Sometimes you get kicked** Trust disclaimers … some further lessons

As mentioned in last week’s post, a previous post has explored arguably the leading case in relation to trust disclaimers, being the decision in FCT vs. Ramsden [2005] FCAFC 39. 

The decision in Smeaton Grange Holdings Pty Ltd vs. Chief Commissioner of State Revenue [2016] NSWSC 1594 provides further clarity around the key issues in this regard. 

While the case is primarily focused on payroll tax grouping issues, it does provide an analysis of the key principles in relation to trust disclaimers that are also important for income tax purposes. 

In summary, the case confirms: 

1. No person can be compelled to accept a gift against their wishes. This principle is derived from the leading English case Re Gulbenkian’s Settlements (No.2) [1970] CH408. Again, if you would like a copy of this case, please let me know.
2. A beneficiary of a discretionary trust can therefore disclaim their interests unilaterally by way of deed poll, which means that no consideration needs to be paid.
3. A disclaimer cannot be made however if a person has full knowledge of all aspects of their entitlements and then fails to take steps to make the disclaimer.
4. A person can disclaim their interest in specific entitlements to income or capital of a trust without disclaiming their interest in the entire trust. In this situation, the disclaimer only applies in relation to the specific interest defined in the disclaimer.
5. Alternatively, a beneficiary can disclaim their interest in the entire trust.
6. Disclaimers, once made, operate retrospectively, thereby meaning that the entitlement disclaimed is effectively deemed to have never arisen. Contrast this with a renunciation, which is effective prospectively.
7. A disclaimer or renunciation can be made from time to time in relation to distributions of income and capital in any income year, however if the person is a default beneficiary the disclaimer or renunciation must be in relation to their entire interest.
8. To be effective a disclaimer must be made within a reasonable time period of the beneficiary becoming aware of the distribution. The importance of this aspect can not be understated and will be explored in more detail next week.

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 ‘Kick’. View hear (sic): 

When amended assessments and trust disclaimers don’t mix**

Last week’s post explored the Yazbek decision. 

One of the critical aspects of the core principle from that decision is the potentially significant adverse consequences that can arise in relation to the Tax Office issuing amended assessments to a taxpayer. 

In particular, any person that is merely a potential beneficiary of a discretionary trust can automatically be subject to a four-year amendment period. 

This is despite the case that they may not even have been aware that they were a potential beneficiary of, for example, a distant relative’s trust. 

This said, where a potential beneficiary is unaware of their beneficiary status, if an amended assessment is issued more than two years (which is the general time limit), but less than four years, the relevant beneficiary may be able to challenge the assessment if they immediately disclaim their interest in the relevant trust. 

A previous post has considered the manner in which an effective disclaimer can be made. 

Next week’s post will further explore some of the key issues in relation to trust disclaimers. 

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 ACDC song ‘Dogs of war’. Listen hear (sic): 

Sometimes** you need to ask: Who are beneficiaries under a trust deed?

Today’s post considers the meaning of ‘beneficiary’, from a tax perspective as confirmed by the Federal Court in the case of Yazbek. 

The decision confirms that a ‘beneficiary’ is not simply a person who, as a matter of fact, has obtained some tangible benefit from the trust, rather a beneficiary is someone who is entitled to enforce the trustee’s obligation to administer the trust according to its terms. 

In other words, anyone named as a potential beneficiary, or a member of a class of beneficiaries (even if not specifically named) will be a beneficiary. 

A comprehensive review of a trust deed should always include an analysis of every variation or resolution of a trustee or other person that may impact on the interpretation of the range of potential beneficiaries. 

Some examples of documents that may impact and the class of potential beneficiaries include: 

1. resolutions of the trustee to add or remove beneficiaries pursuant to a power in the trust deed;
2. nominations or decisions of persons nominated in roles such as a principal, appointor or nominator; and
3. consequential changes triggered by the way in which the trust deed is drafted (for example, beneficiaries who are only potential beneficiaries while other named persons are living).

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 Depeche Mode. Listen hear (sic):

(Charlotte) Sometimes** complex wills fail for want of knowledge and approval

Previous posts have considered some of the key issues in relation to assessing testamentary capacity. 

Given the complexities with life estates mentioned over recent weeks, one aspect that often arises in this regard is the level of knowledge and approval the willmaker must have of their will. 

This is because the requirement that a willmaker knew and approved of the contents of their will is a separate and distinct requirement for validity to the question of the willmaker’s testamentary capacity. 

In this regard it is accepted that it is not necessary to establish that a willmaker was capable of understanding every clause of the will and its legal effect. 

Rather, it need only be shown that the willmaker understood that they were signing a will and the practical effect of its central clauses, including the gifts of property made. 

As with the assessment of capacity, the amount of evidence required to prove a willmaker understood their will depends on the factual matrix. 

In this context, the case of Hoff v Atherton [2005] WTLR 99 is relevant. 

