As we have touched on in previous View posts, each Australian state has a different set of stamp duty rules.
In a very general sense, the broad themes under each state’s legislation are similar.
As is often the case however the detail of particular provisions can provide quite stark contrasts.
This week, I had a timely reminder of the differences between states in relation to the stamp duty concessions available for the transfer of assets under a succession plan from (say) parents to their children.
Under the New South Wales legislation, there are a number of flexibilities with this concession, including (in certain circumstances) the ability to transfer assets out of a company into the individual names of the children of the shareholders.
In contrast, the Queensland legislation (which is in fact broadly modelled on the New South Wales legislation) has no equivalent exemption.
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 ‘Black Bugs’.
In recent times, we have had a number of situations where, when acting for a family group, one member of the group is particularly concerned about asset protection issues.
All advisers providing guidance in this space should be aware that from a privilege perspective, much can turn on very practical issues such as:
Who the customer is defined as being?
In what name the file is opened up in?
Who the correspondence is directed to (including via email)?
Who is invoiced?
Who pays the invoice?
While each of these issues can on their face seem quite benign, if the worst turn of events occurs (and bankruptcy proceedings are commenced), each of the above points can become quite critical.
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 Hoodoo Gurus song 'Hoodoo you love'.
Where a person is domiciled is one of the more difficult and potentially frustrating areas of the law.
A key reason the issue can be so problematic is due to the rules in relation to ‘conflict of laws’ – that is determining which rules apply when there are two or more potential jurisdictions in relation to a certain set of circumstances.
The conflict of laws regime is inherently problematic and one of the most highly specialised of all legal disciplines.
In very broad terms, a person is domiciled where 'their heart calls home'. This means that they need not necessarily be physically located there or indeed have any assets in that particular jurisdiction.
The issue of domicile can arise in a number of situations.
In an estate planning context however, most of the complex issues in relation to domicile only arise in situations where people die without a will (i.e. intestate).
One of the first steps therefore that should be looked at as part of an estate plan where the place of domicile may become an issue is to at least get in place temporary estate planning documents as a matter of urgency.
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 Kylie Minogue song 'Step back in time'.
We recently had an adviser seeking guidance in relation to business succession arrangements where business property was to be purchased by two parties via their self-managed superannuation funds, with a limited recourse borrowing arrangement.
The three main approaches that we explained are as follows, noting that the preferable solution depends on the exact commercial circumstances:
As the intention with the borrowing arrangements is normally that they are self-funded, some business owners choose to leave the structure in place and have an unfunded agreement (for example, a unit holder’s agreement) regulating how the parties will conduct themselves if one of the principals passes away.
In other words, the deceased’s estate would treat the ownership interest in the building as an arm’s length investment and would effectively maintain that interest until the other owner had sufficient funds to acquire the interest, or alternatively, the entire property was sold to a third party.
The above approach is predicated on the assumption that the super fund of the exiting principal otherwise has sufficient assets to pay the death benefit.
A second alternative is for each principal to self-own insurance to pay out any debt referable to ‘their’ interest in the underlying property, noting that practically any such insurance must be held outside the superannuation funds. This is because if it is owned via the super fund, the insurance proceeds are simply added on receipt to the exiting member’s entitlements that must be paid as a lump sum or pension (and can therefore not be used to help reduce debt).
If this approach is adopted, the succession arrangements can proceed essentially along the same lines as set out above, or the estate of the deceased principal can acquire an interest in the property using the insurance proceeds (and triggering the potential tax and stamp duty consequences on the sale).
Finally, each principal can obtain sufficient insurance to clear the entire debt. The buy-sell arrangement would require that 50% of the proceeds are paid to each principal (or their estate). The underlying property can then be dealt with as set out above, or alternatively, steps can also be taken to ensure that the relevant share of the property is transferred to the surviving principal’s benefit.
This last pathway is often used in business succession arrangements and is referred to as the ‘hybrid’ approach (see previous View posts explaining the model). This said, the involvement of superannuation funds does create additional, potentially significant, complications.
