Family court cases and the Stamps Office

Recent cases have explored various aspects of the Tax Office’s ability to access material lodged as part of family law cases.

The recent family law case of Kern [2014] FCCA 1108 provides an example of where the interest of a State based revenue office can be enlivened. 

If you would like a copy of the decision please email me.

The key components of the case here were as follows:

1. A couple who had a 9-year marriage were engaged in proceedings in relation to the division of matrimonial assets.
2. One of the assets related to some land that was gifted to the wife by her parents.  
3. Stamp duty was paid on the transfer at a value of $110,000.  
4. Evidence given by the wife to the family court was that the true market value of the land at the date it was gifted to by her parents was in the region of $150,000 and indeed, may have been closer to $200,000, particularly given that the final sale price for the land when it was subsequently disposed was $325,000.

While the family court accepted the wife’s arguments that she should receive a disproportionate share of the proceeds of the sale of the land due to the contribution that she made, it was also decided to refer the evidence to the Stamps Office for further investigation.

The family court has the inherent power to make a referral in situations such as this (i.e. effectively fraud) under the Evidence Act 1995.

While that Act does provide some protection for self-incrimination, that protection was not available in this case because:

     (a)  The wife provided the incriminating evidence of her own free will.
     (b)  The evidence provided was done so before a request for immunity was made.


Until next week.


Image credit: Des Daughter cc

Another View Legal Apple and Android app launched

Following the successful launch earlier this year of the View Legal Directors Duties, Estate Planning and business succession apps, we have now developed and launched a further Apple and Android app.

The new app is in relation to binding death benefit nominations (BDBN) and can be downloaded via the following links –

1. iPhone – https://itunes.apple.com/au/app/bdbn/id931237201?mt=8
2. Android - https://play.google.com/store/apps/details?id=view.legal.bdbn

BDBNs can be an essential tool for anyone with superannuation savings.  BDBNs are however heavily regulated and there are many aspects that can cause irreversible damage if misunderstood.

The app explores some of the fundamental issues that arise for anyone with superannuation savings considering making a BDBN.

Depending on the answers provided, the app generates a free white paper containing general information in relation to some of the issues that are often relevant.

Until next week.

Extensions to vesting dates – some lessons from Re Arthur Brady Family Trust; Re Trekmore Trading Trust

For those that do not otherwise have access to the Weekly Tax Bulletin, the most recently published article by fellow View Legal Director Patrick Ellwood and I is extracted below.

Often a key reason for seeking to extend the vesting day of a trust will be to defer the likely tax and stamp duty implications that would arise where the trust vests and assets are distributed to the beneficiaries.

The recent Queensland case of Re Arthur Brady Family Trust; Re Trekmore Trading Trust [2014] QSC 244 (see 2014 WTB 42 [1416]), provides a useful illustration of the way in which the Courts respond to applications where deferring revenue costs are arguably the primary driver for the application.

The case follows previous decisions such as Stein v Sybmore Holdings Pty Ltd [2006] NSWSC 1004 in NSW and Re Plator Nominees Pty Ltd [2012] VSC 284 in Victoria, each of which are discussed below.

Legislation

In each State, the Court has statutory power to vary trust instruments in particular circumstances.
In the Northern Territory, this power can be exercised where the Court “thinks fit”.

In Western Australia and Queensland, the power can be exercised where the Court considers the variation “expedient” or where the transaction is in “the best interests of the beneficiaries”.
In all other jurisdictions, the “expedient” test applies.

In circumstances where a trust has been established with a vesting period of less than 80 years, the trustee may vary the trust deed, in accordance with an express power of variation in the trust instrument, to extend the vesting day.

The decision of FCT v Clark [2011] FCAFC 5 provides comfort that in many circumstances, such a variation will not trigger a resettlement of the trust for tax purposes.

However where the trust instrument does not provide the trustee with adequate powers to extend the vesting day, an application to the Court may be necessary.

