Trust renunciations and disclaimers – the changed (tax) position** for the beneficiary

Previous posts have looked at some of the key issues to be aware of in relation to renunciations and disclaimers by beneficiaries of a trust. 

The stamp duty aspects of any such renunciation or disclaimer must be considered carefully on a state-by-state basis. As with many aspects of stamp duty law, frustratingly, there is little consistency across the various jurisdictions.

Fortunately, in relation to the capital gains tax consequences, the position is somewhat clearer.

In particular, the Tax Office has set out their view is in Tax Determinations 2001/26 (in relation to renunciations) and TR 2006/14 (in relation to disclaimers).

Broadly, the Tax Office confirms its view that from a tax perspective outcome of disclaimers (which operate retrospectively from the commencement of the trust) and renunciations (that operate from the date the renunciation is made – ie prospectively) in relation to discretionary entitlements are the same.

The Tax Office has confirmed that a renunciation or disclaimer of a trust interest will not normally have any capital gains tax (CGT) consequences for the trustee of the trust.

In particular the Tax Office confirms that:

1. an interest in a trust is a CGT asset; and
2. a renunciation by a beneficiary of an interest in a trust will give rise to CGT event C2 (the abandonment, surrender or forfeiture of an interest).

However, whether the CGT event has any practical consequence depends on whether:

1. the CGT asset has any value at the time of the CGT event; and
2. if there is any exemption that may be available.

The Tax Office considers that if a beneficiary who renounces their interest is a purely discretionary beneficiary of the trust (that is, the beneficiary has no interest in either the assets or income of the trust before the exercise of any trustee discretion as to the allocation of such income or assets), then there is likely to be no CGT (as the market value of the beneficiary’s interest will be nil).

If however the beneficiary who renounces their interest is a default beneficiary (that is, the beneficiary will receive a distribution of either income or capital in default of the exercise of a discretion by the trustee), then this kind of trust interest may in fact have some value. This means that CGT is more likely to be triggered by that beneficiary as a result of their renunciation.

Similarly, where a beneficiary disclaims (as opposed to renounces) their trust interest, the disclaimer is effective retrospectively and has the effect that the beneficiary is deemed to have never held the interest or entitlement which has been disclaimed. Consequently, there is no asset to which a CGT event could apply.

Whether CGT is payable will be determined on a case by case basis, depending on issues such as:

1) the terms of the particular trust deed and its purpose; and

2) the past history of distributions made by the trustee in favour of the default beneficiary; and

3) all other circumstances of the particular case.

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 one of the coolest song titles ever, namely the Kaiser Chief’s song ‘Na na na na naa’. View hear (sic): 

I like your old stuff better than your new stuff** - Tax Office shows its (previous) caring approach towards family trusts distributing to testamentary trusts

New (financial) year.

More lock downs.

And a reminder some things never change - for example, the Tax Office don’t like trusts.

Previous posts have considered the Tax Office’s views about distributing from a testamentary trust to a family trust, that (at least in part) offered an (arguably) unnecessarily narrow interpretation of the tax rules.

In the context of the 2018 budget changes to the excepted trust income regime, it is timely to revisit PBR 1051238902389 that considers the situation where an inter vivos family discretionary trust was distributing to a testamentary trust.

In contrast to the approach of the changes, the ruling sees the Tax Office adopt a more collaborative approach.

Briefly, to the extent relevant, the factual matrix was as follows:

1. a willmaker was the ultimate controller of a family trust;
2. the willmaker's estate plan attempted to mandate that the assets of the family trust be sold and the cash distributed directly (and equally) to four testamentary trusts established under the will;
3. it was acknowledged by the parties that the directions of the willmaker were an attempted fettering of the trustee's discretion. Therefore, while they could be taken into account, they were not be binding;
4. this said, the assets of the family trust were sold and the intention was to then have the cash distributed to the testamentary trusts – who were potential beneficiaries of the family trust (an approach adopted by default by all View trust documents).

In determining that income of a prescribed person (eg including a minor) as a beneficiary of a testamentary trust, even if sourced from a distribution made by a family trust, is excepted trust income (ie minor's are taxed at adult rates) of the beneficiary, the Tax Office confirmed:

1. Following the decision in Furse (another case regularly explored in View posts), all that is necessary for the assessable income of a trust estate to be excepted trust income is that the assessable income be the assessable income of the trust estate and that the trust estate be as a result of a will.
2. Thus, any amounts representing a distribution from a family trust to a testamentary trust are 'assessable income of a trust estate that resulted from a will’, and therefore will be 'excepted trust income’, unless otherwise excluded.
3. Again largely following the analysis in the Furse decision, the main exclusions (namely either that the parties are not dealing at arm's length or the arrangement is one predominately driven by achieving the tax benefit) were held not to be applicable and thus access to the excepted trust income provisions was confirmed.
4. While the outcome in this private ruling is a positive one, distributions by family trusts to testamentary trusts are clearly denied access to the excepted trust income regime under the new legislation, regardless of how they are made.
5. Practically, the capital gains tax consequences of the distribution from the family trust would also need to be considered, given none of the rollover concessions otherwise available on death under division 128 of the Tax Act would be available on either the sale of the assets by the inter vivos trust, nor a straight distribution of the assets in specie. Similarly, to the extent the distributions were of dutiable property, the exemptions available for deceased estates would also not apply.

