Letting little fury things ** like the tax tail wag the dog

Given the theme of ‘famous tax cases’ in recent posts, it seemed appropriate to revisit the tax aspects of the case involving the family of famous retailer Solomon Lew (Lew), in Solomon Lew & Ors v Adam Priester & Ors [2012] VSC 57.

Broadly the situation was as follows:

1. Based on tax advice about an impending tax change (which was ultimately never implemented), certain distributions were made by a trust ultimately controlled by Lew to each of his children
2. The potential change was proposed in the late 1990’s and was known as the ‘profits first rule’ which would have seen a mandatory requirement that any distribution from a trust would presumed to be of profits and therefore taxable.
3. 2 of Lew’s children some years later were caught up in (separate) property settlements following the breakdown of their respective marriages.
4. The former spouses claimed the outstanding loans were assets of Lew’s children and therefore able to be subject to orders of the Family Court.
5. Lew argued that his children did not have any beneficial interest in the loan accounts due to agreements entered which resulted in the amounts in fact being held by the children on a trust for Lew and his wife Rose.

While the exact outcome as to whether the loans were in fact assets of the children appears to be unknown (it is assumed the cases must have settled out of court or the decisions de-identified), the fact that the former spouses were able to mount the arguments is a reminder that the wider commercial implications of any tax planning strategy should always be considered carefully.

Similarly, in the high profile case of Cardaci v Filippo Primo Cardaci as executor of the estate of Marco Antonio Cardaci [No 5] [2021] WASC 331, in a situation where historically payments to a beneficiary were categorised as distributions of capital or income, a subsequent unilateral attempt by the trustee to commence treating the amounts as loans was rejected by the court.

This was ultimately on the basis that the trustee had not adequately or sufficiently explained how or why the change in characterisation occurred, nor was there any express or implied loan agreement in relation to the payments.

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** For the trainspotters, the title of today's post is riffed from the Dinosaur Jnr song ‘Little fury things’.

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Yeah right** - because before Rinehart, there was Murdoch

While the Rinehart decision received significant attention in relation to many issues, including the tax consequences of ending a trust, the tax principles of another famous case are worth remembering, namely the decision in Murdoch v Commissioner of Taxation [2008] FCAFC 86.

Broadly the situation was as follows –

1. Dame Elisabeth Murdoch (Dame) had a life interest in the income of several family trusts settled by her husband in the 1930s.
2. The remainder interest was held by one or more of the Dame’s children or grandchildren.
3. For many years, the trustee of the relevant trusts was effectively the Dame, her son Rupert Murdoch and a third party.
4. It was however noted that the Dame was likely influenced in her role to accept the investment decisions due to the very strong personality of her son Rupert.
5. A Reorganisation Agreement under which Dame surrendered her life interests under each of the Trusts were entered into, with the consideration a lump sum payment of more than $85m.
6. The payment was couched as releasing the trustees from potential claims for breaches of trustee duties.
7. In particular, the investment policy that had been adopted (apparently at Rupert’s strong recommendation) was overwhelming weighted to shares in Murdoch family companies that produced capital growth, but comparatively small dividend income. This investment approach essentially benefited the remainder beneficiaries, at the expense of the Dame as life tenant.
8. The payment was said to be to help avoid the need for litigation amongst the family.
9. Around 65% of the $85m was then gifted by the Dame to Rupert and charities she was associated with.
10. The payment was funded by the sale of pre capital gains tax shares and was essentially received tax free by the Dame.

In confirming the extremely onerous fiduciary duties of a trustee (see the post from last week) the court confirmed that Rupert had breached his obligations, even though there was no lack of good faith or particular damage to the Dame.

The court relied particularly on the principles of the case Phipps v Boardman [1967] 2 AC 26, which held that this style of claim was not for a reimbursement of the income shortfall.

The payment was therefore on capital, not income, account as a claim against the profit made by Rupert and in essence a constructive trust over assets of the trust.

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** For the trainspotters, the title of today's post is riffed from the Dinosaur Jnr song ‘Yeah, right’.

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Fiduciary duties: they are out there**

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.