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 ‘Modern Life’.
The general position under Australian law is that a willmaker has autonomy to distribute personally owned assets in their absolute discretion.
Previous posts have explored the broad exceptions to this position, each of which primarily revolve around either:
The underlying incapacity of the willmaker to understand and act freely in preparing their will; or
Due to the public policy reasons developed by the legal system that regulate how a responsible willmaker should distribute their wealth.
In this context there are many (in)famous examples often raised by advisers with us of willmakers perhaps taking their autonomy to interesting extremes.
Five examples include:
An alleged will precedent provision used by some law firms, that the gift of an estate by a willmaker 100% to his 2nd wife is entirely dependent on a condition hardwired into the will that she remarries. Why the condition of remarriage? In the words of the willmaker: ‘So that at least one man (or woman as the case may be) mourns my death’ … a concept allegedly based on the precedent of the will made by German poet Heinrich ‘Henry’ Heine.
The William Shakespeare model of giving to his wife of 34 years and mother of his children Anne Hathaway only one asset from his estate; being his ‘second best bed’. At least according to Wikipedia however, the gift may not appear as harsh as might otherwise be assumed. In particular, at the time beds were very expensive assets, sometimes equivalent in value to a small house. Furthermore, it was also custom that the best bed in the house was reserved for guests. Thus the bed that Shakespeare gifted Hathaway may have in fact been their marital bed, and thus not intended to insult her.
Lang Hancock’s business partner Peter Wright had a son (Michael Wright) who created an estate plan to ‘manage’ his obligations to a ‘secret’ daughter from a brief relationship. While the daughter was given a gift of around $3M (challenged successfully to an increased amount of around $6M) much debate was caused by the housing of the gift. This was because the gift was placed into a restrictive trust that mandated rules such as spending limits and the permissible religious faith she adhered to, as well as prohibiting indulging in illegal drugs or committing drug related offences, including driving under the influence of alcohol. Following the challenge these restrictions were all removed.
The ‘leaving it all to the cat home’ approach – perhaps most famously adopted by hotel magnate Leona Helmsley, who died in 2007 and left instructions that almost her entire estate of some $8B pass to a trust for dog welfare. The dog trust was the iterated version of the estate plan – the preceding approach prioritised providing for ‘poor people’ as well as dogs, with the dogs noted as a secondary priority. Three years before death however all references to poor people were removed by Helmsley, leaving dogs as the sole beneficiaries of her wealth. Reports at the time also confirmed that Helmsley's nine-year-old Maltese (‘Trouble’) received $12m. By comparison, two of her grandchildren were excluded from the will and two others had their combined $10m inheritance made contingent on their regular attendance at their father's grave. Trouble's inheritance was ultimately cut by the courts from $12m to $2m, with the balance gifted to Helmsley's charitable foundation.
Robert Holmes a Court approach of ‘the will you have when you don’t have a will’. Australia’s first billionaire allegedly had completed an extensive estate planning exercise and then managed to carry his unexecuted will in his brief case for around 2 years before his sudden death of a heart attack, aged 53. Dying without a valid will meant that the estate was administered under the intestacy regime – however it was also bitterly litigated in a dispute that lasted years.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters a double hit this week - some extra love for Valentine’s Day 2023. First, the title of today's post is riffed from the Dave Graney and the Coral Snakes song ‘Night of the Wolverine’.
View here:
And the second hit - The Fauves song ‘Dogs are the best people’.
The decision of Mantovani v Vanta Pty Ltd (No 2) related primarily to a lost trust deed, an issue explored in previous View posts.
Helpfully however, the decision also sets out a summary of the key duties owed by a trustee, noting that the office of trustee carries with it a number of strict obligations and duties, many of which are fiduciary in nature.
Fiduciary duties are generally seen as the most onerous of all legal duties and where they apply they require a person to act solely in another party's interests.
