Adviser Services

PPSA and company charges

2012-02-27T13:57:00.001+10:00

The long awaited transition to the personal property security regime has continued to evolve since the official ‘live’ date of 30 January 2012.

While there are an ever increasing number of war stories, for anyone involved in advising companies, arguably one of the most tangible changes has been the abolition of ASIC forms in relation to registering company charges.

With thanks to the fantastic team of lawyers at McCullough Robertson who have been at the forefront of communicating virtually every commercial consequence of the new PPSA regime, today’s post focuses on some of the critical aspects of the new company charge regime.

On 30 January 2012, ASIC ceased to register company charges and ASIC forms 309, 311 and 312 are no longer relevant.

No forms - The difference between the PPS register and the ASIC register of company charges is that there are no physical forms that are lodged with the PPS register. All registrations, amendments and releases are done online using the PPS register (i.e. no forms are signed).

How do I find out if a company has charges against its assets? - ASIC searches will no longer show details of current registered charges. You will need to search the PPS register to reveal these details. As the PPS register search function has experienced a number of technical difficulties, you should always search a company by ACN, ABN and company name until these issues are resolved.

How do I register a security interest? - In order to register a security interest on the PPS register you need to register a financing statement.

How do I release a security interest? - As the ASIC form 312 is no longer relevant, parties will need to agree on a way to document the release in another fashion e.g. a deed of release.

Until next week.

elawyer 'TED'

2012-02-20T08:32:00.002+10:00

As part of the thought leadership event facilitated by the Verasage Group in early 2011, I had the opportunity to present a 'TED' style presentation on the evolution of the elawyer platform.

Having had a number of requests in recent weeks, this week’s post provides a link to the presentation – http://www.youtube.com/watch?v=JNnnbkfXY84&feature=youtube_gdata_player

Hopefully, it provides some additional context to the platform, although I should note it is rushed in parts in order to fit within the 6-minute allocation available (event organisers enjoyed the irony of capping everything at one 'chargeable' unit).

Until next week.

Superannuation and binding death benefit nominations (BDBN)

2012-02-14T10:25:00.001+10:00

A couple of weeks ago there was a post in relation to superannuation nominations.

As mentioned in that post, where there is a valid BDBN, the trustee has no discretion to pay death benefits other than in accordance with the notice.

Based on recent client situations we have seen, a few critical points to remember in this area include the following:

1. If a member’s circumstances change and they have failed to update their BDBN, it will, subject in some situations to automatic lapsing (for example, every three years), continue to be binding on the trustee.

2. The trust deed for the superannuation fund must allow for a BDBN to be given to the trustee of the fund – even some recently set up deeds do not always have such a provision.

3. Unless specifically provided for in the deed, a BDBN will often need to be ‘refreshed’ every three years. An alternate approach is to update the trust deed for the fund to ‘hardwire’ the nomination into the deed, avoiding the requirement to regularly refresh the nomination.

Until next week.

What exactly is a firm of the future ?

2012-02-06T13:11:00.001+10:00

Many regular readers will be aware that for around ten years now we have charged on the basis of scoping work up front and providing a set price – that is no time billing.

A large part of the inspiration for abandoning time billing came from the landmark publication ‘Firm of the Future’ by Ron Baker and Paul Dunn. That book describes a journey from the traditional (and largely archaic) professional service firm model to being a knowledge firm. Understanding the value that knowledge workers create and having the skills to price without any reference to time is the foundation of the journey.

While subsequent publications by Baker (in particular ‘Pricing on Purpose’ and the more recent ‘Implementing Value Pricing’) provide significant guidance, we have found that the ability to listen and interact with likeminded advisers who are wanting to consider (or have started) the journey to a life without timesheets is invaluable.

Over the coming weeks there is a special opportunity to participate in Firm of the Future seminars across the eastern seaboard that will be led by internationally renowned pricing expert Ron Baker and facilitated by leading Australian consultant in this area John Chisholm. To learn more, click on the following link:

http://firmofthefutureforum.com.au/

Until next week.

Superannuation death benefits

2012-01-31T08:35:00.002+10:00

The way in which members of a super fund can direct payment of benefits on death come up in virtually every estate planning exercise.

Essentially a member of a superannuation fund has three main choices for specifying what should happen in relation to their superannuation entitlements on death (assuming the proposed recipient is entitled at law), namely:

1. no nomination - the trustee is bound to deal with a member’s benefit in their best interests. The trustee will normally make enquiries as to the member’s family situation, who their dependants are, the provisions of their will and other relevant circumstances before making a decision;

2. a non-binding nomination - the trustee is not bound by a non binding notice and has an absolute discretion as to where the death benefit will be paid. Where a non binding notice is made, it should be taken into account as part of any decision by the trustee as to how to distribute the benefit; or

3. a binding nomination - the trustee is obliged to distribute a member’s death benefits in accordance with a valid binding notice.

Binding nominations have the potential to allow members to protect their death benefits from disputes, as where there is no nomination or a non binding one, a trustee's decison can be challeneged. Binding nominations can also be used as part of a member’s overall estate plan, including, for example, as part of a tax planning strategy for infant children or an asset protection strategy for adult children.

In future posts we will look at other aspects of binding nominations, including non lapsing nominations.

Until next week.

No removal of business duty in Queensland

2012-01-24T14:05:00.000+10:00

With thanks to McCullough Robertson's leading stamp duty senior associate Duncan Bedford, today's post summarises an important issue for anyone conducting business in Queensland.

In particular, the Queensland government has announced in its January 2012 interim budget, the deferral of its plan to abolish transfer duty on non-land Queensland business assets.

Broadly, business assets include goodwill, valuable contractual rights, trade debtors, plant and equipment.

The deferral is 'until the budget can accommodate the abolition' - which many commentators are assuming will be indefinitely.

The abolition had been scheduled from 1 July 2013, following the original aim to see it removed on the introduction of GST in July 2000.

