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.

PPSA transitional arrangements end on 30 January 2014

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A post from February 2012 considered the Personal Property Securities Act 2009 (Cth) (PPSA) which commenced some 18 months ago.

Today’s post focuses on one of the upcoming critical aspects of the regime.

The PPSA is the national system for personal property securities in Australia and replaced many state, territory and Commonwealth registers of personal property securities.

Central to this system is the Personal Property Securities Register (PPSR) where details of security interests in personal property can be registered and searched.

To give creditors an opportunity to adjust to the new regime, the PPSA included transitional provisions. The principal object of these provisions was to maintain priority between security interests that existed before the PPSA commenced on 30 January 2012 for two years. These interests are known as ‘transitional security interests’.

This two year transitional period ends on 30 January 2014.

To ensure transitional security interests continue to be protected they should be reviewed to ensure they are validly registered on the PPSR by 30 January 2014. There is no PPSR fee to register a transitional security interest.

Until next week.

PPSA and company charges

The long awaited transition to the personal property security regime has continued to evolve since the official ‘live’ date of 30 January 2012.

While there are an ever increasing number of war stories, for anyone involved in advising companies, arguably one of the most tangible changes has been the abolition of ASIC forms in relation to registering company charges.

Today’s post focuses on some of the critical aspects of the new company charge regime.

On 30 January 2012, ASIC ceased to register company charges and ASIC forms 309, 311 and 312 are no longer relevant.

No forms - The difference between the PPS register and the ASIC register of company charges is that there are no physical forms that are lodged with the PPS register. All registrations, amendments and releases are done online using the PPS register (i.e. no forms are signed).

How do I find out if a company has charges against its assets? - ASIC searches will no longer show details of current registered charges. You will need to search the PPS register to reveal these details. As the PPS register search function has experienced a number of technical difficulties, you should always search a company by ACN, ABN and company name until these issues are resolved.

How do I register a security interest? - In order to register a security interest on the PPS register you need to register a financing statement.

How do I release a security interest? - As the ASIC form 312 is no longer relevant, parties will need to agree on a way to document the release in another fashion e.g. a deed of release.

Until next week.