Deed updates by exception post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 3rd instalment of 4 in this series of posts via the following video link under the heading ‘Deed updates by exception post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

The second approach is ‘by exception’, that is you do something. So on the basis that even if you do nothing, you've got to do something; which is you've got to have someone read the deed.

The by exception approach is if it's a particularly nasty deed, or there is as particularly big capital gain this year we’re going to invest in this and we're going to look at it and we're possibly going to amend it, because of the particular circumstances.

We're going to do that, because even doing nothing, we've actually sat down and looked at the document and we understand it.

The trigger for a lot of people on that, if you're looking for a date, but don’t quote me because again not all deed providers were diligent in doing this, but by and large, any deed after 1993, from any even remotely reputable provider, will have streaming.

So if you're looking for a date to say I would hope to be basically right, you can use 1993 as the date, because that’s when streaming ruling came out or whatever it was and most deed providers across the board went through and did it. Indeed, a lot of them went and did actual updates in 1993. So even your pre-’85 trusts had gone and had that amendment in 1993.

The next post will look at the third main approach we are seeing in this area.

Until next week.

The “do nothing” approach to deed updates

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 2nd in a series of 4 posts via the following video link under the heading ‘The “do nothing” approach to deed updates’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

There are obvious advantages to ‘doing nothing’.

From a cost perspective for a client, you would intuitively think that’s probably the best outcome for them. Our only asterisk that we would put next to that is it does put enormous amount of pressure back on your practice and your team if someone needs to be sitting down and reading the deed.

Even if you've had the same provider for many years, you can almost guarantee that they will have changed their document, and they won't necessarily be able to tell you at what point at time they changed it.

Even if they could tell you, it probably doesn't absolve you under your insurance policy to say that everyone before a point in time will have this style of deed. Someone has to sit down and look at that. Which then means, according to the Tax Office, you can't just be churning out standard resolutions. You've actually got to have a tailored resolution that fits the particular deed and the particular income profile for the particular year.

So yes, the do nothing is attractive on a number of levels, but you need to be aware that it does add compliance costs.

You will see there's a common theme to all of these 3 choices.

Ultimately, our positioning is ‘don’t shoot the messenger’. This is something that has been imposed on us from Canberra. It means the cost of running a trust is more. So first one is to do nothing.

The next post will look at the second main approach we are seeing in this area.

Until next week.

What are the options in relation to deed updates post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the first in a series of 4 posts via the following video link under the heading ‘What are the options in relation to deed updates post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below - 

What it actually means in terms of the trust variations, we think it's one of the following three things. 

The first one, we're probably guess that most of the people we work with adopt this path, is to ‘do nothing at all’. 

Is that still the right thing to do?  The honest answer is we don’t know. 

What we do know is even within the last 6 weeks, this complete review of trusts, that has been threatened forever, has already been pushed out for another year.  So the earliest that we're going to have a new taxation regime for trusts is 2014. 

You wouldn't want to take too heavy a bet for whether that's going to be pushed back again.  I suspect there's every chance you're going to have an election before the next time around and you may well have a change of government. 

So there's a whole range of things that are going to potentially happen between now and 2014 that will push that out. 

The first one is to just do nothing.

The next post will look at this approach in more detail.

Until next week.

‘Deriving’ trust income

This week’s post looks at a recent case from the Federal Court and is of interest for those following the ongoing debate about trust income.

The name of the case was SCCASP Holdings as trustee for the H&R Superfund v FCT (a link to the full copy of the decision is as follows – http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2012/1052.html?stem=0&synonyms=0&query=SCCASP%20Holdings%20\).

In summary, the core factual background was as follows:

1    A family trust that had made a capital gain of $14 million sought to have this received by a related self managed superannuation fund (SMSF).

2    The ATO was seeking to argue that in the hands of the SMSF, the income was 'special income' and therefore taxed at 47%, as opposed to the taxpayer who argued that it was only subject to tax at the standard income tax rate for SMSFs (namely 15%).

3    The particular 'technical' argument that the taxpayer sought to rely on was that because the trustee of the family trust had not made a decision to pay or apply any amount of the capital gain, then for the purposes of the tax rules, it could not be said that the SMSF 'derived' the income.

Ultimately, the Court agreed with the Tax Office and held that the word 'derived' extended to effectively capture anything that was ultimately received by the SMSF, and in particular, extended to the concepts such as money being 'attributed' or ‘imputed’ to the SMSF.

Until next week.

What are some of the advantages of a professional partnership incorporating?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the advantages of a professional partnership incorporating?’. If you would like a link to the video please let me know.

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The biggest thing I guess with incorporation is that, if only from a perception perspective, but in reality from many other perspectives as well, the ability to facilitate the entry and exit is significantly easier.

Probably the greatest example of that is in relation to transaction costs. In most Australian states already - and in those that haven't done it, it's not very far away – there has been the abolishment of stamp duty on the transfer of shares in unlisted companies.

So what that means in a very practical sense is that shares can be moved without any immediate transaction costs between current owners and future owners. That obviously significantly simplifies and reduces the transaction costs that would otherwise be involved.

Conceptually as well, the ability to create employee share type arrangements or have partial sell downs is significantly easier in a corporate environment than it has historically been in a trust environment, or if there's individual partners involved.

In relation to the stamp duty side of things, it is an important consideration to take into account. Basically every Australian state now has abolished stamp duty. Victoria and Tasmania actually led the way originally by abolishing stamp duty on transfers of unlisted shares. The only major Australian state now that hasn’t done it is New South Wales and the government has released a timetable that would see the abolishment of that duty very soon.

Until next week.

Penalising the under insured

With thanks to co View Legal director Patrick Ellwood, this week’s post looks at a situation we had recently under an insurance funded buy sell arrangement where the parties were wanting to craft the agreement in order to penalise a business owner if they were under insured.

In particular there was a desire to ensure that the agreement discounted the purchase price that was otherwise payable under the agreement if the insurance payout was less than the market value of the interest in the business at the relevant date.

For a number of reasons we recommended against this approach, including:

1.   The overall aim of any business succession agreement is to achieve as smooth a transition of the business as possible.  If a party to the transaction believes that they are not getting fair value then the prospects of a smooth transmission are significantly decreased.

2.   The exiting owner (or their estate) will still be required to pay tax on the transfer of the interest at full market value (even though the price under the agreement would be less than market value) due to the way in which the market value substitution rules under the Tax Act operate.

3.   Practically, if the exiting party had sold their interest the day before the triggering event, they would have received market value.  It is arguably inequitable for an owner to be disadvantaged because of a sudden involuntary exit event, as opposed to a planned voluntary exit.

4.   Generally most agreements (ours included) cater for any shortfall in insurance funding by ensuring that the remaining owners are still required to pay the difference but have an extended period of time (for example, three years) to repay the difference.

Until next week.

Assets of a family trust not necessarily at risk on a matrimonial breakdown

With thanks to team member James Ford, the post this week focuses on another recent decision of the Family Court concerning trusts.

The case is Morton V Morton [2012] FamCA 30. If you would like a copy of the case please email me.

Essentially, the case confirms that, where appropriately structured, the assets of a family trust will not be considered matrimonial property on a relationship breakdown.

Until next week.