Friday, April 23, 2010
Typos and big legal bills
Given Monday is a public holiday, the Blog for next week is posted below.
Yesterday ended up being a very long day and unnecessarily expensive (both in terms of time consumed and bank, accounting and legal charges).
The day was also a particularly frustrating one due to the relatively underwhelming cause of all the hassle – a typo in an on-line created trust deed.
While the typo was not ours, it served as an extremely timely reminder of how critical it is to get even the simple things right.
For those that attended our Master Class on trusts a few years ago (our Master Class series is run once a year and is a half day program built entirely around a practical case study), you may remember one of the examples (based on a real life situation) where the vesting (or ending) date of a trust was accidentally noted as 18 years instead of the more standard 80 years.
Yesterday, the error (which had been generated by a client’s former accountant using an online trust provider) was simply the spelling of the name Stephen with a 'v' instead of the 'ph' in the schedule.
While the trust had borrowed money from the bank before, no one had ever picked up on this typo.
Yesterday was the settlement day for a relatively large transaction and mid morning a Sydney bank officer identified the typo and insisted that the bank security could not be perfected because of it until the error was remedied.
After much (often quite illogical) negotiation, the bank finally agreed to a deed of variation being implemented.
As is often the way in these situations however, the deed (which ran to less than two sentences of actual substantive terms) was redrafted three times to satisfy the precise requirements of the bank.
Furthermore, even having produced the deed, there was the threat of the bank refusing to settle unless it was stamped prior to settlement.
The irony here of course is that the particular form of document is not liable to stamp duty in Queensland and due to recent changes at the Stamps Office trying to discourage people to lodge these documents for duty assessment (I might touch on this in more detail next week), it was going to be impossible to achieve a same day stamping.
Finally, based on a written undertaking provided by us, the bank did agree to settle.
Until next week.
Matthew Burgess
Monday, April 19, 2010
Bamford - What exactly does it mean?
As many of you will be aware, we have updated our Intensive program over the last few weeks to include some initial comments on Bamford.
The Intensives have fully booked out and we are therefore also putting on some Wednesday Night Forums shortly which will focus exclusively on Bamford and the unpaid present entitlement ruling from the end of last year.
One very practical issue that has been raised regularly over the last few weeks has been in relation to trust deeds. In this week’s post, I thought I would list out the answers to some of the most frequently asked questions in this regard.
1. Are View Legal deeds 'Bamford compliant' – every trust deed provided by View Legal is Bamford compliant.
2. Are trust deeds from other providers Bamford compliant – this is an issue that will need to be assessed on a case by case basis. Certainly the older the deed, the less likely it is to be compliant. There are also a number of non tax specialist deed providers who have not traditionally focused on some of the critical issues raised in Bamford.
3. Should we be looking to do wholesale updates of all trust deeds in our client base (similar to the recent super deed updates completed) – subject to the exact approach the ATO adopts in the decision impact statement that is due to be released shortly, we believe there is likely to be some benefit in at least conducting a full review of all deeds.
4. Are there standard distribution minutes available – as many of you will be aware, we have always been conservative in our approach to distribution minutes and strongly recommend that every trustee should independently consider both the trust deed and the exact nature of distributions on a year on year basis (in other words, not use a 'standard' minute).
Certainly given the confirmation of the proportionate approach, the crafting of minutes so that (for example) infant beneficiaries get a set dollar amount and then the balance goes in certain percentages will rarely (if ever) be appropriate.
We are already working with a number of accounting practices to develop an approach that suits the risk profiles of their clients.
Until next week.
Matthew Burgess
The Intensives have fully booked out and we are therefore also putting on some Wednesday Night Forums shortly which will focus exclusively on Bamford and the unpaid present entitlement ruling from the end of last year.
One very practical issue that has been raised regularly over the last few weeks has been in relation to trust deeds. In this week’s post, I thought I would list out the answers to some of the most frequently asked questions in this regard.
1. Are View Legal deeds 'Bamford compliant' – every trust deed provided by View Legal is Bamford compliant.
2. Are trust deeds from other providers Bamford compliant – this is an issue that will need to be assessed on a case by case basis. Certainly the older the deed, the less likely it is to be compliant. There are also a number of non tax specialist deed providers who have not traditionally focused on some of the critical issues raised in Bamford.
3. Should we be looking to do wholesale updates of all trust deeds in our client base (similar to the recent super deed updates completed) – subject to the exact approach the ATO adopts in the decision impact statement that is due to be released shortly, we believe there is likely to be some benefit in at least conducting a full review of all deeds.
4. Are there standard distribution minutes available – as many of you will be aware, we have always been conservative in our approach to distribution minutes and strongly recommend that every trustee should independently consider both the trust deed and the exact nature of distributions on a year on year basis (in other words, not use a 'standard' minute).
