What’s Your Story?** … Tax Sharing & Funding Agreements

Though originally designed to primarily assist 'the big end of town', the tax consolidations regime is available to any Australian company and often can be very useful for small to medium size business operators.

One of the key consequences of forming a tax consolidated group is that all of the members of the group are jointly and severally liable for the tax liabilities of the group as a whole.

If however, each member of the group signs a valid tax sharing agreement (TSA), then it is possible for each member of the group to only be responsible for a 'reasonable' portion of the Group's tax liability.

A TSA is generally seen as a document that should be in place whenever a tax consolidated group is formed.

Generally, a TSA will also set out how any member of the group can make a 'clean exit', ensuring that it will not bear any future liability in relation to taxes that arise once the entity has left the group, even where they relate to a period where the entity was in fact a member.

Often, a TSA will be implemented in conjunction with a tax funding agreement (TFA).

Due to the way in which the tax consolidations regime is structured, the head entity of a consolidated group is the one that is ultimately liable for the tax of the group as a whole.

In order to ensure that the head company has the funds to meet the tax liability, a TFA can be utilised to regulate the manner in which that funding is to occur, particularly with reference to relevant accounting standards.

While most consolidated groups in the small to medium enterprise space will (or at least should) implement a TSA, often TFAs are only utilised by larger tax consolidated groups, given that they are more mechanical and technical in nature.

** For the trainspotters, ‘what’s your story’ is a line from the Red Hot Chili Peppers’ song from their 1986 album Stadium Arcadium, namely ‘Tell Me baby’ see hear (sic):

Surviving spouses attacking the estate of the first to die: Breaking it down (again)**

Last week's post considered the case of Sarant v Sarant [2020] NSWSC 1686.

The decision expressly also stated that in family provision applications (or testator family maintenance claims) the 'principles' or 'general principles' set down in previous decisions are not intended to be elevated into rules of law, propositions of universal application, or be viewed as a rigid formulae.

In other words, the jurisdiction of the court should not be unduly confined and the discretion should not be constrained, by statements of principle found in aspects of other decisions that are not at the core of the case, or by preconceptions and predispositions.

Ultimately then, decisions of the past do not, and cannot, put any fetters on the discretionary power of the court, which is left largely unfettered. That is, what is provided via previous cases is a guide and should not be used to turn a judge into a tyrant.

With the warning immediately above, the court did however make the following comments in relation to a claim by a spouse, particularly of a marriage of long duration, that it said were useful to remember:

1. A spouse, particularly of a long marriage, has a primary right to be considered by the deceased, but the extent that they should provide for the surviving spouse is to be governed by their needs, both at present, and in the foreseeable future and also the needs of any competing claimants.
2. The capacity of the surviving spouse to provide for those needs must also be considered.
3. The general duty of the deceased to the spouse, to the extent to which their assets permit them to do so, is to ensure that the spouse is secure in the matrimonial home, to ensure that they have an income sufficient to permit them to live in the style to which the spouse is accustomed, and to provide the spouse with a fund to enable them to meet any unforeseen contingencies.
4. Generally speaking, the amount should be sufficient to free the mind of the spouse from any reasonable fear of any insufficiency as they grow older and their health and strength fail (see Permanent Trustee Co Ltd v Fraser (1995) 36 NSWLR 24 and Elliott v Elliott (Court of Appeal (NSW), 24 April 1986, unrep).
5. Concern as to the capacity of the spouse to maintain themselves independently, and autonomously, may also bear upon the notion of what is proper provision (see Richard v AXA Trustees Ltd [2000] VSC 341).
6. Where, after competing factors have been taken into account, it is possible to do so, a spouse ought to be put in a position where they are the master, or mistress, of their own life, and in which, for the remainder of their life, they are not beholden to beneficiaries (see Langtry v Campbell (Supreme Court (NSW), Powell J, 7 March 1991, unrep).
7. Greater weight may be given to the claims of parties who have entered 'a formal and binding commitment to mutual support' (see Marshall v Carruthers; Marshall v Marshall [2002] NSWCA 47, In the Matter of the will of G.G. Sitch (deceased) [2005] VSC 308 and Sellers v Scrivenger [2010] VSC 320).

Thus, in Steinmetz v Shannon [2019] NSWCA 114 the second wife of the willmaker (who had spent the majority of their adult life together) was awarded by the court a legacy of $1.75M, out of an estate of $6.8M otherwise left to the adult children of the willmaker from an earlier relationship. This provision replaced the gift under the will of an indexed annual annuity of $52,000 for the remainder of the surviving wife's lifetime.

