Super deed variations and resettlements

Confused about super deed variations?

Last week we had an adviser, probably quite rightly, question us as to why a superannuation trust deed could be totally revoked and replaced with a completely new document, while changes to a family trust deed tend to be extremely piecemeal.

The issue can be largely answered by reference to the Tax Office’s approach to resettlements.

Broadly, the Tax Office accepts that in relation to superannuation funds, a resettlement for tax purposes will never occur. Due to this approach (and stamp duty exemptions that apply in essentially every Australian state), most advisers recommend that when updating a superannuation trust deed, it is best to adopt a completely new deed.

In contrast, where updating a family trust deed, because of the risks associated from a resettlement perspective, it is usually best to only amend the provisions that are in particular need of being addressed.

Until next week.

Image Credit: sidibousaid cc

Wholesale deed updates post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 4th and final one in this series of posts via the following video link under the heading ‘Wholesale deed updates post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

The third idea is the ‘wholesale update’ approach.

The providers around are saying for $x you can go and get all of your deeds across the board 2012 compliant, really adopting the same approach that you do with an SMSF trust deed. People accept that with an SMSF, you're going to have to update it every 5 years probably. That’s just the life that you lead running an SMSF.

We would argue that people have never really had that attitude with family trusts. Whether that’s right or wrong is another question. But by and large, people have not really had that wholesale approach. We'll speak about Clark and why that may be the case from a resettlement perspective.

What we're saying with the third option is that you just go and do the update for all clients. Are you running the risk that you'll have to go and do that again in 3 or 4 years’ time? Absolutely you are. But in the meantime, are you investing in your clients by saying you will read the deed once, make sure that every deed across the entire client base has the exact same provisions, can start getting some efficiencies in terms of resolutions, in terms of the review process.

It may be a little bit of pain upfront, however hopefully, any subsequent changes won't be too prohibitive anyway and many are saying may be this is the way to go.

Until next week.

Deed updates by exception post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 3rd instalment of 4 in this series of posts via the following video link under the heading ‘Deed updates by exception post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

The second approach is ‘by exception’, that is you do something. So on the basis that even if you do nothing, you've got to do something; which is you've got to have someone read the deed.

The by exception approach is if it's a particularly nasty deed, or there is as particularly big capital gain this year we’re going to invest in this and we're going to look at it and we're possibly going to amend it, because of the particular circumstances.

We're going to do that, because even doing nothing, we've actually sat down and looked at the document and we understand it.

The trigger for a lot of people on that, if you're looking for a date, but don’t quote me because again not all deed providers were diligent in doing this, but by and large, any deed after 1993, from any even remotely reputable provider, will have streaming.

So if you're looking for a date to say I would hope to be basically right, you can use 1993 as the date, because that’s when streaming ruling came out or whatever it was and most deed providers across the board went through and did it. Indeed, a lot of them went and did actual updates in 1993. So even your pre-’85 trusts had gone and had that amendment in 1993.

The next post will look at the third main approach we are seeing in this area.

Until next week.

The “do nothing” approach to deed updates

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 2nd in a series of 4 posts via the following video link under the heading ‘The “do nothing” approach to deed updates’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

There are obvious advantages to ‘doing nothing’.

From a cost perspective for a client, you would intuitively think that’s probably the best outcome for them. Our only asterisk that we would put next to that is it does put enormous amount of pressure back on your practice and your team if someone needs to be sitting down and reading the deed.

Even if you've had the same provider for many years, you can almost guarantee that they will have changed their document, and they won't necessarily be able to tell you at what point at time they changed it.

Even if they could tell you, it probably doesn't absolve you under your insurance policy to say that everyone before a point in time will have this style of deed. Someone has to sit down and look at that. Which then means, according to the Tax Office, you can't just be churning out standard resolutions. You've actually got to have a tailored resolution that fits the particular deed and the particular income profile for the particular year.

So yes, the do nothing is attractive on a number of levels, but you need to be aware that it does add compliance costs.

You will see there's a common theme to all of these 3 choices.

Ultimately, our positioning is ‘don’t shoot the messenger’. This is something that has been imposed on us from Canberra. It means the cost of running a trust is more. So first one is to do nothing.

The next post will look at the second main approach we are seeing in this area.

Until next week.