As usual, please contact me 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 Regurgitator song ‘I like your old stuff better than your new stuff’.

View here:

PS and the image the quintessential lock down WFH set up.

Sometimes** Trust to trust distributions are not all good

With only one more sleep until another 30 June is upon us, it seemed timely to remember that all Australian jurisdictions except for South Australia have a statutory perpetuity period of 80 years. In Victoria, Tasmania, Western Australia and the Northern Territory, the common law perpetuity period may also be adopted, that is ‘a life in being plus 21 years’. 

Despite South Australia essentially abolishing the rule against perpetuities, section 62 of the Law of Property Act 1936 (SA) allows the court to dispose of any remaining unvested interests after 80 years on the application of a beneficiary. 

Generally, when trust to trust distributions are made, the vesting date of both trusts should be considered. Where a recipient trust has a vesting date which is later than the distributing trust, the risk that the rule against perpetuities is breached is a particularly relevant issue. 

Historically, many advisers believed that if the vesting date of the recipient trust was later than the distributing trust, then this automatically caused a breach of the rule against perpetuities, making the purported distribution void. 

However, the case of Nemesis Australia Pty Ltd v Commissioner of Taxation [2005] FCA 1273 confirmed that the ‘wait and see rule’ in each jurisdiction can be relied on in a situation where a trust distributes to another trust with a later perpetuity date. 

The ‘wait and see’ rule means the initial distribution will not be void when made, and will not become void until such time as there is a failure to distribute out of the recipient trust before the vesting date of the original distributing trust. 

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

** for the trainspotters, ‘Sometimes’ is a song by the Carpenters. View hear (sic): 

Sometimes**, some of the other key questions concerning family trusts (part two)

Following recent posts, some of the additional questions considered by the court in Beeson v Spence in deciding the assets of a trust were property of the marriage are set out below. 

1. Can beneficiaries be removed or added, and if so by whom?

The beneficiaries could be removed or added by the trustees, only with the consent of the appointor.

2. Is there any risk that the trustee may be seen as simply the ‘alter ego’ of some other person?

The Court found that the trust was created with the wife in control of the appointment of those with the duty of administering it and it was never created to benefit the children alone. The assets of what was essentially a 'standard' discretionary trust were controlled by a party to property proceedings who ultimately had the power to legitimately determine at any point to whom income and/or capital was to be distributed, including herself.

3. Does someone (e.g. an appointor, guardian, principal) have the power to unilaterally change the trustee?

Yes. The appointor was the wife initially. Whilst she subsequently relinquished control and appointed her sister as replacement appointor in 2003, the steps taken via the deed of variation were seen as having been taken at the wife’s direction. This conclusion pointed towards the trust being the alter ego of the wife, and thus the property of the marriage and not the property of the children.

4. If the appointor ceases to act, do their powers pass to anyone else, and if so, who?

The deed provided for the appointor powers to pass to Mr Beeson, the wife’s father and trustee of the trust, upon her death. The deed also allowed for the wife as the original appointor to name a successor appointor (which she did, namely her sister).

5. For an existing trust, has there been a pattern of income or capital distributions?

Distributions were made from income in both 2002 and 2003 to the specified beneficiaries being the children. Distributions were also made to the wife in this period, which she applied, among other things, to payment of her legal costs. Whilst the wife argued the legal costs incurred showed the fund was used for the children’s benefit, it was held that the legal costs should be seen as being incurred on her own account. This supported the conclusion that the trust was not the sole benefit of the children.

Further, there was nothing improper about the trustees distributing funds in the wife’s favour, as she was a potential beneficiary up until the variation in 2003, and continued to be entitled to receive distributions as a ‘parent’ of the specified beneficiaries after the variation.

** for the trainspotters, ‘Sometimes’ is a song by the Brand New Heavies. View hear (sic): 

Sometimes (always)** you need to ask these key questions concerning family trusts (part one)

As flagged in last week’s post, some of the key questions the court in Beeson v Spence took into account when deciding the assets of the trust were property of the marriage are set out below. 

1. Who is the trustee of the trust?

The trustees of the trust were the wife’s father and her solicitor. They had the discretion to administer the trust.

