Two weeks ago, we touched on a situation where the gifting of a family home was potentially exposed under the bankruptcy clawback rules.
As I mentioned, if the original transaction had been structured slightly differently, around 20% of the value of the property could have been protected.
In simple terms, instead of a straight gift of the property, the following steps could have been taken:
1. The house could have been sold by the husband to his spouse for its market value 3½ years ago.
2. The transaction should have been structured under a vendor finance arrangement.
3. Following completion of the sale transaction, the husband could have forgiven the outstanding debt for 'natural love and affection'.
4. Assuming that all steps would have been properly legally documented, then the wife would have had at least a reasonably arguable case that the capital growth in the asset since the date of the initial transfer would have been quarantined to her benefit and not available to creditors on the bankruptcy of her husband.
Until next week.
Matthew Burgess
Monday, August 23, 2010
Monday, August 16, 2010
Unpaid present entitlements (UPE) & the election
Last week, the National Institute of Accountants (NIA) sought to turn the UPE issue into an election topic.
An extract from the Weekly Tax Bulletin released on Friday is set out below.
It highlights, as many have, that the changed approach by the ATO effectively renders the specific provisions under Division 7A in relation to UPEs irrelevant.
Until next week.
The NIA has called on both political parties "to show their small business credentials and intervene to put a stop" to the ATO's changed view of the treatment of unpaid entitlements to corporate beneficiaries. The NIA said that Taxation Ruling TR 2010/3 now confirms the ATO view that unpaid present entitlements (UPE) to corporate beneficiaries will be treated as loans and potentially deeming them as unfranked dividends.
NIA chief executive officer Andrew Conway said this new approach puts an end to a 12 year long standard practice of not treating unpaid entitlements to corporate beneficiaries as loans. "For the majority of cases the use of such funds by the trust is solely for business working capital related purposes. We have been reminded that the mischief which the ATO is trying to address is where these funds are used for private purposes within the trust," he said.
The NIA says there is strong evidence to indicate that it was never the intention of Div 7A to extend to UPEs and that "this latest change of heart by the ATO has no legislative basis". The ruling contradicts the underlying policy intent of Div 7A, the NIA said.
An extract from the Weekly Tax Bulletin released on Friday is set out below.
It highlights, as many have, that the changed approach by the ATO effectively renders the specific provisions under Division 7A in relation to UPEs irrelevant.
Until next week.
The NIA has called on both political parties "to show their small business credentials and intervene to put a stop" to the ATO's changed view of the treatment of unpaid entitlements to corporate beneficiaries. The NIA said that Taxation Ruling TR 2010/3 now confirms the ATO view that unpaid present entitlements (UPE) to corporate beneficiaries will be treated as loans and potentially deeming them as unfranked dividends.
NIA chief executive officer Andrew Conway said this new approach puts an end to a 12 year long standard practice of not treating unpaid entitlements to corporate beneficiaries as loans. "For the majority of cases the use of such funds by the trust is solely for business working capital related purposes. We have been reminded that the mischief which the ATO is trying to address is where these funds are used for private purposes within the trust," he said.
The NIA says there is strong evidence to indicate that it was never the intention of Div 7A to extend to UPEs and that "this latest change of heart by the ATO has no legislative basis". The ruling contradicts the underlying policy intent of Div 7A, the NIA said.
Tuesday, August 10, 2010
House transfers and real love
Last week, I was reminded about the importance of proper planning when implementing asset protection strategies.
The particular scenario involved the potential clawback under the bankruptcy rules of a family home that had been gifted by a husband to a wife approximately 3½ years before a bankruptcy event. Many of you will be aware that changes to the bankruptcy rules extended the clawback period from 2 to 4 years a few years ago.
Whether the transfer could in fact be clawed back for this client was an issue which is as yet unresolved. The issue last week, however, was in relation to whether the value of the house as to today’s date could be clawed back or whether its value 3½ years ago was the relevant value.
The question was quite critical because notwithstanding the intervening GFC, the value of the house had gone up by more than 20% over the 3½ year period.
