Anything goes?** - Partnerships of trusts using a common trustee

Last week’s post considered the issues surrounding whether a partnership exists.

One issue that is raised relatively regularly in this context is whether a partnership of discretionary trusts, each with the same corporate trustee, can be a ‘partnership’ in the context of the various Partnership Acts in each state.

While it is a common commercial approach for a single corporation to act as trustee for multiple trusts, there is at times debate about whether a single trustee can act for multiple trusts who are seeking to trade in partnership.

Each state has different legislation in this regard, however the definition of a ‘partnership’ is substantially similar, generally being defined as a ‘relation which subsists between persons carrying on a business in common with a view of profit’.

‘Person’ is defined in the Acts Interpretation Act of each state as an individual or a corporation. Arguably therefore, one corporate trustee of multiple trusts seeking to form a partnership with themselves is not a partnership under the Partnership Acts because it is not a relationship which subsists between persons (with emphasis on the use of the plural word ‘persons’).

Against this argument is the fact that the Acts Interpretation Act in each state confirms both that plural words are deemed to have singular application and that an interpretation that best achieves the purpose of an act is to be preferred to any other interpretation.

On this basis a corporate trustee forming partnership with itself (in multiple capacities) will be a valid partnership under the Partnership Acts.

Furthermore, at least from a tax perspective, the Tax Office treats a single corporate trustee of multiple trusts purporting to be in partnership as a tax law partnership.

In particular in PSLA 2011/8, the Tax Office confirms that an entity or person can act in multiple capacities and in these instances they are taken to be a different entity or person, particularly where a trustee is a company.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Death in Vegas song ‘Aisha’.

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Shut the door**: yes, a partnership exists

There are no statutory rules in the income tax law for deciding whether persons are carrying on business as partners.

For tax purposes, a tax law partnership will exist if 2 or more people are in receipt of income jointly.

However, whether a partnership also exists for general law purposes is more complicated.

This is because the question of whether a partnership exists is a mixed question of law and fact, as explained in arguably the leading case in relation to this point, Re Raymond William Jolley v Commissioner of Taxation [1989] FCA 62.

In other words, the existence of a partnership must be determined by applying the legal principles to the actual conduct of the parties towards one another and towards third parties during the course of carrying on business.

The Tax Office has confirmed that the primary factors it takes into account in this regard in Taxation Ruling TR94/8 as summarised below.

The starting point is the mutual intention of the parties. In this regard, the Tax Office confirms that a written or oral agreement is prima facie evidence of the required intention.

A fully signed written agreement is said to be desirable, but not necessary to demonstrate mutual assent and intention. That is, an agreement to act as partners can also be inferred from a course of conduct agreed to by all parties.

Generally, a lack of intention to be in partnership means that a partnership will not exist at law. Conversely however, a stated intention of partnership is not, of itself, sufficient to establish a partnership, as the intention must be manifested by the other key factor, being the conduct of the parties.

The conduct of the parties is analysed with reference to the following factors:

1. joint ownership of business assets;
2.  registration of a business name;
3. a joint business account and the power of each party to operate it;
4. the extent to which the parties are involved in the conduct of the business;
5. the extent of the capital contributions by the parties;
6. entitlements of the parties to a share of net profits;
7. extent of business records maintained;
8. whether the parties trade in joint names and publicly recognise the partnership. In this regard the existence of the following is considered relevant -
1. invoices, receipts, tenders, business letters and applications for approval in the partnership name;
2. written and oral contracts with the partnership;
3. advertising in the partnership name.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Death in Vegas song ‘Hands around my throat’.

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Waiting for the day** where there is a maintaining trust records

It’s surprising how often we are provided with an original trust deed for a trust that’s been around for 10 or 15 years and are asked to give advice on the terms of the trust, only to have it turn out later that there were subsequent deeds of variation or resolutions which amended the terms of the trust, which everyone had lost or forgotten about.

