As many will have seen, the lead article in Friday’s Financial Review confirmed that, as far as the Tax Office is concerned, payments made by a super fund, following the death of a member, will be subject to (at least) a 10% capital gains tax bill.
Tax is payable in these circumstances on the difference between the market value of the underlying assets of the fund and the cost base.
While some advisers have tried to adopt approaches to get around what is effectively a death duty, the conservative view as to the likely ATO approach has now been confirmed beyond doubt.
Depending on the exact circumstances of a client, there are still mechanisms to significantly reduce and/or eliminate the capital gains tax liability that might otherwise be triggered on the death of a fund member, however the announcement by the Tax Office further underlines the importance of ensuring a comprehensive, integrated and up-to-date estate plan.
For those interested in reading the full draft ruling, a link is set out below.
Until next week.
http://law.ato.gov.au/atolaw/view.htm?DocID=DTR/TR2011D3/NAT/ATO/00001&PiT=99991231235958
Monday, July 25, 2011
Monday, July 18, 2011
Small i Income
A number of posts over the last 18 months have touched on various aspects of the Bamford decision.
One issue that comes up more frequently than otherwise might be assumed is the way in which the word 'income' is used throughout a trust deed.
At times we have seen in deeds a definition of ‘Income’ and the word defined is mentioned in the definition section in a capitalised sense – that is the word income will start with a capital I.
When reference is then had however to the distribution of income provisions, the deed drafter has not in fact used the 'big I' income definition, but rather has simply referred to 'small i' income. This will generally mean that the defined term will not apply and ‘income’ (for the purposes of the relevant clause) will simply have its ordinary meaning.
Obviously, there are a number of potentially complex trust and tax law interpretation issues that can arise in this regard. This said, it is arguably going to be quite clear what position the Tax Office will take to the extent a trustee has misunderstood the trust deed, particularly given the recently released trust distribution legislation.
Until next week.
One issue that comes up more frequently than otherwise might be assumed is the way in which the word 'income' is used throughout a trust deed.
At times we have seen in deeds a definition of ‘Income’ and the word defined is mentioned in the definition section in a capitalised sense – that is the word income will start with a capital I.
When reference is then had however to the distribution of income provisions, the deed drafter has not in fact used the 'big I' income definition, but rather has simply referred to 'small i' income. This will generally mean that the defined term will not apply and ‘income’ (for the purposes of the relevant clause) will simply have its ordinary meaning.
Obviously, there are a number of potentially complex trust and tax law interpretation issues that can arise in this regard. This said, it is arguably going to be quite clear what position the Tax Office will take to the extent a trustee has misunderstood the trust deed, particularly given the recently released trust distribution legislation.
Until next week.
Monday, July 11, 2011
Lineal descendant trusts post Bamford
As touched on in a recent post, often 'lineal descendant trusts' will adopt a 'hybrid' approach whereby:
1) The capital is protected for lineal descendants.
2) The income may be distributed to a wide range of potential beneficiaries (including non lineal descendants).
We have seen a number of instances lately where trusts that were originally prepared along the lines outlined above where, following Bamford on the recent Government legislation concerning streaming, the client was wanting to redefine income and in particular allow capital gains to form part of the net income of the trust. While (as is the case in many of these areas) there are a number of competing arguments, there is a real risk that this kind of amendment to a 'hybrid' lineal descendant trust would amount to a resettlement for tax purposes.
For regular readers, you will recall that an earlier posting specifically mentions the Tax Office’s Statement of Principles and provides a link to that document.
Until next week.
1) The capital is protected for lineal descendants.
2) The income may be distributed to a wide range of potential beneficiaries (including non lineal descendants).
We have seen a number of instances lately where trusts that were originally prepared along the lines outlined above where, following Bamford on the recent Government legislation concerning streaming, the client was wanting to redefine income and in particular allow capital gains to form part of the net income of the trust. While (as is the case in many of these areas) there are a number of competing arguments, there is a real risk that this kind of amendment to a 'hybrid' lineal descendant trust would amount to a resettlement for tax purposes.
For regular readers, you will recall that an earlier posting specifically mentions the Tax Office’s Statement of Principles and provides a link to that document.
Until next week.
Wednesday, June 29, 2011
ATO gives some relief in lead up to 30 June for trust distribution resolutions
Extracted below is the announcement the ATO has made this morning confirming the transitional arrangements that will apply for 30 June 2011 in relation to trust distributions.
