Many of you will have seen the recently released minutes from the National Tax Liaison Group meeting held on 23 June.
One item of interest relates to the ATO’s view on taxpayer alerts (TA).
In particular, the ATO claims that TAs are simply intended as an 'early warning' to taxpayers and their advisers of significant new and emerging higher risk tax planning issues or arrangements the ATO has under risk assessment.
The ATO claims TAs are essentially a 'press release' about issues causing it concern which it releases 'in the interests of an open tax administration'. The ATO stressed that TAs are not expected to replace rulings, and are not meant to be an ATO view of the law.
Until next week.
Thursday, September 30, 2010
Friday, September 24, 2010
When a power to vary is not a power to vary
Last week, we touched on the fact that many trust deeds do not have any power to vary in them.
There are similarly many trusts that do have a power to vary, but that power to vary is not as comprehensive as may otherwise be assumed.
Two recent examples that we have seen are summarised below.
The first example (which was highlighted in quite a high profile case last year) turns on whether a power to vary extends to all aspects of the trust instrument. In particular, some powers to vary are restricted to either:
1. The formal provisions that actually establish the terms of the trust.
2. Alternatively, the power to vary might be restricted to the actual powers that the trustee has to run the trust.
Care should always therefore be taken to understand exactly how comprehensive the power to vary is.
Similarly, some powers to vary are subject to specific prohibitions. For example, a power might extend to all parts of a trust other than the rules regulating the appointor provision.
In these types of situations, it is generally impossible (unless court approval is obtained to vary the relevant clause), even if the affected party (for example the appointor) were to consent to the variation.
Ultimately (and generally in complete contrast to superannuation trust deed variations), there is always the need to very carefully review the exact basis on which any purported variation to a family trust is to be implemented before making a change.
Until next week.
There are similarly many trusts that do have a power to vary, but that power to vary is not as comprehensive as may otherwise be assumed.
Two recent examples that we have seen are summarised below.
The first example (which was highlighted in quite a high profile case last year) turns on whether a power to vary extends to all aspects of the trust instrument. In particular, some powers to vary are restricted to either:
1. The formal provisions that actually establish the terms of the trust.
2. Alternatively, the power to vary might be restricted to the actual powers that the trustee has to run the trust.
Care should always therefore be taken to understand exactly how comprehensive the power to vary is.
Similarly, some powers to vary are subject to specific prohibitions. For example, a power might extend to all parts of a trust other than the rules regulating the appointor provision.
In these types of situations, it is generally impossible (unless court approval is obtained to vary the relevant clause), even if the affected party (for example the appointor) were to consent to the variation.
Ultimately (and generally in complete contrast to superannuation trust deed variations), there is always the need to very carefully review the exact basis on which any purported variation to a family trust is to be implemented before making a change.
Until next week.
Friday, September 17, 2010
Trust deed updates - Start at the start
Due to the recent decision in Bamford, we have seen a significant increase in the number of advisers recommending to their clients that a complete review of, particularly family trusts, be done for each client.
As part of this review process, there is often a subsequent recommendation that the trust deed needs to be updated for all recent changes in the law, or at the least to make the deed 'Bamford compliant'.
Previous posts have touched on some of the issues that arise in this regard. This week, I was reminded, however, about the importance of getting the basics right in relation to any deed update.
Arguably the most fundamental issue that needs to be considered in any deed update is whether there is in fact a power to vary the document.
There are an amazing number of trust deeds that, for whatever reason, in fact do not have any power to vary under them at all.
In these situations, the only way to amend the trust deed is to apply to court – which is obviously an expensive and time consuming exercise. In some situations however, it is a step that commercially must in fact be taken.
Next week, I will try to detail two further issues that arise in relation to deed updates that should also be kept in mind.
Finally, thank you for all those who have provided feedback on last week's post about the ATO ruling on insurance trusts. I have emailed all those who have emailed me about the posting, however if there is anyone who would like further comments please let me know.