2. Does the trust deed restrict the range of beneficiaries who can receive income or capital distributions?

The specified beneficiaries were the children of the husband and wife, and the husband and wife were initially potential beneficiaries as parents of the specified beneficiaries. By the deed of variation (instigated by the wife) in 2003 the husband and wife were removed as potential beneficiaries. After the deed of variation the wife and husband were entitled to receive distributions, not as potential beneficiaries, but as ‘parents’ of the specified beneficiaries.

3. Does the trustee need consent/approval of any other person for distribution?

No. However, the trust deed gave the wife ultimate control of the distribution of income and capital by giving her power of appointment and removal of trustee, who in turn had the discretion to distribute to the wife and the husband to the exclusion of the children. This level of control pointed towards the trust being an alter ego of the wife, and the conclusion that the assets were property of the marriage, not the children.

4. Does the trustee effectively/practically control the trust in an unfettered way?

No. Up until her resignation under the deed of variation in 2003, the wife as appointor had complete control over the appointment and removal of the trustee. The consent of the appointor was required for the trustee to vary the terms of the trust deed. Nothing, including a request by the trustee, obliged the wife as appointor to relinquish control of the Trust.

5. Does the trustee exercise its powers independently or are they controlled or subject to approval by any other person or entity?

While the trustee had the discretion to make distributions, the power to vary the deed was subject to approval by the appointor and the appointor could remove the trustee at any time.

** for the trainspotters, ‘Sometimes Always’ is a song by the Jesus and Mary Chain. View hear (sic): 

Sometimes** it’s about asking the right questions – Beeson v Spence

Following recent family law related posts, this week, an adviser reminded me of the case of Beeson v Spence [2007] FamCA 200 which highlighted the importance of the factual matrix on how exposed the assets of a trust are. The decision is still regarded as one of the most important in relation to trusts and family law. 

Briefly the case involved a wife and husband who met in 1996 and married in 1997. They had two children and subsequently divorced in 2004. In 2001 the wife had established a trust known as the S Trust. 

On establishment of the trust, the wife’s father and her solicitor were appointed as trustees and the wife was the appointor. The specified beneficiaries were the two children of the marriage and the wife and husband were within the class of potential beneficiaries. 

In 2003, at a time when the husband was going through financial difficulties, and when the wife and husband had separated, the deed was varied to exclude the wife and the husband as potential beneficiaries of the trust, as well as to resign the wife as appointor. A new appointor, being the wife’s sister, was nominated in her place. 

After the variation, the deed practically still entitled the wife and husband to receive distributions, not as potential beneficiaries, but as ‘parents’ of the children who remained specified beneficiaries. 

In the property settlement proceedings, the husband argued that the trust was established for the benefit of the family as a whole and not just the children. 

In contrast, the wife suggested that the trust was ultimately established for the purpose of benefitting the children of the relationship and therefore the assets should not be treated as property of the marriage. 

Having reviewed all of the available facts, the Court ignored the release of direct control by the wife (through her resignation as the appointor and the removal of beneficiaries) and held that the wife still retained sufficient control of the trust to support a conclusion that the assets should be treated as property of the marriage. 

Posts over the next two weeks will look at the key questions the court took into account in reaching this conclusion. 

These posts will show that the factual matrix is decisive in determining whether the property is matrimonial property. This is because the assets of the trust are more likely to be matrimonial property where, among other things, the trust is essentially the alter ego of one of the parties to the marriage. 

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

** for the trainspotters, ‘Sometimes’ is a song by Ash. View hear (sic): 

What do you want from me?** family law and tax fraud

Today’s post looks at the Family Court decision where property proceedings were adjourned to allow for the wife’s allegations against the husband for fraudulent tax evasion to be investigated. 

In Pisani & Pisani [2012] FamCA 532, the main two main issues were: 

1. whether it was appropriate to adjourn the property proceedings given the potential impact on the asset pool?; and
2. whether the Court should bring to the attention of the Australian Tax Office (ATO) evidence of the husband's alleged fraudulent tax evasion, as disclosed by the wife?

The court held that given the potential liability, if the allegations of tax evasion were proven, would have been considerable, it was appropriate to adjourn the property proceedings until the allegations were resolved by the ATO. Until the issues had been resolved, it would be virtually impossible to determine the true asset pool of the parties. 

In relation to the duty of the Court to disclose the allegations to the ATO, the court held it was obligated to take action to bring the issue to the attention of the ATO. This said, the court also confirmed that the question of this type of disclosure was one that needed to be determined balancing all relevant issues on a case by case basis. 

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

** for the trainspotters, ‘What do you want from me?’ is riffed from the Billie Eilish song ‘Bury a friend’. View hear (sic):