As mentioned last week, we often
find trust deeds have prohibitions on a trustee’s ability to vary the document.
Some of the issues to be aware of
in this regard include:
1 Often variations can only be made with the
consent of someone other than the trustee, for example an appointor, guardian
or even the settlor.
2 In some cases, variations can only be made to
the core (or trust) provisions of the deed, as opposed to the more general
powers, which will usually limit the ability to vary the income provisions.
3 Alternatively, while powers can be added to a
trust, a deed will sometimes provide that any existing powers cannot be varied
– this can be particularly problematic where there is a desire to update the
income distribution provisions.
4 There are countless other examples of restrictions
on variations and indeed, we have come across deeds where there is a blanket
prohibition on making variations to the deed, or at least on variations to
particular clauses in the deed.
While
there are often workarounds no matter what restriction is imposed, the
fundamental rule to remember is that each and every deed must be read before
embarking on a variation.
Until next week.
Following on from the recent posts
about the ATO draft determination on resettlements (TD2012/D4), today's post is
in effect a further reminder of an earlier post that focused on the catch
phrase 'Read the Deed', again with thanks to co View Legal director Tara Lucke.
One of the key themes in the
recent ATO determination is that a trust variation must be made within the
scope of the variation power in the trust deed.
If a purported variation is made
outside the scope of the particular variation power, the ATO has provided
guidance that this may result in the termination of a trust (i.e. a
resettlement for CGT purposes).
We are constantly encountering
deeds that have significant limitations on the variation power, particularly
with the regular amendments we are doing for clients of accounting firms to
ensure that trust deeds are up-to-date for all recent changes in law.
Next week’s post will focus on
some of the common variation prohibitions we come across.
Until next week.
As mentioned in the last post,
the ATO has released a draft determination, TD2012/D4, in relation to
resettlements.
With particular thanks to View Legal director Tara Lucke, today’s post focuses on the interplay of the draft
determination with the ATO’s previous published position on resettlements – the
Statement of Principles.
In summary, according to the
determination:
1. The ATO has withdrawn its Statement of
Principles as of April 2012.
2. The ATO accepts that although the Clark and
Commercial Nominee cases were decided in perhaps slightly different contexts to
many of the issues dealt with in the Statement of Principles, the conclusions
reached in each of those two cases do have a broader application.
3. Provided an amendment to a trust is valid at
trust law and is in accordance with the terms of the trust instrument, CGT
event E1 should not be triggered.
4. The ATO will expect any deed of variation to be
made in accordance with trust law principles and the particular requirements of
the trust instrument in order for the amendment to be effective.
Until next week.
Posts from last year looked at the Clark decision. In
that case, the court held that significant changes to a trust instrument would
not of themselves cause a resettlement of the trust for tax purposes.
As mentioned in last week’s post, the Tax Office has now
released draft determination TD2012/D4 which provides some further clarity around
when the Tax Office will deem changes to a trust to amount to a capital gains
tax event under CGT events E1 and E2 (i.e. a resettlement).
In broad terms, the Tax Office states that unless variations
cause a trust to terminate, then there will be no resettlement for tax
purposes.
A number of examples are provided, which give some guidance
around issues such as changes of beneficiaries and update to address
distribution of trust income.
Unfortunately, the examples provided are not particularly
comprehensive and issues such as changing appointors and multiple changes (for
example, changing beneficiaries, the trustee and the appointor as part of an
estate planning exercise) are not specifically addressed.
This said, the draft determination should provide a level of
confidence that relatively significant changes to trust instruments can be made
without adverse tax consequences, although it remains necessary to also
consider the separate stamp duty and trust law implications of any such change.
A full copy of the draft determination is at the following
link – http://law.ato.gov.au/atolaw/view.htm?docid=%22DXT%2FTD2012D4%2FNAT%2FATO%2F00001%22
Until next week.
