Where a business owned and operated by a couple forms part of the assets to be divided under a property settlement, there are a range of potential issues that can arise.
The case of Ledarn & Ledarn [2013] FamCA 858 provides an interesting insight into the types of concepts that the family court will consider.
The case involved a business that the wife was the general manager of and the husband was the original designer of the core product.
Both parties wanted sole control of the business as part of the matrimonial settlement, and the wife ultimately succeeded.
Some of the key aspects of the decision included the following:
Although there was an independent valuation suggesting the business was worth $8 million, the wife had argued that it was worth '$10 million' to her.
While generally, the value attributed to a business will be that which an arm’s length purchaser will pay, the family court can instead accept a value that one of the parties to the relationship subscribes to it.
The court also took into account the evidence that seemed to suggest that the wife had a much better understanding of the nuances of the business and how it would best operate in allowing her to take full control.
The wife’s request that there be a 5-year non-compete restraint imposed on the husband was however rejected on the basis that given she had significant business acumen, in addition to all of the assets of the business, the prospects of the husband successfully commencing a competing offering were at best remote.
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** For the trainspotters, the title of today's post is riffed from the Coldplay song 'Magic'.
One of the advantages of testamentary trusts is the ability to access the 'excepted' trust income rules and therefore ensure infant recipients are taxed as adults.
The Tax Act only allows excepted trust income in relation the amount which is assessable income of a trust estate that resulted from a will, codicil or court order varying a will or codicil.
Importantly, historically the legislation did not appear to expressly exclude an indirect interest as being a beneficiary for the purpose of the provisions.
This meant that as one example, any income received by an infant beneficiary derived from assets of a testamentary trust created under a deceased estate that may have been transferred to an interposed inter vivos trust may be able to be treated as excepted trust income.
It should be noted however that there are rules that provide that an amount will not be treated as excepted trust income if it was derived by a trustee ‘as a result of an agreement entered into for the purpose of securing that the income would be excepted trust income’.
However arguably, historically this prohibition was thought not apply to income derived via an interposed inter vivos trust as the income would have in fact been excepted trust income in the testamentary trust the assets were sourced from.
The Private Rulings mentioned in recent posts provide some support for the above interpretation.
Since the 2018 budget changes however (featured in many previous posts), the rules are now clear that access to excepted trust income is only possible while the assets of the deceased are owned via the testamentary trust under that person’s will. Once the assets are removed from the testamentary trust, for example, to an inter vivos trust, the ability to benefit from the excepted trust income regime ends.
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** For the trainspotters, the title of today's post is riffed from the John Butler Trio song 'Sometimes'.
In holistic estate planning, disputes in relation to SMSFs - and particularly (purported) binding death benefit nominations (BDBN) - are arguably risks of such high probability that there is need for advisers to consider the issues habitually.
The decision in Williams v Williams & Anor [2023] QSC 90 provides a stark example in this regard.
The factual matrix in this case was arguably 'generic' for a material number of SMSFs, that is a blended family with competing interests and (arguably) less than ideal documentation.
In particular:
the deceased member of a sole member fund purported to sign a BDBN in favour of a 50% allocation to each of his second wife and his legal personal representative (LPR), for distribution of this portion under his will;
the trustees of the fund at the date of the relevant BDBN were the deceased and one of his 2 adult sons;
while the deed for the SMSF appeared to require the BDBN to be provided to both trustees in order to be effective, the son (in his role as co-trustee) denied having ever been provided with the document. The son as surviving trustee relied on the fact (that was accepted by the court) that he had not been given the BDBN as supporting a conclusion that the BDBN was void and should be ignored by the trustee, who instead should distribute the death benefit in its discretion.
