Mr Klaw (back)** - Cummins case and the bankruptcy clawback rules

Today’s post considers the above-mentioned topic in a ‘vidcast’.

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below.

In terms of the timeline on the Cummins case, there was a long history here with no returns lodged. It’s going back literally decades. We’ve got a 1987 event where a house on Sydney Harbour goes into the wife’s name. No tax returns were lodged for many years in the lead up to 1987 transfer. In around the year 2000, he was about to retire. He was doing the work for a law firm and the law firm paid his bill, but short paid him to the extent of 48.5 cents. He wrote back and said hang on a second, i.e. I sent you a $100 bill, you only pay me $51.50, what's going on?

The law firm said, “Oh, Mr Cummins, (QC or whatever he was), yes, we will give you your other 48.5 cents when you give us an ABN.” Mr Cummins said, “What’s an ABN? They said you get that from the Tax Office.”

He rang the Tax Office and said, “I need one of these ABNs.” They said, “Okay, that’s fine. Give us your TFN and we'll give you an ABN.” Mr Cummins said, “What’s a TFN? I don’t know what you’re talking about.”

The suspicion is that at that point the Tax Office routed him back to the investigation division. By 2002, Cummins was in the middle of an audit because he hadn’t paid tax for decades. You do not need a tax file number if you never pay tax. That was what he had managed to do during his entire career.

Now if you get litigated against in 2002, four years from 2002 takes you back to about 1998. 1998 is a long, long way after 1987. The question was this. Was the Sydney Harbour property, which in the meantime had gone up in value quite significantly, exposed on Cummins going bankrupt?

Cummins’ argument you would guess was that no, outside the clawback period, I’m in the clear, yes, I’m bankrupt. But I don’t care about it because I don’t own anything in my name. What does it matter?

The court said no. The court said that you need to look at the main purpose that’s sitting around the 1987 transaction. The mere fact that the assessments had not actually issued back in 1987 when the transfer took place was held to be irrelevant.

The debt was still there. The fact that the tax debt hadn't crystallised, or Cummins didn’t actually know about it because the tax man hadn’t found him yet, was actually absolutely irrelevant. Cummins’ purpose at the time of moving the family home was to defeat creditors. Therefore, the whole transaction could be unwound because the 4-year limit only applies for transfers made when there are no known liabilities – if the liabilities (as here) are known, then the clawback period is unlimited.

As we understand it, it’s basically the only textbook of its kind in Australia that’s practically focused on how to deliver the asset protection piece. Very happy to give one of those away.

As always thanks to the Television Education Network for the video content here.

** for the trainspotters, the title here is riffed from the They Might be Giants song ‘Mr Klaw’.

EPAs and SMSFs – Bit like Generals and Majors**

Following recent posts about attorney appointments it is important to also remember the special rules that apply in relation to self-managed superannuation funds (SMSF).

As is well understood, a superannuation fund is an SMSF where all members of the fund are trustees or directors of a corporate trustee – see sections 17A(1) and (2) of the Superannuation Industry (Supervision) Act 1993.

A super fund is also a complying SMSF where an EPA of a member is a trustee or a director for a corporate trustee in place of a member during any period that attorney has an enduring power of attorney (EPA) in respect of a member of the fund who themselves is unable to act (see section 17A(3)(b)(ii)).

In order for section 17A(3) to apply the person seeking to become a trustee or director needs to be appointed under an EPA of the member who cannot act. A general power of attorney will not be sufficient.

Practically, the only way in which an attorney under an EPA can act in the role as trustee for an SMSF is for the existing member to be removed from their role as trustee (or director of the corporate trustee as the case may be), and for the attorney under that member’s EPA to be appointed as the new trustee or director in place of the member.

In addition to satisfying the statutory provisions, the trust deed for the SMSF must also be complied with.

Importantly, the attorney for the member performs their duties as a trustee of the SMSF, or a director of the corporate trustee of the SMSF, pursuant to their appointment to that position, rather than as an attorney or agent for the member.

The Tax Office has detailed their views in this area in Self-Managed Superannuation Funds Ruling SMSFR 2010/2. As usual, if you would like a copy of this ruling please let me know.

** for the trainspotters, the title here is riffed from the XTC song ‘Generals and Majors’.

Who’s Zoomin’ who?** AKA when will AUS follow the Empire State of Mind** and allow estate planning documents to be witnessed via video?

Confirmation that estate planning documents may now be witnessed remotely … in New York …

While NSW has threatened to do the same in AUS (for a maximum of 6 months); query when (if ever) all states will roll this out.

The specifics of the New York rules (perhaps AUS legislators can copy and paste these?) are as follows:

1. The person requesting that their signature be witnessed, if not personally known to a witness, must present valid photo ID to the witness during the video conference, not merely transmit it prior to or after;
2. The video conference must allow for direct interaction between the person and each witness and the supervising lawyer, if applicable (e.g. no pre-recorded videos of the person signing);
3. The witnesses must receive a legible copy of each signed page, which may be transmitted via fax or electronic means, on the same date that the pages are signed by the person;
4. Each witness may sign the transmitted copy of the signed pages and transmit the same back to the person; and
5. Each witness may repeat the witnessing of each original signature page as of the date of execution provided the witness receives such original signature pages together with the electronically witnessed copies within thirty days after the date of execution.

Reassuring I am sure for all #BigLaw lawyers that the transmission of the signed pages can be made by fax ...

** for the trainspotters, a double hit (given the Easter long weekend), firstly Aretha Franklin's tribute to Zoom and 'Who's Zoomin' Who'.

