With increasing regularity, we are seeing issues arise in relation to the authority for people to act under powers of attorney.
Like many laws, the power of attorney legislation is frustratingly inconsistent, with different acts applying in each Australian state and territory.
In theory, there is also legislation requiring each jurisdiction to recognise the documentation prepared in each of the states. In practice however, it is often extremely difficult to convince third parties that a power of attorney document that looks completely different to what they normally expect to see is in fact legally binding.
One solution (although admittedly not a particularly efficient one) we are seeing more people implement is to have a separate power of attorney prepared under each jurisdiction where they are likely to spend significant periods of time. While not a perfect solution, this approach can provide significant practical benefits.
There is an ongoing push, as part of having uniform succession laws across Australia, for the power of attorney laws to also be made consistent. The timeline for achieving such an outcome is difficult to predict given the number of vested interests involved.
Until next week.
Monday, February 28, 2011
Monday, February 21, 2011
ATO attacks Division 7A planning strategy
In what is only a slight variation of the Division 7A planning approach of trusts distributing income to a limited partnership, in order to attain a capped rate of tax of 30% and avoid any application of Division 7A on loans made by the limited partnership, the ATO has released a further taxpayer alert last week.
The use of limited partnerships to avoid Division 7A was an approach that the ATO was on record as having concerns about long before the legislation in this area was changed a couple of years ago.
Following the change, a number of advisers were quick to realise that companies limited by guarantee could offer a similar pathway to the limited partnership approach – in other words:
1. Potentially receive trust distributions, with the tax payable on those distributions capped at the corporate rate of 30%.
2. The company limited by guarantee could then subsequently make loans that would not, on the face of the legislation, be caught by Division 7A.
In their first taxpayer alert for the year (taxpayer alert TA2011/1), the ATO lists its concerns with the above strategy.
The full alert is set out at the following link - http://law.ato.gov.au/atolaw/view.htm?docid=%22TPA/TA20111/NAT/ATO/00001%22.
Until next week.
The use of limited partnerships to avoid Division 7A was an approach that the ATO was on record as having concerns about long before the legislation in this area was changed a couple of years ago.
Following the change, a number of advisers were quick to realise that companies limited by guarantee could offer a similar pathway to the limited partnership approach – in other words:
1. Potentially receive trust distributions, with the tax payable on those distributions capped at the corporate rate of 30%.
2. The company limited by guarantee could then subsequently make loans that would not, on the face of the legislation, be caught by Division 7A.
In their first taxpayer alert for the year (taxpayer alert TA2011/1), the ATO lists its concerns with the above strategy.
The full alert is set out at the following link - http://law.ato.gov.au/atolaw/view.htm?docid=%22TPA/TA20111/NAT/ATO/00001%22.
Until next week.
Monday, February 14, 2011
An estate planning tip
Following last week's post, an adviser contacted me to relay a critical issue to keep in mind whenever looking to move an asset (such as a family home) into the name of a spouse.
Broadly the chain of events was as follows:
1. An at-risk spouse moved the family home into her husband’s name paying a substantial stamp duty bill.
2. The husband subsequently died with a very simple 'I love you' will.
3. Under this will, all of the husband’s wealth passed back to the wife.
4. The wife then had to pay another round of stamp duty to move the asset into a family trust.
5. Aside from the double stamp duty bill (and the second bill was actually significantly larger than the first as duty was payable on 100% of the asset with no concessions available), the second transfer to the family trust has also meant that the house will probably be subject to capital gains tax on any subsequent disposal and the 4-year clawback period under the bankruptcy rules starts again from the date of the second transfer.
6. Both of these adverse outcomes could have been avoided if the husband had ensured testamentary discretionary trusts were established under his will.
Until next week.
Broadly the chain of events was as follows:
1. An at-risk spouse moved the family home into her husband’s name paying a substantial stamp duty bill.
2. The husband subsequently died with a very simple 'I love you' will.
3. Under this will, all of the husband’s wealth passed back to the wife.
4. The wife then had to pay another round of stamp duty to move the asset into a family trust.
5. Aside from the double stamp duty bill (and the second bill was actually significantly larger than the first as duty was payable on 100% of the asset with no concessions available), the second transfer to the family trust has also meant that the house will probably be subject to capital gains tax on any subsequent disposal and the 4-year clawback period under the bankruptcy rules starts again from the date of the second transfer.
6. Both of these adverse outcomes could have been avoided if the husband had ensured testamentary discretionary trusts were established under his will.
Until next week.
Monday, February 7, 2011
Trust resettlements
Following on from last week's post concerning the long awaited 'Colonial' decision, another decision released by the Federal Court in the last couple of weeks is of significant interest.
