Monday, April 23, 2012
Do ‘cascading’ testamentary trusts cause a tax problem
With thanks to the Television Education Network, there will be a series of posts over the next period of time where excerpts from a recent video presentation I have provided will be the basis of the post.
Each week, I will also include a transcript of the presentation for those that cannot (or choose not) to view the presentation.
The first excerpt posted today is under the title ‘Do ‘cascading’ testamentary trusts cause a tax problem’ at the following link - http://youtu.be/YaMouN6Pox0
As explained at the above link -
Under Division 128 of the 1997 Tax Act, the concept of an asset passing from a will maker or the executor into the estate is absolutely certain that that transfer of wealth is not subject to any capital gains tax.
Where some confusion arises, particularly in relation to cascading trusts or master trusts, is that the language under Division 128 is a little bit obscure or a little bit uncertain as to exactly what is going to happen once the assets have passed into the estate. So in other words, the transfer from the will maker to the legal personal representative, absolutely no capital gains tax.
The transfer from the legal personal representative or the executor down into an initial testamentary trust, again absolutely no capital gains tax.
The confusion then arises that is it the case that from the testamentary trust to a beneficiary, particularly if that beneficiary happens to be another testamentary trust, will that transfer be without capital gains tax?
On a plain reading of Division 128, there is little question that that transfer of subsequent assets, even if it is to another trust, will be free of capital gains tax. But there has been, I guess for many years now, a level of uncertainty about that, simply because of the language used under that particular division.
Until next week.
Tuesday, April 17, 2012
Settlement sums
Last week, following on from the post before Easter, we had a enquiry about the consequences of a failure to deposit the settlement sum on the establishment of a discretionary trust.
This area of the law is potentially complex, however ultimately the conservative position is that the settlement sum should always be deposited into the trust’s bank account, and ideally, it should in fact be the first deposit.
The approach of placing the settlement cheque (or a cash equivalent of it) on the file for the trust can be problematic for a range of reasons, including:
1. Where the settlement sum is by way of cheque, the cheque will normally go stale after 13 months; and
2. Even where cash is stored with the trust, it is difficult to provide documentary evidence of the settlement sum forming part of the trust if the cash is lost.
Ensuring that the settlement sum is deposited into the bank account of the trust at least avoids each of these two issues.
Until next week.
This area of the law is potentially complex, however ultimately the conservative position is that the settlement sum should always be deposited into the trust’s bank account, and ideally, it should in fact be the first deposit.
The approach of placing the settlement cheque (or a cash equivalent of it) on the file for the trust can be problematic for a range of reasons, including:
1. Where the settlement sum is by way of cheque, the cheque will normally go stale after 13 months; and
2. Even where cash is stored with the trust, it is difficult to provide documentary evidence of the settlement sum forming part of the trust if the cash is lost.
Ensuring that the settlement sum is deposited into the bank account of the trust at least avoids each of these two issues.
Until next week.
Friday, March 30, 2012
Trust establishment 101
With thanks to co View Legal director Patrick Ellwood, this week’s post concerns a recent land tax case (Aston (Aust) Properties Pty Ltd v Commissioner of State Revenue, for a full copy of the judgment follow this link – http://www.austlii.edu.au/au/cases/vic/VCAT/2012/48.html) that highlights how critical it is to ensure that new structures are established correctly.
In this particular instance the taxpayer was arguing that group land tax assessments were incorrect due to the ownership of various landholdings being via separate trusts.
The trusts that were alleged to exist were prepared by the taxpayer himself and he gave evidence that he had ‘become convinced that the process of creating multi tiered trust structures could be undertaken in an efficient manner without the need to purchase off the shelf trust deeds from solicitors’.
For a myriad of reasons the court held that the grouped land tax assessment was valid and that the purported trusts simply did not exist.
Some of the reasons the court concluded no trusts existed included:
1. there was no evidence of any settlement sum being contributed on the initial creation of the trusts;
2. no evidence could be shown in relation to funds changing hands or creation of bank accounts;
3. while the trusts were purported to be created via schedules that were recreated on numerous occasions with reference to ‘standard terms’, the link to the standard terms could not be shown;
4. of the documents that could be produced, there were a significant number of errors and inconsistencies; and
5. some transactions that had purportedly been entered into were by entities that did not exist.
With the aid of hindsight each of these difficulties identified by the court could have been very easily addressed by getting some level of specialist advice prior to the creation of the trusts.
Given the Easter break there will be no post for the next two weeks.
In this particular instance the taxpayer was arguing that group land tax assessments were incorrect due to the ownership of various landholdings being via separate trusts.
The trusts that were alleged to exist were prepared by the taxpayer himself and he gave evidence that he had ‘become convinced that the process of creating multi tiered trust structures could be undertaken in an efficient manner without the need to purchase off the shelf trust deeds from solicitors’.
For a myriad of reasons the court held that the grouped land tax assessment was valid and that the purported trusts simply did not exist.
