Seven dwarves, pizzas for the homeless and pre-chopped broccoli florets** – taking the detail to a whole new level

Following last week’s post, where I mentioned that, particularly in New South Wales, it is often the case that trustees are expressly prohibited from being beneficiaries of discretionary trusts there were a number of questions relayed to me. Thank you also for the suggestions as to what hair product Van Halen would have likely demanded at the height of their fame in the mid 1980s (see – Brown M&Ms, invasion by aliens and when trust beneficiaries aren’t beneficiaries).

The key reason the ‘trustee can’t be a beneficiary’ prohibition is so prevalent in New South Wales is that under the stamp duty laws there, in order for a trustee to be permitted to be appointed (particularly where there is a change of trustee of a pre-existing trust), that trustee must not be a potential beneficiary of the trust.

Obviously, there are a range of asset protection related issues in this regard as well. At the centre of these issues is the fact that a trustee is directly liable for misadventures of the trust. As a general rule, the maximum value of a trustee company from time to time should never be more than a nominal amount – ie $2. A trustee company receiving distributions as a corporate beneficiary will breach this rule immediately.

Importantly however, many trust deed providers that offer deeds nationally, will incorporate the prohibition on a trustee being a potential beneficiary, even for trusts that do not otherwise have any connection with New South Wales.

This prohibition will often be weaved into a trust instrument in a less than obvious manner. Unless there is a pedantic approach to reviewing the terms of a trust deed the prohibition will be missed.

In summary – yet another example of the importance of the mantra ‘read the deed’.

As mentioned last week, our upcoming webinar ‘Trust Horror Stories’ will have many case study examples highlighting key issues to be aware of with managing trusts.

Find out more here - https://viewlegal.com.au/product/webinar-trust-horror-stories/

Watch the promo video below.

** for the trainspotters, the author of the theme song of ‘Trainspotting’, being ‘Lust for Life’ (see - https://www.youtube.com/watch?v=jQvUBf5l7Vw) Iggy Pop allegedly had a contract rider requiring seven dwarves, pizzas to give to the homeless, and pre-chopped broccoli florets (to make them easier to throw away). Again there is a prize for anyone who can share a more unique list of riders.

Trust Cloning

A recent post focused on trust splitting as a useful tool to improve the administration and management of a discretionary trust http://blog.viewlegal.com.au/2016/03/trust-splitting-some-clarity-at-last.html

As has been widely publicised, trust cloning for family trusts was effectively abolished on 31 October 2008. Since 1 July 2016 trust cloning has been available for trusts that run businesses with an annual turn over of less than $10M – see http://blog.viewlegal.com.au/2016/04/tantalising-opportunities-for-trust.html (the $2M turnover test referred to there is intended to be $10M).

Interestingly, there are still situations when trust cloning might in fact be available, despite the tax concessions being removed on 31 October 2008.

Broadly, the main situations where we see trust cloning being used still are:

1. Where there is no capital gain in relation to the assets to be transferred;
2. Where the capital gains tax that would otherwise be triggered on the trust clone can be rolled over (for example, using the various types of small business CGT concessions or between testamentary trusts); and
3. Where the trust cloning falls within the CGT exemption available for unit trusts.

Generally, there will be stamp duty payable in relation to a trust cloning arrangement to the extent there is dutiable property, although there are areas where there may be a duty exemption, including –

1. In South Australia, for most transfers;
2. In Queensland, for all transfers;
3. In NSW, for business assets and land rich companies; and
4. In Victoria, for business assets.

Image courtesy of Shutterstock

Always ‘read the deed’

The recent decision of Mercanti v. Mercanti [2015] WASC 297 again reinforces the mantra ‘read the deed’, which is a theme that has featured regularly in previous posts (see for example - http://blog.viewlegal.com.au/2014/03/death-benefit-nominations-read-deed.html, http://blog.viewlegal.com.au/2013/08/a-further-reminder-read-deed.html, http://blog.viewlegal.com.au/2012/07/ato-reminder-read-deed.html).

