Sole trustees of a partnership of trusts: No Surprises**

Posts over recent weeks have considered the issues surrounding whether a partnership exists where two or more trusts have the same corporate trustee.

As mentioned last week, while the so called 'self-dealing rule' can potentially invalidate a structure of a single trustee of multiple trusts, that rule can be ignored where this is addressed in the relevant trust instruments.

Subject to this requirement, it appears that at least some professional bodies and third parties (for example the Law Society and Stamps Office) interpret the relevant legislation as allowing a sole corporate trustee of multiple trusts in partnership.

Two commercial examples in this regard would include trust cloning and trust splitting, both of which are founded on the basis that it is possible for the same trustee to contract with itself in relation to multiple trusts.

There does however need to be provisions along the lines set out in the trust deed for each partner.

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Example trust deed clauses

Conflicts of interest

1.1 The Trustee may:

1. contract with, or sell or grant options to buy any part of the Trust Fund to;
2. purchase Property from;
3. borrow money from; or
4. enter into any share farming or agistment agreement, lease, tenancy or partnership with, the Trustee in its own or any other capacity, either alone or in conjunction with any other persons or:
5. any company or partnership, even if the Trustee, or any shareholder or director of the Trustee, is a shareholder, director, member or partner of that company or partnership; or
6. a Child of the Trustee.

1.2 The Trustee may exercise (or concur in exercising) all of the powers and discretions contained in this document or otherwise conferred by law, even if:

1. the Trustee, or any director or shareholder of a Trustee that is a company:
1. has or may have any direct or personal interest in the mode or result of exercising that power or discretion; or
2. may benefit either directly or indirectly as a result of the exercise of that power or discretion;
3. is a party in its personal capacity to the transaction being contemplated; or
2. the Trustee is the sole trustee.

1.3 The Trustee may sell, transfer, dispose, divide in specie, hire or lease any part of the Trust Fund to carry on or carry out any profit making undertaking or scheme in partnership with:

1. the Trustee in any capacity (including its personal capacity, or in its capacity as trustee of another trust fund);
2. any company or partnership, even if the Trustee, or any shareholder or director of the Trustee, is a shareholder, director, member or partner of that company or partnership; or
3. a Child of the Trustee.

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 Radiohead song ‘No surprises’.

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Sole trustees of a partnership of trusts: not so hard to explain**

Posts over recent weeks have considered the issues surrounding whether a partnership exists where two or more trusts have the same corporate trustee.

A related issue in this regard relates to whether a company as trustee of two different trusts can contract with itself.

Generally there are potentially prohibitions against this style of structure under the various state based Property Law Acts. These prohibitions are analogous to the common law ‘self-dealing’ rule, which prevent a trustee conveying or selling property to itself because it places the trustee’s personal interest in conflict with the duty to the beneficiaries.

That is, at common law, there must be at least two parties to a contract. Therefore it is the case that a party cannot contract with a nominee for itself or with its own agent, if that agent is contracting with its principal in that capacity - and two agents of the same principal cannot contract with each other, see Infigo II v Linmas Holdings [2023] NSWSC 75. This case also succinctly confirms that:

1. A trustee, in its personal capacity and in its capacity as a trustee, remains the same legal person.
2. Except as permitted by statute, whilst a trustee can contract in two different capacities, it cannot contract with itself.
3. The assumption that a trustee in its personal capacity and in its trustee capacity are different persons is false (see MacarthurCook Fund Management Ltd v Zhaofeng Funds Ltd [2012] NSWSC 911).
4. A legal person cannot act as agent for itself (see McCausland v Surfing Hardware International Holdings Pty Ltd [2013] NSWSC 902).

Having said the above, the common law rule is largely removed by the Property Law Acts. Under these Acts, a distinction is made between a person conveying land to itself (void) and a person conveying land to itself in another capacity (voidable), that is, as a trustee. In the latter case, a single corporate trustee of a partnership is generally valid, although could in theory be unwound if (say) a beneficiary of one of the partner trusts seeks to object to the arrangement. Any risk is therefore a commercial rather than a legal one.