View here: https://www.dailymotion.com/video/x6qfe8


 ** the second instalment for the trainspotters, Alicia Keys 'Empire State of Mind' (Part 2).

View here: https://www.youtube.com/watch?v=tGwBPy4j8uo

Don’t wanna be the one?** - Corporate trustee appointing an attorney

Recent posts have considered various aspects of attorney appointments.

Where a company is acting as trustee of a trust, it can appoint an attorney to act on its behalf as trustee of the trust, so long as the:

1. constitution for the company permits attorney appointments; and
2. the trust deed for the trust also contains a power for the trustee company to nominate an attorney.

The attorney appointment document should ideally specifically confirm that the:

1. trustee company has power under the trust deed to appoint an attorney; and
2. company, in its capacity as trustee for the trust, is appointing the attorney in accordance with the power.

** for the trainspotters, the title here is riffed from the Midnight Oil song that has a line mentioning corporate, namely ‘I don’t wanna be the one’.

Looking through (you)** - A sole trustee appointing an attorney

Following recent posts about attorney appointment, it is important to remember that a sole individual trustee of a trust can appoint their attorney/s under an enduring power of attorney to act on their behalf if they are unable to carry out their duties as trustee of the trust.

This approach is subject to the trust deed for the trust allowing this outcome.

An example of the relevant clause a trust deed should contain is as follows:

“The Trustee may authorise any person to act as its attorney to perform any act or exercise any discretion within the Trustee’s power including the power to appoint in turn its own agent, attorney or delegate.The appointment may be in respect of more than one delegate or severally and may include provisions to protect those dealing with the agent, attorney or delegate.”

An example provision that should be added to the enduring power of attorney is as follows:

“Whereas I am currently the sole trustee of ‘[#insert] Trust’ a trust established pursuant to the Deed dated [#insert], pursuant to the Trusts Act [#insert details of the relevant stat based Act] and of every other power and law thereunto enabling in the event of my inability for any reason either temporarily or permanently to carry out my duties as sole trustee, or as one of a number of trustees of the [#insert], then this enduring power of attorney operates and allows the attorneys named in this document to act as my attorneys in respect of my trusteeship of the [#insert].”

** for the trainspotters, the title here is riffed (read carefully) from the Beatles Album ‘Rubber Soul’ (Sole) and the song, ‘I’m looking through you’.

Powers of attorney – statutory v common (people)** law documents

Following the previous two posts a question has been raised about the need to comply with the state-based legislation in each jurisdiction when creating a general power of attorney, as opposed to an enduring power of attorney.

Broadly the position in relation to general powers of attorney is as follows:

1. Each state has legislation setting out a statutory regime for making a general power of attorney;
2. In addition to this statutory regime, there is at common law the right to make a power of attorney or otherwise delegate the rights of a principal to an attorney;
3. Assuming the document creating the attorney appointment is properly crafted, a common law appointment of attorney will generally have more flexibility than a statutory document (which will often be in a standard pro-forma).

Enduring powers of attorney are not able to be made at common law and it is therefore necessary to rely on the statutory regime.

The reason that the common law does not support enduring powers of attorney is because a power of attorney terminates automatically when a principal loses legal capacity.

The common law treats a principal-agent relationship as a personal one. This means an agent has no authority to act on behalf of a principal if the principal themselves can no longer act.

** for the trainspotters, the title here is riffed from Pulp, ‘Common People’. 

The time is now** - Start date for an attorney’s powers

One of the questions that arose following last week’s post, that is often raised in estate planning is the timing for powers of attorney to commence operation.

In particular, often a donor will suggest that an attorney’s powers should not commence until some future date, for example ‘on loss of capacity’.

On a number of levels, perhaps counterintuitively, we usually recommend immediate commencement of attorney powers where permitted by law (typically in relation to financial appointments).

In some instances, powers are prohibited at law from commencing until the donor has lost capacity.

The reasons we recommend this approach include:

1. The likelihood the documents may need to be used in other scenarios (such as during overseas travel, or during periods of short term, relatively minor incapacity such as routine surgery) – the effectiveness of the document is significantly compromised if only triggered by ‘complete, absolute and permanent mental incapacity’.
2. Avoiding a debate as to exactly when the document has come into force – particularly in an emergency situation it can significantly undermine the utility of the document if there needs to be an analysis of whether a pre-condition to commencement has in fact been satisfied.
3. As an easy rule of thumb test as to whether there should be (say) a co-attorney appointed – that is, if there are concerns about the powers starting immediately. This can often be at least partly due to concerns about the skills or trustworthiness of the persons nominated.
4. There are a number of practical steps that can be taken to guard against inappropriate attorney conduct – for example, placing the original enduring powers of attorney in secured storage so that the attorneys are required to request copies before they can exercise their powers.
5. Another practical protection is ensuring that the appointed attorneys do not sign to accept their appointment until they need to rely on it - the powers under an enduring power of attorney cannot be used unless the appointed attorney has signed their acceptance.
6. Practically a further easy work around is appointing one or more additional co-attorneys – typically another family member, friend or trusted adviser to act jointly with the clients’ attorneys. This prevents a single ‘rogue’ attorney from acting inappropriately as all decisions would require two or more attorneys to act together.
7. If there are still concerns about the attorneys acting inappropriately in light of the above points, the harsh reality is that this says more about the persons being considered than it does about the document commencing immediately – in other words the issue should be addressed by reconsidering who is being appointed to the role.
8. Indeed, if there remain concerns about the integrity of the nominated attorney acting inappropriately, there may be in fact be wider concerns that need to be addressed – such as the attorney acting inappropriately after the donor has lost capacity or even fraudulently creating documentation to allow themselves to act, regardless of the donor’s intention.

** for the trainspotters, the title here is riffed from Moloko, ‘The Time is Now’.