The court specifically confirmed:

1. A key issue is how freedom of testamentary disposition is to be factored into an assessment of whether the provision made by a willmaker is adequate for the proper maintenance, education or advancement in life of a claimant.
2. The determination of the adequacy of the provision of a claimant is a matter for the court and it is to be determined as at the time the court is considering the application, rather than as at the time the willmaker made the will - this point alone may provide a reason for interference.
3. The rules the court apply should not be confined by notions of 'reluctance to interfere with freedom' of willmaking (see Slack v Rogan [2013] NSWSC 522).
4. In applying the rules, a court may consider what the outcome would have been under a matrimonial property adjustment under the Family Law Act. This is because, although the regimes are not identical, there is a substantial overlap.
5. Furthermore, there is neither social sense nor legal logic in parallel regimes that would have the consequence that a surviving spouse of a relationship which endures is left worse off than would have been the case had there been a separation immediately before death. That is, it should be assumed that the community expects a willmaker to provide for their spouse financially in a manner that is no less than the entitlement that would have arisen on a matrimonial property adjustment.

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

** for the trainspotters, the title today is riffed from the Tears for Fears tune ‘Break it down again’.

View here:

Spouses challenging each other's wills: Everything she (or he) wants**

Last week's post considered the right of a current surviving spouse to challenge a deceased estate (often referred to as family provision or testator family maintenance applications) on the first of the couple to die.

The case of Sarant v Sarant [2020] NSWSC 1686, provides an instructive iteration on this theme in a situation where the couple had been separated, living in the same house, for 4 years before the wife's death.

Other key aspects of the factual matrix included:

1. The main asset of the estate was a 50% share of the house the couple lived in, which was owned as tenants in common at the date of death, due to a unilateral severance of the joint tenancy by the wife prior to death.
2. The marriage between the couple was 44 years in length before their separation.
3. The couple did not divorce and there may have been some level of reconciliation close to the time of the wife's death.
4. The wife's will gave her estate to the 2 daughter's of the marriage, who the husband was estranged from.

In a very detailed judgment the husband was awarded the wife's 50% interest in the house, adjusted by the need for him to make a payment to the estate and also provide a charge over the property to his daughters entitling them to 30% of the sale price on ultimate disposal.

The court also confirmed:

1. The court expects legal representatives to give real consideration to the merits of the other party’s case and provide reasoned submissions on what is, or what is not, “adequate and proper provision in all the circumstances of the case” when asked.
2. The duty to the court of a legal representative requires them, where necessary, to restrain the unreasonable enthusiasms of the party represented, which, ultimately, is in the party’s best interest and is more likely to ensure that a just result is reached sooner and with less expense (see Thomas v SMP (International) Pty Ltd [2010] NSWSC 822).
3. The impact of unfulfilled promises or disappointed expectations may sometimes be relevant when a family provision claim reaches the stage that the moral duty of the deceased is under consideration (see Re Stojanovska; Stojevski v Stojevski [2020] VSC 702).
4. As a rule, when arrangements are made between close relations, for example, between husband and wife, there is a presumption against an intention of creating any legal relationship. This is not a presumption of law, but of fact. It derives from family members generally intending to rely solely on family ties of mutual trust and affection. There may, however, be circumstances in which the presumption, like all other presumptions of fact, can be rebutted (see Jones v Padavatton [1968] EWCA Civ 4 and Balfour v Balfour [1919] 2 KB 571).
5. The inadequacy of provision is assessed at the time when the court is considering the application, however, considerable weight should be given to the assessment of a capable willmaker, who has given due consideration to the claims on their estate (see Sgro v Thompson [2017] NSWCA 326).
6. The court’s discretion in making an order is not untrammelled, or to be exercised according to idiosyncratic notions of what is thought to be fair, or in such a way as to transgress, unnecessarily, upon the deceased’s freedom of will making (see Pontifical Society for the Propagation of the Faith v Scales and McKenzie v Topp [2004] VSC 90).
7. The bond of matrimony gives rise to a testamentary obligation, which can not be assumed comes to an end on the parties separating without them being divorced, at least where there has been no conduct by the applicant disentitling provision (see Kalmar v Kalmar [2006] NSWSC 437).
8. Where a spouse is elderly, generally they should not be given a large capital sum, because this may result in a substantial benefit passing to their chosen beneficiaries, which is contrary to the wishes of the deceased (see White v Barron [1980] HCA 14), although the fact that the provision of a capital asset to the spouse may, incidentally, enable them, in due course, to pass that asset contrary to the deceased’s wishes, is not determinative of the propriety of such a provision (see Worladge v Doddridge (1957) 97 CLR 1).

