Last week’s post considered the case of Katz v Grossman.
Earlier posts have considered the various types of superannuation death benefit nominations that can be made.
Clearly if the father in Katz v Grossman had utilised a binding death benefit nomination, then there would likely have not been any successful challenge to the ultimate payment of the superannuation entitlements
Some of the other planning strategies that can be utilised to regulate how superannuation benefits are distributed on death include:
1) incorporating automatic adjustment clauses under the terms of a will, to take into account benefits that are received directly from a superannuation fund;
2) mandating the succession of trusteeship of the superannuation fund; and
3) entrenching approval mechanisms for death benefit payments, for example, by prohibiting a payment until trustee receives consent from a trusted third party.
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 the INXS song ‘What you need’. View hear (sic):
Superannuation entitlements are regularly one of the most significant assets in any estate planning exercise.
Critically however, superannuation benefits need to be regulated in a way that complements a wider estate planning exercise. Arguably, one of the leading cases in relation to superannuation death benefit planning remains, after more than 15 years, the decision in Katz v Grossman [2005] NSWSC 934.
The case involved Katz bringing an action against his sister Grossman (and her husband), claiming an interest in their father’s self managed superannuation fund (SMSF).
A summary of the facts is as follows:
originally, the father and mother were the individual trustees of the SMSF;
the mother died some years before the father, and subsequently Grossman was appointed as a co-trustee with the father (this was to ensure that the SMSF continued to comply with the relevant superannuation legislation);
when the father later died, Grossman appointed her husband as a co-trustee with her;
during his lifetime the father had made a non-binding nomination indicating that he wanted his superannuation entitlements divided equally between Katz and Grossman; and
Grossman and her husband ignored the nomination and paid the entirety of the superannuation entitlements for the benefit to herself.
The Court held that all the trustees of the SMSF had been validly appointed at the relevant times, and that as a result, the challenge by Katz was unsuccessful and Grossman was entitled to keep the superannuation entitlements.
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 the INXS song ‘Original Sin’. View hear (sic):
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:
an interest in a trust is a CGT asset; and
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:
the CGT asset has any value at the time of the CGT event; and
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):
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:
a willmaker was the ultimate controller of a family trust;
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;
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;
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:
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.
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.
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.
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.
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.
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):
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):
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):