As usual, a full copy of the decision is available via the following link – http://www.austlii.edu.au/au/cases/wa/WASC/2015/297.html

Broadly the background was as follows –

1. As part of a family succession plan, two family discretionary trusts were amended by deleting the original definition of ‘appointor’ for each trust.
2. This resulted in the father being replaced by his son as appointor of the two trusts.
3. The appointor power under each trust gave the person nominated the power to unilaterally change the trustee of each trust.
4. A later family dispute saw the son purport to exercise the appointor powers under each trust deed (as amended) to replace the trustees with a company he controlled.
5. The father attempted to resist the changes, in part on the basis that the earlier deeds of variation were not in accordance with the variation power in the trust deeds and therefore invalid.

In deciding that the change of appointor was valid under one trust deed, and invalid under the other, the court highlighted the overriding importance of reading the relevant trust instrument.  In particular –

(a)    One deed had a variation power that relevantly provided the ability to ‘vary all or any of the trusts, terms and conditions’. The scope of this provision was sufficiently wide to allow the original change of appointor and therefore the son was able to use his power to change the trustee.

(b)   The power under the second deed however only provided the ability to ‘vary all or any of the trusts’.  In other words, there was no express power to amend the terms and conditions of the trust deed.

(c)    The concept of ‘trusts’ does not ordinarily, and did not here, extend to the appointor clauses, meaning the purported variation of appointor was invalid and in turn the son’s attempted change of trusteeship ineffective.

In many respects the decision here is simply the application of principles explained in detail in the case of Jenkins v Ellett [2007] QSC 154, which will be the subject of next week’s post.

Until next week.

Image credit: Anders Bachmann cc

Trust distributions – is the recipient a beneficiary?

Numerous previous posts have raised that the trustee of a discretionary trust must ensure that the intended recipient is in fact a potential beneficiary of the trust when making a trust distributive

http://blog.viewlegal.com.au/2014/06/trust-distributions-3-reminders-for-30.html

http://blog.viewlegal.com.au/2013/09/read-deed-another-reminder-re-invalid.html

http://blog.viewlegal.com.au/2013/07/trust-distributions-and-30-june.html

As mentioned in last week’s post, one of the most famous cases in this regard is BRK (Bris) Pty Ltd v FCT [2001] FCA 164 (see - http://blog.viewlegal.com.au/2015/05/trust-distributions-three-reminders.html).

In relation to the aspect of the decision in BRK that concerned the initial failure to make a valid distribution, the circumstances were as follows:

1. The trustee had the power to make distributions amongst potential beneficiaries.
2. The beneficiaries were listed in a schedule to the deed.
3. The trustee believed it had the power to nominate additional beneficiaries, and indeed, prepared resolutions quoting particular clauses in the deed that gave it the requisite power.
4. Unfortunately the trustee must have been referring to some other trust instrument, as the purported power to nominate additional beneficiaries did not in fact exist in the trust deed for the relevant trust.
5. As the trustee did not have the relevant power to make the nomination resolution, the subsequent distribution resolution purporting to pass benefits to the invalidly nominated beneficiaries also failed.

Although it was unnecessary given the above conclusions, the court also noted that even if the trustee had the power that they purported to exercise in nominating the additional beneficiaries, the attempted resolution of income distribution would have failed in any event because:

• one of the beneficiaries nominated did not exist at the date of the distribution;
• the other beneficiary nominated was mis-defined (in particular, a company was noted as a trustee of a particular trust, however that company was not in fact acting as trustee for the trust at the date of nomination).

Image credit: Matthias Ripp cc

Trust distributions – three reminders

Previous posts have focused on the various key aspects in relation to trust distributions (see for example -

http://blog.viewlegal.com.au/2013/10/one-remedy-where-trust-distributions.html

http://blog.viewlegal.com.au/2013/08/a-further-reminder-read-deed.html

http://blog.viewlegal.com.au/2013/07/trust-distributions-and-30-june.html)

As another 30 June looms, it is useful to note that one of the key aspects in this regard relates to the manner in which section 99 of the Tax Act causes the trustee of a discretionary trust to be taxed at the top marginal rate whenever an income year passes where no beneficiary is made presently entitled to the trust income for that year.

In this type of situation, it is critical to consider the way in which the relevant trust deed is crafted, and in particular:

1. understanding if there is a default distribution provision in relation to income;
2. if there is a default provision, ensuring that the potential default beneficiaries reflect the intentions of those ultimately in control of the trust;
3. ensuring that the default provisions do in fact work.