The Court would therefore need to consider whether the trustee’s reasons for wanting to extend the vesting day are “expedient” or “in the best interests of the beneficiaries”, depending on the jurisdiction.

Cases

Stein v Sybmore Holdings Pty Ltd involved an application under s 81 of the Trustee Act 1925 (NSW) to extend the vesting day of a trust established in 1978, which was to vest in 2007.

The trustee sought an order authorising it to extend the vesting date of the trust, notwithstanding that the variation power in the trust instrument was insufficient to allow such an amendment.

The trustee’s reasons for seeking the authorisation included:

1. the trust had been established for the intended benefit of the applicant’s children and grandchildren, however his adult children were unmarried and without children and unless the application was granted, the trust would vest before his grandchildren could benefit; and

2. the trustee anticipated that capital gains tax of $690,000 and stamp duty of $620,000 would be payable on vesting of the trust, diluting an asset pool valued at approximately $13m.

The Court granted the order requested as it considered the amendment to be “expedient”.  The judgment focused primarily on the first reason for the application outlined above, however the dilution to the value of the trust that would have been caused by the capital gains tax and stamp duty costs outlined above were a relevant factor.

A similar sentiment can be found in the Victorian case of Plator Nominees Pty Ltd.  The case involved a trust established in 1972 which had a 40 year vesting period.  Consequently the trust was due to vest in 2012.

The trustee brought an application under s 63A of the Trustee Act 1958 (Vic) that the vesting day be extended to the date 21 years after the death of the last living relative of one of the primary beneficiaries.

The trustee’s application included the following justifications for the extension:

1. the trust was established as a property investment vehicle intended to survive the primary beneficiaries for the benefit of their children, but if it vested in 2012 it would not achieve that purpose;

2. all of the beneficiaries had consented to the extension;

3. no specific reason could be identified as to why 2012 had been nominated as the vesting day; and

4. if the trust vested in 2012 a “significant capital gain” would be realised.

The Court granted the extension and noted that, consistent with previous judicial authority, the fact that deferral of taxation costs was one of the drivers for requesting the extension did not preclude it from granting the extension.

Re Arthur Brady Family Trust; Re Trekmore Trading Trust arguably further clarifies the position set out in the previous cases.

In that case, the first trust was established in 1977 with a vesting date of 2017.  The second trust was established in 2008 with near identical terms to the first trust (presumably as part of a trust ‘cloning’ arrangement), including the 2017 vesting date.

The applicants sought an order for an extension to the vesting date under (at the time) section 96 of the Trusts Act 1973 (Qld) (which under the Trusts Act 2025 (Qld) would be under section 183).

The sole reason for the application outlined in the judgment was the applicant’s desire to defer capital gains tax and stamp duty costs which would substantially dilute the overall pool of assets to the detriment of the beneficiaries.

The total tax and stamp duty costs across both trusts were anticipated to exceed $1.8m out of an asset pool of $15m.

The applicant submitted that, in order to maintain the property portfolios, the beneficiaries would need to borrow funds to meet the transaction costs.  Each of the contingent beneficiaries supported the application.

After a detailed analysis, the Court granted the requested extensions as it was satisfied the “very substantial impact of taxes and duties upon the trust funds” and the unanimous approval of the beneficiaries supported the exercise of its discretion.

Lessons

A few key lessons can be taken from the cases above.

First, many trust deeds from all eras, and particularly those established in the 1970s and 1980s include vesting periods significantly shorter than 80 years.

Practitioners should be alert to this issue and ensure they methodically check the vesting day of every trust as part of any trust dealing.

Secondly, Re Arthur Brady Family Trust; Re Trekmore Trading Trust provides authority that the Court may grant an order for the extension of a vesting day even where the sole purpose of the extension is to defer the capital gains tax costs and stamp duty costs that would otherwise arise as a result of the vesting, provided it can be shown that those costs would have a material adverse impact on the beneficiaries.