As many readers will be aware, other jurisdictions have either abolished duty on non-land business assets (e.g. Victoria, Tasmania and ACT) or have scheduled to abolish it (e.g. New South Wales and South Australia from 1 July 2012 and Western Australia from 1 July 2013).

Until next week.

Final post for 2011

2011-12-13T14:29:00.000+10:00

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2012.

Similarly, the Twitter postings will also take a hiatus until the New Year as from today.

Very best wishes for Christmas and the New Year period and thank you to all of those advisers who have read, and particularly those that have taken the time to provide feedback in relation to, the various posts.

Until the new year.

Statement of principles to be (finally) amended (?)

2011-12-05T11:37:00.001+10:00

Many readers will be aware of the full Federal Court decision earlier this year of Clark.

In that case, the Court largely reiterated the decision from 10 years ago in Commercial Nominees that, generally speaking, a resettlement of a trust for tax purposes can only happen in a very limited range of circumstances.

At the end of last week, the Tax Office released a decision impact statement in relation to the Clark decision and has, finally, accepted that the position set out in the case may mean that the 'Creation of a New Trust – Statement of Principles' last updated in August 2001, may need to be changed.

A previous post links the Statement of Principles for those that have not seen it, and in that document, the Tax Office suggests that there are in fact quite a large range of situations where a trust may be resettled for tax purposes.

It is hoped that the Tax Office can prioritise providing some clarity around their position on trust resettlements, particularly given that most specialist advisers in this area believe that, in accordance with Commercial Nominees and Clark, significant changes should be able to be made to trust deeds without triggering a resettlement.

For those interested in reviewing the complete decision impact statement, the relevant link is as follows – http://law.ato.gov.au/atolaw/view.htm?docid=%22LIT%2FICD%2FQUD1of2010%2F00001%22

Until next week.

How do the intestacy rules work?

2011-11-28T14:53:00.001+10:00

Following last week’s blog, I have had a couple of enquiries about how the intestacy rules work.

As most readers will know, the intestacy provisions apply where a person dies without a valid will in relation to all of their assets. In this regard, it can in fact be possible to die ‘partially intestate’. This simply means that there are assets in a person’s estate that are not validly dealt with under the will in place at a person’s death.

Not dissimilar to a number of the other issues dealt with in previous posts, the intestacy rules are (at least currently) inconsistent across each state in Australia.

The intestacy rules in each state are however set out under the relevant Succession Acts and, in very broad terms, provide for the distribution of wealth amongst immediate family members according to predetermined formulas.

In very general terms, only one set of intestacy rules will apply and which rules are relevant will depend on where the deceased person was 'domiciled'.

The question of domicile can in itself a fairly complex issue and if there is a level of interest, I will try to address this in a future post.

Until next week.

Court drafted wills

2011-11-21T12:43:00.000+10:00

Last week I had an example of a client situation which in some respects was similar to an earlier post where a sole director died without a will.

The situation that came up last week involved a client who was the sole director of a number of companies and had lost capacity.

While she had an attorney appointed via the Guardianship and Administrative Appeals Tribunal (there are separate entities in each state regulating how someone can be appointed as an attorney where the incapacitated individual has not otherwise made a valid appointment), the director here also did not have a will.

In many situations, there is now the possibility to apply to a court before someone’s death and have the court approve a will.

The process is a relatively intense one, primarily because the court system holds the making of a will as something that ultimately should only ever be made by the individual in control of the relevant assets.

This said, when compared to dying intestate, the process is often one that we strongly recommend be considered.

Until next week.

Financiers being financiers

2011-11-14T09:19:00.000+10:00

With apologies for the lack of post last week (for reasons that I won’t bore you with), this week’s post looks at one area where financiers seem to have had a continued focus on recently. In particular, with the continuing economic uncertainty, we are seeing a number of clients being asked to comply with the financial assistance rules.

Financial assistance can be a relatively complex area of the Corporations Act, however essentially it centres around situations where a company provides some form of help to shareholders (or associates of shareholders) in relation to the provision of finance.

What amounts to ‘financial assistance’ can be an issue of some debate in many transactions, however ultimately the 'golden rule' invariably applies. That is a financier will normally have the last word as to whether they believe there is a financial assistance issue.

There is a specific process set out under the Corporations Act that allows a transaction to proceed despite the existence of financial assistance, however there are a number of strict timelines that must be satisfied in order to comply with these provisions. Therefore, unless all parties are aware of the possibility that financial assistance approval may be required, significant difficulties can arise.

Until next week.

Why do so many people still talk about Richstar?

2011-10-31T14:39:00.002+10:00

The interest from recent posts about accessing assets of a family trust on marriage breakdown reminded me of the Richstar decision.

It has been a few years since the very well publicised decision in Richstar was handed down. The decision does however remain an interim one and there does not seem to be any clear indication as to if or when proceedings might be restarted.

For those unfamiliar with the exact decision of Richstar, a focus is set out at the following link http://www.mccullough.com.au/services/services.aspx?p=2714

While there have been a number of cases that have criticised various aspects of Richstar, it still seems to be generally the case that most commentators strongly recommend that the broad principles in Richstar be considered as part of any trust structuring exercise (whether it be the establishment of a new trust or the variation of a pre-existing trust).

Pragmatically, it may also be that part of the reason that Richstar has remained so relevant despite the fact that it is only an interim decision of a single judge from Western Australia is that the judge involved has now gone on to become the Chief Justice of the High Court.

Until next week.

Insurance funding via superannuation

2011-10-24T10:47:00.001+10:00

Earlier posts have mentioned the ‘debt reduction’ and ‘hybrid’ buy sell arrangements and I can forward information in this regard for those interested.

One particular issue raised with me recently in this area was the ability to use superannuation owned policies for insurance arrangements supporting a debt reduction (or asset protection) solution.

Generally the position is that the asset protection (debt reduction) component of any insurance policy should be self owned, rather than superannuation owned.

This is because a superannuation fund trustee is unlikely to be able to make the required payment directly to the other principals, as the fund can only pay a benefit to a member (in the case of disablement), or to the dependants or estate (in the case of death).

