Previous posts have looked at various issues that arise in relation to trustee companies (let me know if you would like access to any of these posts).
One issue that comes up relatively regularly is the way in which the trustee indemnity provisions work where the same company acts as trustee for multiple trusts.
Briefly, the strict legal position is that the right of indemnity of a trustee is limited to the assets of the trust in relation to which the liability was incurred.
In other words, where a company is a corporate trustee for multiple trusts, a claim or liability in relation to one trust should not expose the assets of the other trust.
Practically however, if the trustee becomes insolvent it can be difficult to establish the beneficial ownership of particular assets to the liquidator’s satisfaction, particularly given some third parties such as ASIC and the NSW Titles Office do not record the name of the beneficial owner.
There are a number of commercial issues that arise in relation to the same company acting as trustee for multiple trusts and some of these will be considered in next week's post.
** for the trainspotters, the title here is riffed from the John Lennon song that has a line mentioning multiple plays, namely ‘Beautiful Boy’.
Last week's post highlighted the fact that in a practical sense, interposed entity elections (IEEs) are very difficult to revoke.
For example, the Tax Office has confirmed in an Interpretive Decision (ID2013/21 – as usual, let me know if you would like a copy of this decision) that IEEs remain in force even if the trust that is a subject of the related family trust election (FTE) ceases to exist.
In particular, where an entity makes an IEE in relation to a family trust to be within the family group of that family trust, it will be taken to be revoked where the FTE for that trust is revoked.
According to the Tax Office, where a family trust is simply wound up and no steps are taken before the wind up to revoke any FTE, then both the FTE and IEE continue to remain in force indefinitely.
This means that the penal rate of tax will continue to apply to the entity that has made the IEE for any distributions it makes outside the family group of the family trust that has been wound up.
While the ability to revoke an FTE is also relatively narrow, whenever considering the windup of a trust that has made an FTE, specific thought should be given to whether the FTE should be revoked before finalising the wind up.
** for the trainspotters, the title here is riffed from the Midnight Oil song that has a line mentioning elections, namely ‘When the generals talk’.
Arguably one of the more complex areas in relation to family trusts relates to interposed entity elections (IEE).
We have had a number of advisers contact us recently in relation to the exact way in which IEEs operate, and unfortunately, preferred distribution arrangements are often effectively prevented due to historical elections that, with the aid of hindsight, were arguably were unnecessary.
While there are some circumstances where an IEE can be revoked, at least in the situations we have looked at recently, the ability to access the revocation provisions is limited.
This is because, among other requirements, a revocation is only available where:
It is done within 4 years of the original IEE being made.
The IEE must not have been relied on at any time.
Next week's post will look at an Interpretive Decision from the Tax Office, which further highlights the restrictive nature of IEEs.
** for the trainspotters, the title here is riffed from the U2 song ‘Desire.
Today’s post considers the above-mentioned topic in a ‘vidcast’.
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below.
In terms of the timeline on the Cummins case, there was a long history here with no returns lodged. It’s going back literally decades. We’ve got a 1987 event where a house on Sydney Harbour goes into the wife’s name. No tax returns were lodged for many years in the lead up to 1987 transfer. In around the year 2000, he was about to retire. He was doing the work for a law firm and the law firm paid his bill, but short paid him to the extent of 48.5 cents. He wrote back and said hang on a second, i.e. I sent you a $100 bill, you only pay me $51.50, what's going on?
The law firm said, “Oh, Mr Cummins, (QC or whatever he was), yes, we will give you your other 48.5 cents when you give us an ABN.” Mr Cummins said, “What’s an ABN? They said you get that from the Tax Office.”
He rang the Tax Office and said, “I need one of these ABNs.” They said, “Okay, that’s fine. Give us your TFN and we'll give you an ABN.” Mr Cummins said, “What’s a TFN? I don’t know what you’re talking about.”
The suspicion is that at that point the Tax Office routed him back to the investigation division. By 2002, Cummins was in the middle of an audit because he hadn’t paid tax for decades. You do not need a tax file number if you never pay tax. That was what he had managed to do during his entire career.
