Presumption** of disclosure of beneficial share ownership

Recent View posts have considered a number of aspects of the ASIC requirement that the beneficial ownership of shares in a private company be disclosed.

 
One potential difficulty in relation to ASIC’s requirements in this regard involves situations where the legal owner holds the share on an undisclosed trust for another party or entity.

 
In this type of situation reading of the relevant ASIC provisions suggests that the company report should disclose the fact that the legal owner holds the share non beneficially.

 
This said, in a true undisclosed trust situation most advisers will recommend that the ASIC records in fact are completed in a way that shows the legal owner is also the beneficial owner.

 
If this approach is adopted then full supporting documentation should be retained by the legal owner to rebut the presumption created by the way in which the ASIC records are completed.

** For the trainspotters, ‘presumption’ is a key word from Midnight Oil’s song from 1998, ‘Blot’ see here:

(Stripped) Bare** trust share ownership

Recent View posts have looked at the various issues in relation to notifying the ASIC of the beneficial ownership of shareholdings in a private company.

 
One aspect of this style of situation that arises relatively regularly relates to companies that were incorporated prior to 1997. Before this date, every private company was required to have at least two shareholders.

 
In order to provide a practical solution where a person was wanting to be the sole shareholder a practice developed whereby a second party would be listed as a legal shareholder, however they would simply hold that share on a bare trust for the intended sole shareholder.

 
Where such a structure exists, assuming that the articles of association or constitution have now been updated, it is generally possible to vest (or bring to an end) the bare trust arrangement and have the ASIC records updated to simply list the sole shareholder.

** For the trainspotters, ‘stripped bare’ is a line from the U2 song from 1983 ‘October’ see hear (sic):

Updating ASIC records – Simple (Simon)**

Last week’s post touched on some of the issues in relation to disclosure of beneficial ownership of shares on ASIC records.

In situations where the beneficial ownership is incorrectly recorded there are three broad alternatives available, namely:

1. Leaving the ASIC records unchanged. From a compliance perspective while this approach is possible, it is not recommended.
2. Simply lodging an annual return or ASIC form 484 that updates the ASIC records from that date. In many cases this approach will be pragmatically appropriate and is certainly the easiest and most cost effective approach. There is a risk however that there may be adverse revenue consequences or challenges from a third party (for example a trustee in bankruptcy).
3. The final approach involves effectively rectifying ASIC records from the date the error first occurred and then arranging for the annual returns for every subsequent year to also be amended. Obviously, this approach can be a significant exercise and is generally only adopted where there are concerns from a tax, stamp duty or asset protection perspective.

** For the trainspotters, the title today is riffed from INXS’ first ever single, from 1980, watch here:

Relationships of share ownership** and the ASIC

Happy New Year!

Up until the early 2000’s, the ASIC required only very basic information in relation to the share ownership in companies.

From around 2002, the ASIC began requiring that all private companies disclose the basis on which shares were owned, in particular whether shares were owned beneficially or non beneficially.

Broadly the distinction is as follows:

1. If a share is owned beneficially this means that the legal owner listed in the ASIC records also has full beneficial ownership.
2. If a share is owned non beneficially then the legal owner holds the share subject to the terms of some form of trust arrangement (often this trust will be a standard discretionary trust).

Unfortunately the disclosure of beneficial ownership is an area of significant confusion and often the confusion does not arise until resolution of the issue is time sensitive (for example in lead up to a sale transaction or as part of an asset protection audit).

Some of the issues that arise in this regard include:

1. anecdotally, it appears that when ASIC was first imputing this data following the change of approach, many companies had their notifications reversed during the data entry process (that is shares that were owned beneficially were noted on ASIC records as being owned non beneficially);
2. similarly many companies were confused about the distinction and therefore provided incorrect notification to ASIC; and
3.  in some instances a full search of all company records was not performed (for example all aspects of the company register) so the company provided incorrect information to ASIC.

Next week’s post will consider the three main alternatives for rectification where the beneficial ownership of shares is incorrectly recorded on ASIC records.

