When cross owned insurance policies are Glorious

In business succession arrangements, cross owned insurance policies are rarely, if ever, utilised. Avoiding the use of cross owned policies is driven by a range of commercial reasons and the fact that invariably adverse tax consequences are unnecessarily triggered as the desired commercial outcomes can normally be achieved utilising self owned policies that almost always deliver favourable tax outcomes.

One scenario where cross owned insurance arrangements historically provided significant potential benefit however related to where a self-managed superannuation fund (SMSF) borrows funds via an instalment trust arrangement to acquire an asset which forms a substantial part of the total value of the fund.

An example of how this approach (which was given in principle support by the Tax Office historically) worked is as follows:

1. The SMSF establishes an instalment trust and borrows funds from a third party to acquire an asset.
2. The (say) only two members of an SMSF are concerned that on the death of one of them, the ability to pay out the member’s entitlement may be impossible to achieve without selling the underlying asset (i.e. neither member’s account balance is large enough to represent the entire value of the acquired asset).
3. If the members took out self-owned insurance policies, this would obviously not assist, given that the exiting member would effectively be entitled to an even greater share of the total assets of the fund.
4. In contrast, if permissible under the trust deed for the SMSF, if cross owned policies were implemented, then the remaining member’s balance would be the one that increases and the cash from the insurance policy could be used to pay the death benefit, while the continuing member would effectively have their member balance represented entirely by the asset originally acquired via the instalment trust.

Despite the above, since 1 July 2014, the view of the Tax Office has been that the superannuation rules do not allow SMSFs to provide insurance for a member, unless the insured event is consistent with one of the following conditions of release:

1. death;
2. terminal medical condition;
3. permanent incapacity; and
4. temporary incapacity.

The Explanatory Memorandum associated with the amended rules made it clear that the proceeds of an insurance policy must be released to the member who is the insured under the policy.

This means that cross-insurance arrangements where the proceeds of an insurance policy are paid to someone other than the insured under the policy are not permitted. 

** for the trainspotters, the title today is riffed from the Breeders song ‘Glorious’. 

View hear (sic):

I like your old stuff better than your new stuff** - Tax Office shows its (previous) caring approach towards family trusts distributing to testamentary trusts

New (financial) year.

More lock downs.

And a reminder some things never change - for example, the Tax Office don’t like trusts.

Previous posts have considered the Tax Office’s views about distributing from a testamentary trust to a family trust, that (at least in part) offered an (arguably) unnecessarily narrow interpretation of the tax rules.

In the context of the 2018 budget changes to the excepted trust income regime, it is timely to revisit PBR 1051238902389 that considers the situation where an inter vivos family discretionary trust was distributing to a testamentary trust.

In contrast to the approach of the changes, the ruling sees the Tax Office adopt a more collaborative approach.

Briefly, to the extent relevant, the factual matrix was as follows:

1. a willmaker was the ultimate controller of a family trust;
2. the willmaker's estate plan attempted to mandate that the assets of the family trust be sold and the cash distributed directly (and equally) to four testamentary trusts established under the will;
3. it was acknowledged by the parties that the directions of the willmaker were an attempted fettering of the trustee's discretion. Therefore, while they could be taken into account, they were not be binding;
4. this said, the assets of the family trust were sold and the intention was to then have the cash distributed to the testamentary trusts – who were potential beneficiaries of the family trust (an approach adopted by default by all View trust documents).

In determining that income of a prescribed person (eg including a minor) as a beneficiary of a testamentary trust, even if sourced from a distribution made by a family trust, is excepted trust income (ie minor's are taxed at adult rates) of the beneficiary, the Tax Office confirmed:

1. Following the decision in Furse (another case regularly explored in View posts), all that is necessary for the assessable income of a trust estate to be excepted trust income is that the assessable income be the assessable income of the trust estate and that the trust estate be as a result of a will.
2. Thus, any amounts representing a distribution from a family trust to a testamentary trust are 'assessable income of a trust estate that resulted from a will’, and therefore will be 'excepted trust income’, unless otherwise excluded.
3. Again largely following the analysis in the Furse decision, the main exclusions (namely either that the parties are not dealing at arm's length or the arrangement is one predominately driven by achieving the tax benefit) were held not to be applicable and thus access to the excepted trust income provisions was confirmed.
4. While the outcome in this private ruling is a positive one, distributions by family trusts to testamentary trusts are clearly denied access to the excepted trust income regime under the new legislation, regardless of how they are made.
5. Practically, the capital gains tax consequences of the distribution from the family trust would also need to be considered, given none of the rollover concessions otherwise available on death under division 128 of the Tax Act would be available on either the sale of the assets by the inter vivos trust, nor a straight distribution of the assets in specie. Similarly, to the extent the distributions were of dutiable property, the exemptions available for deceased estates would also not apply.

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 Regurgitator song ‘I like your old stuff better than your new stuff’.

