Superannuation proceeds trusts

Following last week’s post an issue has been raised as to whether the View wills provide for a Superannuation Proceeds Trust (SPT) -  and the answer is: Yes they do.

A SPT within a will (as opposed to last week’s post that related to a structure established outside a will) is a trust that is set up solely to receive the superannuation benefits of a member following death.

Generally, the beneficiaries of a SPT must be confined to persons who are ‘death benefit dependants’ of the deceased, being a:

a. spouse or former spouse of the deceased;

b. child, aged below 18, of the deceased;

c. person with whom the deceased had an ‘interdependency relationship’; or

d. person financially dependent on the deceased just before they died.

The benefits of having a SPT in a will are:

1. It provides greater asset protection compared to the superannuation death benefits being paid directly to a death benefit dependant - for example, against relationship breakdowns, creditors or spendthrift beneficiaries;

2. Distributions from the SPT will generally be excepted trust income, such that recipients under the age of 18 will be treated as adults;

3. The distribution of the superannuation death benefits to the SPT is taxed in the same way as if they had been paid directly to the death benefit dependant (provided the beneficiaries of the SPT are limited to tax dependants).

 Next week we will look in more detail at how View Legal structures SPTs in wills.

Image credit: Martin Gommel 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

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.

Scope of the Richstar decision

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Scope of the Richstar decision’ at the following link -  http://youtu.be/N2VpKrws93c

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

It’s fair to say Richstar is seen as probably the high watermark in relation to how the assets of a trust may be exposed in the context of some sort of bankruptcy litigation. Interestingly, it has remained almost as an outlier decision.

There really haven't been any decisions that have supported the landing the court reached in relation to Richstar. On top of that, the cases like Smith which have come down since Richstar, effectively completely ignore Richstar and go to the extent of saying it doesn't actually represent good law.

Ultimately, pragmatically and practically what the position seems to be is as long as a trust is structured appropriately it will provide a very good level of asset protection from creditors and should be seen as probably the choice structure in an estate planning exercise under a will - in other words, the use of a testamentary discretionary trust - in order to provide an adequate level of protection.

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

Importance of minimising loan accounts to at risk beneficiaries

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Importance of minimising loan accounts to at risk beneficiaries’.  If you would like a copy of the video link please email me.

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

The reality in relation to beneficiary loan accounts is that sometimes they're unavoidable.

If distributions are being made by the trustee down to an at risk beneficiary and those amounts aren't physically paid, then they’ll sit on the balance sheet either as a credit loan or an unpaid present entitlement.

In either scenario, that’s clearly an asset of the at risk beneficiary. So it’s really important that on a regular basis those potential assets are reviewed and steps are taken to ideally quarantine them away into a protected environment.

The simplest approach, assuming that you can't avoid the distributions coming down to that person, will be to forgive that debt, or as an alternative, making sure that the outstanding amount is gifted across to a protected environment whether that be a spouse, some other family member or perhaps some other related structure.

The critical thing in all of that, quite aside from the pure bankruptcy issues is however that there must be a particular effort applied to the related issues. That is, things like the commercial debt forgiveness rules, wider tax planning issues and the stamp duty rules, that are unfortunately different in every jurisdiction around the country, are all potentially relevant before any step can be taken to quarantine the loan account wealth. 

Until next week.

Trust distributions – 3 reminders for 30 June 2014

Getting ready for 30 June.

For the fourth time in recent weeks we have been fortunate to have an article featured in the Weekly Tax Bulletin. This time it is by fellow View Legal Director Patrick Ellwood and I and is extracted below for those who do not otherwise have easy access.

As regularly addressed in the Weekly Tax Bulletin, a methodical approach is needed when preparing trust distribution resolutions to ensure the intended outcomes are achieved.

With another 30 June fast approaching, it is timely to consider 3 key issues often overlooked, namely:

1. ensuring that the intended recipient of a distribution is in fact a valid beneficiary of the trust;
2. avoiding distributions to beneficiaries who appear to be validly appointed under a trust deed, however are in a practical sense excluded; and
3. complying with any timing requirements under a trust deed, regardless of what the position at law may otherwise be.

Further comments on each of these issues are set out in turn below.