Certainly given the confirmation of the proportionate approach, the crafting of minutes so that (for example) infant beneficiaries get a set dollar amount and then the balance goes in certain percentages will rarely (if ever) be appropriate.
We are already working with a number of accounting practices to develop an approach that suits the risk profiles of their clients.
Until next week.
Matthew Burgess
Monday, April 12, 2010
Trust cloning is dead (or is it?)
On Friday, a lawyer in sole practice and I caught up in relation to reviewing a purported trust clone.
As many of you will know, we have been fortunate (particularly in recent years) to do an ever increasing amount of work with suburban and regional lawyers who effectively use us as their external resource in areas where they do not have the time, energy or skills to otherwise assist.
Here the initial query was for the lawyer directly and in particular whether he had prepared documents for a client that satisfied the relevant trust law rules about how a trust cloning must take place. As it turned out, everything was fine on this point and similarly from a tax perspective, the transaction had been validly implemented prior to the tax rule changes on October 31, 2008.
What had not been resolved however was the way in which the transfer of assets between the two trusts was accounted for. In particular, the lawyer had crafted the documentation so that the consideration paid was the amount notified to the parties by the accountant.
As no notification had yet been made, we caught up with the accountant and quickly determined that there could be four possible alternatives, namely:
1. Nil.
2. $1 (or some other nominal amount greater than nil).
3. The historical cost base.
4. The market value.
Each of these four alternatives had quite dramatically different consequences both from an accounting and tax perspective and Friday's meeting was a timely reminder of the need for a truly collaborative approach between the various professional specialists on behalf of the underlying client.
Until next week.
Matthew Burgess
As many of you will know, we have been fortunate (particularly in recent years) to do an ever increasing amount of work with suburban and regional lawyers who effectively use us as their external resource in areas where they do not have the time, energy or skills to otherwise assist.
Here the initial query was for the lawyer directly and in particular whether he had prepared documents for a client that satisfied the relevant trust law rules about how a trust cloning must take place. As it turned out, everything was fine on this point and similarly from a tax perspective, the transaction had been validly implemented prior to the tax rule changes on October 31, 2008.
What had not been resolved however was the way in which the transfer of assets between the two trusts was accounted for. In particular, the lawyer had crafted the documentation so that the consideration paid was the amount notified to the parties by the accountant.
As no notification had yet been made, we caught up with the accountant and quickly determined that there could be four possible alternatives, namely:
1. Nil.
2. $1 (or some other nominal amount greater than nil).
3. The historical cost base.
4. The market value.
Each of these four alternatives had quite dramatically different consequences both from an accounting and tax perspective and Friday's meeting was a timely reminder of the need for a truly collaborative approach between the various professional specialists on behalf of the underlying client.
Until next week.
Matthew Burgess
Thursday, April 1, 2010
Pre CGT assets owned by family trusts
Given the Easter break for many next week, and our promise to post a blog posting each week - the posting that would have been next Monday is being posted today.
Over the last eighteen months, we have had an increasing number of clients needing to consider various aspects of the capital gains tax (CGT) rules as they relate to assets acquired pre CGT (i.e. before September 1985).
Someone like Bernard Salt (Salt is a renowned demographic consultant out of KPMG in Melbourne – see his website at http://www.bernardsalt.com.au/) would undoubtedly be able to explain that the reason for this has something to do with the baby boomer generation – i.e. people who were in the early to mid part of their wealth creation in the 1980s are now looking at retirement and succession issues.
Two of the potentially trickier aspects of the CGT regime, relate to the deeming provisions under Division 149 (formerly section 160ZZS) and CGT event K6 (formerly section 160ZZT).
As an accountant reminded me last week, there is an old ATO ruling (let me know if you want a copy of it) that confirms Division 149 can in fact apply to discretionary trusts – i.e. the underlying CGT status of trust assets can be impacted on by the way in which distributions have been made out of the trust over the term that the asset was owned.
Best wishes for Easter.
Matthew Burgess
Over the last eighteen months, we have had an increasing number of clients needing to consider various aspects of the capital gains tax (CGT) rules as they relate to assets acquired pre CGT (i.e. before September 1985).
Someone like Bernard Salt (Salt is a renowned demographic consultant out of KPMG in Melbourne – see his website at http://www.bernardsalt.com.au/) would undoubtedly be able to explain that the reason for this has something to do with the baby boomer generation – i.e. people who were in the early to mid part of their wealth creation in the 1980s are now looking at retirement and succession issues.
Two of the potentially trickier aspects of the CGT regime, relate to the deeming provisions under Division 149 (formerly section 160ZZS) and CGT event K6 (formerly section 160ZZT).
As an accountant reminded me last week, there is an old ATO ruling (let me know if you want a copy of it) that confirms Division 149 can in fact apply to discretionary trusts – i.e. the underlying CGT status of trust assets can be impacted on by the way in which distributions have been made out of the trust over the term that the asset was owned.