In relation to the invalidity of the BDBN, the court confirmed:
the purpose of communicating a BDBN to the trustees is largely practical - that is, to give effect to a BDBN the trustees must know about it and, in the case of multiple nominations, must know which was current and which had been superseded (these points were confirmed in the decision of Cantor Management Services Pty Ltd v Booth [2017] SASCFC 122, a case featured in other View posts, which in a similar factual matrix confirmed that a BDBN sent to the registered office of the corporate trustee was a valid approach for a member to provide the requisite notice to the trustees);
while the trust deed had standard provisions that deemed 'singular wording to include plural' and vice versa (a provision that is included by statute in all deeds and instruments, for example see section 61 of the Property Law Act 2023 (Qld)) - these type of provisions were subject to the context of the trust deed;
so too the provisions in the trust deed that provided 'the "Trustees or the Trustee for the time being of the Fund" and “Trustee” have the same meaning' were subject to the context of the wider deed and required that where there was more than one trustee the word 'trustees' should be taken to mean all the trustees;
thus while the deceased member was aware of the BDBN he had signed, and was also a trustee, the context of the trust deed required both trustees to be notified. This conclusion was further supported by the fact that the deed required that on receiving the written notice, certain further steps be taken, namely, the trustees creating a written resolution accepting the terms of the BDBN;
in other words, the knowledge of the deceased member could not automatically affect the co-trustee with knowledge of the transaction (see Cummings v Austin (1902) 28 VLR 347).
The other key aspect of the decision also serves as a blunt reminder of the 'read the deed' mantra so critical for all trust advisers, including in the SMSF space. In particular, a purported change of trusteeship by the surviving son to appoint his brother as a co-trustee was held to be invalid for a range of reasons, including:
the relevant documentation purported to have the deceased member as a party - at a minimum the relevant party would have needed to be the deceased member's LPR;
while the deed gave a two-thirds majority of members the right to appoint a trustee, the relevant documentation did not rely on these provisions;
while the deed also appeared to allow a member's LPR to assume the rights of the member in relation to trustee appointment, the definition of LPR under the deed was limited to a person who had obtained probate of the member's estate; and probate had not in fact been obtained. Therefore, for the purposes of the deed, there was no LPR of the deceased member and the provisions giving rights to the member's LPR were a nullity.
In many respects, a number of the failings in relation to the change of trustee documentation were analogous to the factual matrix in the case of Moss Super Pty Ltd v Hayne [2008] VSC 158, again another case featured in other View posts. In this decision, although not referenced in the Williams case, the trust deed set out the process by which a change of trusteeship could take place and specifically required the 'founder' to appoint any new trustee. While the sole director of the new trustee company was also the founder, she did not in fact sign the change of trustee documentation in her capacity as founder.
In other words, while she signed in her capacity as the sole director of the new trustee, there was no provision where she also signed in her founder role.
Critically, the court found that where structures are created in which individuals have multiple roles to play, the requirements around those roles must be respected and complied with.
Based on the above failings in relation to the purported change of trusteeship - and further concerning conduct and clear conflicts of interest for the son - the court concluded it was appropriate to remove the trustee. The court determined instead to appoint independent trustees, relying on the largely discretionary right for a court to form a judgment on what is in the best interests of the beneficiaries, based upon considerations, possibly large in number and varied in character, which combine to support the conclusion, see Miller v Cameron [1936] HCA 13.
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** for the trainspotters, the title today is riffed from a line in the Whitesnake song ‘Here I go again’.
Often where an SMSF trustee owns all of the units in a unit trust, if only from a cost perspective, the decision will be made to have one bank account - i.e. all of the monies that would otherwise pass to the unit trust and then ultimately be routed back to the SMSF pass directly to the SMSF.
The Tax Office has confirmed in an interpretive decision (ID 2014/7) that they believe such an approach breaches the superannuation legislation.
In particular, the Tax Office argues that the provisions of regulation 4.09A of the Superannuation (Industry) Supervision Regulations require that an SMSF must keep its money and the other assets of the fund separate from any money or assets that are, for example, held by a trustee personally.
Practically however, where the SMSF maintains the bank account, they have arguably not breached regulation 4.09A, rather it may be the trustees of the unit trust that have failed to segregate the funds of the unit trust.