** For the trainspotters, ‘relationships of ownership’ is a line from the Bob Dylan song from ‘Gates of Eden’ listen hear (sic):

Is it the end of the trust as we know it?**

A critical aspect of every trust is the period for which a trust can last – often referred to as the perpetuity period or the vesting day of the trust.

As a rule of thumb, any review of a trust deed that we perform always starts with checking the exact vesting date. We have had countless situations where this review has in fact led to the discovery that the trust itself has ended (in one instance, almost 7 years earlier).

Generally, so long as steps are taken before a trust vests, it should be possible to extend the life of a trust to the maximum period allowed at law (ie the perpetuity period), which in most cases is 80 years – noting that Queensland upped the rules in that state back in 2023 to 125 years.

In some cases, it may also be possible to extend the life of the trust so that it complies with the laws of South Australia – as has long (no pun intended …) been the case, there is effectively an unlimited perpetuity period available via South Australian law.

** For the trainspotters, the title today is riffed from REM’s song of the same name, from 1987, listen here:

Sunny Afternoons - Counter-intuitive Tax Planning **

We had an adviser recently wanting to explore having a client make distributions from a family trust directly to a superannuation fund.

Historically (during the mid-1990s), this was a strategy that many were using until the government closed the loophole.

The way in which the loophole was closed was to treat all such income as 'special income' of the super fund or, as it was then renamed, 'non-arm’s length income'. This type of income is taxed at a flat rate to the fund of 45%.

Interestingly, what the adviser had realised however was that many trust distributions are now effectively taxed at 47% if they go to beneficiaries on the top marginal rate, given the increase in the Medicare levy.

Trust distributions to a superannuation fund may therefore be (marginally) tax effective initially and also a good way to ensure that superannuation savings are increased at a far greater rate than would otherwise be available if relying on the contributions within contribution caps – and subject to overlaying issues such as the $3M cap.

** For the trainspotters, ‘Sunny Afternoon’ is one of the first tax referencing rock songs by the Kinks from 1966, see:

NSW implications for all changes** of trustee

There is a specific provision of the New South Wales and ACT Duties Acts which require that, in order to qualify for the stamp duty exemption where a change of trustee is occurring, the new trustee needs to be excluded as a beneficiary of the trust.

This means the trust deed needs to contain an express provision excluding any new trustee from being a beneficiary.

Advisers practicing in New South Wales or the ACT are usually acutely aware of that limitation being in most of their trust deeds and of the resulting need to look at who may have been a previous trustee to see whether any beneficiaries are excluded.

The issue comes up quite commonly because several of the popular online trust deed providers use trust deeds from Sydney law firms, meaning that even though the trust deed might be ordered online by an accountant in Western Australia or a lawyer in South Australia, if the deed provider is based in New South Wales, the deed they’re providing probably contains this exclusion without the adviser being aware of it.

There are two reasons we need to know whether the deed contains the exclusion.

Firstly, if we are changing the trustee and we appoint a new trustee who is a beneficiary of the trust, then that change of trustee may be invalid or it may trigger unintended tax or stamp duty consequences.

Secondly, we may have individuals who were previously a trustee of the trust and who at face value appear to be a beneficiaries, but who were actually excluded as a result of the clause.

For instance, if Mum and Dad were individual trustees but they subsequently retired and appointed a corporate trustee, even though they may be named as beneficiaries of the trust, the exclusion clause may have made them ineligible to receive income or capital distributions.

An exclusion like this can have an impact from a family law perspective and also from a tax perspective, if we have been purporting to make trust distributions to individuals thinking they were beneficiaries, not being aware of this exclusion hidden within the trust deed.

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 David Bowie song ‘Changes’.

View here:

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.

++++++++++

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’.

View here:

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'.

View here: 

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’.

View here:

(Don’t ask me) why do trusts have vesting dates? **

Arguably trust vesting as a concept is an area of the law where you can ask 4 different lawyers for a view and you will get 5 different answers as to where it actually came from.

