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

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

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

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

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

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

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

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

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

Watch the promo video below.

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

Brown M&Ms, invasion by aliens and when trust beneficiaries aren’t beneficiaries

In preparing for the upcoming View webinar ‘Trust Horror Stories’ (see details below) we had a timely reminder of the mantra to ‘read the deed’.

The read the deed mantra is analogous to the famous contract rider of rock band Van Halen requiring M&Ms in their dressing room; with all the brown ones removed.

Originally thought to be the very definition of an outlandish group of prima donnas, the truth was all about the detail – if Van Halen ever saw brown M&Ms on arrival at a venue they were on notice that the venue operator did not sweat the detail.

On more than one occasion they used the existence of a brown M&M as cause for cancelling a gig; or perhaps more bluntly, telling the venue to go ‘Jump’**.

Contract lawyers have long been renowned for a similar technique when crafting ‘force majeure’ provisions and randomly including events such as inability to complete a contract due to invasion by aliens or abduction by unicorns to flush out those who are not checking every line.

In the trust deed example we had this week, a trustee company had been distributing income from a trust to itself as a corporate beneficiary (ie to cap the tax rate at 30%).

Aside from the asset protection issues that can arise from using a corporate trustee as a corporate beneficiary, the other main issue to consider was whether the company could in fact be a beneficiary of the trust – in other words did the deed include the trustee as a beneficiary.

As is quite often the case with trusts established in New South Wales (in particular), in this instance, the trustee was in fact expressly excluded as a potential beneficiary of the trust. See the following post for a more detailed analysis of this aspect of many trust deeds –

Read the deed - another reminder re invalid distributions.

The invalid distribution, which unfortunately had been made over a number of years, meant that a range of quite complex issues arose in relation to the trust, with a multitude of tax, trust law and accounting issues needing to be addressed. The solutions available for each issue were, at best, problematic.

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


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

Watch the promo video below.

** for the trainspotters, one of Van Halen’s most popular songs is ‘Jump’ – see - https://www.youtube.com/watch?v=k8LdRJqjjRM and there is a prize for anyone who can confirm the list of contract riders for hair product.

Resolutions v minutes – is there a difference?

Previous posts have looked at a number of the key aspects in relation to trust distributions (for example Trust distributions – 3 reminders for 30 June 2014, and A further reminder – read the deed).

One key issue in relation to effectively distributing from a trust is whether the trustee should prepare a resolution or minute.

The threshold issue under any trust instrument is making sure that the terms of the deed are followed.

This can include, for example:

1. If a decision is initially going to be made orally, confirming that there is the power to do so under the trust instrument. 
2. Methodically following all requirements set out in the trust instrument, including evidencing the decision by the date required under the instrument (regardless of what might otherwise be permitted under the tax laws). 

Assuming the above issues are properly addressed, then generally a trustee can invariably make a distribution either by way of a resolution or a minute.

A minute effectively records the decision made in an earlier meeting. It need not be made contemporaneously with the meeting (in other words, it can be prepared, dated and signed sometime after the meeting).

In contrast, a resolution is effective only from the date of signing. Where a circular resolution is made by a multiple director company or multiple trustees, it is valid on the date that the last director or trustee signs it.

Practically:

1. Sole director companies can only make distributions by way of resolutions. Generally, for trust distributions, this means that a sole director must determine how distributions are to be made and record by way of resolution the decision no later than 30 June in the relevant income year.
2. For individual trustees or trustee companies with more than one director, any decisions can be made up until 30 June and then later documented by way of a minute of meeting.
3. Again, subject to the trust instrument, where a trust has derived a capital gain, it should be possible to delay any decision at all until 31 August immediately following the end of the relevant financial year pursuant to provisions under the tax legislation.

Image courtesy of Shutterstock

Superannuation proceeds trusts: Tricks and traps

For those that do not otherwise have access to the Weekly Tax Bulletin, the further article from earlier this month by fellow View Legal Director Patrick Ellwood and me is extracted below.  It provides a more technical analysis of the various issues surrounding superannuation proceeds trusts, building on the discussion in recent posts.

A superannuation proceeds trust (SPT) is a trust established solely to receive superannuation proceeds on the death of a fund member.  A SPT can be established by a will or by deed after the death of an individual, although establishing the structure post death can be problematic and is outside the scope of this article.