Now if you get litigated against in 2002, four years from 2002 takes you back to about 1998. 1998 is a long, long way after 1987. The question was this. Was the Sydney Harbour property, which in the meantime had gone up in value quite significantly, exposed on Cummins going bankrupt?
Cummins’ argument you would guess was that no, outside the clawback period, I’m in the clear, yes, I’m bankrupt. But I don’t care about it because I don’t own anything in my name. What does it matter?
The court said no. The court said that you need to look at the main purpose that’s sitting around the 1987 transaction. The mere fact that the assessments had not actually issued back in 1987 when the transfer took place was held to be irrelevant.
The debt was still there. The fact that the tax debt hadn't crystallised, or Cummins didn’t actually know about it because the tax man hadn’t found him yet, was actually absolutely irrelevant. Cummins’ purpose at the time of moving the family home was to defeat creditors. Therefore, the whole transaction could be unwound because the 4-year limit only applies for transfers made when there are no known liabilities – if the liabilities (as here) are known, then the clawback period is unlimited.
As we understand it, it’s basically the only textbook of its kind in Australia that’s practically focused on how to deliver the asset protection piece. Very happy to give one of those away.
As always thanks to the Television Education Network for the video content here.
** for the trainspotters, the title here is riffed from the They Might be Giants song ‘Mr Klaw’.
Following recent posts about attorney appointments it is important to also remember the special rules that apply in relation to self-managed superannuation funds (SMSF).
As is well understood, a superannuation fund is an SMSF where all members of the fund are trustees or directors of a corporate trustee – see sections 17A(1) and (2) of the Superannuation Industry (Supervision) Act 1993.
A super fund is also a complying SMSF where an EPA of a member is a trustee or a director for a corporate trustee in place of a member during any period that attorney has an enduring power of attorney (EPA) in respect of a member of the fund who themselves is unable to act (see section 17A(3)(b)(ii)).
In order for section 17A(3) to apply the person seeking to become a trustee or director needs to be appointed under an EPA of the member who cannot act. A general power of attorney will not be sufficient.
Practically, the only way in which an attorney under an EPA can act in the role as trustee for an SMSF is for the existing member to be removed from their role as trustee (or director of the corporate trustee as the case may be), and for the attorney under that member’s EPA to be appointed as the new trustee or director in place of the member.
In addition to satisfying the statutory provisions, the trust deed for the SMSF must also be complied with.
Importantly, the attorney for the member performs their duties as a trustee of the SMSF, or a director of the corporate trustee of the SMSF, pursuant to their appointment to that position, rather than as an attorney or agent for the member.
The Tax Office has detailed their views in this area in Self-Managed Superannuation Funds Ruling SMSFR 2010/2. As usual, if you would like a copy of this ruling please let me know.
** for the trainspotters, the title here is riffed from the XTC song ‘Generals and Majors’.
Confirmation that estate planning documents may now be witnessed remotely … in New York …
While NSW has threatened to do the same in AUS (for a maximum of 6 months); query when (if ever) all states will roll this out.
The specifics of the New York rules (perhaps AUS legislators can copy and paste these?) are as follows:
The person requesting that their signature be witnessed, if not personally known to a witness, must present valid photo ID to the witness during the video conference, not merely transmit it prior to or after;
The video conference must allow for direct interaction between the person and each witness and the supervising lawyer, if applicable (e.g. no pre-recorded videos of the person signing);
The witnesses must receive a legible copy of each signed page, which may be transmitted via fax or electronic means, on the same date that the pages are signed by the person;
Each witness may sign the transmitted copy of the signed pages and transmit the same back to the person; and
Each witness may repeat the witnessing of each original signature page as of the date of execution provided the witness receives such original signature pages together with the electronically witnessed copies within thirty days after the date of execution.
Reassuring I am sure for all #BigLaw lawyers that the transmission of the signed pages can be made by fax ...
** for the trainspotters, a double hit (given the Easter long weekend), firstly Aretha Franklin's tribute to Zoom and 'Who's Zoomin' Who'.