The theory I enjoy the most and the one that probably resonates most closely to what is possibly the truth is that, historically, trusts or as known in early English law, 'uses' could last forever.

In other words, trusts were the same as the modern-day company. There was no ending date; a trust was a structure that could last in perpetuity.

The story goes that there were forms of death duties back in the early English law. What was happening was that wealthy families would arrange for an initial transfer of assets into a trust on death.

While, there would be tax payable on that initial transfer of assets into the trust (that is, the death duty) once the asset was inside the trust, it was effectively protected from tax forever.

In other words, from a tax perspective, it was sheltered because there would be no further transfer of the asset on later deaths and therefore no further revenue to the monarchy.

The allegation was that King Henry VIII (after it took the revenue authorities about a hundred years to work it out) eventually was unimpressed that the revenue was drying up.

The reason that tax collections were drying up was because all the wealthy families were putting their assets into trusts and then effectively just skipping the death tax and making it an elective tax for later generations.

The solution, as is often the case in the structuring area, was to create the revenue outcome by imposing a limit on the life span of trusts.

Hence, you’ll see in many trust instruments, particularly earlier trust instruments, this idea of the 'life in being' of King Henry VIII or some other member of the royal family.

This is because the rule imposing the limit was set as the life in being as at the date of establishment of the trust plus 21 years. In most states (other than South Australia, which effectively has no statutory limit) the life in being approach has been replaced with a maximum period of 80 years.

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

** For trainspotters, ‘Why’ is song by Annie Lennox.

View here:

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.

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

** for the trainspotters, the singer of the theme song of ‘Trainspotting’, being ‘Lust for Life’ 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).

View here:

They're 18, they’re beautiful and they're no longer ‘yours’

One regularly asked question in estate planning is ‘do my kids need estate planning documents?’.

The one word answer is – absolutely.

The more detailed answer to provide some context is as follows:

1. Assuming a person otherwise has mental capacity, they are entitled to implement estate planning documents on reaching the age of majority (i.e. 18 years).
2. The main exception to this rule is that a married person may implement estate planning documents, even if they have not reached the age of majority.
3. If a person has reached the age of majority, but does not have estate planning documents in place, an array of complications can arise.
4. If the person dies, then their estate will be administered in accordance with the intestacy rules (previous posts have looked at various aspects of these rules, please contact me if you would like access to these and can not easily locate them).
5. Invariably, the intestacy rules trigger a ‘triple whammy’ – significantly more costs, significant time delays and often a distribution that does not reflect the wishes of the deceased.
6. Where a young adult loses capacity, the adverse consequences for the family can in some cases be even more traumatic than a person dying intestate.
7. In particular, without an enduring power of attorney, it is essentially a government department that has the default right to make the decisions on behalf of the incapacitated person.
8. While there is a statutory process that allows interested parties (for example, parents of the young adult) to have themselves appointed, this again invariably causes a ‘triple whammy’ of increased costs, increased delays and the risk that the preferred people are not in fact appointed.

Unfortunately, we have seen a myriad of horror stories involving young adults without any estate planning arrangements in place, for example:

1. A 21-year-old who died with over $1 million in assets. These assets were as a result of being a member of multiple superannuation funds that she had joined working in a range of casual positions during university. Each fund had automatic insurance, regardless of the member balance, that totalled over $1 million. 50% of these entitlements went to the lady’s estranged father whom she had not even spoken to for over 15 years.
2. A 19-year-old man who had been gifted over $300,000 by his parents to help acquire his own unit. On his death the unit passed to a lady who claimed to be his de facto, but whom the parents had never in fact met.
3. An 18-year-old man who was left stranded in an incapacitated state in Spain following an accident at the ‘running of the bulls’. As his parents were not appointed as his enduring attorney, they had no legal authority recognised by the Spanish authorities.

As a separate comment - the popularity of recent posts leveraging pop references has been used again, with a song, the most popular version arguably recorded by Beatle’s drummer Ringo Starr.