As unit trusts are not directly regulated by the superannuation laws, any breach of trust would have to be separately pursued, and where the trust is solely owned by the SMSF, it is unlikely that anyone would fact seek to complain.
Whether the Tax Office is likely to adopt such a pragmatic approach appears somewhat unlikely in the context of the interpretive decision mentioned above.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, the title today is riffed from the Ride song ‘Leave them all behind’.
In business succession arrangements, cross owned insurance policies are rarely, if ever, utilised. Avoiding the use of cross owned policies is driven by a range of commercial reasons and the fact that invariably adverse tax consequences are unnecessarily triggered as the desired commercial outcomes can normally be achieved utilising self owned policies that almost always deliver favourable tax outcomes.
One scenario where cross owned insurance arrangements historically provided significant potential benefit however related to where a self-managed superannuation fund (SMSF) borrows funds via an instalment trust arrangement to acquire an asset which forms a substantial part of the total value of the fund.
An example of how this approach (which was given in principle support by the Tax Office historically) worked is as follows:
The SMSF establishes an instalment trust and borrows funds from a third party to acquire an asset.
The (say) only two members of an SMSF are concerned that on the death of one of them, the ability to pay out the member’s entitlement may be impossible to achieve without selling the underlying asset (i.e. neither member’s account balance is large enough to represent the entire value of the acquired asset).
If the members took out self-owned insurance policies, this would obviously not assist, given that the exiting member would effectively be entitled to an even greater share of the total assets of the fund.
In contrast, if permissible under the trust deed for the SMSF, if cross owned policies were implemented, then the remaining member’s balance would be the one that increases and the cash from the insurance policy could be used to pay the death benefit, while the continuing member would effectively have their member balance represented entirely by the asset originally acquired via the instalment trust.
Despite the above, since 1 July 2014, the view of the Tax Office has been that the superannuation rules do not allow SMSFs to provide insurance for a member, unless the insured event is consistent with one of the following conditions of release:
death;
terminal medical condition;
permanent incapacity; and
temporary incapacity.
The Explanatory Memorandum associated with the amended rules made it clear that the proceeds of an insurance policy must be released to the member who is the insured under the policy.
This means that cross-insurance arrangements where the proceeds of an insurance policy are paid to someone other than the insured under the policy are not permitted.
** for the trainspotters, the title today is riffed from the Breeders song ‘Glorious’.
Posts over recent weeks have explored what issues a court will consider before a trustee of a trust is removed against their will.
Many of the themes mentioned are relevant to the issue of whether a court will remove an executor (or legal personal representative (LPR)) of a person’s will.
As a threshold issue, any person with an interest sufficient to entitle them to oppose an application for a grant of probate also has sufficient standing to seek revocation of a grant (see Re Hartley [2020] QSC 251).
As confirmed in Gardiner and Ors v Hughes and Anor [2017] VSCA 167 “…[I]n order to establish standing, an applicant for an order revoking a grant of probate or letters of administration must have a sufficient interest in the proceeding. Sufficiency of interest is established by showing that the applicant’s rights would or might be affected if the grant were to be revoked. The bare possibility of an interest will suffice."
The decision in Re Franks [2021] QSC 134 provides a useful summary of the key issues in this area.
In a situation where 2 executors were unable to agree on how to administer the estate (after a third executor had renounced their role due to the conflicts between the parties), one of the executors applied to the court for an independent executor to be appointed. Importantly, an executor can not resign without order of the court once probate had been granted. Furthermore, unless a law firm has joint instructions from the executors, they are unable to act.
The court confirmed:
Similar to its role when there is an application for removal of a trustee of a trust, at the highest level, the question for the court when considering the removal of an executor is what is in the best interest of the persons who have an interest in the estate, including creditors and beneficiaries, and its due administration.
A conflict between personal representatives is not solely determinative and there is no precondition of default on the part of any executor before the power of the court can be exercised (see Chesney & Anor v Tognola & Anor [2011] QSC 340).