Is the intended recipient a beneficiary?

A beneficiary is a person or entity who has an equitable interest in the trust fund. A beneficiary has enforceable rights against a trustee who fails to comply with their duties, regardless of whether they have ever received distributions of income or capital from the trust. 

The range of eligible beneficiaries will generally be defined in the trust deed and the first step in any proposed distribution should be to ensure that the intended recipient falls within that defined range.

Once the range of eligible beneficiaries has been determined, the next step is to identify classes of specifically excluded beneficiaries.

These exclusions will usually override the provisions in a trust deed which create the class of potential beneficiaries and some common examples include:

• persons who have either renounced their beneficial interest or have been removed as a beneficiary of the trust fund;
• the settlor and other members of the settlor's family;
• any "notional settler"; and
• the trustee.

A comprehensive review of a trust deed must include an analysis of every variation or resolution of a trustee or other person (such as an appointor) that may impact on the interpretation of the document.

The range of documents that could impact on the potential beneficiaries of a trust at any particular point in time is almost limitless. Some examples include:

• resolutions of the trustee to add or remove beneficiaries pursuant to a power in the trust deed;
• nominations or decisions of persons nominated in roles such as a principal, appointor or nominator; and
• consequential changes triggered by the way in which the trust deed is drafted (eg beneficiaries who are only potential beneficiaries while other named persons are living).

Does the intended recipient appear to be a beneficiary, yet practically is excluded?

It is important to remember that the unilateral actions of a potential beneficiary may impact on whether they can validly receive a distribution. For example, a named beneficiary may disclaim their entitlement to a distribution in any particular year, or may in fact renounce all interests under the trust.

There are also a number of potential issues that can arise in relation to beneficiaries that appear to have been nominated as beneficiaries, as to whether the nomination is effective. These issues can include:

• whether the appointment needs to be made in writing;
• whether the appointor has been validly appointed to their role;
• at what point the nomination needs to take place in the context of the timeframe within which a distribution must be made; and
• are there any consequential ramifications of the nomination, eg stamp duty, resettlement for tax purposes or asset protection.

Family trust election

In addition to the traditional trust law related restrictions on the potential beneficiaries of a trust, it is important to keep in mind the consequences of a trustee making a family trust election or interposed entity election.

Where such an election has been made, despite what might otherwise be provided for in the trust instrument, the election will effectively limit the range of potential beneficiaries who can receive a distribution without triggering a penal tax consequence (being the family trust distribution tax).

A family trust election will generally be made by a trustee for one or more of the following reasons:

• access to franking credits;
• ability to utilise prior year losses and bad debt deductions;
• simplifying the continuity of ownership test; and
• eliminating the need to comply with the trustee beneficiary reporting rules.

While a full analysis of the impact of family trust elections and interposed entity elections is outside the scope of this article, it is critical to consider the potential implications of any such election on what might otherwise appear to be a permissible distribution in accordance with the trust deed.

Complying with any timing requirements under the trust deed

Historically, the Commissioner permitted resolutions to be made after 30 June each year via longstanding ITs 328 and 329, however as practitioners will recall, these were withdrawn in 2011.

The current law does allow resolutions in relation to capital gains to be made no later than 2 months after the end of the relevant income year. Any other distributions, including in particular franked distributions, must be made by 30 June in the relevant income year.

Notwithstanding the general position above, the ATO has regularly confirmed its view that regardless of any timing concessions available under the tax legislation or ATO practice, these concessions are subject always to the provisions of the relevant trust instrument.

In recent times, we have reviewed a number of trust deeds by different providers that require all resolutions to be made by a date earlier than 30 June, eg no later than 12pm on 28 June in the relevant financial year. Unfortunately, in every situation we have seen, all distributions for previous income years were dated 30 June, meaning each resolution was in fact invalid under the deed, regardless of the fact that the resolution otherwise complied with the law.

In these situations, arguably the only practical solution is to proceed with lodgment of amended returns, relying on the default provisions under the trust deed – assuming there are adequate default provisions.

Until next week.

Image credit: Steve Corey cc via Flickr

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.