** For the trainspotters, the title of today's post is riffed from the song ‘You’re sixteen, you’re beautiful and you’re mine’.

View arguably the most popular version recorded by Beatle’s drummer Ringo Starr here:

Keith Richards, estate planning, body disposal and keeping it Respectable**

Last week’s post mentioned Keith Richards and it reminded me of one death-related story that Keith Richards is famous (or perhaps more accurately infamous) for. In particular, the way that Keith Richards (allegedly) disposed of his father’s ashes, as profiled in more detail below.

Certainly, one aspect of estate planning that often receives less attention than many other areas is body disposal.

Ideally, a will maker’s wishes in relation to body disposal should be communicated to immediate family members or the executor of the estate.

A memorandum of directions, letter of wishes or similar style document is often the best mechanism in this regard.

At least in western culture, the three most traditional body disposal approaches are:

1. burial;
2. cremation;
3. burial at sea.

Some alternative approaches include the following, which can all be accessed via Dr Google:

1. Diamonds
2. Mummification
3. Cryogenically frozen
4. Coral reefs
5. Composting
6. Deluxe cardboard box
7. Vinyl records
8. Firecrackers
9. Snorting (ie the Keith Richards play; note - the mixing of ashes with illicit substances is generally regarded as optional)
10. Smoking – as a variation on the snorting idea, friends of rap singer Tupac allegedly mixed his ashes with marijuana and smoked them
11. An hour glass
12. Glass orb
13. Snow Globes
14. Space flight (as made famous by James Doohan, the actor who played Scotty in Star Trek, whose ashes were sent into space on a Elon Musk SpaceX rocket launch)
15. Shot out of a cannon – Hunter S. Thompson style, perhaps helping deliver on his famous comment that:

‘Life should not be a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside in a cloud of smoke, thoroughly used up, totally worn out, and loudly proclaiming "Wow! What a Ride!”’

** For the trainspotters, the title of today's post is riffed from the Rolling Stones song 'Respectable'.

View here:

Pre-nups, (cosmic) pole dancers** and PI insurance

The saga involving swimmer Grant Hackett suing two law firms for negligence is a high profile reminder of the difficulties in relation to 'pre-nups'.

Broadly the Hackett matter centred on allegations that the relevant law firms failed to properly advise him to create a binding financial agreement.

In particular, Hackett argued that the original agreement entered into before marriage failed to comply with the strict legal requirements under the Family Law Act. When the agreement was later updated after the birth of the couple's twin children the alleged difficulties with the agreement were not remedied.

In many respects the issues here are analogous to the relatively well known 'pole dancer' case of Wallace v Stelzer [2014] HCATrans 135 - so named because the husband met the wife at what was described as 'an adult entertainment venue' where the wife was working as a dancer. As usual, if you would like copies of the relevant decisions please email me.

At the heart of the pole dancer case was the husband's desire to avoid the terms of the binding financial agreement that saw him liable to pay $3million dollars to his former wife when their marriage ended after only 18 months.

Some of the arguments raised included that the lawyers failed to discharge their duty to properly explain the terms of the agreement - an allegation that would have seen the lawyers potentially liable in negligence if it had been held to be correct.

It was also argued that the agreement was void in relation to some technical aspects required to be complied with under the Family Law Act and that attempted legislative fixes to the rules were also invalid, in part because the changes purported to be retrospective.

While it was ultimately held that the agreement was effective and the legislative changes were valid the extent of the litigation has seen many law firms, even those that specialise solely in family law, choose to no longer prepare binding financial agreements.

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 T-Rex song 'Cosmic Dancer'.

View a version by Nick Cave here: 

Refinancing rules: ensure you & your client feel good**

One issue that arises regularly in relation to the taxation of trusts is the incurring of interest expenses by a trustee for external borrowings used to discharge an obligation to pay a monetary distribution to a beneficiary such as a credit loan or unpaid present entitlement (UPE).