Arguably, the leading case in this area is BRK (Bris) Pty Ltd v FCT [2001] FCA 164.

As usual, a full copy of the case is available at the following link http://www.austlii.edu.au/au/cases/cth/FCA/2001/164.html.

While there was a purported default distribution, it was crafted to only apply if the trustee had not otherwise made a decision 'within a reasonable time after the end of a financial year'.

While the provision was likely valid for trust law purposes, it was ineffective for tax law purposes because section 99 imposes the top marginal tax rate for any undistributed income as at midnight on 30 June each financial year.

Image credit: Ken Teegardin cc

Using discretionary trusts to protect inheritances

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Using discretionary trusts to protect inheritances’ at the following link - https://youtu.be/lkkevmdo4MU

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

Historically, the reality has been that no matter if it’s a normal family trust or some form of testamentary trust, there's been a general acceptance that the Family Court could attack the assets of that trust in particular circumstances.

However, if it was structured appropriately, and care was taken in terms of how the trust structure was setup, then the assets of a trust would generally be quarantined.  The concern in recent times has been the decision of Spry, which received a lot of media attention. 

That decision seemed to create the impression, on the face of it, that no matter what form of structure was setup - family trust or testamentary trust - and no matter how that was crafted in terms of the control structure of the arrangement, the assets of the trust would always be completely exposed. So, obviously a decision that created a radical change in terms of the way people approach setting up trust structures.

Until next week.

Cases that have considered Richstar

As set out in many earlier posts, the Richstar case was decided in 2006, and yet, it continues to receive significant attention.

Interestingly, there has not been a substantive case that has accepted the conclusions in Richstar, and indeed, there are now many cases that have effectively rejected the core aspects of the decision in Richstar.

A selection of the subsequent cases is summarised below. If you would like access to the full copies of the decision, please email me:

1. Tibben & Tibben [2013] FamCAFC 145 - The only ‘entitlement’ of the beneficiaries under the Deed of Settlement was a right to consideration and due administration of the trust: Gartside v Inland Revenue Commissioners;
2. Deputy Commissioner of Taxation v Ekelmans [2013] VSC 346 - The applicant relied on the decision in Richstar to contend that the cumulative effect of the role and entitlement of Leopold Ekelmans under the trust instruments amounted to a contingent interest in all of the assets of the trust, making those assets amenable to a freezing order as if the assets of Leopold Ekelmans. The Court found that the applicant could not in this matter rely on Richstar;
3. Hja Holdings Pty Ltd and Ors & Act Revenue Office (Administrative Review) [2011] ACAT 91 – notwithstanding that beneficiaries under a ... discretionary trust have some rights, such as the right to have the trust duly and properly administered, generally a beneficiary of a discretionary trust, who is at arm's length from the trustee, only has an expectancy or a mere possibility of a distribution. This is not an equitable interest which constitutes "property" as defined;
4. Donovan v Sheahan as Trustee of the Bankrupt Estate of Donovan [2013] FCA 437 - a beneficiary of a non-exhaustive discretionary trust has no assignable right to demand payment of the trust fund to them (and nor have all of the beneficiaries acting collectively) and that the essential right of the individual beneficiary of a non-exhaustive discretionary trust is to compel the due administration of the trust;
5. Simmons and Anor & Simmons [2008] FamCA 1088 – the court and parties referred to Richstar on a number of occasions and confirmed that a beneficiary has nothing more than an expectancy.

Until next week.

Impact of Richstar on discretionary trusts

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Impact of Richstar on discretionary trusts’. If you would like a link to the video please email me.

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

Probably the most interesting part of Richstar is that in some respects counter-intuitively, it confirms that trusts remain a very robust structure from an asset protection perspective.

If you actually take a helicopter view of where the court landed in Richstar, it certainly supports this idea that just because an individual happens to be the trustee and beneficiary and appointor will not of itself mean that the trust is ignored and that the assets of the trust will automatically be deemed to be those of the relevant individual.

In contrast however, and the flipside to this argument is that if you do fulfil a number of those roles and the court feels as though that’s enough in combination to create a scenario where a person is effectively the alter ego of the trust, then indeed the trust structure will not provide you any asset protection and the assets will be potentially exposed.

Until next week.