The decision in Leximed Pty Ltd v Morgan [2016] 2 Qd R 442 provides some context in this regard. This case involved a partnership agreement between 2 trusts with the same trustee. The court confirmed that the partnership agreement was likely to be unenforceable at common law on the basis that the partnership was a nullity under the ‘self dealing’ rule, although a concluded position was not reached on the issue. Part of the reason the issue of invalidity due to self dealing was not determined was because the relevant Property Law Act overruled the common law position and therefore would have created the requisite ability to enforce the arrangements.

Similar to the Property Law Acts, under the Tax Act, section 960-100(3) confirms 'A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity' (see Re David Christie as trustee for The Moreton Bay Trading Company [2004] AATA 1396).

In this regard, there are two exceptions to the self-dealing rule as it relates to the trustee of a trust:

1. it is authorised or contemplated by the trust instrument; or
2. it is authorised by each of the beneficiaries (who are of legal age) and the transaction occurs at arm’s length terms.

While the law is not settled on this point, assuming the documentation is drafted in a way to ensure the intention was clear that the trusts would be forming a partnership with one corporate trustee, and the practical arrangements reflected this intention, such a structure is at most voidable if a successful application is made by (say) one of the beneficiaries.

Practically, there is often also utility in having an appointor or principal power in each trust deed, to facilitate a change of trustee if required of any partner, without terminating the partnership.

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 Strokes song ‘Hard to explain'.

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Anything goes?** - Partnerships of trusts using a common trustee

Last week’s post considered the issues surrounding whether a partnership exists.

One issue that is raised relatively regularly in this context is whether a partnership of discretionary trusts, each with the same corporate trustee, can be a ‘partnership’ in the context of the various Partnership Acts in each state.

While it is a common commercial approach for a single corporation to act as trustee for multiple trusts, there is at times debate about whether a single trustee can act for multiple trusts who are seeking to trade in partnership.

Each state has different legislation in this regard, however the definition of a ‘partnership’ is substantially similar, generally being defined as a ‘relation which subsists between persons carrying on a business in common with a view of profit’.

‘Person’ is defined in the Acts Interpretation Act of each state as an individual or a corporation. Arguably therefore, one corporate trustee of multiple trusts seeking to form a partnership with themselves is not a partnership under the Partnership Acts because it is not a relationship which subsists between persons (with emphasis on the use of the plural word ‘persons’).

Against this argument is the fact that the Acts Interpretation Act in each state confirms both that plural words are deemed to have singular application and that an interpretation that best achieves the purpose of an act is to be preferred to any other interpretation.

On this basis a corporate trustee forming partnership with itself (in multiple capacities) will be a valid partnership under the Partnership Acts.

Furthermore, at least from a tax perspective, the Tax Office treats a single corporate trustee of multiple trusts purporting to be in partnership as a tax law partnership.

In particular in PSLA 2011/8, the Tax Office confirms that an entity or person can act in multiple capacities and in these instances they are taken to be a different entity or person, particularly where a trustee is a company.

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 Death in Vegas song ‘Aisha’.

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Shut the door**: yes, a partnership exists

There are no statutory rules in the income tax law for deciding whether persons are carrying on business as partners.

For tax purposes, a tax law partnership will exist if 2 or more people are in receipt of income jointly.

However, whether a partnership also exists for general law purposes is more complicated.

This is because the question of whether a partnership exists is a mixed question of law and fact, as explained in arguably the leading case in relation to this point, Re Raymond William Jolley v Commissioner of Taxation [1989] FCA 62.

In other words, the existence of a partnership must be determined by applying the legal principles to the actual conduct of the parties towards one another and towards third parties during the course of carrying on business.

The Tax Office has confirmed that the primary factors it takes into account in this regard in Taxation Ruling TR94/8 as summarised below.

The starting point is the mutual intention of the parties. In this regard, the Tax Office confirms that a written or oral agreement is prima facie evidence of the required intention.

A fully signed written agreement is said to be desirable, but not necessary to demonstrate mutual assent and intention. That is, an agreement to act as partners can also be inferred from a course of conduct agreed to by all parties.

Generally, a lack of intention to be in partnership means that a partnership will not exist at law. Conversely however, a stated intention of partnership is not, of itself, sufficient to establish a partnership, as the intention must be manifested by the other key factor, being the conduct of the parties.