Furthermore, a superannuation fund could not be a party to the agreement as this would raise issues about compliance with the sole purpose test, and also might be construed as an assignment of a benefit, which super fund trustees are prohibited from recognising.

Given these technical limitations, there could be no certainty that insurance proceeds held in superannuation would find their way to the correct parties to enable them to pay down the external debt.

This said, it is often possible to have two policies for each principal under a hybrid buy sell deed, one being a self owned policy for asset protection (debt reduction) purposes and the other policy being owned through superannuation for equity transfer (that is, traditional ownership or buy sell) purposes.

Until next week.

Further comments on assets protected by a family trust on marriage breakdown

2011-10-17T14:13:00.001+10:00

Further to last week’s post, some feedback was received about other aspects of the decision mentioned (Keach & Keach).

To provide some more context to the main conclusion of the case mentioned last week, it is worth noting that:

1. The relevant trust was established by the father of the divorcing husband.

2. The father had all practical control over the trust as well as legal control.

3. While the main asset of the trust (being a home that the husband and wife were living in) was allegedly used by the husband 'as if it were his own', this did not change the legal ownership position.

4. In order for an arrangement to be a sham (and therefore, for example, for the trust’s ownership to be ignored), it must be shown that all relevant parties had the common intention to mislead others.

5. Even if the husband was conducting himself as if he were the owner, unless it could have been shown that the husband’s father intended the arrangement to be a sham, then there was no access to the assets of the trust.

6. Here the evidence was in fact the opposite – i.e. the husband’s father deliberately structured the arrangements to ensure that he retained control and direction of the trust. On this basis, the assets of the trust could not be considered as assets of the marriage.

Until next week.

Family law case excludes assets owned by a family trust

2011-10-10T07:56:00.002+10:00

As mentioned in last week’s post, a family law case from earlier this year involving a family trust has received an amount of attention given the decision seems somewhat at odds with the High Court’s decision in Spry.

The more recent case (named Keach & Keach and Ors [2011] FamCA 192 – a full copy of the decision is at the following link - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FamCA/2011/192.html?stem=0&synonyms=0&query=Keach) focused on a family trust that the father of the divorcing husband had established.

The father admitted that among other things, one reason for setting up the trust was to keep the assets as far away from the reach of the family court as possible.

The divorcing wife argued that the assets of the trust should be available to her on a property settlement as her former husband effectively treated them as his own.

The court held that the assets should be ignored on the property settlement. Essentially, it was held the only time that the legal documents and arrangements could be ignored was where they were a sham or a 'mere puppet'. In all other instances, the family court cannot ignore the interests of third parties in the property, nor the existence of conditions or covenants that limit the rights of the party who owns it.

Until next week.

Spry - one year on

2011-10-03T11:22:00.003+10:00

Undoubtedly, the highest profile family law case (at least involving trusts from 2010) was the Spry case.

While the actual scenario was somewhat unique and obviously the decision became one of the highest profiled decisions issued by the High Court in this space in recent years, the actual implications of the case may not in fact be as far reaching as first thought.

In particular, what many advisers in this area are seeing is that a number of the aspects of the decision can be explained by the particularly aggressive and arguably misleading approach that the husband took in relation to attempting to remove assets from the pool that could be distributed to his former wife.

For those wanting to revisit some of the other core aspects of the decision, a focus that we prepared last year (namely - Kennon v Spry - the next chapter - 12 August 2010) can be accessed via the following link - http://www.mccullough.com.au/services/services.aspx?p=2714

Unless something else comes up during the week, next post I will summarise a recent family law decision that further confirms that the Spry decision may not be as concerning as many commentators first thought.

Until next week.

Interdependency relationships – further examples

2011-09-19T11:22:00.002+10:00

Following on from last week’s post, some comments were received in relation to the lack of cases in this relatively new area of law.

Interestingly, the superannuation legislation (for those particularly interested, the actual regulation is 1.04AAAA) sets out a number of tests in relation to whether a relationship between two people amounts to an interdependency relationship.

In summary, the tests include:

(a) the duration of the relationship;

(b) whether or not a sexual relationship exists;

(c) the ownership, use and acquisition of property;

(d) the degree of mutual commitment to a shared life;

(e) the care and support of children;

(f) the reputation and public aspects of the relationship;

(g) the degree of emotional support;

(h) the extent to which the relationship is one of mere convenience; and

(i) any evidence suggesting that the parties intend the relationship to be permanent.

A link the above definition is as follows:

http://www.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/s1.04aaaa.html

Many of these themes are similar to the definition of what a de facto relationship is, which were summarised in a post a few weeks ago.

Due to the September holidays, the next post will be in a couple of weeks time.

What is an ‘interdependency relationship’?

2011-09-12T10:41:00.002+10:00

Following on from last week’s post, one issue that was raised with me related to the concept of an 'interdependency relationship' under the superannuation rules.

Again, for those who have not had cause to look at it recently, this definition is worth reviewing closely and an extract of it is included below.

Two persons (whether or not related by family) have an interdependency relationship under this section if:

(a) they have a close personal relationship; and
(b) they live together; and
(c) one or each of them provides the other with financial support; and
(d) one or each of them provides the other with domestic support and personal care.

In addition, two persons (whether or not related by family) also have an interdependency relationship under this section if:

1. they have a close personal relationship; and
2. they do not satisfy one or more of the requirements of an interdependency relationship mentioned in paragraphs (a), (b), (c) and (d); and
3. the reason they do not satisfy those requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability.

A link the above definition is as follows:

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s302.200.html

Until next week.

Being a 'kept’ woman (or man) may not be a de facto relationship

2011-09-05T15:23:00.001+10:00

Following last week's post, I was reminded of a case from earlier in 2011 that involved a lady who had been a part of a secret intimate relationship with a married family man for 17 years.

According to her evidence, she and the man involved 'spent time together at various times in various places, had a sexual relationship, and expressed love and affection for each other'. The argument being that this was a 'de facto relationship' within the meaning of section 4AA of the Family Law Act (which was summarised in an earlier post).