What are the options in relation to deed updates post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the first in a series of 4 posts via the following video link under the heading ‘What are the options in relation to deed updates post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below - 

What it actually means in terms of the trust variations, we think it's one of the following three things. 

The first one, we're probably guess that most of the people we work with adopt this path, is to ‘do nothing at all’. 

Is that still the right thing to do?  The honest answer is we don’t know. 

What we do know is even within the last 6 weeks, this complete review of trusts, that has been threatened forever, has already been pushed out for another year.  So the earliest that we're going to have a new taxation regime for trusts is 2014. 

You wouldn't want to take too heavy a bet for whether that's going to be pushed back again.  I suspect there's every chance you're going to have an election before the next time around and you may well have a change of government. 

So there's a whole range of things that are going to potentially happen between now and 2014 that will push that out. 

The first one is to just do nothing.

The next post will look at this approach in more detail.

Until next week.

Prohibitions on trust deed variations

As mentioned last week, we often find trust deeds have prohibitions on a trustee’s ability to vary the document.

Some of the issues to be aware of in this regard include:

1    Often variations can only be made with the consent of someone other than the trustee, for example an appointor, guardian or even the settlor.

2    In some cases, variations can only be made to the core (or trust) provisions of the deed, as opposed to the more general powers, which will usually limit the ability to vary the income provisions.

3    Alternatively, while powers can be added to a trust, a deed will sometimes provide that any existing powers cannot be varied – this can be particularly problematic where there is a desire to update the income distribution provisions.

4    There are countless other examples of restrictions on variations and indeed, we have come across deeds where there is a blanket prohibition on making variations to the deed, or at least on variations to particular clauses in the deed.

While there are often workarounds no matter what restriction is imposed, the fundamental rule to remember is that each and every deed must be read before embarking on a variation.

Until next week.

ATO reminder – read the deed

Following on from the recent posts about the ATO draft determination on resettlements (TD2012/D4), today's post is in effect a further reminder of an earlier post that focused on the catch phrase 'Read the Deed', again with thanks to co View Legal director Tara Lucke.

One of the key themes in the recent ATO determination is that a trust variation must be made within the scope of the variation power in the trust deed.

If a purported variation is made outside the scope of the particular variation power, the ATO has provided guidance that this may result in the termination of a trust (i.e. a resettlement for CGT purposes).

We are constantly encountering deeds that have significant limitations on the variation power, particularly with the regular amendments we are doing for clients of accounting firms to ensure that trust deeds are up-to-date for all recent changes in law.

Next week’s post will focus on some of the common variation prohibitions we come across.

Until next week.

More comments on ATO resettlements determination

As mentioned in the last post, the ATO has released a draft determination, TD2012/D4, in relation to resettlements.

With particular thanks to View Legal director Tara Lucke, today’s post focuses on the interplay of the draft determination with the ATO’s previous published position on resettlements – the Statement of Principles.

In summary, according to the determination:

1.        The ATO has withdrawn its Statement of Principles as of April 2012.

2.        The ATO accepts that although the Clark and Commercial Nominee cases were decided in perhaps slightly different contexts to many of the issues dealt with in the Statement of Principles, the conclusions reached in each of those two cases do have a broader application.

3.        Provided an amendment to a trust is valid at trust law and is in accordance with the terms of the trust instrument, CGT event E1 should not be triggered.

4.       The ATO will expect any deed of variation to be made in accordance with trust law principles and the particular requirements of the trust instrument in order for the amendment to be effective.

Until next week.

ATO releases draft determination on trust resettlements

Posts from last year looked at the Clark decision.  In that case, the court held that significant changes to a trust instrument would not of themselves cause a resettlement of the trust for tax purposes.

As mentioned in last week’s post, the Tax Office has now released draft determination TD2012/D4 which provides some further clarity around when the Tax Office will deem changes to a trust to amount to a capital gains tax event under CGT events E1 and E2 (i.e. a resettlement).

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

A number of examples are provided, which give some guidance around issues such as changes of beneficiaries and update to address distribution of trust income.

Unfortunately, the examples provided are not particularly comprehensive and issues such as changing appointors and multiple changes (for example, changing beneficiaries, the trustee and the appointor as part of an estate planning exercise) are not specifically addressed.