Finally, although any application to Court carries a degree of risk, recent cases indicate the Court will generally react positively to applications for the extension of vesting dates, where there are compelling commercial or family reasons to order the extension.


Until next week.

Latest View Legal Apple and Android app launched

Following the successful launch earlier this year of the View Legal Directors Duties and Estate Planning apps, we have now developed and launched another Apple and Android app.

The new app is in relation to Business Succession and can be downloaded via the following links –

1. iPhone – https://itunes.apple.com/au/app/business-succession/id927283653?mt=8
2. Android – https://play.google.com/store/apps/details?id=business.succession

Business succession is the important process of ensuring a plan is in place for a person’s business assets so they are dealt with, after death, as intended, while minimising the impact of challenges against the arrangements and costs such as stamp duty, tax and administration expenses.

The business succession area is however heavily regulated and it is vital that business owners and their advisers have a deep understanding across all relevant areas.

The business succession app is designed to allow the user to narrow down some of the broad areas that might be relevant in relation to a business succession plan.

Depending on the answers provided, the app generates a free white paper containing general information in relation to some of the issues that are often relevant.

Until next week.

Tax Office denied access to family law documents

Following on from recent posts, another decision arising out of family law proceedings that is worth remembering is International Litigation Partners Pte Ltd v FCT [2014] FCA 671.

If you would like a copy of the decision please email me. In this particular case, the Tax Office had sought access to material filed in the family court proceedings to assist in determining the tax residency of various related entities of the husband.  While the former wife consented to access being granted, the husband opposed access.

In ultimately denying the Tax Office access to the documents requested, the court confirmed:

1. The court must use its discretion to determine whether access to family court documents is appropriate on a case by case basis.


2. The exercise of the discretion involves the weighing of a number of competing interests, and in particular, whether the Tax Office was likely to derive any substantial benefit by breaching the confidential nature of personal documents filed in family court proceedings. 


3. The court should also take into account practical difficulties in separating documents that might be of use to the Tax Office and those that disclose personal issues (including those concerning the children of the relationship). 


4. Also of relevance is whether the spouse to the marriage is party to a Tax Office litigation (in this case, the husband was not a party).  As set out in earlier posts, in the Darling matter, the husband was a party to Tax Office audit activity.

Until next week.


Image credit: Paul Hocksenar cc

Some ramifications of failed trust distributions

For those that do not otherwise have access to the Weekly Tax Bulletin, the most recent published article by fellow View Legal Director Tara Lucke and I is extracted below.

As regularly addressed in the Weekly Tax Bulletin, a methodical approach is needed when preparing trust distribution resolutions to ensure the intended outcomes are achieved.

As explored at 2014 WTB 27 [942], there are a range of issues often overlooked in relation to distribution resolutions.

Where a purported trust distribution is subsequently found to be invalid, several potential ramifications arise, including:

• The "knowing recipient" principle.
• Disallowed deductions.
• Disclaimers.
• Equity and rectification.
• Impact of any default provisions.

Further comments on each of these issues are set out in turn below.

"Knowing recipient" principle

"Knowing recipient" is a principle that evolved out of situations where a trustee (who holds property on trust on behalf of the beneficiaries of a trust) appropriates trust funds for the benefit of a third party who has knowledge of the trust relationship. 

The concept gives the "wronged" beneficiaries the right to make a personal claim against the third party on the basis that the third party received the trust property, whilst having knowledge of the relationship between the property in question, the trustee and the beneficiaries. 

Impact of disallowed deductions

The treatment of disallowed deductions turns largely on the way in which the relevant distribution resolution is crafted. 

Broadly, there are 3 possible outcomes, namely:

• the amounts representing the disallowed deductions will be validly distributed to a particular beneficiary via the provisions of a distribution resolution;
• the default provisions under the trust deed will regulate the distribution (further comments in this regard are set out below); or
• the amount will be treated as an accumulation to the trust and the trustee will be taxed at the highest marginal tax rate is applied.