One case often referred to that highlights the extent of fiduciary duties is Loughnan v McConnell [2006] QSC 359.

Broadly the situation was as follows:

1. Loughnan was a lawyer and a co-executor and trustee of the estate of Mr McConnell (Ross).
2. Nadia McConnell (Ross’ wife) was the co-executor and trustee.
3. Ross’ accountant was also an executor.
4. Duckett Pty Ltd was the trustee of a family trust.
5. The sole shareholder of Duckett was Ross, who held two shares, and he and Nadia were its directors.
6. Under the will, the shares in Duckett were to be held by the trustees of the will on trust for Henry McConnell (the son of Ross and Nadia) if he was living on 1 August 2021.
7. After probate was granted, Nadia undertook a number of actions without reference to Loughnan, including relevantly -
1. in her role as sole director appointed herself as chairman of Duckett;
2. appointed her mother as an additional director of Duckett;
3. Duckett then resolved to vary the deed for the trust to (among other things) make Nadia the appointor of the trust and allow her to remain a beneficiary even if she remarried. The trust deed prior to the amendment excluded Nadia as a beneficiary if she remarried and gave the appointor powers to Nadia and Loughnan jointly.
4. Under the trust deed as amended, Nadia then by further deed removed Duckett as trustee and in its place appointed NEM Investments Pty Ltd of which she was sole director.

Loughnan made an application to court for directions concerning the trust and in particular unwinding the steps Nadia had unilaterally taken. The court confirmed that proceedings against Nadia should be commenced by Loughnan on the basis that she had breached her fiduciary duties as an executor and trustee of the estate.

The court also observed however that the primary concern was Nadia’s failure to disclose her intentions and that if consent of the co-executors had been obtained the actions would not have been reviewable.

As usual, please make contact 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 Dinosaur Jnr song ‘Out there’.

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Step (child) on** ... and the list of people entitled under an estate

 

Last week's post considered some of the key issues, from a will drafting perspective, about whether a step child is entitled under a deceased estate.

The case of the Superannuation Complaints Tribunal in D19-20\023 provides a useful explanation of the wider position at law in relation to step children, including from a superannuation perspective.

In summary the decision confirms:

1. There is some support for the position for general law purposes, and in particular family provision (or testator family maintenance applications) that someone does not cease to be a ‘step-child’ of a person when their natural parent pre-deceases the person, if the marital relationship between their natural parent and the person was in place at the date of the natural parent’s death (see Scott-Mackenzie v Bail [2017] VSCA 108).
2. That is, the relationship of step-parent and step-child is one of affinity and does not cease merely because of the death of the natural parent. In other words 'once a step-child of the deceased, always a step-child of the deceased (providing the relationship of the deceased with the natural parent was not earlier dissolved otherwise than by death)'.
3. In contrast, there are also cases that conclude the relationship of ‘step-child’ ceases automatically on the death of the natural parent (see Re Burt (1988) 1 Qd R 23, Re Moreton (1996) 2 Qd R 174, Basterfield v Gay (1994) 3 Tas R 293 and Connors v Tasmanian Trustee Limited (1996) 6 Tas R 267).
4. For superannuation purposes, historically the Tax Office is on record as holding that a child only remains a stepchild while the relevant parents are a couple, for example see ATO ID 2011/77 where it was decided that a person ceases to be a 'stepchild' for the purposes of being a 'dependant' of the member under regulation 6.22 of the superannuation regulations, when the legal marriage of their natural parent to the member ends.
5. There is however support for the broader concept of ‘step-child’ - that is a relationship of affinity between the step-parent and step-child that can continue beyond the death of the natural parent.
6. In the factual matrix here, the Tribunal was satisfied that the step-daughter and the deceased member continued to have a sufficiently close relationship after the earlier death of the spouse of the member (who was the natural parent of the step-daughter).
7. As a result the natural daughter of the spouse of the member remained the step-child of the deceased member and in turn fell within the definition of ‘child’ at the date of the deceased member’s death. Therefore she was a ‘dependant’ for the purposes of both the trust deed of the fund and the superannuation legislation.