This said, the draft determination should provide a level of confidence that relatively significant changes to trust instruments can be made without adverse tax consequences, although it remains necessary to also consider the separate stamp duty and trust law implications of any such change.

A full copy of the draft determination is at the following link – http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2012D4%2FNAT%2FATO%2F00001%22

Until next week.

Discretionary trust deeds health check

Over time, View Legal has developed a 'trust review checklist' that outlines some of the key issues which should be considered as part of a general ‘health check’ of a discretionary trust deed to ensure it aligns with the constantly evolving legal requirements regarding trusts and tax implications.

An adviser after reading the document made contact in relation to the potential outcomes in the event a trustee fails to make a resolution. 

We confirmed that there are the two main potential outcomes; namely that the trustee is taxed or the default beneficiaries are taxed.  Which of the two outcomes applies will depend on how the trust deed is crafted.

In this regard, the leading case in this area is Ramsden. 

The deed in Ramsden provided that a purported default distribution did not actually operate on its face and therefore the trustee was taxed at the top marginal rate.  This can be a particularly poor outcome where there are capital gains given there is no entitlement to the 50% discount.

Conversely, we have seen many situations where the default provisions apply such that all distributions are made to a corporate beneficiary.  To the extent that there are capital gains that would otherwise be entitled to the 50% discount, this outcome will trigger adverse (and unnecessary) tax costs.

One other issue to be aware of, which again reinforces the importance of reading a deed, is that the actual timing of the resolution must be in accordance with the deed, even if legislation or Tax Office practice otherwise permits a later date.

For those interested to review the abovementioned summary, go to the 'core services' section of the View Legal website (viewlegal.com.au)

The next post will look at the Tax Office Determination released last week on trust variations.

Statement of principles to be (finally) amended (?)

Many readers will be aware of the full Federal Court decision earlier this year of Clark.

In that case, the Court largely reiterated the decision from 10 years ago in Commercial Nominees that, generally speaking, a resettlement of a trust for tax purposes can only happen in a very limited range of circumstances.

At the end of last week, the Tax Office released a decision impact statement in relation to the Clark decision and has, finally, accepted that the position set out in the case may mean that the 'Creation of a New Trust – Statement of Principles' last updated in August 2001, may need to be changed.

A previous post links the Statement of Principles for those that have not seen it, and in that document, the Tax Office suggests that there are in fact quite a large range of situations where a trust may be resettled for tax purposes.

It is hoped that the Tax Office can prioritise providing some clarity around their position on trust resettlements, particularly given that most specialist advisers in this area believe that, in accordance with Commercial Nominees and Clark, significant changes should be able to be made to trust deeds without triggering a resettlement.

For those interested in reviewing the complete decision impact statement, the relevant link is as follows – http://law.ato.gov.au/atolaw/view.htm?docid=%22LIT%2FICD%2FQUD1of2010%2F00001%22

Until next week.

Small i Income

A number of posts over the last 18 months have touched on various aspects of the Bamford decision.

One issue that comes up more frequently than otherwise might be assumed is the way in which the word 'income' is used throughout a trust deed.

At times we have seen in deeds a definition of ‘Income’ and the word defined is mentioned in the definition section in a capitalised sense – that is the word income will start with a capital I.

When reference is then had however to the distribution of income provisions, the deed drafter has not in fact used the 'big I' income definition, but rather has simply referred to 'small i' income. This will generally mean that the defined term will not apply and ‘income’ (for the purposes of the relevant clause) will simply have its ordinary meaning.

Obviously, there are a number of potentially complex trust and tax law interpretation issues that can arise in this regard. This said, it is arguably going to be quite clear what position the Tax Office will take to the extent a trustee has misunderstood the trust deed, particularly given the recently released trust distribution legislation.

Until next week.

Bamford driven review of Tax Act

While I had flagged there would be no further post this year, the Government has made a mid December announcement yesterday worth noting.

As you will read elsewhere, it has been confirmed that there will be a full review of the way in which trusts are taxed.

Relevant extracts of Bill Shorten's announcement are set out below.