The comments in relation to IT 328 are particularly interesting.
Other administrative arrangements
The Commissioner recognises that the passage of this legislation so close to the end of the income year to which it will first apply gives trustees and practitioners little time to familiarise themselves with its content and to determine how it might affect the circumstances of a particular trust for that income year (that is, the 2010-11 income year).
Therefore, following representations from practitioners, and in recognition of the practical difficulties faced by them and by trustees as a result of the timing of the new law, the Commissioner will put in place the following administrative arrangements in respect of the application of the new law to the 2010-11 income year.
Specific entitlement to franked distributions
As regards the timing of recording such an entitlement for the 2010-11 income year, the Commissioner has agreed to adopt a similar approach to that set out in Income Tax Rulings IT 328 and 329 in respect of ‘present entitlement’ to trust income.
That is, for trusts with a 30 June balance date the Commissioner will accept that a relevant record made in respect of a franked distribution by 31 August 2011 meets the requirements of the new law for the 2010-11 income year in any case where ITs 328 and 329 would permit the trustee to take steps within that same period to make beneficiaries presently entitled to trust income for the purpose of Division 6.
For trusts that balance earlier than 30 June 2011 (or later than 30 June 2011 but before 31 August 2011) the Commissioner will likewise accept a relevant record made by 31 August 2011.
As the new law (if enacted as passed) will permit relevant records to be made in respect of capital gains no later than two months after the end of the relevant income year, there is no need for this arrangement to be extended to a beneficiary’s specific entitlement to capital gains.
It should be noted that the arrangement outlined above concerning a beneficiary’s specific entitlement to franked distributions will apply only for the 2010-11 income year.
Further, the Commissioner intends withdrawing ITs 328 and 329 for the 2011-12 and later income years.
Compliance action
Staff will also be instructed not to select cases for review or audit in respect of the 2010-11 income year for the sole purpose of determining whether the purported streaming of capital gains or franked distributions by a trustee is effective.
This instruction will not apply where there has been a deliberate attempt to exploit weaknesses or deficiencies in the law. In those cases we will apply the law as we understand it to operate.
We will also apply the law as we understand it to operate in any case that has been selected for review or audit for other reasons, and in preparing rulings or objections, and in arguing cases before the Tribunal or the courts.
At this stage the next post will be Monday week.
The comments in relation to IT 328 are particularly interesting.
Other administrative arrangements
The Commissioner recognises that the passage of this legislation so close to the end of the income year to which it will first apply gives trustees and practitioners little time to familiarise themselves with its content and to determine how it might affect the circumstances of a particular trust for that income year (that is, the 2010-11 income year).
Therefore, following representations from practitioners, and in recognition of the practical difficulties faced by them and by trustees as a result of the timing of the new law, the Commissioner will put in place the following administrative arrangements in respect of the application of the new law to the 2010-11 income year.
Specific entitlement to franked distributions
As regards the timing of recording such an entitlement for the 2010-11 income year, the Commissioner has agreed to adopt a similar approach to that set out in Income Tax Rulings IT 328 and 329 in respect of ‘present entitlement’ to trust income.
That is, for trusts with a 30 June balance date the Commissioner will accept that a relevant record made in respect of a franked distribution by 31 August 2011 meets the requirements of the new law for the 2010-11 income year in any case where ITs 328 and 329 would permit the trustee to take steps within that same period to make beneficiaries presently entitled to trust income for the purpose of Division 6.
For trusts that balance earlier than 30 June 2011 (or later than 30 June 2011 but before 31 August 2011) the Commissioner will likewise accept a relevant record made by 31 August 2011.
As the new law (if enacted as passed) will permit relevant records to be made in respect of capital gains no later than two months after the end of the relevant income year, there is no need for this arrangement to be extended to a beneficiary’s specific entitlement to capital gains.
It should be noted that the arrangement outlined above concerning a beneficiary’s specific entitlement to franked distributions will apply only for the 2010-11 income year.
Further, the Commissioner intends withdrawing ITs 328 and 329 for the 2011-12 and later income years.
Compliance action
Staff will also be instructed not to select cases for review or audit in respect of the 2010-11 income year for the sole purpose of determining whether the purported streaming of capital gains or franked distributions by a trustee is effective.
This instruction will not apply where there has been a deliberate attempt to exploit weaknesses or deficiencies in the law. In those cases we will apply the law as we understand it to operate.