In a similar vein to the high profile tax cases last year of Bamford and Thomas, the taxpayer here was largely successful.
For those interested the full title of the case is - FCT v Clark [2011] FCAFC 5 (Full Federal Court; Dowsett, Edmonds and Gordon; 21 January 2011).
In brief terms, the key aspects of the decision (which was given by way of a 2 to 1 majority) were as follows:
1. What is required to constitute a resettlement (i.e. the disposal and reacquisition, for tax purposes, of all assets of a trust at market value) is significantly more than what the Tax Office has traditionally suggested, and indeed argued in this case;
2. The High Court decision of Commercial Nominees confirms that to avoid a resettlement occurring, there only needs to be a continuum of property and membership, that can be identified at any time, even if different from time to time;
3. The Commercial Nominees case, while it related to a superannuation fund, is relevant in relation to trusts more generally;
4. In the circumstances of this case the fact that there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years did not trigger a resettlement; and
5. Where a trust has been effectively deprived of all assets and then 're-endowed', a resettlement will probably occur.
Until next week.
In a similar vein to the high profile tax cases last year of Bamford and Thomas, the taxpayer here was largely successful.
For those interested the full title of the case is - FCT v Clark [2011] FCAFC 5 (Full Federal Court; Dowsett, Edmonds and Gordon; 21 January 2011).
In brief terms, the key aspects of the decision (which was given by way of a 2 to 1 majority) were as follows:
1. What is required to constitute a resettlement (i.e. the disposal and reacquisition, for tax purposes, of all assets of a trust at market value) is significantly more than what the Tax Office has traditionally suggested, and indeed argued in this case;
2. The High Court decision of Commercial Nominees confirms that to avoid a resettlement occurring, there only needs to be a continuum of property and membership, that can be identified at any time, even if different from time to time;
3. The Commercial Nominees case, while it related to a superannuation fund, is relevant in relation to trusts more generally;
4. In the circumstances of this case the fact that there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years did not trigger a resettlement; and
5. Where a trust has been effectively deprived of all assets and then 're-endowed', a resettlement will probably occur.
Until next week.
Monday, January 31, 2011
'Colonial' decision released
Earlier in the month the long awaited 'Colonial' decision was released by the Federal Court.
Although, unlike other tax cases last year (such as Bamford and Thomas), the taxpayer was largely unsuccessful, the Colonial decision again reinforces that the provisions of the trust deed are critical.
For those interested the full title of the case is 'Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16' (Federal Court of Australia, Stone J, 18 January 2011).
In brief terms, the key aspects of the decision were as follows:
1. The main interest in the decision will be for the Australian funds management industry as it focussed on the tax effect of provisions in a unit trust that sought to allocate part of the taxable income to a unitholder redeeming units.
2. The tests that must be satisfied to meet the definition of a 'fixed trust' for tax purposes will be difficult for many unit trusts. Here the unit trust was held not to constitute a fixed trust, primarily due to the wide amendment power that allowed changes to be made to unitholders' entitlements. The ability to satisfy the Tax Act definition of fixed trust is important in a number of areas including -
(a) to carry forward tax losses;
(b) passing through franking credits to unit holders; and
(c) where superannuation funds are unitholders, avoiding application of the ‘non-arm’s length income’ rules (note that prior to 1 July 2007, these rules were called ‘special income’).
3. The attempt by way of variation to provide the trustee the discretion to allocate discounted and non-discounted capital gains to unitholders on redemption was ineffective.
As set out in the post on 17 December 2010, it has been confirmed that there will be a full review of the way in which trusts are taxed.
The Colonial decision further highlights the need for a comprehensive review of the existing rules and Stone J mentions the need for legislative change in this regard.
A number of commentators also believe the proposed managed investment trust attribution regime (due to take effect on 1 July 2011) may address many of the concerns raised in Colonial.
Until next week.
Although, unlike other tax cases last year (such as Bamford and Thomas), the taxpayer was largely unsuccessful, the Colonial decision again reinforces that the provisions of the trust deed are critical.
For those interested the full title of the case is 'Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16' (Federal Court of Australia, Stone J, 18 January 2011).
In brief terms, the key aspects of the decision were as follows:
1. The main interest in the decision will be for the Australian funds management industry as it focussed on the tax effect of provisions in a unit trust that sought to allocate part of the taxable income to a unitholder redeeming units.
2. The tests that must be satisfied to meet the definition of a 'fixed trust' for tax purposes will be difficult for many unit trusts. Here the unit trust was held not to constitute a fixed trust, primarily due to the wide amendment power that allowed changes to be made to unitholders' entitlements. The ability to satisfy the Tax Act definition of fixed trust is important in a number of areas including -
(a) to carry forward tax losses;
(b) passing through franking credits to unit holders; and
(c) where superannuation funds are unitholders, avoiding application of the ‘non-arm’s length income’ rules (note that prior to 1 July 2007, these rules were called ‘special income’).