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 Wham! song 'Everything she wants'

View here:

Spouses challenging each other's estates (that is, when the music's over**)

Previous View posts have considered various aspects of the right for someone to challenge a deceased estate (often referred to as family provision or testator family maintenance applications).

Another important aspect of the issues in this regard is the ability of a (then current) life spouse to challenge an estate of the first of the couple to die.

In relatively modern times, the decision in Luciano v Rosenblum (1985) 2 NSWLR 65 was often quoted as summarising the position of the surviving spouse as follows:

'… as a broad general rule, and in the absence of special circumstances, the duty of a willmaker to his widow is, to the extent to which his assets permit him to do so, to ensure that she is secure in her home, to ensure that she has an income sufficient to permit her to live in the style to which she is accustomed, and to provide her with a fund to enable her to meet any unforeseen contingencies'.

The later decision of Neale v Neale [2015] NSWCA 206 also confirmed generally the correctness of the above approach. However, in the context of a dispute between a second spouse and children of the first relationship of the willmaker, the court also confirmed that the 'rule' should be considered with the following qualifications:

1. The Luciano case involved only some of the estate passing to the spouse, whereas here the entire estate was in fact left to the second wife, and it was the adult children of the first relationship seeking further provision.
2. It is unhelpful, and sometimes misleading, to adopt the value laden language of a different age and culture (in this context, 1985 is a long time ago; as too the challenge mentioned by the court by 'deserving widows' as perceived by 'middle class morality' presented by Eliza Doolittle’s father in Bernard Shaw’s Pygmalion).
3. To describe a party as a 'deserving widow' is to express a conclusion which will reflect fact-specific findings; it is not to state a freestanding criterion.
4. Any references to the Luciano case confirming 'a broad general rule', qualified only by 'the absence of special circumstances', that cause the assumption of an independent standard, are inconsistent with the exercise of discretion required of the court by the legislation in this area.
5. Any such general rule would involve a conclusion reflecting only part of the statutory exercise imposed on the courts in this area.
6. That is, the court must consider a widow’s circumstances balanced against the circumstances, needs and moral claims of the claimants and other beneficiaries.
7. Ultimately then, to treat the Luciano case as establishing a legal principle, or a standard, runs the risk of deflecting the court from the full exercise of its functions.

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

** for the trainspotters, the title today is riffed from a song by the Doors being ‘When the Music's Over'.

View here:

Legal Professional Privilege** in adviser facilitated estate planning

A question came up recently from a financial planning licensee about whether an adviser attending an estate planning meeting between a client and their lawyer inadvertently waives the client’s legal professional privilege over those estate planning discussions.

As mentioned in last week’s post, legal professional privilege protects communications between a client and their lawyer from third parties, if the communications are brought into existence for the dominant purpose of obtaining legal advice. However, legal professional privilege over communications between a lawyer and a client can be waived if the information is disclosed to a third party.

Broadly we confirmed that we do not believe legal professional privilege is particularly relevant in the context of most estate planning discussions with clients. In particular, the advice generally provided to the client in a meeting is unlikely to be of the nature that legal professional privilege would need to be claimed. Furthermore, the legal documents (i.e. the final wills and powers of attorney) themselves are not generally privileged.

Indeed, in an adviser facilitated estate planning scenario, the client will have, in most cases, already disclosed most (if not all) of the information that will be discussed in the online meeting to the adviser as part of the initial fact finding process before the lawyer commences the legal aspects of the estate planning exercise.

We therefore believe that the risk of any implied waiver of legal professional privilege by having a client’s adviser sitting through the online meeting with the client is low and it would be an unnecessary step looking to avoid having the adviser attend the online meeting.

As most readers will be aware, our strong preference is to have the adviser attend the meeting as, generally speaking, their insights about the appropriateness of the estate planning strategy for the client’s family and financial circumstances is highly valuable.

** For the trainspotters, last week I mentioned that ‘privilege on privilege’ is a line from one of my favourite privilege related songs, from the Church and their 1986 album Heyday, namely ‘Myrrh’. Based on further research, this song is not simply one of my favourite privilege related songs, it is the only decent song I can find, thus listen again hear (sic):