Due regard must be paid to the willmaker's wishes as to the identity of their LPR, however it should not be assumed that a willmaker who was aware of potential disputes among beneficiaries will also have anticipated disputes among the executors (see Baldwin v Greenland [2007] 1 Qd R 117).
Ultimately, each case must turn on its own facts (see Re Flavel; Application by Lipshut [2018] VSC 228, Re McLennan [2018] QSC 124 and Mann Jnr v Grantham [2004] VSC 156).
Here there was held to be sufficient benefit in an independent administrator being appointed who would not need the agreement for joint action and who would not be compromised by conflicts of interest or personal interest. This was despite the nomination made by the willmaker in their will and the additional expenses the estate would incur.
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** For the trainspotters, the title of today's post is riffed from the Bronski Beat song 'Why?’.
Last week’s post explored what issues a court will consider before a trustee is removed against their will and mentions the (in)famous decision from the Lang Hancock and Gina Rinehart saga (namely Hancock v Rinehart [2015] NSWSC 646).
A related issue is whether a court will unilaterally remove an appointor or principal of a trust – that is a party who has the right under a trust deed to change the trustee.
The decision in McNee v Lachlan McNee Family Maintenance Pty Ltd [2020] VSC 273 is a useful reference point in this regard.
Relevantly the factual matrix was as follows:
A 12 year old son of former life spouses was the primary beneficiary of a child maintenance trust (a form of trust explored in other View posts that allows access to excepted trust income for infant beneficiaries following a relationship breakdown).
The mother was the sole director and shareholder of the trustee company and sole appointor of the trust until the son turned 18, at which time the deed mandated he would become the appointor.
The trust owned a residential property which the mother and son lived in, until their relationship fractured and the son moved in with his father.
The mother continued to live in the property owned by the trust (and had been given this right to occupy under the trust deed, as had the son) and the son (via his father) approached the court to remove the trustee and appointor and appoint an independent third party.
The court confirmed as follows:
as mentioned in last week's post, whether the court exercises its discretion to remove a trustee turns upon the circumstances of each case;
a lack of confidence in the trustee can be sufficient justification that the court should exercise its powers;
this said, here there were a range of reasons that meant removal as trustee was appropriate such as friction and hostility between the key parties, the trustee's failure to read and understand the trust deed, the trustee consciously acting in breach of the trust deed (including a failure to keep proper records), the trustee preferring the interests of others rather than the beneficiary, failure to exercise powers of investment for the benefit of the beneficiaries, failure to proactively address a clear position of conflict and a failure to offer any reasons for why an independent trustee would not be appropriate;
any one of the above reasons on its own may have been sufficient to justify removal, however in combination made the decision overwhelming in favour of removal;
the suggestion that a co-director could have been appointed to the trustee company was rejected as it would have failed to address the inappropriate conduct of the mother;
for similar reasons, the mother was also replaced as appointor of the trust, given that if she retained this role she could have later removed the independent trustee appointed by the court. In this regard, the court confirmed that where the trust instrument already contains an express power of appointment, the court has the ability to change the appointor. This outcome was contrasted with the decision in W E Pickering Nominees Pty Ltd v Pickering [2016] VSC 71 where it was held the court can not ‘grant’ a general power of appointment in circumstances where the trust instrument does not make any provision for an appointor;
the court confirmed that it was appropriate for the trustee and appointor to be the same person, given that the trust clearly established the settlor’s intention in settling a trust with a trustee whose controlling mind (ie being the mother as sole director) was also the appointor (again, the mother);
the trustee and appointor would be an independent third party, nominated by the President of the Law Institute; and
the mother was however entitled to continue to reside in the property subject to certain conditions. This said, the son (under the deed) would have the right once he turned 18 to terminate the trust (and thus end his mother's right to occupy).
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** For the trainspotters, the title of today's post is riffed from the Bananarama song 'Cruel Summer’.
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