We will also apply the law as we understand it to operate in any case that has been selected for review or audit for other reasons, and in preparing rulings or objections, and in arguing cases before the Tribunal or the courts.
At this stage the next post will be Monday week.
Monday, June 27, 2011
Lineal descendant trusts
One of the other queries that has been raised following the last couple of posts concerns lineal descendant trusts.
There are a number of names in the marketplace for this form of trust structure, however in very broad terms, these types of trusts involve narrowing the range of potential beneficiaries that might otherwise be expected under a family trust.
In particular, the range of beneficiaries is often limited to the direct lineal descendants of the primary beneficiaries of the trust.
As has been mentioned a number of times in earlier posts, it is always critical to read the trust deed and lineal descendant trusts are another example of this rule. One of the key issues to be mindful of in this regard is that some trusts 'reserve' only the capital for lineal descendants, while still allowing very wide distribution powers for income.
Next week, we will look at a very practical, post Bamford, implication of lineal descendant trusts that only limit capital distributions.
Until next week.
There are a number of names in the marketplace for this form of trust structure, however in very broad terms, these types of trusts involve narrowing the range of potential beneficiaries that might otherwise be expected under a family trust.
In particular, the range of beneficiaries is often limited to the direct lineal descendants of the primary beneficiaries of the trust.
As has been mentioned a number of times in earlier posts, it is always critical to read the trust deed and lineal descendant trusts are another example of this rule. One of the key issues to be mindful of in this regard is that some trusts 'reserve' only the capital for lineal descendants, while still allowing very wide distribution powers for income.
Next week, we will look at a very practical, post Bamford, implication of lineal descendant trusts that only limit capital distributions.
Until next week.
Monday, June 20, 2011
Wills post Bamford
Following last week’s post, there were some enquiries in relation to whether the Bamford decision meant that wills should be updated.
Very broadly, the position in relation to will updates post Bamford is similar to discretionary trust deed updates, namely:
1) All wills should at least be reviewed (to the extent that they contain ongoing trust provisions).
2) Our experience is that many wills probably are going to require update. The reason for this is that traditionally wills have been crafted by specialist will lawyers, as opposed to tax specialists.
3) The significant (and very obvious) difference between trust provisions in a standard family discretionary trust and under a will, is that (in comparison) the amending of a will becomes extremely difficult following the death of the will maker.
4) While there can be pathways to achieve an amendment after death, almost without exception it is preferable to have the will document fully in order before it comes into force.
Until next week.
Very broadly, the position in relation to will updates post Bamford is similar to discretionary trust deed updates, namely:
1) All wills should at least be reviewed (to the extent that they contain ongoing trust provisions).
2) Our experience is that many wills probably are going to require update. The reason for this is that traditionally wills have been crafted by specialist will lawyers, as opposed to tax specialists.
3) The significant (and very obvious) difference between trust provisions in a standard family discretionary trust and under a will, is that (in comparison) the amending of a will becomes extremely difficult following the death of the will maker.
4) While there can be pathways to achieve an amendment after death, almost without exception it is preferable to have the will document fully in order before it comes into force.
Until next week.
Tuesday, June 14, 2011
When do wills need updating?
In many cases, the need to update a will is obvious due to significant changes in tax or trust laws or a significant change in the circumstances for a client.
Some of the other reasons that a will may need changing are often not as obvious and a brief summary of the potential trigger points is as follows:
(a) there is a change of name of the will maker or anyone named in the will changes their name;
(b) an executor/trustee dies or becomes unwilling or unsuitable to act due to ill health, age or any other reason;
(c) a beneficiary dies;
(d) the family situation or that of any beneficiary changes (e.g. through marriage, divorce, matrimonial problems, children or further children, de facto relationships or interpersonal relationships);
(e) there is a material change in financial circumstances of the will maker or any beneficiary;
(f) the will maker becomes involved in a new business, company or trust.
Until next week.
Some of the other reasons that a will may need changing are often not as obvious and a brief summary of the potential trigger points is as follows:
(a) there is a change of name of the will maker or anyone named in the will changes their name;
(b) an executor/trustee dies or becomes unwilling or unsuitable to act due to ill health, age or any other reason;
(c) a beneficiary dies;
(d) the family situation or that of any beneficiary changes (e.g. through marriage, divorce, matrimonial problems, children or further children, de facto relationships or interpersonal relationships);
(e) there is a material change in financial circumstances of the will maker or any beneficiary;
(f) the will maker becomes involved in a new business, company or trust.
Until next week.
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