While there is obviously a long way to go, it is reassuring that the rumoured revisiting of the entity taxation regime has been expressly ruled out.
1. There are major uncertainties after Bamford, especially about the extent to which amounts derived by trustees retain their character (for example, as capital gains or franked dividends) when they flow through to beneficiaries.
2. A public consultation process (has been announced) as the first step towards updating the trust income tax provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and rewriting them into the 1997 Act.
3. "In developing an initial consultation paper for release in the first part of 2011, Treasury will draw heavily on the expertise of the private sector, particularly through the established Tax Design Panel process and the Board of Taxation," said the Assistant Treasurer
4. "The options to be canvassed in public consultation will be developed within the broad policy framework currently applying to the taxation of trust income".
5. Any options will seek to ensure that net taxable income of a trust is assessed primarily to beneficiaries. Trustees will continue to be assessed only to the extent that amounts of net taxable income are not otherwise assessable to beneficiaries. The options will not include the taxation of trusts as companies, which would be a major departure from the current law.
6. “Based on advice I have sought from the Board of Taxation, I will also consider further whether there are any issues that must be addressed in this current tax year".
7. "Trust tax law has been an ongoing issue for some time and it is important to simplify the system, rewrite the rules and give more certainty to the many thousands of small businesses and farmers who use trusts. I encourage all interested stakeholders to make a submission to the consultation".

When is a trust not a trust

One adviser contacted me after the post a couple of weeks ago about powers of variation and sent a trust deed for a brief initial review to our office.

For probably the 5th or 6th time in recent years, we discovered a situation where the trust itself had in fact already ended.

In other words, the vesting day for the trust had passed and, unfortunately, neither the client nor the adviser had realised that this event had taken place.

Practically the question as to whether the power to vary was wide enough, was easy to answer – it was irrelevant as there was in fact no longer a trust.

The more problematic issues however revolved around how exactly the income and capital of the trust should have been dealt with over the last 3 years since the trust had ended and what issues need to be addressed under -

1. trust law;

2. trustee liability;

3. tax legislation; and

4. stamp duty law.

Until next week.

When a power to vary is not a power to vary

Last week, we touched on the fact that many trust deeds do not have any power to vary in them.

There are similarly many trusts that do have a power to vary, but that power to vary is not as comprehensive as may otherwise be assumed.

Two recent examples that we have seen are summarised below.

The first example (which was highlighted in quite a high profile case last year) turns on whether a power to vary extends to all aspects of the trust instrument. In particular, some powers to vary are restricted to either:

1. The formal provisions that actually establish the terms of the trust.

2. Alternatively, the power to vary might be restricted to the actual powers that the trustee has to run the trust.

Care should always therefore be taken to understand exactly how comprehensive the power to vary is.

Similarly, some powers to vary are subject to specific prohibitions. For example, a power might extend to all parts of a trust other than the rules regulating the appointor provision.

In these types of situations, it is generally impossible (unless court approval is obtained to vary the relevant clause), even if the affected party (for example the appointor) were to consent to the variation.

Ultimately (and generally in complete contrast to superannuation trust deed variations), there is always the need to very carefully review the exact basis on which any purported variation to a family trust is to be implemented before making a change.

Until next week.

Trust deed updates - Start at the start

Due to the recent decision in Bamford, we have seen a significant increase in the number of advisers recommending to their clients that a complete review of, particularly family trusts, be done for each client.

As part of this review process, there is often a subsequent recommendation that the trust deed needs to be updated for all recent changes in the law, or at the least to make the deed 'Bamford compliant'.

Previous posts have touched on some of the issues that arise in this regard. This week, I was reminded, however, about the importance of getting the basics right in relation to any deed update.

Arguably the most fundamental issue that needs to be considered in any deed update is whether there is in fact a power to vary the document.

There are an amazing number of trust deeds that, for whatever reason, in fact do not have any power to vary under them at all.

In these situations, the only way to amend the trust deed is to apply to court – which is obviously an expensive and time consuming exercise. In some situations however, it is a step that commercially must in fact be taken.

Next week, I will try to detail two further issues that arise in relation to deed updates that should also be kept in mind.

Finally, thank you for all those who have provided feedback on last week's post about the ATO ruling on insurance trusts. I have emailed all those who have emailed me about the posting, however if there is anyone who would like further comments please let me know.

Until next week.

Further trust deed tips

A few weeks ago (see the posting 'Trust deed tip'), I mentioned the trust where a number of variations had been implemented over the years, but those variations did not comply with the rules set out under the trust instrument.