As the original transfer had been crafted simply as a gift for 'natural love and affection', we had to advise the client that the house itself was the asset that would be exposed and therefore the value at today’s date was at risk.
Next week, I will try to provide an example of how the original arrangement could have been structured differently to potentially limit the total value exposed under the clawback provisions.
Until next week.
Matthew Burgess
The particular scenario involved the potential clawback under the bankruptcy rules of a family home that had been gifted by a husband to a wife approximately 3½ years before a bankruptcy event. Many of you will be aware that changes to the bankruptcy rules extended the clawback period from 2 to 4 years a few years ago.
Whether the transfer could in fact be clawed back for this client was an issue which is as yet unresolved. The issue last week, however, was in relation to whether the value of the house as to today’s date could be clawed back or whether its value 3½ years ago was the relevant value.
The question was quite critical because notwithstanding the intervening GFC, the value of the house had gone up by more than 20% over the 3½ year period.
As the original transfer had been crafted simply as a gift for 'natural love and affection', we had to advise the client that the house itself was the asset that would be exposed and therefore the value at today’s date was at risk.
Next week, I will try to provide an example of how the original arrangement could have been structured differently to potentially limit the total value exposed under the clawback provisions.
Until next week.
Matthew Burgess
Monday, August 2, 2010
Trustee companies multitasking
Last week we touched on the importance of trustee companies not accumulating assets in their own right.
The specific example that inspired last week’s post related to a recent client situation where the trustee company had been used to receive distributions out of the trust that it acted as trustee for.
Often advisers assume that it is not in fact possible at law for a trustee company to also act as the corporate beneficiary. While this is often a good assumption, it is not necessarily the case.
The question of whether a trustee company can in fact be a beneficiary of the trust it acts as trustee for depends on the terms of the trust deed.
Even where a trustee company is listed under the trust deed as a potential beneficiary of the trust that it acts as trustee for, we normally strongly recommend against it being used as a corporate beneficiary.
This is because the trustee is liable for any difficulties that arise against the trust.
It is therefore preferable a completely 'cleanskin' company acts as the corporate beneficiary in order to ensure that the accumulated profits of the trust are quarantined from any litigation against the trustee from time to time.
Until next week.
Matthew Burgess
The specific example that inspired last week’s post related to a recent client situation where the trustee company had been used to receive distributions out of the trust that it acted as trustee for.
Often advisers assume that it is not in fact possible at law for a trustee company to also act as the corporate beneficiary. While this is often a good assumption, it is not necessarily the case.
The question of whether a trustee company can in fact be a beneficiary of the trust it acts as trustee for depends on the terms of the trust deed.
Even where a trustee company is listed under the trust deed as a potential beneficiary of the trust that it acts as trustee for, we normally strongly recommend against it being used as a corporate beneficiary.
This is because the trustee is liable for any difficulties that arise against the trust.
It is therefore preferable a completely 'cleanskin' company acts as the corporate beneficiary in order to ensure that the accumulated profits of the trust are quarantined from any litigation against the trustee from time to time.
Until next week.
Matthew Burgess
Monday, July 26, 2010
Trustee companies and specialisation
Today’s post relates to an asset protection issue that unfortunately is too often overlooked.
Many of you will have heard our firm (and other lawyers) referring to the 'domino theory'.
This theory is one of the very basic asset protection concepts of ensuring that there is a deliberate limit placed on the number of assets owned by any one entity. Furthermore, the assets owned by a particular entity should be of comparable risk profiles.
A similar issue arises in a slightly different context where a company acts as trustee for a trust. In this situation, while the company will be the legal owner of all assets of the trust, it will not have beneficial ownership.
In a number of instances recently, we have seen situations where the trustee company does in fact own assets in its own right, even if this is simply cash, unpaid entitlements or at call loans.
In these situations, those assets are unnecessarily exposed to difficulties that might be encountered by the trust.
In order to maximise the trustee company structure, care must always be taken to ensure that its assets are no more than the initial capital paid up on establishment of the company (i.e. $2).
Next week, we will look at the specific scenario today’s post was inspired by, that being a trustee company that had also been used for many years as the corporate beneficiary for the trust.
