On Friday, a lawyer in sole practice and I caught up in relation to reviewing a purported trust clone.
As many of you will know, we have been fortunate (particularly in recent years) to do an ever increasing amount of work with suburban and regional lawyers who effectively use us as their external resource in areas where they do not have the time, energy or skills to otherwise assist.
Here the initial query was for the lawyer directly and in particular whether he had prepared documents for a client that satisfied the relevant trust law rules about how a trust cloning must take place. As it turned out, everything was fine on this point and similarly from a tax perspective, the transaction had been validly implemented prior to the tax rule changes on October 31, 2008.
What had not been resolved however was the way in which the transfer of assets between the two trusts was accounted for. In particular, the lawyer had crafted the documentation so that the consideration paid was the amount notified to the parties by the accountant.
As no notification had yet been made, we caught up with the accountant and quickly determined that there could be four possible alternatives, namely:
1. Nil.
2. $1 (or some other nominal amount greater than nil).
3. The historical cost base.
4. The market value.
Each of these four alternatives had quite dramatically different consequences both from an accounting and tax perspective and Friday's meeting was a timely reminder of the need for a truly collaborative approach between the various professional specialists on behalf of the underlying client.
Until next week.
Matthew Burgess
Monday, April 12, 2010
Thursday, April 1, 2010
Pre CGT assets owned by family trusts
Given the Easter break for many next week, and our promise to post a blog posting each week - the posting that would have been next Monday is being posted today.
Over the last eighteen months, we have had an increasing number of clients needing to consider various aspects of the capital gains tax (CGT) rules as they relate to assets acquired pre CGT (i.e. before September 1985).
Someone like Bernard Salt (Salt is a renowned demographic consultant out of KPMG in Melbourne – see his website at http://www.bernardsalt.com.au/) would undoubtedly be able to explain that the reason for this has something to do with the baby boomer generation – i.e. people who were in the early to mid part of their wealth creation in the 1980s are now looking at retirement and succession issues.
Two of the potentially trickier aspects of the CGT regime, relate to the deeming provisions under Division 149 (formerly section 160ZZS) and CGT event K6 (formerly section 160ZZT).
As an accountant reminded me last week, there is an old ATO ruling (let me know if you want a copy of it) that confirms Division 149 can in fact apply to discretionary trusts – i.e. the underlying CGT status of trust assets can be impacted on by the way in which distributions have been made out of the trust over the term that the asset was owned.
Best wishes for Easter.
Matthew Burgess
Over the last eighteen months, we have had an increasing number of clients needing to consider various aspects of the capital gains tax (CGT) rules as they relate to assets acquired pre CGT (i.e. before September 1985).
Someone like Bernard Salt (Salt is a renowned demographic consultant out of KPMG in Melbourne – see his website at http://www.bernardsalt.com.au/) would undoubtedly be able to explain that the reason for this has something to do with the baby boomer generation – i.e. people who were in the early to mid part of their wealth creation in the 1980s are now looking at retirement and succession issues.
Two of the potentially trickier aspects of the CGT regime, relate to the deeming provisions under Division 149 (formerly section 160ZZS) and CGT event K6 (formerly section 160ZZT).
As an accountant reminded me last week, there is an old ATO ruling (let me know if you want a copy of it) that confirms Division 149 can in fact apply to discretionary trusts – i.e. the underlying CGT status of trust assets can be impacted on by the way in which distributions have been made out of the trust over the term that the asset was owned.
Best wishes for Easter.
Matthew Burgess
Monday, March 29, 2010
When is a share not a share?
Special classes of shares have, at least in recent years, always been a hallmark of company structures.
One of the most common descriptions of shares that provide no other rights than simply a dividend at the complete discretion of the directors from time to time is a 'dividend access' or 'dividend only' share.
Last week, we helped an accountant whose client was the subject of a wider ATO audit. For the third time I am personally aware of in the last twelve months, one of the core issues the ATO was pursuing related to the application of the debt equity rules to a purported dividend access share.
For anyone that has spent time considering the debt equity rules, they will know how complex they are (indeed the position paper from the ATO on this point ran to around 15 A4 pages).
The bottom line in a practical sense is if you have clients wanting to implement a dividend access share arrangement and they are not willing to have you provide formal advice about the application (or otherwise) of the debt equity rules, you should get as a minimum confirmation from them that they understand the consequences of a share being treated as debt instead of equity.