The man denied 'any such relationship’, and instead claimed it was simply 'an affair' and the lady was a 'kept woman’. Both parties agreed that they travelled overseas together and the man paid the lady $24,000 to help her buy a home and $2,000 monthly, increasing progressively to $3,000 a month.

While the court rejected the man’s argument that 'exclusivity' was necessary for a de facto relationship to exist, the facts here did not support the lady’s argument that they were de factos.

The quote that best captured the decision here was as follows:

“the key to that definition (i.e. de facto) is the manifestation of a relationship where both the parties have so merged their lives that they were, for all practical purposes 'living together' as a couple on a genuine domestic basis. It is the manifestation of 'coupledom' which involves the merger of two lives as just described, that is the core of a de facto relationship as defined and to which each of the statutory factors (and others that want to apply to a particular relationship) are directed”.

Until next week.

De facto relationships - further examples

2011-08-29T09:09:00.002+10:00

Further to last week’s post, the list below sets out some of the specific circumstances that are taken into account by the courts to determine whether a relationship does amount to a de facto relationship.

Circumstances of the relationship taken into consideration include any or all of the following:

(a) the duration of the relationship;
(b) the nature and extent of their common residence;
(c) whether a sexual relationship exists;
(d) the degree of financial dependence or interdependence, and any arrangements for financial support, between them;
(e) the ownership, use and acquisition of their property;
(f) the degree of mutual commitment to a shared life;
(g) whether the relationship is or was registered under a prescribed law of a State or Territory as a prescribed kind of relationship;
(h) the care and support of children; and
(i) the reputation and public aspects of the relationship.

A link to the above definition is as follows:

http://www.austlii.edu.au/au/legis/cth/consol_act/fla1975114/s4aa.html

Until next week.

What is a de facto?

2011-08-22T13:08:00.001+10:00

Following on from last week’s post, I thought it would be useful to also summarise the definition of 'de facto'.

This particular definition is taken from the Family Law Act (Section 4AA).

In summary, a person will be in a de facto relationship with another person, if:

(a) the persons are not legally married to each other; and

(b) the persons are not related by family (see subsection (6)); and

(c) having regard to all the circumstances of their relationship, they have a
relationship as a couple living together on a genuine domestic basis.

A link to the above definition is - http://www.austlii.edu.au/au/legis/cth/consol_act/fla1975114/s4aa.html

Until next week.

What is a spouse?

2011-08-15T10:08:00.001+10:00

The issue that what kind of relationship satisfies the definition of a 'spouse' has been coming up increasingly regularly.

The Tax Act sets out one of the most used definitions in this regard and I thought it useful this week to extract that definition in its entirety, given that it has been amended relatively recently.

A "spouse" of an individual includes:

(a) another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a State law or Territory law prescribed for the purposes of section 22B of the Acts Interpretation Act 1901 as a kind of relationship prescribed for the purposes of that section; and

(b) another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple.

Until next week.

Review of a trustee's decision

2011-08-08T07:16:00.002+10:00

Last week we had to assist a trustee of a family trust in their attempt to resist a review of a decision by a disgruntled beneficiary.

Many will be aware of the High Court decision in Finch v Telstra Super Pty Ltd [2010] HCA 36 – a link to the case is as follows:

http://www.austlii.edu.au/au/cases/cth/HCA/2010/36.html

In very broad terms, we confirmed to the trustee the relatively settled position that seems to have evolved in this area, namely that the exercise of a discretion by a trustee is not subject to review by the court unless one of the following three factors is present:

1. The trustee does not act in good faith;

2. The trustee does not give real and genuine consideration to the exercise of the discretion and the purposes for which the discretion was granted; or

3. Reasons for the decision are provided by the trustee, but those reasons are unsound.

Until next week.

Prenups and the need for independent legal advice

2011-08-01T13:41:00.001+10:00

An interesting issue came up recently in relation to a 'prenuptial agreement (more technically referred to as a 'binding financial agreement')'.

In particular, as many would know, the need for both parties to the relationship to obtain independent legal advice was brought into question because often one party will choose not to follow the advice that is provided. That is the lawyer may recommend that the agreement not be signed, however the client will still sign.

Based on recent cases, it seems clear that:

1. There is no need for independent advice to be actually accepted or followed to satisfy the requirement that independent advice is sought.

2. Even if advice provided by the independent lawyer is later shown to be incorrect, the criteria that independent advice be sought may still be satisfied.

Until next week.

De facto death duty confirmation

2011-07-25T13:56:00.002+10:00

As many will have seen, the lead article in Friday’s Financial Review confirmed that, as far as the Tax Office is concerned, payments made by a super fund, following the death of a member, will be subject to (at least) a 10% capital gains tax bill.

Tax is payable in these circumstances on the difference between the market value of the underlying assets of the fund and the cost base.

While some advisers have tried to adopt approaches to get around what is effectively a death duty, the conservative view as to the likely ATO approach has now been confirmed beyond doubt.

Depending on the exact circumstances of a client, there are still mechanisms to significantly reduce and/or eliminate the capital gains tax liability that might otherwise be triggered on the death of a fund member, however the announcement by the Tax Office further underlines the importance of ensuring a comprehensive, integrated and up-to-date estate plan.

For those interested in reading the full draft ruling, a link is set out below.

Until next week.

http://law.ato.gov.au/atolaw/view.htm?DocID=DTR/TR2011D3/NAT/ATO/00001&PiT=99991231235958

Small i Income

2011-07-18T08:47:00.001+10:00

A number of posts over the last 18 months have touched on various aspects of the Bamford decision.

One issue that comes up more frequently than otherwise might be assumed is the way in which the word 'income' is used throughout a trust deed.

At times we have seen in deeds a definition of ‘Income’ and the word defined is mentioned in the definition section in a capitalised sense – that is the word income will start with a capital I.