As usual, please make contact 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 Happy Mondays song ‘Step On’.

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A drafting lesson: waiting for you in the shadows**

Recently we were reviewed a clause in a trust deed that confirmed the beneficiaries were ‘any and all of the children, grandchildren or great grandchildren of the mother and the father.

The drafting approach is a common one, and can lead to 2 starkly different interpretations, namely either all of the children, grandchildren and great grandchildren of:

1. the relationship between the father and the mother; or
2. each of the father and the mother (i.e. including children from other relationships).

Generally the position adopted by the courts is that where a phrase is capable of more than one correct grammatical interpretation the construction that conforms with current usage should prevail, while also having regard to the circumstances surrounding the establishment of the trust.

One of the leading cases is Boranga v Flintoff (1997) 19 WAR 1.

The case confirms that the primary task of courts is to discern the intention of the settlor from the words of the relevant trust deed, with reference to the position as at time the deed was entered into.

In this case the following facts were considered to be relevant in determining whether step-children would be included as beneficiaries under the phrase 'the children of A and B’:

1. the ages of the stepchildren at the time the trust was established and whether the step- children were dependants of A or B at the time;
2. whether the step-children had any special needs, e.g. a disability;
3. the existence and ages of any children from the relationship of A and B at the settlement date;
4. the ages of A and B at the settlement date and whether it was likely there would be any further children from the relationship of A and B; and
5. the pattern of trust distributions and whether the step-children received distributions from the trust.

Having factored in each of the above issues, it was held that the phrase 'the children and remoter issue of the said A and the said B’ included children of either A or B – in other words stepchildren were included.

As usual, please make contact 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 Thurston Moore song ‘Smoke of dreams’.

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SMSFs and non-geared unit trusts: bulletproof**

While there are some, narrow exceptions, generally an SMSF is only able to invest in an ungeared unit trust and subject to strict requirements set out in the Superannuation (Supervision) Regulations (namely regulation 13.22C).

The provisions of regulation 13.22C are detailed and prescriptive and if there is any intention to access the concession regard should be had to the exact requirements.

One issue that often arises for SMSFs that do have a partial ownership interest in a trust that otherwise complies with regulation 13.22C is whether the SMSF can acquire additional units in the structure from a related party.

Generally such an acquisition by an SMSF is prohibited under the in-house asset rules, however there is an exemption from those rules in relation investments in trusts that comply with regulation 13.22C.

Furthermore there is an exemption from the prohibition that also applies against SMSFs acquiring assets from related parties for ownership interests in trusts that comply with regulation 13.22C.

The exceptions operate to specifically permit the acquisition of shares in companies or units in unit trusts, so long as all provisions of regulation 13.22C are satisfied at the time of the acquisition and on an ongoing basis.

As usual, please make contact 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 Radiohead song ‘Bulletproof’.

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Accessing excepted trust income – avoid being a paranoid android**

Estate planning best practice dictates to ’begin with the end in mind’ and ensure a person's documentation achieves their objectives, for example, by including a testamentary trust.

This said, as previous posts have highlighted, it is possible to establish a trust following a person's death such as an estate proceeds trusts, superannuation proceeds trust or a special disability trust.

When considering the use of ‘post death testamentary trusts’ it is important to ensure income derived from gifted property to the structure does in fact create excepted trust income.

The Tax Office has provided useful guidance in this regard in Private Ruling 50621.

In the situation of this Ruling, minor children had each received gifts of money from 2 sources which were then invested on their behalf by a relative.

The 2 sources of the gifts were:

1. money left to them in a will; and
2. other gifts made to them by persons who were alive at the time the gifts were made.

The Tax Office confirmed its view that:

1. The investment earnings derived from monies that were sourced from a deceased estate (whether due to an absolute gift under a will or due to the intestacy rules) held in trust for minor beneficiaries were excepted income.
2. In contrast, the investment earnings from monies gifted to children by their living relatives were not excepted income.

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** For the trainspotters, the title of today's post is riffed from the Radiohead song ‘Paranoid android’.

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#exceptedtrustincome #estateplanning #Radiohead #bethechange #viewlegal #matthewburgess