Some of the reasons the court concluded no trusts existed included:
1. there was no evidence of any settlement sum being contributed on the initial creation of the trusts;
2. no evidence could be shown in relation to funds changing hands or creation of bank accounts;
3. while the trusts were purported to be created via schedules that were recreated on numerous occasions with reference to ‘standard terms’, the link to the standard terms could not be shown;
4. of the documents that could be produced, there were a significant number of errors and inconsistencies; and
5. some transactions that had purportedly been entered into were by entities that did not exist.
With the aid of hindsight each of these difficulties identified by the court could have been very easily addressed by getting some level of specialist advice prior to the creation of the trusts.
Given the Easter break there will be no post for the next two weeks.
Monday, March 26, 2012
Contribution assessments in family law cases
The posts for the last 2 weeks have focused on the decision from the end of 2011 of Harris.
One final aspect of the case that it is worth highlighting involved the comments made by the Court about the ‘contribution’ that the parties to the marriage, and their respective families, made to growing the asset base during the course of the relationship.
As many will be aware, once the court has determined the property that satisfies the definition of being an ‘asset’ of the marriage and then in turn the property that is a ‘resource’, there is a need to determine the contribution the parties have made to creating the wealth.
In the Harris case, the appeal court expressly directed that in the retrial (which is yet to take place) the judge must be careful to ensure that adequate weight is given to the husband and his parents in terms of building up the value of the business that was owned by the family trust at the centre of the dispute.
This direction was as a result of the initial trial judge’s decision to simply ignore the contribution that had been made by the husband and his parents over many years, both before the marriage and during the course of it.
Until next week.
One final aspect of the case that it is worth highlighting involved the comments made by the Court about the ‘contribution’ that the parties to the marriage, and their respective families, made to growing the asset base during the course of the relationship.
As many will be aware, once the court has determined the property that satisfies the definition of being an ‘asset’ of the marriage and then in turn the property that is a ‘resource’, there is a need to determine the contribution the parties have made to creating the wealth.
In the Harris case, the appeal court expressly directed that in the retrial (which is yet to take place) the judge must be careful to ensure that adequate weight is given to the husband and his parents in terms of building up the value of the business that was owned by the family trust at the centre of the dispute.
This direction was as a result of the initial trial judge’s decision to simply ignore the contribution that had been made by the husband and his parents over many years, both before the marriage and during the course of it.
Until next week.
Tuesday, March 20, 2012
Trust distributions 101
Last week’s post touched on the Family Court decision from the end of 2011 concerning the way in which a family trust was treated as part of a matrimonial settlement.
One other aspect of the case that is worth mentioning involved the conclusion by the Court about the, purported, use of a corporate beneficiary.
In particular a ‘bucket company’ was set up some years after the initial establishment of the trust. The evidence that seemed to be accepted by the Court was that the company was established for ‘tax minimisation or reduction purposes’.
Unfortunately, to the extent that a disgruntled third party (including the Tax Office) may wish to challenge the distributions, the company was not in fact a beneficiary of the trust.
While the ‘wrongful’ distributions (in the words of the Court) were not explored further in the context of this family law case, the comments highlight the theme of many earlier posts – that is in almost every area where structures are used (whether they be trusts, companies or super funds) it is critical that someone takes responsibility for reading the establishment documents before any step is taken.
Until next week.
One other aspect of the case that is worth mentioning involved the conclusion by the Court about the, purported, use of a corporate beneficiary.
In particular a ‘bucket company’ was set up some years after the initial establishment of the trust. The evidence that seemed to be accepted by the Court was that the company was established for ‘tax minimisation or reduction purposes’.
Unfortunately, to the extent that a disgruntled third party (including the Tax Office) may wish to challenge the distributions, the company was not in fact a beneficiary of the trust.
While the ‘wrongful’ distributions (in the words of the Court) were not explored further in the context of this family law case, the comments highlight the theme of many earlier posts – that is in almost every area where structures are used (whether they be trusts, companies or super funds) it is critical that someone takes responsibility for reading the establishment documents before any step is taken.
Until next week.
Monday, March 12, 2012
Another family law case on trusts
Posts made in October 2011 focused on a high profile family law case involving a family trust (Keach).
In that case, the assets of a family trust were essentially protected on a property settlement.
Towards the end of last year, the case Harris v Harris (for a full copy of the decision follow this link - http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FamCAFC/2011/245.html) provided further context to the general attitude of the Family Court in relation to traditional trust structures.
The outcomes of both cases can be contrasted with the outcomes in cases involving arrangements that the Court believes are unconscionably designed to hide assets (for example, the case of the Kennon v Spry, also featured in the posts during the latter half of 2011).
In brief terms, the Harris case involved a trust established by the husband’s father.
At the relevant time, the appointor of the trust was the husband’s mother and the controllers of the trustee company were the husband’s mother, a son from a previous relationship and a friend.