Image credit: Jasper Nance cc

Is appointorship an asset?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Is appointorship an asset?’ If you would like a link to the video please email me.

As usual, a transcript of the presentation for those that cannot (or choose not to) view the presentation is below –

Whether the appointor role is an asset on the holder’s bankruptcy is probably one of the most contentious issues to have arisen in recent years. Certainly, the feeling amongst lawyers that act on behalf of trustees in bankruptcy or creditors is that absolutely the role is a potential asset.

If it is an asset, then it forms part of the bankrupts’ estate. The reality however when you actually look at the decisions that have been handed down is the exact opposite. So in other words, the role of an appointor is a personal role, akin to a directorship. Therefore, that’s not an asset that can be handed onto creditors.

Having said this, the issue does not seem to be going away and the conservative view would be that you would try, when setting up this type of structure, to ensure that you do one of a myriad of things.

So for example, making sure that if there is an at risk person that is needing to fulfil the role of appointor or principal, that they don’t fulfil that role individually and solely, that ideally there's some other person acting with them.

Secondly, the way in which the role is structured, it's embedded under the trust instrument, whether it be a family trust or a testamentary discretionary trust, the appointor is automatically disqualified in the event of committing an act of bankruptcy.
Until next week.

What strategies are there available to protect at risk beneficiaries?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What strategies are there available to protect at risk beneficiaries?’ at the following link - http://youtu.be/Joz2vYxhcDY

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The obvious solution is to try to minimise the number of distributions that go to the at risk beneficiary. That’s obviously a lot easier said than done. Particularly from a tax perspective, there is a bias towards making sure that the income does flow out to an individual beneficiary, particularly if there's a capital gain to be distributed.

Leaving that to one side, there are other ways to manage it, the biggest one seen in practice is making sure that the recipient beneficiary is themselves not exposed.

The classic example would be using a corporate beneficiary or company as the recipient. In that scenario, it's important to remember that the ownership structure of the shares in that company is going to be vital.

You don’t want to create a situation where even though the beneficiary exposed doesn't directly have the asset or the income distributed to them, they're the shareholder of the company, which is the recipient beneficiary. The risk is that the wealth is effectively in just as exposed a position as it would have otherwise been.

Until next week.

EPAs and gift and loan back arrangements

Two possible solutions.

Following the recent post about conflict of interest provisions under an enduring power of attorney (EPA) a question came up as to whether a gift and loan back arrangement would have provided another solution. 

A summary of the general way in which a gift and loan back arrangement would work is set out in recent posts (http://mwbmcr.blogspot.com/2014/04/how-gift-and-loan-back-arrangements-work.html).

The concept raised in the scenario touched on in the recent post was as follows:

1. The attorney could arrange for a cash gift equal to the value of the husband’s interest in the home to a discretionary trust that would ultimately pass to the control of the children of the marriage. 
2. That trust would then lend the amount back to the husband (via his wife as the attorney). 
3. The husband’s estate (following his death) would then be required to repay the debt to the trust effectively ensuring that only nominal assets would pass under the husband’s will and the main value of the estate would in turn be held via a more robust structure, being the previously established trust. 

Obviously the ability to implement this approach would depend entirely on whether the appropriate conflict of interest provision existed under the EPA and whether the attorney could satisfy themselves that they would not be breaching their fiduciary duties to the principal by undertaking the arrangement.

There would also be a range of commercial issues that would need to be considered, not least of which the fact that the trust involved would not be a testamentary trust and therefore would not enjoy the various advantages that testamentary trusts have as compared to standard discretionary trusts.

Until next week.

Image credit: Jens Wessling cc

Gift and loan back arrangements - some frequently asked questions

Recent posts have looked at various aspects of the 'gift and loan back' strategy (see http://mwbmcr.blogspot.com.ar/2014/03/leading-gift-and-loan-back-case.html and http://mwbmcr.blogspot.com/2014/04/subdivision-ea-giftloan-back.html) 

While there are a myriad of potential issues that always need to be considered, some of the key aspects include:

1. care should always be taken to ensure that the trust which will make the secured loan does not itself conduct risky activities (for example, run a business). 
2. while the arrangement can be entered into without registering a mortgage, if this step is not taken, the trust that has made the loan will simply be an unsecured creditor. 
3. the impact of the arrangement in relation to potentially accessing the small business tax concessions should always be carefully considered, because while a family home will generally be excluded from the $6 million test, a secured loan will generally be included if the trust is an affiliate or ‘connected entity’ under the Tax Act (which will typically be the case). 
4. to the extent that a third party financier already has a mortgage over the property, they will generally require a deed of priority securing their lendings (to whatever level they may be from time to time) as a first priority before the trust's second mortgage. 
5. As flagged in previous posts (http://mwbmcr.blogspot.com/2013/10/one-remedy-where-trust-distributions.html) if no real property is available for registering security over, personal property can be used via the Personal Property Security Register. 