When reference is then had however to the distribution of income provisions, the deed drafter has not in fact used the 'big I' income definition, but rather has simply referred to 'small i' income. This will generally mean that the defined term will not apply and ‘income’ (for the purposes of the relevant clause) will simply have its ordinary meaning.

Obviously, there are a number of potentially complex trust and tax law interpretation issues that can arise in this regard. This said, it is arguably going to be quite clear what position the Tax Office will take to the extent a trustee has misunderstood the trust deed, particularly given the recently released trust distribution legislation.

Until next week.

Lineal descendant trusts post Bamford

2011-07-11T08:26:00.001+10:00

As touched on in a recent post, often 'lineal descendant trusts' will adopt a 'hybrid' approach whereby:

1) The capital is protected for lineal descendants.

2) The income may be distributed to a wide range of potential beneficiaries (including non lineal descendants).

We have seen a number of instances lately where trusts that were originally prepared along the lines outlined above where, following Bamford on the recent Government legislation concerning streaming, the client was wanting to redefine income and in particular allow capital gains to form part of the net income of the trust. While (as is the case in many of these areas) there are a number of competing arguments, there is a real risk that this kind of amendment to a 'hybrid' lineal descendant trust would amount to a resettlement for tax purposes.

For regular readers, you will recall that an earlier posting specifically mentions the Tax Office’s Statement of Principles and provides a link to that document.

Until next week.

ATO gives some relief in lead up to 30 June for trust distribution resolutions

2011-06-29T14:11:00.002+10:00

Extracted below is the announcement the ATO has made this morning confirming the transitional arrangements that will apply for 30 June 2011 in relation to trust distributions.

The comments in relation to IT 328 are particularly interesting.

Other administrative arrangements

The Commissioner recognises that the passage of this legislation so close to the end of the income year to which it will first apply gives trustees and practitioners little time to familiarise themselves with its content and to determine how it might affect the circumstances of a particular trust for that income year (that is, the 2010-11 income year).

Therefore, following representations from practitioners, and in recognition of the practical difficulties faced by them and by trustees as a result of the timing of the new law, the Commissioner will put in place the following administrative arrangements in respect of the application of the new law to the 2010-11 income year.

Specific entitlement to franked distributions

As regards the timing of recording such an entitlement for the 2010-11 income year, the Commissioner has agreed to adopt a similar approach to that set out in Income Tax Rulings IT 328 and 329 in respect of ‘present entitlement’ to trust income.

That is, for trusts with a 30 June balance date the Commissioner will accept that a relevant record made in respect of a franked distribution by 31 August 2011 meets the requirements of the new law for the 2010-11 income year in any case where ITs 328 and 329 would permit the trustee to take steps within that same period to make beneficiaries presently entitled to trust income for the purpose of Division 6.

For trusts that balance earlier than 30 June 2011 (or later than 30 June 2011 but before 31 August 2011) the Commissioner will likewise accept a relevant record made by 31 August 2011.

As the new law (if enacted as passed) will permit relevant records to be made in respect of capital gains no later than two months after the end of the relevant income year, there is no need for this arrangement to be extended to a beneficiary’s specific entitlement to capital gains.

It should be noted that the arrangement outlined above concerning a beneficiary’s specific entitlement to franked distributions will apply only for the 2010-11 income year.

Further, the Commissioner intends withdrawing ITs 328 and 329 for the 2011-12 and later income years.

Compliance action

Staff will also be instructed not to select cases for review or audit in respect of the 2010-11 income year for the sole purpose of determining whether the purported streaming of capital gains or franked distributions by a trustee is effective.

This instruction will not apply where there has been a deliberate attempt to exploit weaknesses or deficiencies in the law. In those cases we will apply the law as we understand it to operate.

We will also apply the law as we understand it to operate in any case that has been selected for review or audit for other reasons, and in preparing rulings or objections, and in arguing cases before the Tribunal or the courts.

At this stage the next post will be Monday week.

Lineal descendant trusts

2011-06-27T08:42:00.001+10:00

One of the other queries that has been raised following the last couple of posts concerns lineal descendant trusts.

There are a number of names in the marketplace for this form of trust structure, however in very broad terms, these types of trusts involve narrowing the range of potential beneficiaries that might otherwise be expected under a family trust.

In particular, the range of beneficiaries is often limited to the direct lineal descendants of the primary beneficiaries of the trust.

As has been mentioned a number of times in earlier posts, it is always critical to read the trust deed and lineal descendant trusts are another example of this rule. One of the key issues to be mindful of in this regard is that some trusts 'reserve' only the capital for lineal descendants, while still allowing very wide distribution powers for income.

Next week, we will look at a very practical, post Bamford, implication of lineal descendant trusts that only limit capital distributions.

Until next week.

Wills post Bamford

2011-06-20T12:10:00.001+10:00

Following last week’s post, there were some enquiries in relation to whether the Bamford decision and recent legislation introducing division 6E to the Tax Act mean that wills should be updated.

Very broadly, the position in relation to will updates post Bamford is that:

1) All wills should at least be reviewed (to the extent that they contain ongoing trust provisions).

2) Our experience to date is that often wills require updating. The reason for this is that traditionally wills have been crafted by specialist will lawyers, as opposed to tax specialists.

3) The significant (and very obvious) difference between trust provisions in a standard family discretionary trust and under a will, is that (in comparison) the amending of a will becomes extremely difficult following the death of the will maker.

4) While there can be pathways to achieve an amendment after death, almost without exception it is preferable to have the will document fully in order before it comes into force.

Until next week.

When do wills need updating?

2011-06-14T11:45:00.001+10:00

In many cases, the need to update a will is obvious due to significant changes in tax or trust laws or a significant change in the circumstances for a client.

Some of the other reasons that a will may need changing are often not as obvious and a brief summary of the potential trigger points is as follows:

(a) there is a change of name of the will maker or anyone named in the will changes their name;

(b) an executor/trustee dies or becomes unwilling or unsuitable to act due to ill health, age or any other reason;

(c) a beneficiary dies;

(d) the family situation or that of any beneficiary changes (e.g. through marriage, divorce, matrimonial problems, children or further children, de facto relationships or interpersonal relationships);

(e) there is a material change in financial circumstances of the will maker or any beneficiary;

(f) the will maker becomes involved in a new business, company or trust.