The Tax Office has confirmed that the interest expense incurred in this style of situation will not be automatically deductible, even if the borrowed funds allows the trust to retain income producing assets.

Instead, in order for the interest to be deductible, the borrowings must be shown to be ‘sufficiently connected’ with the assessable income earning activity.

The leading case in this area is that of FC of T v. JD Roberts & Smith 92 ATC 4380 (Roberts & Smith). The principles in that decision were further expanded on in the Tax Office Ruling TR 2005/12.

Based on the principles outlined in the Ruling and Roberts & Smith, it is clear that whenever a trust is refinancing any existing loans or UPEs care should be taken to ensure there is the requisite connection to income producing activities; as opposed to, for example, making distributions to beneficiaries.

The key criteria is whether it can be shown that the objective purpose of the trustee in borrowing the funds is to refinance the outstanding amount, however the Tax Office’s position is that each situation will depend on the particular facts of the case.

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 Gorillaz song ‘Feel Good Inc’.

View here:

Letting little fury things ** like the tax tail wag the dog

Given the theme of ‘famous tax cases’ in recent posts, it seemed appropriate to revisit the tax aspects of the case involving the family of famous retailer Solomon Lew (Lew), in Solomon Lew & Ors v Adam Priester & Ors [2012] VSC 57.

Broadly the situation was as follows:

1. Based on tax advice about an impending tax change (which was ultimately never implemented), certain distributions were made by a trust ultimately controlled by Lew to each of his children
2. The potential change was proposed in the late 1990’s and was known as the ‘profits first rule’ which would have seen a mandatory requirement that any distribution from a trust would presumed to be of profits and therefore taxable.
3. 2 of Lew’s children some years later were caught up in (separate) property settlements following the breakdown of their respective marriages.
4. The former spouses claimed the outstanding loans were assets of Lew’s children and therefore able to be subject to orders of the Family Court.
5. Lew argued that his children did not have any beneficial interest in the loan accounts due to agreements entered which resulted in the amounts in fact being held by the children on a trust for Lew and his wife Rose.

While the exact outcome as to whether the loans were in fact assets of the children appears to be unknown (it is assumed the cases must have settled out of court or the decisions de-identified), the fact that the former spouses were able to mount the arguments is a reminder that the wider commercial implications of any tax planning strategy should always be considered carefully.

Similarly, in the high profile case of Cardaci v Filippo Primo Cardaci as executor of the estate of Marco Antonio Cardaci [No 5] [2021] WASC 331, in a situation where historically payments to a beneficiary were categorised as distributions of capital or income, a subsequent unilateral attempt by the trustee to commence treating the amounts as loans was rejected by the court.

This was ultimately on the basis that the trustee had not adequately or sufficiently explained how or why the change in characterisation occurred, nor was there any express or implied loan agreement in relation to the payments.

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 Dinosaur Jnr song ‘Little fury things’.

View here:

Yeah right** - because before Rinehart, there was Murdoch

While the Rinehart decision received significant attention in relation to many issues, including the tax consequences of ending a trust, the tax principles of another famous case are worth remembering, namely the decision in Murdoch v Commissioner of Taxation [2008] FCAFC 86.

Broadly the situation was as follows –

1. Dame Elisabeth Murdoch (Dame) had a life interest in the income of several family trusts settled by her husband in the 1930s.
2. The remainder interest was held by one or more of the Dame’s children or grandchildren.
3. For many years, the trustee of the relevant trusts was effectively the Dame, her son Rupert Murdoch and a third party.
4. It was however noted that the Dame was likely influenced in her role to accept the investment decisions due to the very strong personality of her son Rupert.
5. A Reorganisation Agreement under which Dame surrendered her life interests under each of the Trusts were entered into, with the consideration a lump sum payment of more than $85m.
6. The payment was couched as releasing the trustees from potential claims for breaches of trustee duties.
7. In particular, the investment policy that had been adopted (apparently at Rupert’s strong recommendation) was overwhelming weighted to shares in Murdoch family companies that produced capital growth, but comparatively small dividend income. This investment approach essentially benefited the remainder beneficiaries, at the expense of the Dame as life tenant.
8. The payment was said to be to help avoid the need for litigation amongst the family.
9. Around 65% of the $85m was then gifted by the Dame to Rupert and charities she was associated with.
10. The payment was funded by the sale of pre capital gains tax shares and was essentially received tax free by the Dame.