Until next week.

Image credit: Alexander Henning Drachmann via Flickr

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

Share self-ownership - a structuring warning

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week is extracted below.

Recent articles in this Bulletin (for example, 2013 WTB 38 [1642] and WTB 43 [1821]) have focused on the various issues that can arise in relation to the use of corporate beneficiaries by discretionary trusts.

A separate issue that practitioners must be aware of whenever reviewing existing structures or establishing new entities, arises under the Corporations Act 2001. In particular, the Act expressly prohibits companies from owning shares in themselves.

This can arise in instances where a trustee company is incorrectly established with the trust (for which it is trustee) owning some or all of the shares. As the legal owner of those shares is the trustee, this results in the trustee owning shares in itself.

The relevant section is s 259A, which provides as follows:

"A company must not acquire shares (or units of shares) in itself except:

(a) in buying back shares under section 257A; or

(b) in acquiring an interest (other than a legal interest) in fully-paid shares in the company if no consideration is given for the acquisition by the company or an entity it controls; or

(c) under a court order; or

(d) in circumstances covered by subsection 259B(2) or (3)."

Under s 259F of the Act, if a contravention has occurred, a person who was involved (which is widely defined and includes any person who was, directly or indirectly, knowingly concerned in or party to the contravention) in the contravention may be subject to a civil penalty of up to $200,000. There are also potential criminal consequences that can flow from the breach.

Due to the potentially significant penalties that can arise under the Act, together with the likely adverse commercial ramifications, any identified breach of s 259A should be remedied as soon as practical following identification of the issue.

One option is for the persons involved in the contravention to apply to ASIC for a no-action letter, whereby ASIC confirms it does not intend to take any steps as a result of a particular contravention of the Act.

As flagged above, a breach of the Act in the SME space most typically arises where a trustee company of a family discretionary trust is listed under ASIC records as having its shares owned by the trust. That is, the trustee of the trust owns shares in itself. While "circular" ownership arrangements can be beneficial from an asset protection perspective, they must still comply with the Act.

The preferred approach therefore, where the shares in a corporate beneficiary are to be owned by a trust, is for a structure along the following lines:

1. the shares in the corporate trustee should be owned by individuals with a low risk profile; 
2. the corporate trustee should undertake no activities other than its trusteeship and the value of the shares in the trustee company should therefore be limited to their issue price; and 
3. the trustee company in its capacity as trustee should own all of the shares in the corporate beneficiary.

Until next week.

One remedy where trust distributions prove problematic

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week is extracted below.

A recent article in this Bulletin focused on the critical need to "read the deed" whenever making trust distributions (see 2013 WTB 38 [1642]).

Even where distributions are made validly to a potential beneficiary, they can prove extremely problematic from an asset protection perspective.

One scenario that seems to arise regularly in this regard is the distribution by a trust to a corporate beneficiary, the shares in which are owned personally by an at-risk individual.

Often, the difficulties with this ownership structure are not identified until after many years of distributions have been made to the bucket company, and anecdotally, the issue is often first identified at a point which is too late, for example, just before litigation proceedings are to commence against the relevant shareholder.

Where this ownership structure is identified and assessed to be inappropriate, the first critical step is to ensure that any future distributions to a corporate beneficiary are directed to a newly established company, the shares in which are owned by a non-risk entity (e.g. a passive family trust).

However, resolving the historical distributions is generally not as simple.

Depending on the circumstances, some form of dividend access share or discretionary dividend share may provide a pathway to remedy the historic distributions, although it will be important to consider the ATO's recent guidance in Draft Taxation Determination TD 2013/D5 (see 2013 WTB 24 [1092]) and Taxpayer Alert TA 2012/4 (see 2012 WTB 30 [1194]) which warned taxpayers of arrangements where accumulated profits of a private company are distributed substantially tax-free to an entity associated with the ordinary shareholders of the private company.

