an appointor can be similarly complex.

Stamp duty costs on changing an appointor

In broad terms, the stamp duty consequences of changing an appointor provision can normally be managed in most Australian states.

This said, care always needs to be taken, particularly where the trust deed simply defines the appointor by reference to some other named beneficiary in the trust.

For example, it can often be the case that the appointor is defined as being the primary beneficiary of the trust and that primary beneficiary may also be a default beneficiary.

In these circumstances, depending on how the deed is crafted, there may be stamp duty consequences of implementing any change.

Tax Office views on changing an appointor

In relation to the tax consequences of changing an appointor, there are a number of private rulings published by the Tax Office which support the ability to change an appointor role, particularly if it is part of a standard family succession plan.

Arguably the 2 leading private rulings concerning the tax consequences of changing an appointor are Authorisation numbers 1011616699832 and 1011623239706. Broadly, these each confirm that there should be no tax resettlement on the change of an appointor where –
  • The relevant trust deed provides the appointor with the power to nominate new appointors and also allows for the resignation of an appointor;
  • The intended change complies with the trust deed (the "read the deed" mantra again highlighted);
  • The proposed amendment is otherwise analogous with the changing of a trustee and is thus essentially procedural in nature; and
  • The original intention of the settlor is not changed such that there will not be any change to the beneficiaries, the obligations of the trustee or the terms or nature of the trust.
Clark case

The conclusion that there should be no adverse tax consequences on changing an appointor is also supported by the decision in FCT v Clark [2011] FCAFC 5 ("Clark") and which has been profiled previously in this blog.

In particular, the Full Federal Court in Clark held that significant changes to a trust instrument would not of themselves cause a resettlement of the trust for tax purposes, so long as there is a continuum of property and membership, that can be identified at any time, even if different from time to time. That meant that, in Clark, although there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years, this did not trigger a resettlement for tax purposes.

Rather, it is only where a trust has been effectively deprived of all assets and then 're-endowed', that a resettlement will occur.

While the Tax Office released a Taxation Determination (namely TD 2012/21) following Clark, it unfortunately does not provide any specific commentary around when the Tax Office will deem changes to an appointor or principal of a trust to amount to a capital gains tax event under CGT events E1 and E2 (ie a resettlement).

Rather, in broad terms, the Tax Office simply states that unless variations cause a trust to terminate, then there will be no resettlement for tax purposes.

While a number of examples are provided, which give some guidance around issues such as changes of beneficiaries and updates to address distribution of trust income, the examples ignore issues such as changing appointors and multiple changes (for example, changing beneficiaries, the trustee and the appointor as part of an estate planning exercise).

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

The above post is based on an article that we originally contributed to the Weekly Tax Bulletin

** For the trainspotters, the title of today's post is riffed from the John Lennon song ‘Just like starting over’.

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Tuesday, May 6, 2025

One way or another** way to convert water into wine - trust to company rollovers

View Legal blog – One way or another way to convert water into wine - trust to company rollovers by Matthew Burgess

The vast majority of rollovers available under the Tax Act relate to transactions between companies.

There is however a series of transactions that effectively allows one form of structure to be converted into another.

Following last week’s post, I was reminded of one of the very few rollovers that allows the iteration from one legal structure to another. In particular, the tax rollover available for a discretionary trust that allows a trust to transfer all of its assets into a company, so long as the shares in the company are owned by that same discretionary trust. This form of rollover is available under Subdivision 122A of the 1997 Tax Act.

Obviously, there are stamp duty considerations in many states still that often need to be taken into account, however the rollover can be a very useful one in a wide range of circumstances to ensure no tax is triggered.

We have particularly seen it used proactively as part of a succession plan – it is often seen as easier to facilitate the transfer of shares in a company, as opposed to managing the control of a discretionary trust.

For those interested, our book ‘The Seven Foundations of Business Succession’ explores each of the key company and trust rollover concessions used in estate and succession planning.

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 Blondie song ‘One way or another’.

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