The conduct of the parties is analysed with reference to the following factors:

1. joint ownership of business assets;
2.  registration of a business name;
3. a joint business account and the power of each party to operate it;
4. the extent to which the parties are involved in the conduct of the business;
5. the extent of the capital contributions by the parties;
6. entitlements of the parties to a share of net profits;
7. extent of business records maintained;
8. whether the parties trade in joint names and publicly recognise the partnership. In this regard the existence of the following is considered relevant -
1. invoices, receipts, tenders, business letters and applications for approval in the partnership name;
2. written and oral contracts with the partnership;
3. advertising in the partnership name.

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 Death in Vegas song ‘Hands around my throat’.

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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.

Why would a professional partnership incorporate?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Why would a professional partnership incorporate?’. 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 listen to the presentation is below –

The number of answers to this question are probably only limited to the number of professional practices there are out there.  There are a range of reasons. 

Tax is one and we keep coming back to that, but that can sometimes be in the eye of the beholder from that perspective. 

We're seeing, certainly from a risk management perspective and asset protection and the credit crunch and everything else that’s going on and the changes to the bankruptcy rules in the recent past mean that everyone is much more aware that when things go wrong, it's very attractive to have your liability limited.  

Obviously, that’s probably the biggest advantage of an incorporated model. 

There's also I guess the sense from people talking about retaining key staff and the skills shortage that many professional organisations are facing these days that it tends to make sharing of equity a lot easier if you've got a true corporate model. 

That can sometimes be as simple from a perception viewpoint that a lot of times staff or key employees are much more aligned and find it much easier to understand a company setup as opposed to some sort of fancy trust arrangement or a service trust arrangement for that matter. 

Certainly, the transaction costs side of things, in terms of the hard costs, particularly stamp duty, in most states now, the concept of having to pay stamp duty on the transfer of listed shares is basically a thing of the past.  So that can be very attractive to people. 

The last main reason and perhaps this is touching on the perception side of it again, I think the corporate model from a governance perspective, it tends to be a lot easier for people to understand.  We've done a lot of work in this area and it is interesting that by becoming a director, and by having a board and by having shareholders and all of these sorts of more formal things, even though the deck chairs haven't really changed in the organisation, there seems to be an air of governance around the place that just wasn't there while they remained as a partnership.

Until next week.

How should a partnership of discretionary trusts be structured?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘How should a partnership of discretionary trusts be structured?’ by way of audio podcast (not video) at the following link - http://youtu.be/qPJJ_1NRwcw

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

There's a number of aspects relevant here. 

The biggest one, if we pick up on that idea of it being a little bit of a messy structure, is that ideally there should be some sort of corporate entity that’s the face to the outside world.  We see that being used very regularly. 

Now whether that's a standalone nominee or agent company that’s appointed to act on behalf of all the trusts or whether in fact you just have one company acting as trustee for all of the trusts is probably a mute point. 

The outcome that’s delivered to the outside world is that they're not having to deal with numerous separate trusts; as far as the clients know, all they see is that standalone Pty Ltd company.  That would probably be the biggest thing. 

The other types of things that need to be thought about I guess are looking at the constitution of that company and making sure that you've got an appropriate balance between directorship powers and shareholder powers. 

You'd also obviously, particularly if you're going to use the same company as trustee for a number of trusts, need to have a fairly good understanding of how an appointor or principal or nominee type power under the trust documents work, to give everyone the comfort of knowing that they do have ultimate say over ‘their’ particular trust. 

Probably, the final point would be, and we've got recurring themes coming through here, (this harks back to this concept of asset protection) and that is, if you're serious about maintaining protection against issues that might go wrong in the practice, it would really be quite important in our view that the trust that is involved as a partner in the partnership of trusts do nothing else but be a partner in that partnership. 

So in other words, you don’t buy the investment property in that trust and you don't have a listed share portfolio in that trust, because otherwise you're potentially exposing all those passive assets to the risks of the business.

Until next week.

How do business, or goodwill, licences work?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘How do business, or goodwill, licences work?’. 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 listen to the presentation is below –

The key idea, and it’s probably not dissimilar to some sort of service trust arrangement, is having the two arms of the business being conducted by different entities.

An example, particularly for those that are currently in a partnership of individuals is that if the right to run the business was able to be utilised by someone else or by another entity, for example a partnership of trusts, then there's arguably the ability to create a licence arrangement that would say that the partnership of trusts has the ability to do everything to conduct the business and to enjoy the fruits of conducting the business, the income that’s generated for the payment of invariably a relatively nominal fee back to the actual original owners of the business.