3. The attempt by way of variation to provide the trustee the discretion to allocate discounted and non-discounted capital gains to unitholders on redemption was ineffective.
As set out in the post on 17 December 2010, it has been confirmed that there will be a full review of the way in which trusts are taxed.
The Colonial decision further highlights the need for a comprehensive review of the existing rules and Stone J mentions the need for legislative change in this regard.
A number of commentators also believe the proposed managed investment trust attribution regime (due to take effect on 1 July 2011) may address many of the concerns raised in Colonial.
Until next week.
Topics:
Capital gains tax,
Colonial,
Superannuation,
Trustee,
Unit trust
Friday, December 17, 2010
Bamford driven review of Tax Act
While I had flagged there would be no further post this year, the Government has made a mid December announcement yesterday worth noting.
As you will read elsewhere, it has been confirmed that there will be a full review of the way in which trusts are taxed.
Relevant extracts of Bill Shorten's announcement are set out below.
While there is obviously a long way to go, it is reassuring that the rumoured revisiting of the entity taxation regime has been expressly ruled out.
1. There are major uncertainties after Bamford, especially about the extent to which amounts derived by trustees retain their character (for example, as capital gains or franked dividends) when they flow through to beneficiaries.
2. A public consultation process (has been announced) as the first step towards updating the trust income tax provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and rewriting them into the 1997 Act.
3. "In developing an initial consultation paper for release in the first part of 2011, Treasury will draw heavily on the expertise of the private sector, particularly through the established Tax Design Panel process and the Board of Taxation," said the Assistant Treasurer
4. "The options to be canvassed in public consultation will be developed within the broad policy framework currently applying to the taxation of trust income".
5. Any options will seek to ensure that net taxable income of a trust is assessed primarily to beneficiaries. Trustees will continue to be assessed only to the extent that amounts of net taxable income are not otherwise assessable to beneficiaries. The options will not include the taxation of trusts as companies, which would be a major departure from the current law.
6. “Based on advice I have sought from the Board of Taxation, I will also consider further whether there are any issues that must be addressed in this current tax year".
7. "Trust tax law has been an ongoing issue for some time and it is important to simplify the system, rewrite the rules and give more certainty to the many thousands of small businesses and farmers who use trusts. I encourage all interested stakeholders to make a submission to the consultation".
As you will read elsewhere, it has been confirmed that there will be a full review of the way in which trusts are taxed.
Relevant extracts of Bill Shorten's announcement are set out below.
While there is obviously a long way to go, it is reassuring that the rumoured revisiting of the entity taxation regime has been expressly ruled out.
1. There are major uncertainties after Bamford, especially about the extent to which amounts derived by trustees retain their character (for example, as capital gains or franked dividends) when they flow through to beneficiaries.
2. A public consultation process (has been announced) as the first step towards updating the trust income tax provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and rewriting them into the 1997 Act.
3. "In developing an initial consultation paper for release in the first part of 2011, Treasury will draw heavily on the expertise of the private sector, particularly through the established Tax Design Panel process and the Board of Taxation," said the Assistant Treasurer
4. "The options to be canvassed in public consultation will be developed within the broad policy framework currently applying to the taxation of trust income".
5. Any options will seek to ensure that net taxable income of a trust is assessed primarily to beneficiaries. Trustees will continue to be assessed only to the extent that amounts of net taxable income are not otherwise assessable to beneficiaries. The options will not include the taxation of trusts as companies, which would be a major departure from the current law.
6. “Based on advice I have sought from the Board of Taxation, I will also consider further whether there are any issues that must be addressed in this current tax year".
7. "Trust tax law has been an ongoing issue for some time and it is important to simplify the system, rewrite the rules and give more certainty to the many thousands of small businesses and farmers who use trusts. I encourage all interested stakeholders to make a submission to the consultation".
Topics:
Bamford,
Deed of variation,
Discretionary trust,
Trust deed,
Trustee
Monday, December 13, 2010
Final blog for 2010
With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s blog will be the final formal blog until 2011.
Similarly, the Twitter postings will also take a hiatus until the New Year.
Very best wishes for Christmas and the New Year period and thank you to all of those advisers who have read and the many advisers who have taken the time to provide feedback in relation to the blog postings.
Similarly, the Twitter postings will also take a hiatus until the New Year.
Very best wishes for Christmas and the New Year period and thank you to all of those advisers who have read and the many advisers who have taken the time to provide feedback in relation to the blog postings.
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