This case confirmed that a court may require evidence that the effect of the document was explained, that the willmaker did know the extent of their property and comprehended and appreciated the claims on the estate that they should have considered. 

These factors are not considered simply because the court may have doubts as to the willmaker’s capacity to make a will. Rather the focus is on the separate issue of whether the willmaker knew and approved the contents of the will. 

This means that even a willmaker who is held to have full capacity, and was not subject to undue influence (see our previous post that explores this issue), can have probate of their will refused on the basis that the document does not express their true intentions. 

As usual, please contact me if you would like access to any of the content mentioned in this post. 

** for the trainspotters, ‘Charlotte Sometimes’ is a song by the Cure. View hear (sic): 

Exactly what** does the market value substitution rule say

Following last week’s post feedback has been received about what exactly the market value substitution rule (MVSR) provides for capital gains tax purposes (CGT).

Interestingly, the MVSR section in the Tax Act (namely section 116-30) is one of the, arguably few, provisions where the legislation is relatively clear. This means that, generally, there is not the need to rely on Court decisions to understand how the rules work.

The exact wording of the relevant parts of section 116-30(2) is as follows:

‘The capital proceeds from a CGT event are replaced with the market value of the CGT asset that is the subject of the event if...those capital proceeds are more or less than the market value of the asset...and...you and the entity that acquired the asset from you did not deal with each other at arm’s length in connection with the event.’

** for the trainspotters, ‘Exactly what’ is riffed from the Oasis song ‘Girl in the dirty shirt’. Listen hear (sic):

Granny flats and rights to occupy ... now what kind of mess have you gone and gotten yourself into?**

Previous posts have considered the creation of life estates under an estate plan where a willmaker is wanting to allow a particular beneficiary the right to reside in a property without gifting it to them directly. 

As set out in the earlier post, the creation of a life interest is rarely appropriate as part of a modern day estate plan. 

One potential pathway mentioned in the previous post was using a right to occupy under a will. 

While a right to occupy under a will can be a tax effective solution, creating a right to occupy during a person’s life is often very tax ineffective. 

With the increasing interest in (for example) having parents live in a ‘granny flat’ style arrangement on the property of one of their children, the issues in this regard are important to be aware of. 

In very broad terms (that is, there are a number of potentially different outcomes depending on the factual matrix), the key issues to be aware of in this regard include: 

1. Any payment of money for the right to occupy a granny flat gives rise to a capital gains tax (CGT) event, namely CGT event D1.
2. CGT event D1 is triggered even if the granny flat may have previously formed part of the main residence of the children.
3. The CGT is payable with reference to the consideration provided for the grant of the right to occupy, regardless of whether the arrangements are documented or not.
4. Where consideration is paid that is less than market value, the market value substitution rule can apply as the parties will generally not be seen to be dealing with each other at arm’s length.
5. If there is truly nil consideration, there should be no CGT payable.
6. The termination of a right to occupy on the death of the parent will not cause any CGT event.
7. Similarly, if the person holding the right to occupy relinquishes that right, there will be no CGT consequences as long as they receive no consideration and the property was their main residence during the term of the occupancy.
8. Finally, the right to occupy the granny flat should not impact on the ability for the owner of the main dwelling to access the CGT main residence 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 You Am I song ‘Hourly daily’. View hear (sic): 

Don't know what you got 'til it's gone** - testamentary trusts and ETY

Thank you to all those who were part of our Estate Planning 2021 webinar this week.

A key question discussed related to the way in which the new restrictions on excepted trust income (ETY) via testamentary trusts operate.

In particular, in the context of a husband and wife preparing wills incorporating Testamentary Trusts, are there any tax consequences that flow from preparing the husband and wife’s wills to reflect that in the event the husband predeceases the wife (for example) the wife’s will provides that her assets will be gifted into the Testamentary Trust previously set up under the husband’s will.

Focusing solely on the ETY position, the new rules unfortunately make it clear that in this situation the income earned on the wife’s assets gifted to the husband’s Testamentary Trust will not give rise to ETY.

The reason for this is that the legislation mandates that the ‘property (must be) transferred to the trustee of the trust estate to benefit the beneficiary FROM THE ESTATE OF THE DECEASED PERSON concerned’ (emphasis added).

View made submissions on the draft legislation on this point (which were ignored ...) as follows:

‘The draft legislation is focused on “the deceased person concerned”, and it is unclear why this restriction is relevant.

For example, for most couples who both implement testamentary trusts, it will be the case that they will die at different times and there will often be a desire to transfer assets between testamentary trusts.

It is clearly the case that the excepted trust income rules should continue to apply in situations where a couple both implement testamentary trusts.

To argue otherwise would again see the proposed amendments extend significantly beyond the stated intent of the announced measure and impact taxpayers in a range of circumstances where there is no inappropriate tax benefit received by a beneficiary.’

** For the trainspotters, the title of today's post is riffed from the Joni Mitchell song ‘Big Yellow Taxi'.

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