Until next week.
Matthew Burgess
Many of you will have heard our firm (and other lawyers) referring to the 'domino theory'.
This theory is one of the very basic asset protection concepts of ensuring that there is a deliberate limit placed on the number of assets owned by any one entity. Furthermore, the assets owned by a particular entity should be of comparable risk profiles.
A similar issue arises in a slightly different context where a company acts as trustee for a trust. In this situation, while the company will be the legal owner of all assets of the trust, it will not have beneficial ownership.
In a number of instances recently, we have seen situations where the trustee company does in fact own assets in its own right, even if this is simply cash, unpaid entitlements or at call loans.
In these situations, those assets are unnecessarily exposed to difficulties that might be encountered by the trust.
In order to maximise the trustee company structure, care must always be taken to ensure that its assets are no more than the initial capital paid up on establishment of the company (i.e. $2).
Next week, we will look at the specific scenario today’s post was inspired by, that being a trustee company that had also been used for many years as the corporate beneficiary for the trust.
Until next week.
Matthew Burgess
Monday, July 19, 2010
Insurance funded buy-sell arrangements
Over the last 2 to 3 years, there has rarely been a week gone by where we have not been fortunate to help a risk adviser implement an insurance funded buy-sell arrangement with their clients.
One issue that comes up surprisingly more regularly than it probably should occurred again last week in relation to the structure of these arrangements and the use of options.
There is an enormous amount of material on insurance funded buy-sell deeds (if you are interested, spend some time looking at our website – see the following link viewlegal.com.au).
Invariably, most advisers in this area will, for a multitude of tax and wider commercial reasons, recommend an option based contractual arrangement – these arrangements provide the most amount of flexibility possible for each party.
Where however a discretionary trust is involved in the business structure, it is generally the case under trust laws that the trust deed must expressly permit the granting of options.
The technical reasons for this position revolve around issues concerning the fettering of a trustee’s discretion – practically however the position is that unless the trust does have the power to grant options at the date the buy-sell agreement is signed, there is a risk that the agreement may not be enforceable as otherwise anticipated.
Until next week.
Matthew Burgess
One issue that comes up surprisingly more regularly than it probably should occurred again last week in relation to the structure of these arrangements and the use of options.
There is an enormous amount of material on insurance funded buy-sell deeds (if you are interested, spend some time looking at our website – see the following link viewlegal.com.au).
Invariably, most advisers in this area will, for a multitude of tax and wider commercial reasons, recommend an option based contractual arrangement – these arrangements provide the most amount of flexibility possible for each party.
Where however a discretionary trust is involved in the business structure, it is generally the case under trust laws that the trust deed must expressly permit the granting of options.
The technical reasons for this position revolve around issues concerning the fettering of a trustee’s discretion – practically however the position is that unless the trust does have the power to grant options at the date the buy-sell agreement is signed, there is a risk that the agreement may not be enforceable as otherwise anticipated.
Until next week.
Matthew Burgess
Monday, July 12, 2010
Can an enduring attorney be a company?
The issues in relation to attorney appointment over the last couple of weeks have generated a number of questions and comments.
One common theme has been in relation to the distinction between the appointment of an attorney and the role of an executor and/or trustee under a will.
There are a number of distinctions between these various roles, however one of the overriding practical points is that the appointment of an attorney can generally only be of an individual person.
In contrast, the appointment of an executor or trustee can be of a company or a particular role – for example, you will often see the executor of a will being crafted so that it is the 'senior partner from time to time in the firm of . . . . . .’.
Until next week.
Matthew Burgess
One common theme has been in relation to the distinction between the appointment of an attorney and the role of an executor and/or trustee under a will.
There are a number of distinctions between these various roles, however one of the overriding practical points is that the appointment of an attorney can generally only be of an individual person.
In contrast, the appointment of an executor or trustee can be of a company or a particular role – for example, you will often see the executor of a will being crafted so that it is the 'senior partner from time to time in the firm of . . . . . .’.
Until next week.
Matthew Burgess
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