Best wishes for Easter.
Matthew Burgess
Monday, March 29, 2010
When is a share not a share?
Special classes of shares have, at least in recent years, always been a hallmark of company structures.
One of the most common descriptions of shares that provide no other rights than simply a dividend at the complete discretion of the directors from time to time is a 'dividend access' or 'dividend only' share.
Last week, we helped an accountant whose client was the subject of a wider ATO audit. For the third time I am personally aware of in the last twelve months, one of the core issues the ATO was pursuing related to the application of the debt equity rules to a purported dividend access share.
For anyone that has spent time considering the debt equity rules, they will know how complex they are (indeed the position paper from the ATO on this point ran to around 15 A4 pages).
The bottom line in a practical sense is if you have clients wanting to implement a dividend access share arrangement and they are not willing to have you provide formal advice about the application (or otherwise) of the debt equity rules, you should get as a minimum confirmation from them that they understand the consequences of a share being treated as debt instead of equity.
More conservatively, you should probably refuse to implement the structure at all, although obviously commercially, this raises a number of difficulties.
For the client last week, if the ATO is successful in arguing that the dividend access share was in fact a debt instrument for tax purposes, it will mean that the 7-digit dividend that had been declared will be completely unfrankable.
Until next week.
Matthew Burgess
One of the most common descriptions of shares that provide no other rights than simply a dividend at the complete discretion of the directors from time to time is a 'dividend access' or 'dividend only' share.
Last week, we helped an accountant whose client was the subject of a wider ATO audit. For the third time I am personally aware of in the last twelve months, one of the core issues the ATO was pursuing related to the application of the debt equity rules to a purported dividend access share.
For anyone that has spent time considering the debt equity rules, they will know how complex they are (indeed the position paper from the ATO on this point ran to around 15 A4 pages).
The bottom line in a practical sense is if you have clients wanting to implement a dividend access share arrangement and they are not willing to have you provide formal advice about the application (or otherwise) of the debt equity rules, you should get as a minimum confirmation from them that they understand the consequences of a share being treated as debt instead of equity.
More conservatively, you should probably refuse to implement the structure at all, although obviously commercially, this raises a number of difficulties.
For the client last week, if the ATO is successful in arguing that the dividend access share was in fact a debt instrument for tax purposes, it will mean that the 7-digit dividend that had been declared will be completely unfrankable.
Until next week.
Matthew Burgess
Monday, March 22, 2010
How many directors does it take to have a company ?
Last week, I further explored the issues that came out of a relatively common situation of a loan or unpaid present entitlement owed to a company, where that company was a trading entity.
As mentioned last week, one asset protection strategy that often makes sense on a number of levels is ensuring that the only directors of a trading company are those people who, commercially, absolutely must be a director.
Often, we find situations where, for example, a husband and wife are both directors of a company when only one spouse in fact needs to be.
As directors carry personal liability, this is unnecessarily risky.
While this issue can normally be very easily solved by simply resigning the relevant director and giving notification to the company and the ASIC - care must be taken.
In particular, all companies, until the late 1990s, had to have at least two directors (and, other than in very limited circumstances, all public companies must still have three directors).
Therefore, even though the Corporations Law has been updated for about 13 or 14 years now, there are many company constitutions (or as they were formally known ‘memorandum and articles’) that still require two directors.
If a director resigns in breach of the company constitution, there can be a series of Corporation Law issues that need to be taken into account. These issues can all be avoided by simply ensuring the company’s constitution is updated before the resignation takes place.
Until next week.
Matthew Burgess
As mentioned last week, one asset protection strategy that often makes sense on a number of levels is ensuring that the only directors of a trading company are those people who, commercially, absolutely must be a director.
Often, we find situations where, for example, a husband and wife are both directors of a company when only one spouse in fact needs to be.
As directors carry personal liability, this is unnecessarily risky.
While this issue can normally be very easily solved by simply resigning the relevant director and giving notification to the company and the ASIC - care must be taken.
In particular, all companies, until the late 1990s, had to have at least two directors (and, other than in very limited circumstances, all public companies must still have three directors).
Therefore, even though the Corporations Law has been updated for about 13 or 14 years now, there are many company constitutions (or as they were formally known ‘memorandum and articles’) that still require two directors.
If a director resigns in breach of the company constitution, there can be a series of Corporation Law issues that need to be taken into account. These issues can all be avoided by simply ensuring the company’s constitution is updated before the resignation takes place.
Until next week.
Matthew Burgess
Monday, March 15, 2010
In times of peace - prepare for war
Two weeks ago, I explained the importance of reviewing all loan accounts and unpaid present entitlements in the context of asset protection issues.
As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:
1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.
Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.
The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.
As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.
Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.
As usual, until next week.
Matthew Burgess
As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:
1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.
Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.
The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.
As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.
Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.
As usual, until next week.
Matthew Burgess
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