Until next week.

Where is the statement of principles?

2011-06-06T10:53:00.004+10:00

Perhaps due to the number of trusts that are now being reviewed and amended following the decision in Bamford, we have been regularly asked where the Statement of Principles is actually located.

As most readers will know, the Statement of Principles is the Tax Office's statement as to when they believe an existing trust is 'resettled', thereby causing a notional disposal of all assets of the trust and an immediate reacquisition.

Despite recent cases calling into question many aspects of the Statement of Principles, the Tax Office still appears to consider itself at least administratively bound by the document. For those who have not reviewed it recently it can be found via the following link -

http://www.ato.gov.au/content/14283.htm

Until next week.

2011 Federal Budget and deceased estates

2011-05-30T09:38:00.001+10:00

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

2011-05-23T12:34:00.001+10:00

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

2011-05-16T11:27:00.002+10:00

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

2011-05-09T10:36:00.001+10:00

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

2011-05-03T12:06:00.000+10:00

Following the last blog 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

2011-04-14T12:45:00.001+10:00

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

2011-04-11T10:08:00.000+10:00

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.

Important stamp duty changes in Queensland

2011-04-04T11:11:00.003+10:00

For those advisers who provide guidance to trusts with assets in Queensland, relatively important changes have been announced to the Duties Act.

Previous posts have mentioned the difficulties surrounding corporate trustee duty, particularly in relation to the Commissioner’s discretion in determining whether it applies.

This discretion has now been removed.

Similarly, the discretion surrounding whether a trust is a 'family trust' and therefore able to get access to various concessionary provisions has also been removed.

At least on the face of the new provisions, it should be easier to implement rearrangements of family trusts (particularly in succession situations), however due to the vagaries of how many trust deeds are drafted, advisers will need to be extremely careful to ensure that any particular change does in fact comply with new rules.

It should be noted that the changes are only in bill form at this stage – in other words, they are not formally legislated as yet.

Until next week.

ATO Discussion Paper on buy-sell agreements

2011-03-28T09:19:00.004+10:00

Following last week’s post, we had a number of people contact us in relation to the, withdrawn, ATO Discussion Paper on business succession arrangements (i.e. buy-sell agreements).

As mentioned in last week’s post, the ATO has unequivocally stated its belief that the Discussion Paper is not current and that advisers in this area should be deterred from relying on it.

This said, the Discussion Paper remains (even 11 years after its initial circulation) the only comprehensive attempt by the ATO to articulate its view of the various business succession models.

For those interested in the issues addressed by the Discussion Paper, it can be found at the following link - http://www.mccullough.com.au/services/services.aspx?p=2708.

Once you open the link, click on the icon under the fact sheets heading titled 'ATO Discussion Paper – Buy-Sell'.

Please note the paper is shown in 'marked up' format as this was the final version released by the ATO before it was withdrawn from circulation.

Until next week.

Insurance funded buy-sell arrangements - ATO commentary

2011-03-21T08:08:00.002+10:00

A number of earlier posts have considered various taxation aspects of insurance funded buy-sell arrangements.

Some minutes recently released from the National Tax Liaison Group meeting towards the end of last year provide an interesting insight to the latest ATO views in this area.

For those who have not seen a full copy of the minutes, the following link provides access -
http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/00271267.htm&page=11&H11

As you will see, in summary:

1. The status of taxation ruling on absolute entitlement (TR2004/D25) remains unclear.

2. The ATO considers its finalisation intricately linked to how it will deal with bare trusts, which again remains an unresolved issue.

3. The ATO confirms that the product ruling released last year in relation to one provider’s insurance trust arrangement is based entirely on the assumption that absolute entitlement was created. As my post from last year indicated, this assumption may be an unwise one to make given the ATO’s apparent attitude in this area.

4. While the ATO is flagging that they will further consider providing appropriate guidance, they have specifically confirmed that the Discussion Paper from 2000 on business succession arrangements cannot be considered current.

Until next week.

Do prenups actually work?

2011-03-14T11:41:00.001+10:00

The above question was posed to me during the week and, unfortunately, when I was told to make my answer succinct, the only thing that easily came to mind was 'it depends'.

Many advisers will be aware that prenups (or as they are more technically termed in Australia 'binding financial agreements') have been available for around 10 years now.

There have been a number of changes to the way in which the rules in this area work and the most significant of these changes occurred towards the end of last year.

While there were a number of quite heavily publicised cases where what otherwise appeared to be binding agreements were held to be invalid, the changes made towards the end of last year have generally been seen to be positive steps to ensure that disgruntled spouses cannot extract themselves from previously made promises on the basis of a legal technicality.

For those interested in learning more about the broad way in which binding financial agreements work, there are some fact sheets on our website (see at the following link - http://www.mccullough.com.au/services/services.aspx?p=2714)

Until next week.

Witnessing powers of attorney

2011-03-07T09:57:00.002+10:00

Following last week’s blog, I had a number of people raise concerns about the witnessing requirements for powers of attorney.

Unfortunately, this is yet another example of inconsistencies between each Australian state.

Certainly, in each state, legal practitioners are authorised witnesses for most forms of powers of attorney.

Having this said, documents that are directly related to medical issues can normally only be witnessed by a medical practitioner.

In some states, the financial related power of attorney documents can be witnessed by a relevantly large range of authorised signatories.

Ultimately, as I recommended to the advisers who contacted me, the safest pathway is to carefully read the relevant documentation to ensure all witnessing provisions are complied with. While there are numerous inconsistencies between the various states, each state does at least set out in some detail the witnessing requirement for each document as part of the standard government form.

Until next week.

How many powers of attorney does it take to create authority?

2011-02-28T08:09:00.001+10:00

With increasing regularity, we are seeing issues arise in relation to the authority for people to act under powers of attorney.