The ITAA 1997 provides that a superannuation death benefit, paid to a death benefit dependant as a lump sum, is not assessable income.  A death benefit dependant (defined under s 302-195 of the ITAA 1997) is a:

• spouse or former spouse of the deceased;

• child, aged below 18, of the deceased;

• person with whom the deceased had an "interdependency relationship", as defined by s 302-200 of the ITAA 1997; or

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

Payments to the estate

Where there are death benefit dependants under a deceased estate who are potential recipients of superannuation benefits, it is often an appropriate estate planning strategy to allow for a separate SPT under the will in addition to any testamentary trust (TT), so that a tax-free distribution of the superannuation proceeds can be achieved via a protected structure.  Other estate assets can be distributed to a TT that has beneficiaries who are not death benefit dependants.

When the superannuation proceeds are paid to a SPT, the legal personal representative (LPR) is taxed in accordance with how the person or persons intended to benefit from the estate would be taxed were they to have received the payments directly.  That is, ATO will generally adopt a "look through" approach as if the death benefit had been paid directly to the recipient.

To ensure that any receipt of superannuation proceeds is tax-free, the LPR should ensure that, at least at the time of receipt of the superannuation proceeds by the SPT, the only capital beneficiaries of the SPT are those who meet the definition of "death benefit dependant" under s 302-195 of the ITAA 1997.

In practical terms, this means that where there is more than one death benefit dependant, the terms of the SPT should provide that they receive the trust capital in specified shares on vesting.

In particular, ATO Interpretative Decision 2001/751 (which has since been withdrawn on the basis that its view has been subsumed into s 302-10 of the ITAA 1997) confirms that it appears to be the clear intention of the legislation that the fact that a payment is made to a trustee, rather than directly to the dependant, should not obscure the fact that the payment is ultimately for the benefit of the dependant.

In the facts considered in ATO ID 2001/751, the death benefit dependant was the sole beneficiary of the trust and, therefore, absolutely entitled to the income and capital of the trust.

Income beneficiaries of a SPT

The requirement that death benefit dependants receive the capital on the ending of the trust is also driven by the requirements of s 102AG(2) of the ITAA 1936, which sets out the basis on which trust property must be regulated when the trust ends, in order to access the excepted trust income provisions.  The excepted trust income provisions effectively allow infant beneficiaries of income distributions to be taxed as adults.

There is limited guidance about whether the ATO will require all the income beneficiaries of a SPT to be death benefit dependants.

The conservative position would be to limit the income beneficiaries of the SPT to death benefit dependants only.  In particular, the guidance available in relation to whether tax will be payable on receipt of the superannuation proceeds under s 302-10 of the ITAA 1997 indicates that the income and capital beneficiaries should be limited to death benefit dependants.

It is arguable however, based on the ATO's comments in Taxation Ruling TR 98/4, that a SPT can include a broad range of discretionary income beneficiaries.  While TR 98/4 sets out the ATO's view in relation to child maintenance trusts (see 2015 WTB 11 [287]), it can by analogy be argued that the comments apply to other similar types of trusts (including SPTs).

Furthermore, in practical terms, it appears that the ATO only tests the range of potential beneficiaries of the SPT at the date at which the superannuation proceeds are received by the SPT (for example, see private ruling authorisation number 1011741138466). 

Therefore, even if a trustee takes the conservative approach, that is, to limit the range of potential income beneficiaries to death benefit dependants, following receipt of the proceeds, it may be possible for the range of beneficiaries to be expanded to include non-death benefit dependants.

Below is a diagram giving an example of making distributions under a will to a TT and a SPT.

Provisions of a will

For completeness, as superannuation proceeds do not automatically form part of the estate of the deceased member, it may be necessary to ensure that appropriate nominations are made by the member to direct that the superannuation death benefits are paid to the LPR for distribution under the will, and if appropriate, to any SPT established.

Assuming proceeds are paid under a will, the LPR should have the power to ensure that the range of potential beneficiaries can be limited to persons: 

• within the provisions of s 295-485(1)(a) of the ITAA 1997; and
• who satisfy the definition of "death benefits dependant" under s 302-195 of the ITAA 1997.

The main reason both these provisions should be mentioned is due to the requirement under s 295-485(4) that regard needs to be had to the extent to which a death benefit dependant can reasonably be expected to benefit from the estate.

In particular, s 295-485 of the ITAA 1997 gives superannuation funds the ability to claim a tax deduction based on an increased amount of superannuation lump sum death benefit paid under the "anti-detriment" rules, with reference to the tax paid on contributions.

Conclusion

In many respects, the ability to utilise a SPT under a will incorporating a TT is a simple, yet powerful, strategy that practically is useful in a large range of circumstances.

There are however some fundamental threshold issues that need to be addressed to ensure the expected income tax concessions can be validly accessed.  Furthermore, given the significant number of estate planning related issues aside from tax that are potentially relevant, it is critical that a methodical approach is adopted.

Image credit: Martin Howard cc