Taxation consequences of testamentary trust distributions - Part II

Again for those that do not otherwise have easy access to the Weekly Tax Bulletin, Part II of the article by fellow View Legal Director Patrick Ellwood and I is extracted below.

Part I of this article (at 2014 WTB 19 [658]) considered a number of specific aspects of the transfer of assets under a deceased estate testamentary trust. Part II of the article now considers:

• distributions from testamentary trusts to beneficiaries;
• the proposed changes to CGT event K3; and
• the proposed changes where an intended beneficiary dies.

Distributions from testamentary trusts

In 2003, the ATO released PS LA 2003/12, which states that its purpose is to inform ATO staff that the Commissioner will not depart from the long-standing administrative practice of treating the trustee of a testamentary trust in the same way as a legal personal representative (LPR) is treated for the purposes of Div 128 of the ITAA 1997.

In the 2011-12 and 2012-13 Federal Budgets, it was proposed that the current ATO practice set out in PS LA 2003/12 of allowing a testamentary trust to distribute an asset of a deceased person without a capital gains tax (CGT) taxing point occurring would be codified.

While draft legislation to effect the change was prepared, the Federal Government announced that it was reviewing the progress of a large number of unenacted legislative announcements and ultimately confirmed on 14 December 2013 that the amendments would not be implemented - see 2013 WTB 53 [2270] and also 2014 WTB 12 [399].

As set out at 2014 WTB 16 [561], the ATO recently republished PS LA 2003/12 confirming that it intends to continue to consider itself bound by it. Despite the ATO apparently acknowledging that the Government will not proceed with any legislative changes, some amount of confusion has been caused by the ATO stating in updates on its website that it will "accept tax returns as lodged during the period up until the proposed law change is passed by Parliament". Those comments are contained in the ATO update entitled "Refinements to the income tax law in relation to deceased estates" (dated 22 April 2014). It is assumed these comments are simply an oversight by the ATO and that PS LA 2003/12 (as amended) will continue to be applied indefinitely into the future.

The position therefore appears to remain that there is exemption roll-over from CGT covering the "transfer" of assets from the LPR to the trustee of the testamentary trust in the first instance and the subsequent transfer by the trustee to an eventual beneficiary of the testamentary trust. The subsequent transfer may either involve a capital distribution being made by the trustee of the trust to a beneficiary during the lifetime of the trust, or a payment of capital upon vesting of the trust.

The result of PS LA 2003/12 is that, on the subsequent disposal of a CGT asset from a testamentary trust trustee to a beneficiary of the testamentary trust:

• any capital gain or loss that the testamentary trust trustee makes is disregarded under s 128-15(3); and
• the beneficiary will be taken to have acquired the CGT assets of the deceased at the date of the deceased's death (rather than on the date they were distributed by the LPR) and the first element of the cost base and reduced cost base for the beneficiary will be:
• for pre-CGT assets in the hands of the deceased - the market value of the asset on the day the deceased died; and
• for post-CGT assets in the hands of the deceased - the deceased's cost base (or reduced cost base) at the date of their death.

Ultimately under PS LA 2003/12, Div 128 (in particular ss 128(2), (3) and (4)) effectively applies twice:

• initially, when the LPR is the "LPR" for the purposes of Div 128 and the testamentary trust trustee is the "beneficiary"; and
• subsequently, when the testamentary trust trustee is treated as an "LPR" for the purposes of Div 128 and the beneficiaries of the testamentary trust are treated as the "beneficiaries".

CGT event K3

The ATO has indicated that the position in PS LA 2003/12 is subject to CGT event K3, which covers assets passing to tax-advantaged entities.

CGT event K3 operates to ensure that, where assets pass to concessionally taxed entities from a deceased estate, a capital gain or loss is recognised in the deceased's final tax return. This prevents assets with embedded capital gains from avoiding capital gains when they are later disposed of by the concessionally taxed entity. CGT event K3 has, in the past, been avoided by ensuring an asset does not pass to a concessionally taxed entity until after the deceased's standard amendment period (generally 4 years after the assessment) has expired.

As part of the 2011-12 Budget measures, it was announced that amendments would be made to ensure that where CGT event K3 happened outside of the deceased's standard amendment period, a CGT liability still arose in the deceased's tax return. It was proposed this could be achieved by excluding CGT event K3 from the standard amendment period.