As a practical tip, clients who are establishing a trust should have some form of trust register or trust folder in which they store copies of all of the trust deeds, trust variations, trust resolutions and any other documents which may impact on understanding what rights and responsibilities attach to that trust.

We also need to understand that beneficiaries can make unilateral decisions, such as deciding to renounce an interest as a beneficiary of a trust.

If an individual who is a beneficiary issues a disclaimer or a renunciation, which says that notwithstanding the terms of the trust deed they have chosen not to be a beneficiary of the trust anymore, that will impact on their standing from a family law perspective, bankruptcy perspective and a tax perspective.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the George Michael song ‘Waiting for that day’.

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Who’s (are you**) a beneficiary?

When we’re dealing with a discretionary trust, one of the first things we need to do is to identify who the beneficiaries are.

Is our client (or their spouse) in fact a beneficiary of the trust that we’re dealing with?

There are some common tricks and common issues that we should be keeping an eye out for, including ensuring we have identified all variations to the deed since establishment.

We also need to be aware of a case by the name of Yazbek, which outlines the approach that the courts take when they are asked to consider who the beneficiaries of a trust are.

Yazbek is significant because the court confirmed that a person who is eligible under a trust deed to receive income or capital from a trust is a beneficiary, notwithstanding that they may not have actually received anything from the trust at that point in time.

The Yazbek decision was handed down in the context of an assessment which had been issued to an individual beneficiary.

The ATO normally has a two-year period after that assessment was issued in which to issue an amended assessment (where they have identified some additional tax they believe should have been included in the taxpayer’s return).

However that standard two-year window is extended to four years where the individual involved is the beneficiary of a trust.

In Yazbek, ATO was trying to issue an amended assessment three years after the original assessment had been issued. So it was outside the two-year window, but within the four-year window.

The taxpayer in Yazbek hadn't received any distributions from the discretionary trust that the ATO contended he was a beneficiary of.

This was a discretionary trust which was controlled by other family members.

He was included in a wide class of discretionary beneficiaries, but had not actually received anything.

His contention was that in order to be a beneficiary of a trust, he needed to have actually received something from it.

Now the court was quite quick to shut that argument down and said that even if a person has not received any income or capital from the trust for the entire period it has existed, if they are within a class of persons who are eligible to receive income or capital at the trustee’s discretion, they are still a beneficiary of the trust.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Who song ‘Who are you?’.

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Identifying trust types (AKA – that’s not my name**)

The first step in the process is to identify what sort of trust we’re dealing with.

Discretionary trusts and unit trusts are usually relatively easy to identify. The discretionary trusts will have a range of beneficiaries, but no single beneficiary will have any fixed entitlement to income or capital from that trust.

Therefore, the rights that a beneficiary has against the trustee are limited to the right to be considered for distributions from time to time and the right to ensure that the trustee fulfils their fiduciary obligations.

If you contrast that with a unit trust, the unit trust will usually have beneficiaries with units or fixed percentages, which entitle them to determinable amounts of the trust income and capital.

Therefore, a unit trust will be treated quite differently from a bankruptcy perspective and a Family Law Act perspective in the event something goes wrong for one of the unit owners.

The hybrid trust is quite different again and there is no single agreed definition.

You could talk to 10 different lawyers and probably get 10 different definitions of what a hybrid trust is.

It is a structure that has been evolving a lot over the last 10 to 15 years and there are a lot of different variations around, which each have slightly different provisions or quirks in the way they operate.

In a general sense, a hybrid trust is a trust which has some discretionary entitlements and some fixed entitlements.

One example of a type of hybrid trust that was particularly common in the lead up to the GFC is a negative gearing hybrid trust, where we have an individual unitholder who goes out and borrows funds to buy units in that trust, and that unit gives the unitholder a fixed entitlement to the income from the trust.

The thinking behind these hybrid trusts is that because the individual had borrowed to acquire an income producing asset, being the units, they could therefore claim a tax deduction for their interest on the borrowings.

