Your free access to our white paper on PSF innovation

It is exciting to confirm the release of our professional service firm innovation white paper.

Titled – ‘How I learned to stop building faster horse carriages and love disruption’, the release is with the support of LexisNexis.

To access a free copy of the 3,000 word white paper click here - http://lexisnexis.com.au/media-centre/blog-articles/2016-June-17-How-I-learned-to-stop-building-faster-horse-carriages-and-love-disruption

As mentioned in previous posts, we began the journey to address many of the challenges of redefining the professional services firm business model over 10 years ago.

For many, the journey has started more recently and we believe it important to share our learnings.

In this regard, we are excited to be presenting at the 2016 ALPMA Summit, A Blue Print for Change, 7-9 September in Melbourne – see http://www.alpma.com.au/Summit

Before then, there is still time to register for our upcoming Roadshow that will be a full day example of our contribution in this space.

Download the brochure.

Watch the promo video below.

Vesting Dates and Trust Distributions: measure twice; cut once – read the deed … and then some

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article by View is extracted below.

As previously reported by us in the Weekly Tax Bulletin, there are a range of issues often overlooked in relation to trust distributions (see 2014 WTB 43 [1426]) and extensions to vesting dates (see 2014 WTB 44 [1446]). Rarely, however, do these issues arise together in the same factual scenario.

In the lead up to another 30 June, the decision in Domazet v Jure Investments Pty Limited [2016] ACTSC 33 (7 March 2016) is a timely example of the problems that can arise when a deed is not carefully reviewed before trust distributions are made.

The decision

In summary, a Family Trust was settled in the ACT on 1 April 1980. The Family Trust deed gave the trustee the power to nominate additional beneficiaries, including trusts, so long as the vesting date of the other trust was not longer than that of the Family Trust.

In 2009, a new trust (referred to as the "Finance Trust"), which was part of the same family group was purportedly appointed as a general beneficiary of the Family Trust.

The Family Trust had a cascading optional perpetuity period, which the parties wrongly interpreted as allowing the vesting date to be 80 years from the date of settlement. In fact, the Family Trust vesting date was 21 years after the death of King George VI's living issue as at 1 April 1980.

The Finance Trust, established in 2005, was set to vest either upon the election of the Trustee or a maximum of 80 years from settlement, making it prima facie ineligible. In an attempt to ensure the Finance Trust was an eligible beneficiary of the Family Trust, the vesting date was then amended to be one day before 80 years from 1 April 1980 (ie 31 March 2060).

Practically speaking, this meant that in order for the Finance Trust to be an eligible beneficiary of the Family Trust, it needed to be absolutely certain that at least one of King George VI's living issue in 1980 would still be living on 31 March 2039 (that is, 21 years before 2060), which the Court thought was possible, but not absolutely certain. This meant the appointment of the Finance Trust as a general beneficiary was invalid.

It appears from the decision that a number of capital distributions were purported to be made after the Finance Trust was invalidly appointed as an additional beneficiary. The invalid appointment meant that the distributions made to the Finance Trust would have been done in breach of trust. Furthermore, the invalid distributions would have also caused adverse tax consequences for the parties. This seems to have been a potential issue because the ATO had made submissions as part of the proceedings.

Perpetuity rules

It is critically important to not just read the deed, but also specifically consider which perpetuity rules apply. The difficulties arose in this case because amendments to the rule against perpetuities were progressively rolled out throughout Australia. The advisers which prepared the documents had wrongly assumed the ACT rules, which came into effect on 18 December 1985 (after the Family Trust was settled), were implemented at the same time as the Queensland rules were introduced (1 April 1973).

In this respect, the earliest change to the rule against perpetuities occurred in Victoria in 1968, whereas Tasmania only introduced new rules in 1992. When reviewing trusts which span between these dates, it is therefore critically important to firstly determine the trust's governing jurisdiction, but also consider which perpetuities rules apply.

Some possible workarounds

With the aid of hindsight, there were a number of alternatives that could have avoided the outcome that the parties ultimately faced: a substantive trust to trust distribution being invalid. In summary, the other alternatives that could have been adopted include:

1. The vesting date of the recipient trust could have been amended to provide that - notwithstanding any other provision of either trust instrument, it would automatically vest on or before the date of the distributing trust.
2. The requirement in the distributing trust that the recipient trust needed to vest before it could have simply been deleted. While it still would have been necessary for the recipient trust to have ultimately vested by the date of the distributing trust, it would have been possible to rely on the 'wait and see' rule rather than the distribution being void immediately on the date that it was made.
3. Depending on the factual matrix, the distributing trust could have made a distribution directly to the ultimate intended beneficiaries, even if that may have required a variation to the trust instrument (and thereby avoid the need to distribute to an interposed trust).