In particular, the CGT event would have been deemed to happen to the relevant entity that passed the asset to the concessionally taxed entity (rather than with the beneficiary), avoiding the need to amend the deceased's tax return. This change would have allowed the entity to which CGT event K3 applied to be able to utilise its realised capital losses against CGT event K3, instead of the deceased utilising their capital losses against their capital gain from CGT event K3.

The change would have been consistent with how Div 128 operates under PS LA 2003/12 where an LPR or testamentary trust trustee sells an asset to a third party, rather than passing the asset to the intended beneficiary of the estate.

However, as with other proposed changes mentioned below, the announced changes to CGT event K3 were abandoned in late 2013.

Where an intended beneficiary dies before administration is completed

The Federal Government released a proposal paper "Minor amendments to the capital gains tax law" in June 2012 which specifically addressed the circumstance where an intended beneficiary dies before administration of an estate is completed. Generally, in that situation, s 128-15 provides a CGT roll-over provided that the asset passes from the first deceased's LPR to the beneficiary's LPR.

However, no CGT roll-over exists where the asset passes (ultimately) from the first deceased's LPR via the second deceased's LPR to the trustee of a testamentary trust or a beneficiary of the intended beneficiary's (ie the second deceased) estate because the asset was not one which the intended beneficiary owned when they died.

The former Labor Federal Government proposed to introduce measures to allow the intended beneficiary's LPR to access the roll-over where the intended beneficiary died before an asset that the first deceased owned passed to them, regardless of whether it passed first to a testamentary trust trustee. Again, however, the Coalition Government confirmed the amendments would not be implemented.

Arguably, PS LA 2003/12 can be relied on to provide relief in this type of situation.

Image credit: Alan Cleaver cc

Subdivision EA & gift/loan back arrangements

Recent posts have touched on various aspects of the 'gift and loan back' arrangement.

Recently we had a situation where historically a gift and loan back arrangement had been entered into, however the provisions of the Tax Act under subdivision EA had been ignored.

While there has been some significant dilution of the circumstances where subdivision EA will apply given the Tax Office’s approach to unpaid present entitlements, in the situation we were looking at it remained potentially relevant.

In particular, the second 'tranche' of the gift and loan back arrangement involving a loan out of a trust was problematic because at the time the loan was made, there was an unpaid distribution to a corporate beneficiary.

We are working with the relevant adviser to determine the most appropriate approach moving forward, however the example was a timely reminder that in any structuring exercise, it is critical to consider all potential transaction costs and in particular those that are not immediately obvious.

Until next week. 

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.

Read the deed - another reminder re invalid distributions

A structure diagram of the trust in Harris v Harris [2011] FamCAFC 245 

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

Practitioners will be aware, from many previous articles in this Bulletin (and elsewhere), of the critical importance that trust deeds should be read before making any distribution of income or capital. While the "read the deed" mantra should be indelibly etched in practitioners' minds, regular reminders of the dangers of not doing this are not out of place.

One example of a family law case of Harris v Harris [2011] FamCAFC 245 where the range of potential beneficiaries was critical was profiled in our article at 2012 WTB 39 [1586].

In that case, the trial judge in a family court matter noted that the recipient of trust distributions (being a company), who was being challenged, was not in fact an eligible beneficiary of the relevant trust. If the company had been simply nominated as a potential beneficiary, then the distributions would have most likely been valid.

A more common example of where difficulties with invalid distributions arise, however, relates to where particular potential beneficiaries are in fact expressly excluded by the trust deed. The most common example in this regard is the exclusion of the trustee, be that the current, former or even a future trustee, from being a beneficiary of a trust.

These types of clauses are often found in deeds prepared by New South Wales advisers. This is primarily because s 54(3) of the Duties Act 1997 (NSW) limits the nominal duty exemption for a change of trustee to trust deeds that contain provisions ensuring that:

1. none of the continuing trustees remaining after the appointment of a new trustee are or can become a beneficiary under the trust; 
2. none of the trustees of the trust after the appointment of a new trustee are or can become a beneficiary under the trust; and 
3. the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person. 