Now the idea of that arrangement obviously, particularly from an asset protection perspective is that, if you can get the risks associated from running the business away from the individuals, that’s obviously a very attractive thing.

It also gives the partners the ability to think a little bit strategically about how they would want that income derived. So in other words, rather than earning the income in their own name, they have the ability to earn it through a company or trust environment.

Until next week.

What are some of the issues with a professional partnership ‘rolling over’ into a company structure?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the issues with a professional partnership ‘rolling over’ into a company structure?’at the following link - http://youtu.be/pIwVOyEAeBA



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

The rollover at face value is always the easiest way to go, because it removes one seriously significant transaction cost being the capital gains tax implications. The problem though is that when you dig a little bit deeper, that is a little illusionary at times, particularly for a group of individual partners rolling over to a company. The attraction of taking that style of rollover can be diminished by the fact that they will still individually own the shares in the company.

So if it's a standard rollover, for example a partnership to a company under Division 122B of the Tax Act, ultimately, the individuals would still actually own the shares in the company. What they will have done is taken away 100 cents in the dollar, if that’s the right way to say it, of income that they’ve historically been enjoying and replaced that with 70 cents in the dollar and an imputation credit or franking credit.

This can lead to a situation where people, having done a rollover are then looking to restructure again anyway. So effectively it's a double restructure because they'll want to divest themselves individually of shares and make those shares be owned via some sort of discretionary trust arrangement.

It can also lead into a range of other potential restructures, dividend access shares and these types of arrangements that certainly get away from the overall goal in the first place, which was to simplify arrangements and get true limited liability.

The other areas (and some of these touched on in other parts of today's program) that obviously need to be taken into account include that while there is no stamp duty on unlisted shares, there is certainly stamp duty in every state moving from an individual or partnership arrangement into a company arrangement. That's a significant transaction cost that cannot be avoided in any way, shape or form currently and needs to be paid upfront effectively to get yourself into the new structure. The other ancillary costs that go around an incorporation include issues such as payroll tax, which is inevitably a lot more expensive if you've moved into a company structure as opposed to remaining in a partnership structure.

Until next week.

What are some of the advantages of a professional partnership incorporating?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the advantages of a professional partnership incorporating?’. 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 –

The biggest thing I guess with incorporation is that, if only from a perception perspective, but in reality from many other perspectives as well, the ability to facilitate the entry and exit is significantly easier.

Probably the greatest example of that is in relation to transaction costs. In most Australian states already - and in those that haven't done it, it's not very far away – there has been the abolishment of stamp duty on the transfer of shares in unlisted companies.

So what that means in a very practical sense is that shares can be moved without any immediate transaction costs between current owners and future owners. That obviously significantly simplifies and reduces the transaction costs that would otherwise be involved.

Conceptually as well, the ability to create employee share type arrangements or have partial sell downs is significantly easier in a corporate environment than it has historically been in a trust environment, or if there's individual partners involved.

In relation to the stamp duty side of things, it is an important consideration to take into account. Basically every Australian state now has abolished stamp duty. Victoria and Tasmania actually led the way originally by abolishing stamp duty on transfers of unlisted shares. The only major Australian state now that hasn’t done it is New South Wales and the government has released a timetable that would see the abolishment of that duty very soon.

Until next week.

ATO attacks Division 7A planning strategy

In what is only a slight variation of the Division 7A planning approach of trusts distributing income to a limited partnership, in order to attain a capped rate of tax of 30% and avoid any application of Division 7A on loans made by the limited partnership, the ATO has released a further taxpayer alert last week.

The use of limited partnerships to avoid Division 7A was an approach that the ATO was on record as having concerns about long before the legislation in this area was changed a couple of years ago.

Following the change, a number of advisers were quick to realise that companies limited by guarantee could offer a similar pathway to the limited partnership approach – in other words:

1. Potentially receive trust distributions, with the tax payable on those distributions capped at the corporate rate of 30%.

2. The company limited by guarantee could then subsequently make loans that would not, on the face of the legislation, be caught by Division 7A.

In their first taxpayer alert for the year (taxpayer alert TA2011/1), the ATO lists its concerns with the above strategy.

The full alert is set out at the following link - http://law.ato.gov.au/atolaw/view.htm?docid=%22TPA/TA20111/NAT/ATO/00001%22.

Until next week.