The main asset of the trust was a business which it was accepted was run on a day-to-day basis by the husband and wife.
The main beneficiaries of the trust were the husband’s parents and their children (i.e. the husband and his siblings).
Distributions from the trust had been amongst the entire family group (including the wife), although the distributions to the wife ceased on separation with the husband.
In summary, the Court held:
1. The trust and its assets were not an asset of the marriage.
2. At most, the trust should be considered a significant financial resource for the husband.
3. If a party to the marriage is not directly the appointor or in control of the trustee, then they do not have direct control.
4. In order for there to be indirect control by a beneficiary, there must effectively be a situation where someone who has direct control is the mere puppet of the beneficiary.
5. In order to demonstrate indirect control (e.g. through a ‘puppet’ scenario), there must be clear evidence to support the argument and merely reviewing a history of trust distributions of itself will not be sufficient.
Until next week.
In that case, the assets of a family trust were essentially protected on a property settlement.
Towards the end of last year, the case Harris v Harris (for a full copy of the decision follow this link - http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FamCAFC/2011/245.html) provided further context to the general attitude of the Family Court in relation to traditional trust structures.
The outcomes of both cases can be contrasted with the outcomes in cases involving arrangements that the Court believes are unconscionably designed to hide assets (for example, the case of the Kennon v Spry, also featured in the posts during the latter half of 2011).
In brief terms, the Harris case involved a trust established by the husband’s father.
At the relevant time, the appointor of the trust was the husband’s mother and the controllers of the trustee company were the husband’s mother, a son from a previous relationship and a friend.
The main asset of the trust was a business which it was accepted was run on a day-to-day basis by the husband and wife.
The main beneficiaries of the trust were the husband’s parents and their children (i.e. the husband and his siblings).
Distributions from the trust had been amongst the entire family group (including the wife), although the distributions to the wife ceased on separation with the husband.
In summary, the Court held:
1. The trust and its assets were not an asset of the marriage.
2. At most, the trust should be considered a significant financial resource for the husband.
3. If a party to the marriage is not directly the appointor or in control of the trustee, then they do not have direct control.
4. In order for there to be indirect control by a beneficiary, there must effectively be a situation where someone who has direct control is the mere puppet of the beneficiary.
5. In order to demonstrate indirect control (e.g. through a ‘puppet’ scenario), there must be clear evidence to support the argument and merely reviewing a history of trust distributions of itself will not be sufficient.
Until next week.
Monday, March 5, 2012
Anti avoidance rules to be amended from 1 March 2012
Towards the end of last week the Federal Government announced that changes would be made to the general anti avoidance tax provisions under part IVA.
The announcement was made in the context of the government’s view that the provisions needed to ‘be effective in counteracting tax avoidance schemes that are carried out as part of broader commercial transactions’.
In particular the proposed amendments are said to be designed to ‘confirm that part IVA always intended to apply to commercial arrangements which have been implemented in a particular way to avoid tax. This also includes steps within broader commercial arrangements’.
The changes are said to be required because ‘in recent cases, some taxpayers have argued successfully that they did not get a 'tax benefit' because, without the scheme, they would not have entered into an arrangement that attracted tax. For example, they could have entered into another scheme that also avoided tax, deferred their arrangements indefinitely or done nothing at all. Such an outcome can potentially undermine the overall effectiveness of Part IVA and so the Government will act to ensure such arguments will no longer be successful.’
The government has said that to ensure that the changes do not interfere with what are otherwise genuine commercial activities it will consult extensively as to how to best implement the new rules.
Specialist advice is also likely to be sought before preparing the first draft of the new legislation and throughout the redrafting process.
A full copy of the media release is at the following link:
http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2012/010.htm&pageID=003&min=mva&Year=&DocType=
Until next week.
The announcement was made in the context of the government’s view that the provisions needed to ‘be effective in counteracting tax avoidance schemes that are carried out as part of broader commercial transactions’.
In particular the proposed amendments are said to be designed to ‘confirm that part IVA always intended to apply to commercial arrangements which have been implemented in a particular way to avoid tax. This also includes steps within broader commercial arrangements’.
The changes are said to be required because ‘in recent cases, some taxpayers have argued successfully that they did not get a 'tax benefit' because, without the scheme, they would not have entered into an arrangement that attracted tax. For example, they could have entered into another scheme that also avoided tax, deferred their arrangements indefinitely or done nothing at all. Such an outcome can potentially undermine the overall effectiveness of Part IVA and so the Government will act to ensure such arguments will no longer be successful.’
The government has said that to ensure that the changes do not interfere with what are otherwise genuine commercial activities it will consult extensively as to how to best implement the new rules.
Specialist advice is also likely to be sought before preparing the first draft of the new legislation and throughout the redrafting process.
A full copy of the media release is at the following link:
http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2012/010.htm&pageID=003&min=mva&Year=&DocType=
Until next week.
Subscribe to:
Posts (Atom)