An example of a clause adopting an approach that ensures access to the stamp duty relief is as follows:

"The Trustee for the time being of the Trust can not be a beneficiary of the Trust. None of the continuing Trustees remaining after the retirement of a Trustee is or can become a beneficiary under the Trust, and none of the Trustees of the Trust after the appointment of a new Trustee is or can become a beneficiary under the Trust."

New South Wales is the only Australian jurisdiction that has this type of restriction on accessing the duty concessions for a change of trustee and, understandably, clauses drafted in this manner are extremely prevalent with deed providers or lawyers based in New South Wales.

In many instances, however, there may in fact be no other connection with New South Wales for anyone associated with the trust.

The risks created by this drafting approach will, therefore, often be less than obvious. Anecdotally, there would seem to be an increasing number of situations where invalid distributions are being discovered that stretch back over many years and involve significant levels of invalid distributions.The exact ramifications of this type of situation will depend on a range of issues, including how any default provision under the relevant trust deed is crafted. This said, an embracing by all advisers involved with the administration of the trust of the mantra "read the deed" would avoid the issue ever arising in the first place.

Until next week.

Using court drafted wills to achieve asset protection and tax planning

Photo Credit: Joe Gratz via Compfight cc

Last week's post focused on the recent case of Re Matsis. This recent decision was one of the first situations where a court permitted a new will to be prepared for someone who had lost capacity where the primary reason for the application was not that the person had no will. Instead, the catalyst was that the beneficiaries were wanting to ensure the appropriate level of commercial asset protection and tax planning would be available.

The decision is particularly important because there are other cases where, in the past, similar requests have been denied.

Arguably, the important factors here included:

1. evidence was able to be shown that the will that was in place before the will maker lost capacity was largely seen by him as an 'interim' document; 
2. the only person who could have brought a challenge against the estate was the will maker's daughter, who indicated in the proceedings that she was independently wealthy and had no intention of challenging the estate; 
3. the ultimate beneficiaries of the estate (and the people bringing the application) were the will maker's grandsons. While each of them potentially had asset protection risks, none of them were aware of any potential litigation; 
4. the change to the existing will did not alter any of the provisions in relation to, for example, executorship or any specific gifts; 
5. while the grandsons lost direct entitlement by the inclusion of the testamentary trusts, they were still ultimately the likely potential beneficiaries via the trust structures; and 
6. the court accepted evidence that the will maker may well have himself implemented testamentary trust provisions, had he not lost capacity. 

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.

Buy sell deeds, family trusts and the deemed market value substitution rule

Click here for an overview of buy-sell arrangements

With thanks to co View Legal director Tara Lucke, today’s post considers an issue that has been raised with us by an adviser recently.

It is generally accepted that where a business succession plan is structured with self owned insurance policies and a buy sell deed using put and call options, the deemed market value substitution rules apply for taxation purposes.  This outcome occurs notwithstanding that the transfer has been funded (either wholly or partly) by insurance.

Given the recent changes to the rules relating to the taxation of trusts, some uncertainty has arisen in relation to the ability to effectively manage the taxation consequences of a deemed capital gain arising from a transfer under a buy sell deed.

Under the ‘interim’ taxation rules relating to trusts, there can be particular problems relating to distributions of capital gains arising under the deemed market value substitution rule.  In particular, it is generally not possible to create specific entitlement to a deemed capital gain, notwithstanding that there may be a streaming power in the trust deed. 

However, where $1 of consideration has been received (which is how we generally recommend buy sell deeds be crafted), provided a beneficiary is made specifically entitled to the $1 of consideration, the deemed gain should be distributed to that same trust beneficiary.

It will therefore be important in each case to consider the specific terms of the trust deed and the other income of the trust, and to craft the distribution minute correctly to ensure the gain can ultimately be distributed to individuals who can access the general 50% capital gains tax discount. 

Until next week.

Appointor succession - read the deed

As highlighted in previous posts, it is critical to 'read the deed' when providing advice that involves a trust.

Following last week's post (and again with thanks to Tara Lucke) about Montevento Holdings, this post reinforces the importance of reading a trust deed before taking any step. 