In any of the above cases, again with the aid of hindsight, a private ruling could have been sought from the ATO, or indeed a declaration from the Court could have been obtained. While both of these approaches obviously create significant time delays and cost exposure where (as here) there are significant funds at risk, these additional costs can be an appropriate investment.

In regards to the "wait and see" rule, the approach to be taken was summarised in the case of Nemesis Australia Pty Ltd v FCT [2005] FCA 1273 (14 September 2005) (reported at 2005 WTB 40 [1638]). The case confirmed that the "wait and see rule" in each jurisdiction can be relied on in a situation where a trust distributes to another trust with a later perpetuity date.

The "wait and see" rule means the initial distribution will not be void when made, and will not become void until such time as there is a failure to distribute out of the recipient trust before the vesting date of the original distributing trust.

Rectification

The final main alternative to the issues faced in this case, which was the one ultimately adopted, was to seek rectification of the documentation from the Court.

The case provides a very detailed analysis of the way in which the rectification rules work, including heavily quoting Dr Spry, who has been featured prominently in trust related areas, both for his academic writing and his legal challenges in a personal family law dispute (see Kennon v Spry (2008) 238 CLR 366 (reported at 2008 WTB 51 [2303]).

Ultimately, although with some reservation, the Court did rectify the relevant documents to essentially adopt the approach outlined at paragraph (a) above. While it cannot be certain, it is likely that the rectification order settles a number of the potential taxation consequences resulting from what would have otherwise been invalid distributions.

Pace of change an issue for incumbent professional service providers

Previous posts have looked at various aspects of the radical change sweeping through the professions.

Generally, the four main areas where disruptors, innovators and incubators tend to focus their attention are:

1. unchallenged orthodoxies - the parts of a business model that have remained unchanged and are assumed by industry players to be non-negotiable


2. unappreciated trends - things that are happening in other unrelated industries that have not been embraced more widely


3. unleveraged competencies - a focus on what the business knows as opposed to what it does can create new value propositions


4. unarticulated needs – a focus on the '5 Whys' and 'What job is to be done?'.

As Jack Welch has explained, firms are at significant and potentially irretrievable risk when the rate of internal change is slower than the pace of external change.

True incubators understand that plans for the future must simply be plans for learning. In other words, plan to be wrong - and then learn how to be right as fast as possible.

A new solution must always be simple, reliable and convenient. It will always be delivered at lower margins - the profits will follow as market share is secured.

As the solution is generally only valued by the least profitable customers, a firm that chooses simply to listen to its best customers to identify new products essentially ignores all forms of disruptive innovation and, in turn, essentially ensures that it will fail the innovator's dilemma test.

This means there is a very strong first mover advantage as the incumbents effectively ignore the disruptive model until it is too late.

As mentioned previously, we began the journey to address many of the challenges of redefining the professional services firm business model over 10 years ago.

For many, the journey has started more recently and we believe it important to share our learnings.

In this regard, we are excited to be presenting at the 2016 ALPMA Summit, A Blue Print for Change, 7-9 September in Melbourne – see -http://www.alpma.com.au/Summit

Before then, our upcoming Roadshow will also be a full day example of our contribution in this space.

Download the brochure.

Watch the promo video below.

Image courtesy of Shutterstock

The Incumbents Dilemma

The impact of what Chris Anderson famously coined 'The Long Tail' is across virtually every industry and the disruptive aspects of the technology ultimately evidence themselves in what Clayton Christensen describes as the 'Innovator's Dilemma'; which is also referred to as the ‘incumbents dilemma'.

The theory means that only very rarely can an incumbent firm embrace and leverage disruptive solutions. This is largely because in non-technology driven businesses, there is only so much space available. In contrast, where there is effectively unlimited space, as on the internet, there are potentially high quality goods at every juncture of the long tail.

Furthermore, given that quality is entirely subjective, what is often defined by an incumbent firm as ‘low quality’ will be seen by others in the marketplace as in fact at least 'good enough' – if not actually high quality.

Critically, the barriers to entry, in terms of getting a solution to market and then allowing the market to determine whether there is any value, are constantly decreasing.

Similarly, industries such as photography, media, transport and book publishing have been radically re-engineered because of the ability to self publish electronic versions in the marketplace.

Many believe the professions are at the cusp of being similarly radically re-engineered.