Like many laws, the power of attorney legislation is frustratingly inconsistent, with different acts applying in each Australian state and territory.

In theory, there is also legislation requiring each jurisdiction to recognise the documentation prepared in each of the states. In practice however, it is often extremely difficult to convince third parties that a power of attorney document that looks completely different to what they normally expect to see is in fact legally binding.

One solution (although admittedly not a particularly efficient one) we are seeing more people implement is to have a separate power of attorney prepared under each jurisdiction where they are likely to spend significant periods of time. While not a perfect solution, this approach can provide significant practical benefits.

There is an ongoing push, as part of having uniform succession laws across Australia, for the power of attorney laws to also be made consistent. The timeline for achieving such an outcome is difficult to predict given the number of vested interests involved.

Until next week.

ATO attacks Division 7A planning strategy

2011-02-21T08:08:00.001+10:00

In what is only a slight variation of the Division 7A planning approach of trusts distributing income to a limited partnership, in order to attain a capped rate of tax of 30% and avoid any application of Division 7A on loans made by the limited partnership, the ATO has released a further taxpayer alert last week.

The use of limited partnerships to avoid Division 7A was an approach that the ATO was on record as having concerns about long before the legislation in this area was changed a couple of years ago.

Following the change, a number of advisers were quick to realise that companies limited by guarantee could offer a similar pathway to the limited partnership approach – in other words:

1. Potentially receive trust distributions, with the tax payable on those distributions capped at the corporate rate of 30%.

2. The company limited by guarantee could then subsequently make loans that would not, on the face of the legislation, be caught by Division 7A.

In their first taxpayer alert for the year (taxpayer alert TA2011/1), the ATO lists its concerns with the above strategy.

The full alert is set out at the following link - http://law.ato.gov.au/atolaw/view.htm?docid=%22TPA/TA20111/NAT/ATO/00001%22.

Until next week.

An estate planning tip

2011-02-14T11:29:00.001+10:00

Following a blog posting towards the end of last year, an adviser contacted me to relay a critical issue to keep in mind whenever looking to move an asset (such as a family home) into the name of a spouse.

Broadly the chain of events was as follows:

1. An at-risk spouse moved the family home into her husband’s name paying a substantial stamp duty bill.

2. The husband subsequently died with a very simple 'I love you' will.

3. Under this will, all of the husband’s wealth passed back to the wife.

4. The wife then had to pay another round of stamp duty to move the asset into a family trust.

5. Aside from the double stamp duty bill (and the second bill was actually significantly larger than the first as duty was payable on 100% of the asset with no concessions available), the second transfer to the family trust has also meant that the house will probably be subject to capital gains tax on any subsequent disposal and the 4-year clawback period under the bankruptcy rules starts again from the date of the second transfer.

6. Both of these adverse outcomes could have been avoided if the husband had ensured testamentary discretionary trusts were established under his will.

Until next week.

Trust resettlements

2011-02-07T09:03:00.001+10:00

Following on from last week's post concerning the long awaited 'Colonial' decision, another decision released by the Federal Court in the last couple of weeks is of significant interest.

In a similar vein to the high profile tax cases last year of Bamford and Thomas, the taxpayer here was largely successful.

For those interested the full title of the case is - FCT v Clark [2011] FCAFC 5 (Full Federal Court; Dowsett, Edmonds and Gordon; 21 January 2011).

In brief terms, the key aspects of the decision (which was given by way of a 2 to 1 majority) were as follows:

1. What is required to constitute a resettlement (i.e. the disposal and reacquisition, for tax purposes, of all assets of a trust at market value) is significantly more than what the Tax Office has traditionally suggested, and indeed argued in this case;

2. The High Court decision of Commercial Nominees confirms that to avoid a resettlement occurring, there only needs to be a continuum of property and membership, that can be identified at any time, even if different from time to time;

3. The Commercial Nominees case, while it related to a superannuation fund, is relevant in relation to trusts more generally;

4. In the circumstances of this case the fact that there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years did not trigger a resettlement; and

5. Where a trust has been effectively deprived of all assets and then 're-endowed', a resettlement will probably occur.

Until next week.

'Colonial' decision released

2011-01-31T10:48:00.002+10:00

Earlier in the month the long awaited 'Colonial' decision was released by the Federal Court.

Although, unlike other tax cases last year (such as Bamford and Thomas), the taxpayer was largely unsuccessful, the Colonial decision again reinforces that the provisions of the trust deed are critical.

For those interested the full title of the case is 'Colonial First State Investments Limited v Commissioner of Taxation [2011] FCA 16' (Federal Court of Australia, Stone J, 18 January 2011).

In brief terms, the key aspects of the decision were as follows:

1. The main interest in the decision will be for the Australian funds management industry as it focussed on the tax effect of provisions in a unit trust that sought to allocate part of the taxable income to a unitholder redeeming units.

2. The tests that must be satisfied to meet the definition of a 'fixed trust' for tax purposes will be difficult for many unit trusts. Here the unit trust was held not to constitute a fixed trust, primarily due to the wide amendment power that allowed changes to be made to unitholders' entitlements. The ability to satisfy the Tax Act definition of fixed trust is important in a number of areas including -

(a) to carry forward tax losses;

(b) passing through franking credits to unit holders; and

(c) where superannuation funds are unitholders, avoiding application of the ‘non-arm’s length income’ rules (note that prior to 1 July 2007, these rules were called ‘special income’).

3. The attempt by way of variation to provide the trustee the discretion to allocate discounted and non-discounted capital gains to unitholders on redemption was ineffective.

As set out in the blog posting on 17 December 2010, it has been confirmed that there will be a full review of the way in which trusts are taxed.

The Colonial decision further highlights the need for a comprehensive review of the existing rules and Stone J mentions the need for legislative change in this regard.

A number of commentators also believe the proposed managed investment trust attribution regime (due to take effect on 1 July 2011) may address many of the concerns raised in Colonial.

Until next week.

Bamford driven review of Tax Act

2010-12-17T08:25:00.002+10:00

While I had flagged there would be no further blog postings this year, the Government has made a mid December announcement yesterday worth noting.