View here:

PS and the image the quintessential lock down WFH set up.

Family court cases and the Stamps Office

Recent cases have explored various aspects of the Tax Office’s ability to access material lodged as part of family law cases.

The recent family law case of Kern [2014] FCCA 1108 provides an example of where the interest of a State based revenue office can be enlivened. 

If you would like a copy of the decision please email me.

The key components of the case here were as follows:

1. A couple who had a 9-year marriage were engaged in proceedings in relation to the division of matrimonial assets.
2. One of the assets related to some land that was gifted to the wife by her parents.  
3. Stamp duty was paid on the transfer at a value of $110,000.  
4. Evidence given by the wife to the family court was that the true market value of the land at the date it was gifted to by her parents was in the region of $150,000 and indeed, may have been closer to $200,000, particularly given that the final sale price for the land when it was subsequently disposed was $325,000.

While the family court accepted the wife’s arguments that she should receive a disproportionate share of the proceeds of the sale of the land due to the contribution that she made, it was also decided to refer the evidence to the Stamps Office for further investigation.

The family court has the inherent power to make a referral in situations such as this (i.e. effectively fraud) under the Evidence Act 1995.

While that Act does provide some protection for self-incrimination, that protection was not available in this case because:

     (a)  The wife provided the incriminating evidence of her own free will.
     (b)  The evidence provided was done so before a request for immunity was made.


Until next week.


Image credit: Des Daughter cc

Tax Office denied access to family law documents

Following on from recent posts, another decision arising out of family law proceedings that is worth remembering is International Litigation Partners Pte Ltd v FCT [2014] FCA 671.

If you would like a copy of the decision please email me. In this particular case, the Tax Office had sought access to material filed in the family court proceedings to assist in determining the tax residency of various related entities of the husband.  While the former wife consented to access being granted, the husband opposed access.

In ultimately denying the Tax Office access to the documents requested, the court confirmed:

1. The court must use its discretion to determine whether access to family court documents is appropriate on a case by case basis.


2. The exercise of the discretion involves the weighing of a number of competing interests, and in particular, whether the Tax Office was likely to derive any substantial benefit by breaching the confidential nature of personal documents filed in family court proceedings. 


3. The court should also take into account practical difficulties in separating documents that might be of use to the Tax Office and those that disclose personal issues (including those concerning the children of the relationship). 


4. Also of relevance is whether the spouse to the marriage is party to a Tax Office litigation (in this case, the husband was not a party).  As set out in earlier posts, in the Darling matter, the husband was a party to Tax Office audit activity.

Until next week.


Image credit: Paul Hocksenar cc

Tax Office views on accessing Family Court documents

As mentioned in last week’s post, in the case of Darling, the Tax Office was given access to material lodged as part of family law proceedings, to further its audit activities in relation to the husband of the marriage.

The Tax Office has now released a Decision Impact Statement in relation to its intended approach in this area.  As usual, a full copy of the document is available via the following link - http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/M34of2014/00001

In addition to providing a useful summary of the key aspects of the court decision, the Statement confirms –

1. There is an implied obligation on the Tax Office not to make use of documents disclosed as part of a family law case for a purpose not related to the family court litigation (ie to assist the Tax Office with its tax audit activities).


2. Whenever the Tax Office is wanting access to court documents for use other than in relation to the case in which the documents were filed, it will make an application to the court for release from the implied obligation.


3. In making an application to court, the Tax Office will have regard to the factors set out in the Darling decision (as summarised in last week’s post).

 Until next week.

Image credit: Adam Rifkin cc

Tax Office access to family court material

One area of the law that continues to evolve relates to the Tax Office being able to access material lodged as part of family law proceedings.  A further example of this is the case of FCT & Darling [2014] FamCAFC 59.  A full copy of the decision is available via the following link - http://www.austlii.edu.au/au/cases/cth/FamCAFC/2014/59.html

Whereas the original decision prevented the Tax Office from accessing certain information disclosed by the husband in his family court affidavit, the Tax Office was ultimately given access to the material on appeal.

While the court acknowledged that they did not want to create an environment that discouraged those involved in family court proceedings from making full and frank disclosures, it was also the case that, given the family court had an inherent ability to refer matters of tax evasion to the Tax Office, any further access granted on a case by case basis was unlikely to have a significant impact.

The other specific reasons given by the court for allowing access included:

1 there were significant restrictions on the Tax Office in relation to the ability to use the information that they gained, particularly in relation to releasing it publicly;

2 while the husband had argued that it would be inconvenient to have the information released, there was no actual evidence supporting this argument;

3 the Tax Office was engaged in a significant and targeted audit in relation to the husband – i.e. the Tax Office was not engaged in some form of ‘fishing expedition’.

Overall, it was deemed to be in the public interest to allow the commissioner access to the material.

Next week’s post will consider the Decision Impact Statement recently released by the Tax Office.

Until next week.

Image credit: reynermedia cc