In Montevento Holdings, a disgruntled beneficiary sought to rely on a technical interpretation of the way the appointor could exercise their power under the trust deed to change the trustee to support the argument that the change was ineffective. 

The relevant clause precluded individual appointors from personally being appointed as trustee.  As mentioned last week, the individual appointor appointed a company as trustee of which he was personally the sole director and shareholder. 

The High Court held that the ordinary and natural meaning of the clause was that an individual person holding the office of appointor could not personally appoint themselves as trustee.  However, because the trust deed consistently distinguished between individuals and companies, it did not prohibit the appointment of a corporate trustee, even if that trustee was controlled by the individual appointor.

Until next week.

Appointor succession – choose wisely

With thanks to co View Legal director Tara Lucke, today’s post looks at how the role of the appointor is often the most important to consider when establishing or reviewing a trust. There does not necessarily need to be an appointor provision under a trust deed, however where there is, a trust deed will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Failing to understand succession arrangements of an appointor can create a range of difficulties as highlighted in the recent case of Montevento Holdings Pty Ltd v Scaffidi (2012) HCA 48. A full copy of the case is available at http://www.austlii.edu.au/au/cases/cth/HCA/2012/48.html

The case concerned a challenge by a beneficiary of a discretionary trust to a change of trustee by the appointor. The challenging beneficiary was Guiseppe Scaffidi who, along with Maria (his mother) and Eugenio (his brother), was within the range of potential beneficiaries of the Scaffidi Family Trust.

The original appointor of the trust was Antonio Scaffidi (the father). On Antonio’s death, Maria became the appointor and by deed Maria subsequently appointed Eugenio Scaffidi as the appointor.

After his appointment, Eugenio appointed Montevento Holdings Pty Ltd (a company of which he was the sole director and shareholder) as the sole trustee, effectively giving him complete control over the trust and its assets.

Guiseppe’s challenge to the appointment of the trustee company ultimately failed before the High Court, essentially because the appointment complied with the provisions of the trust deed. The decision highlights that the role of appointor can often give ultimate control of a trust. Furthermore, it is a timely reminder of the importance of regularly reviewing the appropriateness of the appointor role in the context of succession planning, particularly where multiple beneficiaries are arguably intended to benefit from a discretionary trust over time.

The mechanics of the decision will be explored further in next week’s post.

Until next week.

When will ‘master’ trusts be uncommercial?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘When will ‘master’ trusts be uncommercial ?’ at the following link - http://youtu.be/9JGjM-_h2Ac



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

The issue in relation to when the traditional master trust might not in fact be entirely commercial is probably very similar to many other issues in this area in so much as there's a myriad of reasons why it might not be entirely sensible.　

Three common themes that I would probably encourage people to keep an eye out for would be – firstly, that the overall value of the estate just doesn't justify any form of testamentary trust.　

In other words, the ongoing administrative cost and the actual costs to actually set the structure up just don’t make it economical, and part of it might be that because the will makers’ are ultimately wanting to spend the kids’ inheritance, so they're actually going to make sure that it's all gone in the first place.

That would be the first category.　

The second category would be what we would describe as an estate where there is ‘enough wealth to be dangerous’ – so in other words, not wanting to put any actual numbers around it, but if there are, say, ultimately 3 or 4 children that are going to take a benefit, but the overall portfolio of the estate makes it unwise to be trying to lock that into one particular structure, and it would be in fact better for everyone concerned that they each get their own piece of the pie as it were, then that can be another big reason to sort of trend away from master trusts.　

That can often be driven not just by the financial numbers involved, but also practically, if you've got children spread all around the world, it may not be the absolute smartest thing to be trying to lock them into one structure.　

The third big reason tends to be actually at the other end of the scale where you've got significant wealth involved, serious wealth involved, and you've got the will maker sitting there and saying look, at the end of the day, while we're very happy to have the master trust as a big part of what we're trying to achieve here, we need to be able to allocate some money off directly to the ultimate beneficiaries.　 So that they actually can have something they can touch and feel - I guess it's called the ‘beer money’ trust on the side.

In those cases, it's not so much that the master trust is uncommercial overall, it's more that if you only had a master trust, that would be an unwise way to go in a particular set of circumstances.

Until next week.