Disclaimers

In FCT v Ramsden [2005] FCAFC 39, the court held that the purported disclaimers by particular beneficiaries were ineffective.  However, it was confirmed that any interest acquired in the net income of a trust under the default provisions of a deed could be disclaimed by a beneficiary separately from any other entitlements which might accrue to that beneficiary under other provisions of the deed.

It was also confirmed that a disclaimer can be made retrospectively, provided it is made within a reasonable period of time from the beneficiary first becoming aware of the relevant interest that they wish to disclaim.

Equity and rectification

A court may use the equitable remedy of rectification where there is an error in a trust document which does not reflect the intentions of the parties and in turn, results in an invalid distribution. 

In order for rectification to be granted, the party applying for the court to exercise its discretion must establish 3 elements:

• the intention that the parties had in relation to the document up until the time the distribution resolution was executed
• a mistake was made in the document that does not reflect the parties' true intentions; an
• if the rectification order was granted, it would correct the mistake and match the parties' intentions.

Importantly, rectification will not be granted where there is simply an inadvertent financial result that occurred due to a misunderstanding of the consequences of a deliberate act.

Default provisions

From a trust law perspective, default capital provisions, and in some cases, default income provisions, under discretionary trusts are generally seen as important to ensure that the trust is valid at law.

From a tax perspective, the main objective of a default distribution clause, particularly for income, is to ensure that the default beneficiaries are assessed on the failed distribution, rather than the trustee being assessed at the top marginal rate.

The case of BRK (BRIS) PTY LTD v FCT (2001) 46 ATR 347 is arguably the leading example in this regard.  In this case, the default distribution clause of the relevant trust required, where there was a failure to distribute, that the trustee "divide the Fund equally among the beneficiaries named in the Schedule hereto". 

However, the clause was crafted such that the distribution did not take place until a date after the end of a tax year. 

Based on the drafting of the relevant clause, the court confirmed that while the provisions were valid from a trust law perspective, the trustee was unable to make the required distribution to the default beneficiaries until after the end of each tax year.  This, in turn meant that all undistributed income was in fact effectively accumulated for tax purposes each tax year. Therefore, all undistributed income was taxed to the trustee at the top marginal rate.

Conclusion – start by reading the deed

Given the range of significantly adverse consequences that can result where a purported trust distribution is subsequently found to be invalid, advisers should proactively invest in processes and systems to minimise the risk of such an outcome.

Invariably, best practice dictates that in every situation before preparing a resolution there should be:

1. a comprehensive review of the relevant trust deed including an analysis of every variation or resolution of a trustee or other person (such as a principal, appointor or guardian) that may impact on the interpretation of the trust document;


2.  specific review of the relevant tax legislation applicable to the amounts to be addressed by the resolution; and


3. thought applied to the exact factual scenario that the trustee is addressing, in the context of the trust deed and tax laws.

Until next week.

Tax Office views on accessing Family Court documents

As mentioned in last week’s post, in the case of Darling, the Tax Office was given access to material lodged as part of family law proceedings, to further its audit activities in relation to the husband of the marriage.

The Tax Office has now released a Decision Impact Statement in relation to its intended approach in this area.  As usual, a full copy of the document is available via the following link - http://law.ato.gov.au/atolaw/view.htm?DocID=LIT/ICD/M34of2014/00001

In addition to providing a useful summary of the key aspects of the court decision, the Statement confirms –

1. There is an implied obligation on the Tax Office not to make use of documents disclosed as part of a family law case for a purpose not related to the family court litigation (ie to assist the Tax Office with its tax audit activities).


2. Whenever the Tax Office is wanting access to court documents for use other than in relation to the case in which the documents were filed, it will make an application to the court for release from the implied obligation.


3. In making an application to court, the Tax Office will have regard to the factors set out in the Darling decision (as summarised in last week’s post).

 Until next week.

Image credit: Adam Rifkin cc