In confirming the extremely onerous fiduciary duties of a trustee (see the post from last week) the court confirmed that Rupert had breached his obligations, even though there was no lack of good faith or particular damage to the Dame.

The court relied particularly on the principles of the case Phipps v Boardman [1967] 2 AC 26, which held that this style of claim was not for a reimbursement of the income shortfall.

The payment was therefore on capital, not income, account as a claim against the profit made by Rupert and in essence a constructive trust over assets of the trust.

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 Dinosaur Jnr song ‘Yeah, right’.

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SMSFs and non-arm’s length income: right here; right now**

One issue to remember with SMSFs is that any income derived by an SMSF as a beneficiary of a trust can be subject to penalty tax.

In particular, income earned other than through holding a fixed entitlement, is non-arm’s length income, and will be taxed according to the non-arm’s length income provisions of the Tax Act at a flat rate of 47%.

Income derived by a superannuation fund as a beneficiary of a fixed trust will also be non-arm’s length income if:

1. the fund acquired the entitlement under a scheme, or the income was derived under a scheme, the parties to which were not dealing with each other at arm’s length; and
2. the amount of the income is more than the amount that the fund might have been expected to derive if those parties had been dealing at arm’s length.

To avoid the impact of the non-arm’s length income rules, it is therefore vital for SMSFs to ensure that:

1. no distributions are made to a SMSF from a discretionary trust; and
2. where a SMSF owns units in a unit trust, the unit trust is a fixed trust for tax purposes.

From a planning perspective, given the Medicare and other surcharges, there may in fact be a saving on overall tax payable by triggering the non-arm’s length income rules by (for example) distributing from a family trust to a SMSF and capping the tax rate at 47%.

It is also relevant to note that the non-arm’s length income rules may apply where a SMSF allows its fixed entitlement to remain as an unpaid present entitlement, as this generally does not reflect an arm’s length arrangement.

When allowing unpaid present trust entitlements in favour of a SMSF, it is therefore necessary to ensure that interest on those unpaid distributions is paid by the trust at market rates as would be the case if the SMSF and trust were dealing with each other at arm’s length.

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 Fatboy Slim song 'right here, right now’.

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(out of) ‘Control’** of family trusts

Under the capital gains tax small business concessions, what amounts to ‘control’ of a discretionary trust is an important issue. 

In this regard, a key aspect relates to the concept of whether the trustee of a trust ‘acts, or could reasonably be expected to act, in accordance with the directions or wishes of another person or entity’.

Arguably, the leading analysis of these rules is in the case of Gutteridge v Commissioner of Taxation [2013] AATA 947.

Briefly, the case involved sale of assets by the corporate trustee of a traditional family trust (Trust).

The sole director and shareholder of the corporate trustee was Ms McKenzie, who also controlled another company (Company).

The principal of the Trust was as third party professional adviser to the family (Mr Coffey), who provided evidence that he would always follow any directions from Ms McKenzie’s father (Mr Gutteridge) including, if necessary, removing a trustee from that role. In turn Mr Coffey confirmed he would disregard any instructions from Ms McKenzie that were contrary to those provided by Mr Gutteridge.

The Tax Office denied access to the small business concessions on the basis that Ms McKenzie controlled both the Trust and Company.

The court held however that the Trust ultimately acted in accordance with the directions of Mr Gutteridge and therefore Ms McKenzie did not control it.

The Trust was therefore able to access the small business concessions.

The case ultimately reinforces that the rules are highly dependent upon the factual matrix of each case.

As usual, please contact me 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 Chemical Brothers song 'Out of control’.

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