2011 Federal Budget and deceased estates

Three relatively obscure changes announced in the budget recently have important implications for those in the estate planning space, namely –

1. Legislating the current Tax Office practice (see Practice Statement LA 2003/12) of allowing a testamentary trust to distribute an asset of a deceased person without a capital gains tax (CGT) taxing point occurring.

This is an important clarification and provides confirmation that there are effectively three CGT rollovers in deceased estates; that is -

(a) will maker to legal personal representative (LPR);

(b) LPR to testamentary trust; and

(c) testamentary trust to a beneficiary.

Unfortunately the stamp duty position is not so clear in relation to this 'third' rollover from a testamentary trust to a beneficiary.

It should be noted that it will be necessary to continue to rely on PS LA 2003/12 for the immediate future as the changes will only apply to CGT events happening on or after the day the legislation receives Royal Assent.

2. The Commissioner will be given a discretion to extend the two-year ownership period in which the trustee of a deceased estate (or beneficiary) must dispose of their interest in the deceased's dwelling to access a CGT main residence exemption.

This is also important as the two-year ownership period is currently the only CGT event where it is the date of completion (as opposed to the date of contract) that is the relevant date for CGT purposes.

3. Finally, as most will have seen, the relatively minor tax planning opportunity in relation to unearned income derived by minors through family trusts (via the low income tax offset) has been removed with effect from 1 July 2011. The indications seem to be that there will be no change however to the excepted trust income rules for minors receiving distributions via testamentary trusts.

Until next week.

Unpaid present entitlement warning

As those of you who sat through our webinars over the last few months in relation to unpaid present entitlements (UPEs) would know, there can be a number of traps in relation to the provisions of a trust deed in the context of the Tax Office’s approach in this area.

Arguably, the most concerning trust deed provision that we have seen in recent times is a clause in the deed of a relatively high profile provider that on a plain reading of the deed automatically causes any UPE to become a loan at call.

Obviously, this provision can have significantly adverse consequences, particularly for those clients wishing to 'quarantine' UPEs that existed as at 16 December 2009.

Until next week.

Business licences

The combination of the Bamford decision and the Tax Office’s attitude in relation to unpaid present entitlements have meant that we have spent a significant amount of time recently looking at optimal structures for business and investment purposes.

One approach that we have seen an increasing number of clients and advisers consider where a business is owned by a discretionary trust, is the licensing of that business to a trading company.

Obviously, there are a number of tax and stamp duty issues that need to be considered in relation to this approach.

A recent case however seems to confirm that at least in relation to the philosophical legal questions, this kind of approach is now available.

For those who are interested to learn more, a copy of the decision is at the link below. One of the most important paragraphs in the decision is number 42, which highlights the distinction between a goodwill licence and a business licence.

http://www.austlii.edu.au/au/cases/sa/SASC/2010/279.html

Until next week.

UPE deadline day rapidly approaching

Over the last couple of weeks, we have seen a significant increase in the level of enquiry about the appropriate strategies to adopt for clients that have trusts with unpaid present entitlements (UPE) owing to corporate beneficiaries.

For some months leading advisers have recommended that any specific steps be delayed for as long as possible on the basis (and hope) that there might be some relaxation or unwinding of the position adopted by the Tax Office. Indeed, there have also been rumours of a test case being run.

Given that it now appears increasingly likely that there will be nothing of substance changing the current rules before 30 June 2011, advisers and clients in this area now have less than eight weeks to have adopted one of the 'safe harbours' provided by the Tax Office.

Until next week.

Keeping it simple with company set ups

Following the last post, I had a question in relation to how the secretary position of the sole director company was resolved.

Interestingly due to relatively recent changes to the Corporations Act, there is now no longer a requirement to have a secretary for a proprietary limited company.

For those interested to explore the provisions in this regard further, the particular section of the Corporations Act is Section 204A(1).

Until next week.

Sole director companies – An estate planning tip

During the week, due to a rather unfortunate set of circumstances, I was reminded of a very important provision under the Corporations Act.

The situation broadly was as follows:

1. The sole director of a number of companies suddenly passed away.

2. A number of third parties (including a financier) questioned representatives of the deceased director’s estate about the authority for the company to continue to act and in particular, requested copies of the deceased’s will.

3. The deceased director in fact died without a will.

While there will be a number of issues that arise in relation to the director dying intestate (including the way in which the shares in the various companies are to be distributed amongst the family members), the immediate issue concerning who had authority to act as director of each company was resolved by a particular section of the Corporations Act.

In particular there is a section that allows the legal personal representative of a sole director company to take steps to appoint a new director.

While a fairly significant amount of additional paperwork has been required because of the absence of the will, the various concerns of the financier have at least been managed for the time being.

Given the number of public holidays over the next 10 days or so, unless a particularly time sensitive issue comes up, there will not be a post for a couple of weeks and today’s post is made ‘early’ (normally it would be posted next Monday).

Government review of trusts – the journey continues

As most will know, the ongoing saga in relation to the taxation of trusts took another turn last week with Bill Shorten retracting his previous promise to ensure that post Bamford amendments would be implemented before 30 June 2011.

The government has now indicated that other than in relation to the streaming of income all other issues will not be considered further until the wider taxation review scheduled for October. This review has already been postponed once.

Practically the latest announcement may cause trust advisers to proceed with ‘core’ amendments (for example, ensuring that trustee minutes can be made after the end of a financial year) to trust deeds before 30 June 2011.

Two other important issues to note from last week in relation to trusts are that:

1. it now appears unlikely that there will be any change to the unpaid present entitlement rules released by the Tax Office before 30 June 2011.

2. the announcement that the Coalition will look to re-invigorate entity taxation (i.e. taxing trusts as companies) if they win the next election.

Until next week.