Until next week.
As part of this review process, there is often a subsequent recommendation that the trust deed needs to be updated for all recent changes in the law, or at the least to make the deed 'Bamford compliant'.
Previous posts have touched on some of the issues that arise in this regard. This week, I was reminded, however, about the importance of getting the basics right in relation to any deed update.
Arguably the most fundamental issue that needs to be considered in any deed update is whether there is in fact a power to vary the document.
There are an amazing number of trust deeds that, for whatever reason, in fact do not have any power to vary under them at all.
In these situations, the only way to amend the trust deed is to apply to court – which is obviously an expensive and time consuming exercise. In some situations however, it is a step that commercially must in fact be taken.
Next week, I will try to detail two further issues that arise in relation to deed updates that should also be kept in mind.
Finally, thank you for all those who have provided feedback on last week's post about the ATO ruling on insurance trusts. I have emailed all those who have emailed me about the posting, however if there is anyone who would like further comments please let me know.
Until next week.
Topics:
Bamford,
Deed of variation,
Discretionary trust,
Insurance,
Trust deed
Wednesday, September 8, 2010
ATO ruling on insurance trusts
Last week the ATO released a Product Ruling (PR2010/18) in relation to the capital gains tax consequences for the beneficiary of an insurance trust deed.
In many respects the ruling reflects what most specialists in this area (including View Legal) have been saying for many years. That is that a properly crafted insurance trust deed should provide appropriate protection for the principals of a business without any significant tax detriment, notwithstanding that there may be other commercial issues to consider regarding the structure.
Unfortunately the positive aspects of the ruling are largely undermined by the fact that the outcomes are based on the assumption that the insurance trust deed will create absolute entitlement for each beneficiary in the relevant insurance policy. As many advisers who work in this area will know, the expressed views of the ATO concerning absolute entitlement are somewhat contentious and the ATO continues to refer to a draft ruling that has never been finalised - despite being issued in 2004.
One practical issue is that the ruling released last week confirms that in order to ensure absolute entitlement the relevant beneficiary must be able to call for the asset at any time. This largely undermines one of the main reasons advisers had historically recommended insurance trusts - that is that the trustee will have the ability to ultimately control the payment of any insurance proceeds received.
A further practical issue, given the way in which many providers have traditionally structured trust arrangements is that the product ruling only relates to insurance trust deeds where the company acting as trustee is an entity owned and controlled by the principals involved in the business entity and the relevant insurer is not be a party to the arrangements.
For those interested in reading a full copy of the ruling please email me.
Until next week.
In many respects the ruling reflects what most specialists in this area (including View Legal) have been saying for many years. That is that a properly crafted insurance trust deed should provide appropriate protection for the principals of a business without any significant tax detriment, notwithstanding that there may be other commercial issues to consider regarding the structure.
Unfortunately the positive aspects of the ruling are largely undermined by the fact that the outcomes are based on the assumption that the insurance trust deed will create absolute entitlement for each beneficiary in the relevant insurance policy. As many advisers who work in this area will know, the expressed views of the ATO concerning absolute entitlement are somewhat contentious and the ATO continues to refer to a draft ruling that has never been finalised - despite being issued in 2004.
One practical issue is that the ruling released last week confirms that in order to ensure absolute entitlement the relevant beneficiary must be able to call for the asset at any time. This largely undermines one of the main reasons advisers had historically recommended insurance trusts - that is that the trustee will have the ability to ultimately control the payment of any insurance proceeds received.
A further practical issue, given the way in which many providers have traditionally structured trust arrangements is that the product ruling only relates to insurance trust deeds where the company acting as trustee is an entity owned and controlled by the principals involved in the business entity and the relevant insurer is not be a party to the arrangements.
For those interested in reading a full copy of the ruling please email me.
Until next week.
Monday, August 23, 2010
The price of love
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
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 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
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