Over time, View Legal has developed a 'trust review checklist' that outlines some of the key issues which should be considered as part
of a general ‘health check’ of a discretionary trust deed to ensure it aligns
with the constantly evolving legal requirements regarding trusts and tax
implications.
An adviser after reading the document made contact in
relation to the potential outcomes in the event a trustee fails to make a
resolution.
We
confirmed that there are the two main potential outcomes; namely that the
trustee is taxed or the default beneficiaries are taxed. Which of the two
outcomes applies will depend on how the trust deed is crafted.
In this regard, the leading case in this area is
Ramsden.
The deed in Ramsden provided that a purported default
distribution did not actually operate on its face and therefore the trustee was
taxed at the top marginal rate. This can be a particularly poor outcome
where there are capital gains given there is no entitlement to the 50% discount.
Conversely, we have seen many situations where the default
provisions apply such that all distributions are made to a corporate
beneficiary. To the extent that there are capital gains that would
otherwise be entitled to the 50% discount, this outcome will trigger adverse
(and unnecessary) tax costs.
One other issue to be aware of, which again reinforces the
importance of reading a deed, is that the actual timing of the resolution must be
in accordance with the deed, even if legislation or Tax Office practice
otherwise permits a later date.
For those interested to review the abovementioned summary, go to the 'core services' section of the View Legal website (viewlegal.com.au)
The next post
will look at the Tax Office Determination released last week on trust variations.
As set
out in earlier posts, and with thanks to the Television Education Network,
today’s post addresses the issue of ‘When do ‘gift and loan’ arrangements need
to be refreshed?’ at the following link - http://www.youtube.com/watch?v=QuRRvCIx9e8&feature=relmfu
As usual, a transcript of the
presentation for those that cannot (or choose not) to view the presentation is
below –
There's two real reasons that the top up arrangement can come into
effect.
The first one, and hopefully for most people, even in a post GFC
environment, is that the actual underlying asset has gone up in value.
So in other words, you end up with a gap between the amount that was
originally forwarded and the underlying asset value. So in that instance,
there is obviously a desire to ‘catch up’ that gap or to remove that gap and
that can be done by effectively recycling or regenerating a debt back to the
trust and then making sure that the mortgage arrangements are updated to catch
that additional amount.
The other reason that it might take place, and this particularly can arise
in relation to master trusts, is where there's a feeling amongst the family
unit that all arrangements are to be on a commercial basis.
In that instance, it's quite often the case that there are interest and
principal repayments. So in that scenario, you'll start to get a gap
between the level of security that the trust might have over the particular
asset and the debt that’s actually outstanding.
The critical point in relation to either of those scenarios, so in other
words the asset going up in value or the debt being reduced, or for that
matter, both things happening at once, is that whenever that gap is removed,
you will generally find that there is wealth being moved away from an at-risk
individual into a protected environment being the trust. Obviously in
that scenario, in each and every instance that it takes place, you've
potentially got to be aware of and advise the client, in relation to the
application of the bankruptcy clawback provisions.
Until next week.
There have been a number of court decisions in recent times
focused on the way in which valuations are conducted for the purposes of
satisfying (what is currently) the ‘$6M net asset test’ for the small business
capital gains tax concessions.
The Tax Office has recently released a Decision Impact Statement following one of the cases from last year (for a full copy of the statement, please email me).
In the statement the Tax Office has confirmed that its
publication ‘market valuation for tax purposes’ provides the guidance that it
believes should be followed in order to establish a market value for tax
purposes.
In particular, the Tax Office states that it believes market
value should be determined with reference to the ‘highest and best use’ of each
asset being assessed.
While generally the sale price of an asset will be its
market value, the Tax Office believes that each situation must be considered on
a case by case basis to determine the most appropriate methodology for
determining market value.
Often this will lead to reference to the long standing
concept of ‘what a desirous buyer would have paid as a fair price to a willing
vendor who was not necessarily desirous (or over anxious) to sell’.
Until next week.