Similarly, since the introduction of the Personal Property Securities Act 2009 (PPSA), steps can often be taken to grant a security interest over the at-risk shares to a low risk related entity.

Broadly, this solution can be achieved by a "gift and loan back" style arrangement, whereby:

1. the at-risk individual gifts a cash amount equal to the gross value of the shares to a protected environment (e.g. a passive family trust);
2. the family trust subsequently lends the gifted amount back to the at-risk individual; and
3. the family trust simultaneously registers a security interest over the shares on the PPS register to secure repayment of the loan. Subject to certain conditions (such as the family trust establishing "control" over the shares) the family trust's interest in the shares should be protected under the PPSA.

The advantages of utilising a gift and loan back, compared to a straight transfer of the shares in the corporate beneficiary can include:

1. the arrangement achieves broadly equivalent protection for the asset compared with a straight transfer; and
2. as there is no change in the legal ownership of the shares, transfer duty (where applicable) and capital gains tax will generally not apply. The only transaction cost should be the PPSR registration fee.

The disadvantages of utilising a gift and loan back approach, compared to a straight transfer of the shares can include:

1. the arrangement is more complex than a simple transfer, and involves the preparation of additional documentation (including a deed of gift, loan agreement and security documentation);
2. it only protects the amount of net equity in the asset at the time of the gifting, however as mentioned above, there should not be any further distributions made to the inappropriately structured corporate beneficiary; and
3. the arrangement is subject to the bankruptcy clawback rules and specialist advice should be obtained in relation to the operation of these provisions.

Until next week.

Stamp duty on changes of trustee

One issue that is coming up increasingly regularly is changing trustees of either family trusts or self managed superannuation funds.

Generally, there are no tax consequences on the change of trustee for any form of trust (including a superannuation fund).

In each Australian State, there are also provisions that provide a stamp duty rollover on the change of trusteeship.

Care must always be taken however to review at least two issues from a stamp duty perspective.

Firstly, care must be taken to ensure that the correct state law is being applied. There can be complications in this regard where a trust is setup under one jurisdiction, but it has substantial assets in another state.

Once this threshold issue has been resolved, the exact provisions of the relevant stamp duty legislation need to be considered. While each state has similar provisions, there are differences. One example in this regard is that in New South Wales (among other things), any new trustee cannot be a potential beneficiary under the terms of the trust.

Until next week.

A further reminder – read the deed

As regular readers are aware, there have been numerous posts highlighting the importance of reading trust deeds and recently we had (yet another) reminder.

Many advisers would be aware that, particularly for deeds established in New South Wales (due to the stamp duty rules there), there is often a prohibition on any trustee, and in some instances any former trustee, being a beneficiary of a trust.

The example that came up again recently (it seems to be one that comes up every few weeks) involved an individual trustee of a standard family discretionary trust. That individual trustee was also the sole primary beneficiary and sole appointor.

While there were potential issues from an asset protection perspective that we were reviewing, the more fundamental concern was that under the trust deed the trustee was specifically prohibited from ever receiving any income or capital distributions. A brief review of the balance sheet of the trust showed that substantial distributions had in fact been made to the trustee as primary beneficiary over a number of years.

There are now a myriad of issues that the trustee and his adviser are needing to work through, not least of which being how to address the enquiries of the lawyers for the trustee’s former spouse who are alleging a breach of trust and what steps will need to be taken from a tax perspective in relation to the various years in which invalid distributions have taken place.

Until next week.

Trust distributions and 30 June

 

In the wash up of the passing of the financial year, an adviser contacted us last week with yet another reminder about the importance of reading trust deeds. 

In this particular instance, the adviser had taken over a client from another firm. One of the key items on the trust checklist completed for every client of this adviser's firm is confirming what date the trust deed requires income distributions to have been made by. 

The Tax Office has a long stated view that regardless of whatever concessions may be available under the tax legislation in terms of the due date for resolutions, these concessions are subject always to the trust instrument. 