More conservatively, you should probably refuse to implement the structure at all, although obviously commercially, this raises a number of difficulties.
For the client last week, if the ATO is successful in arguing that the dividend access share was in fact a debt instrument for tax purposes, it will mean that the 7-digit dividend that had been declared will be completely unfrankable.
Until next week.
Matthew Burgess
One of the most common descriptions of shares that provide no other rights than simply a dividend at the complete discretion of the directors from time to time is a 'dividend access' or 'dividend only' share.
Last week, we helped an accountant whose client was the subject of a wider ATO audit. For the third time I am personally aware of in the last twelve months, one of the core issues the ATO was pursuing related to the application of the debt equity rules to a purported dividend access share.
For anyone that has spent time considering the debt equity rules, they will know how complex they are (indeed the position paper from the ATO on this point ran to around 15 A4 pages).
The bottom line in a practical sense is if you have clients wanting to implement a dividend access share arrangement and they are not willing to have you provide formal advice about the application (or otherwise) of the debt equity rules, you should get as a minimum confirmation from them that they understand the consequences of a share being treated as debt instead of equity.
More conservatively, you should probably refuse to implement the structure at all, although obviously commercially, this raises a number of difficulties.
For the client last week, if the ATO is successful in arguing that the dividend access share was in fact a debt instrument for tax purposes, it will mean that the 7-digit dividend that had been declared will be completely unfrankable.
Until next week.
Matthew Burgess
Monday, March 22, 2010
How many directors does it take to have a company ?
Last week, I further explored the issues that came out of a relatively common situation of a loan or unpaid present entitlement owed to a company, where that company was a trading entity.
As mentioned last week, one asset protection strategy that often makes sense on a number of levels is ensuring that the only directors of a trading company are those people who, commercially, absolutely must be a director.
Often, we find situations where, for example, a husband and wife are both directors of a company when only one spouse in fact needs to be.
As directors carry personal liability, this is unnecessarily risky.
While this issue can normally be very easily solved by simply resigning the relevant director and giving notification to the company and the ASIC - care must be taken.
In particular, all companies, until the late 1990s, had to have at least two directors (and, other than in very limited circumstances, all public companies must still have three directors).
Therefore, even though the Corporations Law has been updated for about 13 or 14 years now, there are many company constitutions (or as they were formally known ‘memorandum and articles’) that still require two directors.
If a director resigns in breach of the company constitution, there can be a series of Corporation Law issues that need to be taken into account. These issues can all be avoided by simply ensuring the company’s constitution is updated before the resignation takes place.
Until next week.
Matthew Burgess
As mentioned last week, one asset protection strategy that often makes sense on a number of levels is ensuring that the only directors of a trading company are those people who, commercially, absolutely must be a director.
Often, we find situations where, for example, a husband and wife are both directors of a company when only one spouse in fact needs to be.
As directors carry personal liability, this is unnecessarily risky.
While this issue can normally be very easily solved by simply resigning the relevant director and giving notification to the company and the ASIC - care must be taken.
In particular, all companies, until the late 1990s, had to have at least two directors (and, other than in very limited circumstances, all public companies must still have three directors).
Therefore, even though the Corporations Law has been updated for about 13 or 14 years now, there are many company constitutions (or as they were formally known ‘memorandum and articles’) that still require two directors.
If a director resigns in breach of the company constitution, there can be a series of Corporation Law issues that need to be taken into account. These issues can all be avoided by simply ensuring the company’s constitution is updated before the resignation takes place.
Until next week.
Matthew Burgess
Monday, March 15, 2010
In times of peace - prepare for war
Two weeks ago, I explained the importance of reviewing all loan accounts and unpaid present entitlements in the context of asset protection issues.
As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:
1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.
Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.
The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.
As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.
Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.
As usual, until next week.
Matthew Burgess
As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:
1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.
Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.
The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.
As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.
Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.
As usual, until next week.
Matthew Burgess
Monday, March 8, 2010
Can a company own shares in itself ?
A couple of days ago, a financial adviser and I were looking at helping a client to implement an insurance funded buy-sell arrangement.
Particularly since the downturn over 2008 and 2009, there seems to have been an increasing focus on insurance protection in the context of business succession (quite aside from any keyperson insurance) and we are regularly seeing bank funding approvals being made conditional on the insurance at least covering the bank’s lending exposure.