The short term fix (in order to satisfy financier requirements) was to implement a deed of confirmation of the historical changes.

To try and minimise future difficulties, we are also implementing the following:

1. With the settlor’s consent (given that he is still alive and has capacity to do so), we are removing the requirement for him to consent to any future changes. This step has some potential tax and stamp duty consequences, however on balance, the client’s accountant has agreed with us that it is the most logical next step.

2. We are also clarifying the requirements around the consent of primary beneficiaries. For this particular situation, all primary beneficiaries are currently over the age of 18 and alive, however the client did not want a situation in the future where there were infant beneficiaries (or beneficiaries that were no longer alive) given third parties might seek to challenge whether a future purported variation was in fact effective without the consent of those people.
Until next week.

Matthew Burgess

Trust deed tip

Again this last week, we have had some more issues arise in relation to family trusts.

As is often the case, the issue from this week was identified by a financier.

The issue arose due to a review of some historical variation deeds to the original trust documents.

Due to a relatively unusual provision, the original trust required that any variation could only be made with the consent of the settlor (i.e. the person who originally set up the trust) and all of the 'primary' beneficiaries who were set out in the schedule to the trust.

None of the earlier variations had received consent from any of the relevant parties.

The solution (which is still to be approved by the bank) was to implement a comprehensive deed of confirmation and obtain signatures from all relevant people – fortunately, the settlor was still alive and willing to assist.

Next week, I will touch on some other practical difficulties that we are going to need to consider and possibly address in the future.

Until next week.

Matthew Burgess

Deeds of variation and stamp duty

As I flagged in my last blog posting, we had a very difficult day recently – all triggered by a simple typo in the schedule to a trust deed.

One aspect that proved unnecessarily difficult due to the particular approach of the relevant bank officer was in relation to stamping.

Most Australian states (and particularly Queensland where this transaction was taking place) do not require administrative type changes to trusts to be charged with stamp duty.

In fact, in Queensland, recent changes have been made by the Stamps Office to actively discourage people from lodging these types of documents for assessment, given that the assessment is going to be returned as no duty payable.

Essentially then the only types of trust variations that need to be lodged for assessment in Queensland are ones that historically have been loosely described as 'resettlements'.

Practically, there is in fact no definition of a resettlement under the stamp duty rules and instead there is a series of other, relatively technical, provisions that need to be considered. For those interested in the general way in which these rules operate, please let me know and I can direct you to the relevant parts of the Stamps Office website.

Until next week.


Matthew Burgess

Typos and big legal bills

Given Monday is a public holiday, the Blog for next week is posted below.

Yesterday ended up being a very long day and unnecessarily expensive (both in terms of time consumed and bank, accounting and legal charges).

The day was also a particularly frustrating one due to the relatively underwhelming cause of all the hassle – a typo in an on-line created trust deed.

While the typo was not ours, it served as an extremely timely reminder of how critical it is to get even the simple things right.

For those that attended our Master Class on trusts a few years ago (our Master Class series is run once a year and is a half day program built entirely around a practical case study), you may remember one of the examples (based on a real life situation) where the vesting (or ending) date of a trust was accidentally noted as 18 years instead of the more standard 80 years.

Yesterday, the error (which had been generated by a client’s former accountant using an online trust provider) was simply the spelling of the name Stephen with a 'v' instead of the 'ph' in the schedule.

While the trust had borrowed money from the bank before, no one had ever picked up on this typo.

Yesterday was the settlement day for a relatively large transaction and mid morning a Sydney bank officer identified the typo and insisted that the bank security could not be perfected because of it until the error was remedied.

After much (often quite illogical) negotiation, the bank finally agreed to a deed of variation being implemented.

As is often the way in these situations however, the deed (which ran to less than two sentences of actual substantive terms) was redrafted three times to satisfy the precise requirements of the bank.
Furthermore, even having produced the deed, there was the threat of the bank refusing to settle unless it was stamped prior to settlement.

The irony here of course is that the particular form of document is not liable to stamp duty in Queensland and due to recent changes at the Stamps Office trying to discourage people to lodge these documents for duty assessment (I might touch on this in more detail next week), it was going to be impossible to achieve a same day stamping.

Finally, based on a written undertaking provided by us, the bank did agree to settle.

Until next week.
Matthew Burgess