However the trust deed would then have a separate provision which said any capital gain that may be realised by the trust could be distributed at the trustee’s discretion to a wide range of beneficiaries.

In other words, we have some discretionary entitlements in relation to capital and some fixed entitlements in relation to income.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Ting Ting’s song ‘That’s not my name’.

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Go your own way - The Rinehart Ruling – a key aspect **

Following last week’s post in relation to the, suspected, Tax Office Ruling in relation to the Rinehart trust dispute matter, there was some discussion about one key aspect of the reasoning.

In particular, the question of when a beneficiary becomes absolutely entitled to a particular capital asset as against the trustee is generally seen as critical.

The position appears to be that, where a trustee has a right of indemnity (and lien over) the relevant asset, it is not enough that the beneficiary has a ‘vested and indefeasible’ interest in the trust capital.

Instead, the beneficiary must have the right to force the trustee to transfer to them the asset, subject only to the payment of the trustee's expenses.

In order for this to be the case the better view appears to be that one of the following tests must be met, despite some suggestions to the contrary in the Tax Office’s Taxation Ruling 2004/D25 (TR 2004/D25), mentioned in last week’s post –

1. If the trust is over particular assets, then the trustee has a clear duty to transfer those assets to the beneficiary, without the trustee having any express or implied power of sale under the trust instrument.
2. Alternatively, if the trustee has a power of sale, the beneficiary must have demanded a particular asset be transferred to them and must tender sufficient funds to the trustee to satisfy the trustee’s right of indemnity.
3. Finally, absolute entitlement may be created by a trustee resolving to exercise a power under the trust deed (or at law) that a particular asset be immediately distributed to the beneficiary.

Importantly, and as flagged by the Tax Office in TR 2004/D25, a trustee’s right of indemnity of itself is irrelevant to the question of whether absolute entitlement exists. Rather it is a trustee's power of sale that will generally prevent a beneficiary being able to demonstrate absolute entitlement. However this point is unfortunately not clear in TR 2004/D25, despite the Ruling running to over 100 pages.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, ‘Go Your Own way’ is another song by legendary band Fleetwood Mac from 1977.

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Little lies ? The Rinehart Private Ruling **

Obviously, there has been an enormous amount of interest in relation to the Rinehart trust dispute matter over an extended period of time.

Interestingly, the centrepiece of the dispute, at least from a tax perspective, does not always receive a significant amount of attention.

Given what has been disclosed publicly, there are many who believe that Ms Rinehart successfully obtained a private ruling from the Tax Office in relation to whether there were any capital gains tax (CGT) consequences of the trust, which is the focus of the dispute, vesting when Ms Rinehart’s youngest child turned 25.

While it cannot be certain, it appears that private ruling authorisation No. 1012254771092 relates to the Rinehart matter. As usual, if you would like a copy of the ruling please contact me.

The private ruling carefully considers whether CGT event E5 occurs on the vesting of a trust. CGT event E5 is said to occur when a beneficiary becomes ‘absolutely entitled' to a CGT asset of trust as against the trustee.

The ruling then goes onto explore in some detail the broad position that the Tax Office adopts in these areas based on Taxation Ruling 2004/D25 (TR 2004/D25). Again, as usual, if you would like a copy of the ruling please contact me.

The Tax Office confirms that while TR 2004/D25 remains in draft, so long as it is not withdrawn, it does represent its view of the law.

Based on the analysis of TR 2004/D25, the ruling concludes that because no beneficiary was able to call for any one or more of the assets to be transferred to them, they were not entitled to any assets as against the trustee, and therefore, CGT event E5 did not occur on the vesting of the trust.

An interesting footnote in this regard is that CGT event E5 was essentially based on similar UK legislation. The CGT rules in the UK however, unlike in Australia, explicitly state that absolute entitlement can be triggered for jointly owned property even when the trustee's right of indemnity is yet to be satisfied.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, ‘Little Lies’ is a song by legendary band Fleetwood Mac from 1987.

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