The case specifically confirms that the duties of a trustee include to:
become thoroughly acquainted with the terms of the trust and all documents relating to or affecting the trust property;
adhere rigidly to the terms of the trust and conform to and carry out the wishes of the settlor as expressed in the deed of trust; which is said to be ‘perhaps the most important duty’ of a trustee;
keep and render proper accounts and report to beneficiaries or to a court regarding the administration of the trust;
act fairly and impartially between beneficiaries;
administer the trust property in a way so as to avoid benefiting one beneficiary or set of beneficiaries at the expense of another;
make an application for judicial advice where the trustee requires advice or direction in relation to the management or administration of trust property or the interpretation of a trust instrument.
In relation to the last mentioned duty (ie to seek advice), it should be noted that a failure to seek advice has been held to be at the trustee’s 'own peril'. This is because any departure from the terms of the trust and any negligence in the performance of the duties of the trust will amount to a breach of trust.
Similarly, any acts in contravention of the duties imposed on the trustee by the trust or in excess of its powers will also be a breach of trust.
The ability of a court to review, and potentially unwind, a decision of a trustee, including for a breach of fiduciary duties, is in many respects predicated on the trust adviser's mantra profiled often in this journal, namely: 'read the deed'.
The issues in this regard can be particularly critical in relation to discretionary trusts where, at least in theory, there are few limitations placed on a trustee concerning most key aspects of the administration of the trust.
In a sentence, the rule the courts appear to apply is that a trustee's decision cannot be reviewed unless, on the material before the trustee, it is one that no reasonable trustee could have made.
What this rule means in any particular factual matrix can however be somewhat nuanced – reinforcing the value that advisers who adopt a holistic approach to estate planning can add in this space; pending ChatGPT taking over.
Previous View posts have explored aspects of the asset protection strategy often referred to as a 'gift and loan back' arrangement.
The arrangement (and various iterations of it) has arguably had a chequered history, and often seen branding developed to conveniently label the steps involved, for example:
Beta Strategy (which was the subject of a failed patent application in the case of Grant v Commissioner of Patents [2006] FCAFC 120);
Legacy Protection Strategy;
Secured loan arrangement;
Synthetic transfer;
Capital protection strategy using a lineal descendent or bloodline trust;
100% security strategy - to protect your assets from thieves such as the tax man (see Ed Burton and his 'Diamond Inner Circle Coaching and Mastermind Alliance' as part of the 'Vital Link Financial Education' Group circa 2004).
In late 2022, another productised version of the arrangement gained the attention of the Tax Office in their release labelled QC 71175 (22 December 2022).
Branded as the 'Vestey Trust' or the 'Master Wealth Control Package', the arrangement is promoted as part of a wider property and investment offering that promises advice on 'how to locate and invest in undervalued property, undertaking property developments, locating undervalued businesses, renovating for profit and how to secure and grow your wealth' by the 'DG Institute', founded by Dominique Grubisa.
As with all the various versions, or brands, of a gift and loan back arrangement, the key components appear to be driven by managing asset protection that would be otherwise problematic due to related tax and stamp duty asset transfer costs.
That is, in broad terms, the owner of an asset gifts an amount equal to their equity in the asset to a family trust (or low risk spouse). The family trust then lends an amount of money to the owner and takes a secured mortgage over the property or registers a security interest on the Personal Property Securities Register over the personal assets of the individual the protection is intended for.
Implemented correctly, the gift and loan back approach ensures there are no CGT or stamp duty consequences to achieving asset protection, subject to the claw back rules under the bankruptcy regime and various state based property or conveyancing acts.
The integrity of the particular strategy promoted by DG Institute has been subject to attention in mass media for some years, for example Richard Baker in The Sydney Morning Herald in 2020 identified that the promoters were claiming that "If you have superannuation, you want to protect that now. The current laws say that’s already protected. But in a grab for cash and a time of crisis like this where the government is supporting the whole nation for an indefinite period, that is a big pool of money that is up for grabs and they have the power to enact laws to take that. We want to protect it now".