The terms of the trust deed here required all resolutions to be made by no later than 12pm on 29 June in the relevant financial year. Unfortunately, the distributions for each of the previous years had all been dated 30 June, which meant they were invalid under the deed. 

The adviser was, therefore, required to begin the process for lodgement of amended returns, relying on the default provisions under the trust deed and sought our guidance on how to best address this. 

Needless to say that the income determination for the current financial year was made and passed by resolution dated 28 June, so as to at least comply with the deed this year. 

Until next week.

What are the main advantages and disadvantages of using a partnership of discretionary trusts for a professional practice?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the main advantages and disadvantages of using a partnership of discretionary trusts for a professional practice?’ at the following link - http://youtu.be/AzNQv_QLMd4

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

I'll start with the advantages and there are many.  Probably the biggest one is the access to the small business concessions moving forward.  Again as we've touched on in other parts of today’s program, the ability for a partnership of trusts for each individual partner to gain access to the small business concessions is one that just simply cannot be ignored. 

Obviously, discretionary trusts are the vehicle of choice by and large for most small to medium sized businesses these days.  So the ability to combine both the small business concession access with individual autonomy and flexibility on income tax planning is very attractive. 

The other issue I guess with a partnership of discretionary trusts is that it's relatively simple to explain and understand.  This point is often in the eye of the beholder and we'll talk in a moment about some of the disadvantages and how this same advantage can in fact be a disadvantage, particularly in larger practices.  This issue can often be managed by making sure that the one company is trustee for all trusts in the group, and also perhaps acting as a nominee to the outside world, so that as far as clients are concerned, they are in fact only dealing with one entity, being the corporate trustee of a number of different trusts. 

I guess the final point to make however in relation to the advantages is that the ability to limit liability to the actual interest in the practice is solely dependent on the actual trust making sure that it only owns one asset, being it’s interest in the partnership.  So in other words, the attraction of perhaps having different assets inside that one structure very much diminishes the ability to limit liability in relation to issues that might arise. 

The disadvantages are probably not dissimilar to the advantages, just looking at things from the other side of the fence obviously.  I touched on in the advantages that the ability to have a number of partners in partnership via the trust structure can be an advantage.  Obviously, it can be a disadvantage as well, and particularly as partnerships get bigger, the concept of having countless discretionary trusts involved can administratively be quite prohibitive.  Now   argument would be that as long as you have the same corporate trustee across the group, that can be attractive. 

This of itself creates further issues, particularly from a control perspective, because you then need to have the individual trusts looking very carefully at issues such as the appointorship, to make sure that if there is disharmony within the partnership that there's an exit mechanism, via the trusts, for each of the individual partners. 

Conceptually also, while the attraction of the small business concessions is very strong, you are not getting away from the stamp duty costs.  So in other words, if an individual trust decides to dispose of its partnership interest, it will still very much be exposed to all of the normal stamp duty costs at an ad valorem rate, on the full unencumbered value of interest in the partnership. 

The last point, and this is in direct contrast to what the situation is for companies, is that you do not really have a corporate model.  So all of the normal advantages that you associate with incorporation, such as employee share arrangements, become very difficult indeed to achieve, because you've got this disparate structure of a number of different trusts involved in relation to the partnership.

Until next week.

What are the broad alternatives for professionals not wanting to use service trusts?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the broad alternatives for professionals not wanting to use service trusts?’. If you would like a link to the video please let me know.

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

There's the ability to completely restructure the existing arrangements and move into a new structure and if that alternative was to be taken, there are then a series of different arrangements that might be entered into, and that can include a new structure in total, or some sort of hybrid arrangement. 

The types of structures that are available are only really limited by your imagination in terms of what may or may not be useful. 

Obviously, there are also a number of commercial issues that need to be taken into account.  Many of those will be driven by the actual underlying nature of the partnership that’s involved, but generally there are two alternatives if you're moving out of an individual structure, and that can be to incorporate or to form some sort of trust arrangement. 

Within those two parameters or those two goalposts, there's quite a large playing field in terms of what that might look like.  So in some instances, there's a hybrid between both companies and trusts.  In other instances, there are trusts which are of a hybrid nature.  So in other words, a unit trust or some sort of partnership of trusts or a blended discretionary trust.  Again the common theme is that it’s largely driven by what's going to be most useful for the underlying partners involved.

Until next week.