As part of the audit process that we were jointly performing on the client's circumstances, the financial adviser identified that one of the shareholders in the trading company was the trading company itself.
This was not a simple case of the trading company having done some sort of share buyback arrangement – the company was listed under the ASIC records as a one third shareholder in itself.
Although it is an area that is not often considered, the Corporations Act expressly prohibits companies owning shares in themselves and there are a series of practical consequences (as well as potentially significant penalties) that can flow.
It looks as though there will be a solution for this client, however as with most breaches of the law, prevention would have been infinitely more palatable than the cure.
And no - a company can not own shares in itself.
Until next week.
Matthew Burgess
Particularly since the downturn over 2008 and 2009, there seems to have been an increasing focus on insurance protection in the context of business succession (quite aside from any keyperson insurance) and we are regularly seeing bank funding approvals being made conditional on the insurance at least covering the bank’s lending exposure.
As part of the audit process that we were jointly performing on the client's circumstances, the financial adviser identified that one of the shareholders in the trading company was the trading company itself.
This was not a simple case of the trading company having done some sort of share buyback arrangement – the company was listed under the ASIC records as a one third shareholder in itself.
Although it is an area that is not often considered, the Corporations Act expressly prohibits companies owning shares in themselves and there are a series of practical consequences (as well as potentially significant penalties) that can flow.
It looks as though there will be a solution for this client, however as with most breaches of the law, prevention would have been infinitely more palatable than the cure.
And no - a company can not own shares in itself.
Until next week.
Matthew Burgess
Monday, March 1, 2010
UPEs and an Asset Protection Trap
This last week I had a timely reminder that while those tax driven issues are critical, they are in fact not as important as the underlying loan or UPE itself.
In particular, I was helping an accountant who had a client whose trading company had been served with litigation proceedings. My role was to help review all structures in the group from an asset protection perspective, although as the litigation lawyer here politely reminded us (I do not get involved in any actual court work if I can avoid it), it was probably not the most opportune time to be doing the asset protection audit - hence Friday's Twitter posting 'in times of peace - prepare for war' www.twitter.com/mwb_mcr
In any event, while the overall structure of the group was fairly sensible, there was one, very large asset on the trading company’s balance sheet. That asset was a UPE (or if the ATO chooses to ignore industry feedback and finalises its draft ruling – a loan) owed to the trading company by a passive investment trust.
Despite bankruptcy clawback rules, there may be a solution for this client that we are currently exploring. The situation they have to address, now urgently, is of course less than ideal and was a timely reminder that all clients should be encouraged to undertake an asset protection 'audit' regularly.
For those interested, the particular solution potentially available to the client here was somewhat unique and fairly complex and I have added it to the list of ideas for presentation topics at a future Intensive or a Master Class by our firm.
Next week (or if another more relevant topic arises, within the next few weeks), I will relay one other difficulty with this client’s structure that is likely to not be able to be addressed – but could have been with some forward planning.
Matthew Burgess
In particular, I was helping an accountant who had a client whose trading company had been served with litigation proceedings. My role was to help review all structures in the group from an asset protection perspective, although as the litigation lawyer here politely reminded us (I do not get involved in any actual court work if I can avoid it), it was probably not the most opportune time to be doing the asset protection audit - hence Friday's Twitter posting 'in times of peace - prepare for war' www.twitter.com/mwb_mcr
In any event, while the overall structure of the group was fairly sensible, there was one, very large asset on the trading company’s balance sheet. That asset was a UPE (or if the ATO chooses to ignore industry feedback and finalises its draft ruling – a loan) owed to the trading company by a passive investment trust.
Despite bankruptcy clawback rules, there may be a solution for this client that we are currently exploring. The situation they have to address, now urgently, is of course less than ideal and was a timely reminder that all clients should be encouraged to undertake an asset protection 'audit' regularly.
For those interested, the particular solution potentially available to the client here was somewhat unique and fairly complex and I have added it to the list of ideas for presentation topics at a future Intensive or a Master Class by our firm.
Next week (or if another more relevant topic arises, within the next few weeks), I will relay one other difficulty with this client’s structure that is likely to not be able to be addressed – but could have been with some forward planning.
Matthew Burgess
Subscribe to:
Posts (Atom)