Ultimately, the reason that incubation is such a powerful driver for wealth creation is that, from a customer's perspective, new ideas that actually work are far more valuable than the making (or manufacturing) of the idea.

As mentioned previously, we began the journey to address many of the challenges of redefining the professional services firm business model over 10 years ago.

For many, the journey has started more recently and we believe it important to share our learnings.

In this regard, we are excited to be presenting at the 2016 ALPMA Summit, A Blue Print for Change, 7-9 September in Melbourne – see http://www.alpma.com.au/Summit

Before then, our upcoming Roadshow will also be a full day example of our contribution in this space.

Download the brochure.

Watch the promo video below.

Image courtesy of Shutterstock

If you think about it, it exists

Last week’s post mentioned that there is no central registry for wills (unlike, for example, the ASIC which records numerous key aspects in relation to every company registered in Australia) – see 'Challenging a Will due to a Later Inconsistent Document'

Thank you to all those that flagged that this statement is no longer correct, for those in South Australia.

In a similar vein as being the first (and to date only) Australian jurisdiction to allow trusts to have no mandated vesting date (see reference to this in the following post - 'Testamentary trusts and excepted trust income') the Law Society of South Australia has established a wills register.

The platform is broadly analogous to government registers such as ASIC and is fully electronic.

Importantly however –

1. It is not compulsory for lawyers to submit wills for registration;
2. the system is confidential and not available to the public (access is limited to lawyers working in South Australia);
3. there is no cost to lodge the will nor search the register;
4. practically the platform is likely to only be of utility to those domiciled in South Australia at the date they sign (and register) their will

Despite this innovation, as mentioned last week, best practice will likely remain (even for those able to access the new platform) that a person only ever sign one copy of their intended will, and generally ensure that the physical copy of any previous will is then destroyed.

Furthermore, if a will is registered, it will make it critical that any future amendments (via codicil) or any updated will is also registered.

Image courtesy of Shutterstock

Challenging a Will due to a Later Inconsistent Document

A recent post listed the five main ways in which a will can be challenged – see Ways to contest a will

One of the aspects listed was the ability to challenge a will due to a later inconsistent document.

As there is no central registry for wills (unlike, for example, the ASIC which records numerous key aspects in relation to every company registered in Australia), often confusion can arise as to what is in fact a person’s last will.

Generally, any potential confusion is resolved as part of the probate process. In other words, before a court grants probate of a testamentary document, it must be satisfied that the document is the last statement of the will maker’s intentions.

There can be scenarios however where, even after probate has been granted, evidence is discovered that shows either a later will was made, or alternatively, material was brought into existence that overrides certain aspects of what was otherwise the person’s last will.

Particularly as technology improves, the complexity surrounding what is in fact a person’s last testamentary document is likely to increase and reinforce the approach adopted by virtually every specialist lawyer in this area of a person only ever signing one copy of their intended will, and generally ensuring that the physical copy of any previous will is then destroyed.

Resolutions v minutes – is there a difference?

Previous posts have looked at a number of the key aspects in relation to trust distributions (for example Trust distributions – 3 reminders for 30 June 2014, and A further reminder – read the deed).

One key issue in relation to effectively distributing from a trust is whether the trustee should prepare a resolution or minute.

The threshold issue under any trust instrument is making sure that the terms of the deed are followed.

This can include, for example:

1. If a decision is initially going to be made orally, confirming that there is the power to do so under the trust instrument. 
2. Methodically following all requirements set out in the trust instrument, including evidencing the decision by the date required under the instrument (regardless of what might otherwise be permitted under the tax laws). 

Assuming the above issues are properly addressed, then generally a trustee can invariably make a distribution either by way of a resolution or a minute.

A minute effectively records the decision made in an earlier meeting. It need not be made contemporaneously with the meeting (in other words, it can be prepared, dated and signed sometime after the meeting).

In contrast, a resolution is effective only from the date of signing. Where a circular resolution is made by a multiple director company or multiple trustees, it is valid on the date that the last director or trustee signs it.

Practically:

1. Sole director companies can only make distributions by way of resolutions. Generally, for trust distributions, this means that a sole director must determine how distributions are to be made and record by way of resolution the decision no later than 30 June in the relevant income year.
2. For individual trustees or trustee companies with more than one director, any decisions can be made up until 30 June and then later documented by way of a minute of meeting.
3. Again, subject to the trust instrument, where a trust has derived a capital gain, it should be possible to delay any decision at all until 31 August immediately following the end of the relevant financial year pursuant to provisions under the tax legislation.

Image courtesy of Shutterstock