The articles also pointed out that:
there was nothing to indicate superannuation laws would be changed to see assets exposed to financial misadventure;
the organisation instructed 'students' of the courses to buy property from people identified in Family Court proceedings as divorcing or financially struggling (ie to secure properties from distressed vendors);
Dominique Grubisa engaged her parents in property and financial deals even though both were struck off the NSW solicitor’s roll in 2013 for fraud.
Similarly, in December 2022, the ACCC commenced proceedings in the Federal Court against Master Wealth Control Pty Limited, trading as DG Institute, for allegedly making false or misleading representations, including in relation to the Master Wealth Control program DG Institute offered to consumers, in breach of the Australian Consumer Law.
The ACCC alleges DG Institute also made false or misleading representations in the delivery of the Master Wealth Control program and that by setting up a ‘Vestey Trust’, using a suite of documentation provided by DG Institute said to be legally binding, any assets in the trust would be completely protected from creditors. DG Institute said the Vestey Trust was “bulletproof”, “impenetrable” and would result in students being "unable to be effectively pinned down by creditors".
The ACCC alleges that this was misleading as the Vestey Trust did not provide that complete protection.
Further, the ACCC argues that DG Institute represented that the Vestey Trust structure had been tested and upheld as effective by the Full Federal Court of Australia. The ACCC alleges that this is misleading as the referenced court judgment, Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530 (a case explored in other View posts), did not concern a Vestey Trust and does not provide authoritative precedent or support for the legitimacy or effectiveness of the Vestey Trust structure in protecting assets from creditors.
Titled 'SMSFs and schemes involving asset protection' the Tax Office confirms that as a threshold issue the arrangement is unnecessary because the superannuation system already protects SMSF assets from creditors.
This fundamentally important observation is supported with a number of further comments focused on the likely superannuation related compliance risks, for example that the arrangement may:
result in the giving of a ‘charge’ over, or in relation to, a fund asset by the SMSF trustee;
involve the ‘borrowing’ of money by the SMSF trustee;
expose fund assets to unnecessary risk if it is unclear who owns them;
cause the fund to be maintained in a way that doesn’t comply with the sole purpose test;
cause SMSF money to be used for costs related to asset protection arrangements entered into by members to protect their personal or business assets; which is prohibited because these expenses are not incurred in running the SMSF.
Based on publicly available information there is no doubt that each of the concerns set out by the Tax Office are correct and likely to be applicable to any gift and loan back arrangement involving an SMSF.
For arrangements not involving SMSFs, despite the case featured in the previous article (namely Re Permewan No 2 [2022] QSC 114), appropriately implemented gift and loan back arrangements appear to be a valid and revenue effective asset protection strategy. This said, there are a myriad of potential issues that always need to be considered, for example:
care should always be taken to ensure that the trust which will make the secured loan does not itself conduct risky activities (for example, run a business).
while the arrangement can be entered into without registering a mortgage, if this step is not taken, the trust that has made the loan will simply be an unsecured creditor.
the impact of the arrangement in relation to potentially accessing the small business tax concessions should always be carefully considered, because while a family home should be excluded from the $6 million test, a secured loan will generally be included if the trust is an affiliate or ‘connected entity’ under the Tax Act (which will typically be the case).
to the extent that a third party financier already has a mortgage over the property, they will generally require a deed of priority securing that lending (to whatever level it may be from time to time) as a first priority before the trust's second mortgage.
the provisions of the Tax Act under subdivision EA need to be considered. While there has been some significant dilution of the circumstances where subdivision EA will apply given the Tax Office’s approach to UPEs, in some situations it remains potentially relevant. In particular, the second 'tranche' of the gift and loan back arrangement involving a loan out of a trust can be problematic if at the time the loan is made, there was an unpaid distribution to a corporate beneficiary.
As usual, please make contact if you would like access to any of the content mentioned in this post.
PS: the image today is of a random truck I happened to spy while working on the full article.
** For the trainspotters, the title today riffed from the Jimmy Barnes song 'Too much ain't enough love'.
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