As you will read elsewhere, it has been confirmed that there will be a full review of the way in which trusts are taxed.

Relevant extracts of Bill Shorten's announcement are set out below.

While there is obviously a long way to go, it is reassuring that the rumoured revisiting of the entity taxation regime has been expressly ruled out.

1. There are major uncertainties after Bamford, especially about the extent to which amounts derived by trustees retain their character (for example, as capital gains or franked dividends) when they flow through to beneficiaries.

2. A public consultation process (has been announced) as the first step towards updating the trust income tax provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) and rewriting them into the 1997 Act.

3. "In developing an initial consultation paper for release in the first part of 2011, Treasury will draw heavily on the expertise of the private sector, particularly through the established Tax Design Panel process and the Board of Taxation," said the Assistant Treasurer

4. "The options to be canvassed in public consultation will be developed within the broad policy framework currently applying to the taxation of trust income".

5. Any options will seek to ensure that net taxable income of a trust is assessed primarily to beneficiaries. Trustees will continue to be assessed only to the extent that amounts of net taxable income are not otherwise assessable to beneficiaries. The options will not include the taxation of trusts as companies, which would be a major departure from the current law.

6. “Based on advice I have sought from the Board of Taxation, I will also consider further whether there are any issues that must be addressed in this current tax year".

7. "Trust tax law has been an ongoing issue for some time and it is important to simplify the system, rewrite the rules and give more certainty to the many thousands of small businesses and farmers who use trusts. I encourage all interested stakeholders to make a submission to the consultation".

Final blog for 2010

2010-12-13T08:51:00.001+10:00

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s blog will be the final formal blog until 2011.

Similarly, the Twitter postings will also take a hiatus until the New Year.

Very best wishes for Christmas and the New Year period and thank you to all of those advisers who have read and the many advisers who have taken the time to provide feedback in relation to the blog postings.

Unpaid present entitlement warning

2010-12-09T12:07:00.000+10:00

As those of you who sat through our webinar in relation to unpaid present entitlements (UPEs) yesterday 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 one provider that on a plain reading of the deed seems to automatically cause 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.

Trustee indemnity case - Appeal

2010-11-29T08:51:00.001+10:00

Even though the blog last week touched on a court case that was relatively widely reported, the importance of the streaming decision meant I felt it appropriate to profile.

This week another court decision caught my eye, even though it was simply in relation to the granting of leave to appeal a previous decision.

Many readers will have noticed the 'Bruton Holdings' case from earlier in the year. In that case, a single court judge held that a corporate trustee was not indemnified by a trust for expenses incurred in (successfully) challenging the Tax Office. The lack of indemnity was largely based on the fact that the expenses were incurred after it had ceased to be trustee of the trust.

An appeal has now been granted against the original decision on the basis that -

(a) the issues are of general importance to the powers and rights of trustees; and
(b) the state of the law regarding the powers and rights of bare trustees is not settled.

Until next week.

Streaming decision released

2010-11-22T10:08:00.002+10:00

There was confirmation last week from the Queensland Supreme Court that where a trust deed of a discretionary trust has appropriate powers and the trustee resolutions are appropriately crafted, a trustee can allocate franking credits differentially from net income.

For those interested the full title of the case is 'Thomas Nominees Pty Ltd ACN 010 049 788 v Thomas & Anor [2010] QSC 417' (Supreme Court of Qld, Applegarth J, 11 November 2010).

The decision turned to a large extent on the terms of the trust deed and the fact that the trustee:

(a) could treat franking credits as income of the trust capable of distribution;

(b) had discretion to distribute franking credits to different beneficiaries; and

In light of the above powers, in brief terms, the key aspects of the decision were as follows:

1. selective allocation of franking credits is possible under section 207-35 ITAA 1997;

2. section 97 ITAA 1936 takes a proportionate approach to the distribution of net income (as set out in the Bamford decision);

3. section 207-35 is an exception to Division 6 (and therefore section 97) ITAA 1936;

4. franking credits need not follow the shares of net income included in a beneficiary's assessable income on an equal footing;

5. net income (under section 95 ITAA 1936) does not need to exceed the franking credits included in assessable income for those credits to pass through to beneficiaries; and

6. the ATO's comments that franking credits may not be able to form part of the income of a trust estate for trust law purposes because they are 'merely a tax concept which do not represent an accretion to the trust fund over and above the distributions to which they attach' could not be accepted;

7. ultimately, franking credits were held to have some attributes of income under the tax legislation, therefore they could be dealt with by the trustee.

Until next week.

What difference does 1% make?

2010-11-15T15:20:00.001+10:00

Last week we were walking through an asset protection exercise with a business owner and one of the recommendations was that the family home (currently owned by the wife and husband as joint tenants) should be converted to tenants in common ownership and 49% of the total interest of the house owned by the husband was then to be transferred to the wife.

An earlier blog touches on the difference between owning an asset as joint tenants as opposed to tenants in common.

Today’s blog focuses on the reasons why an at-risk spouse might retain a 1% interest in a property.

The main reasons that an at-risk spouse would retain a nominal percentage interest can include:

1. Protection against spouse or relationship difficulties.

2. Protection against the majority owner seeking to encumber the property. In particular, if there is (for example) a gambling issue that arises, no mortgage may be taken out over the property without the consent of the spouse who owns the nominal interest.

3. For ease of security arrangements – often a financier will prefer to see the at-risk spouse’s name on title documentation, even if their actual ownership interest is nominal.

4. Stamp duty savings. This issue is not as relevant as in days gone by because generally there is no longer any substantial stamp duty benefit, even if both spouses retain an interest in the property.

In relation to stamp duty, it should be noted that in most states there are concessional provisions which apply where one spouse who owns 100% of a family home and transfers 50% (but no more or less) to their spouse and this is another concept that we may deal with in a future blog.

Until next week.

Virtual company registers

2010-11-08T07:38:00.001+10:00

We are seeing an increasing number of accounting firms that we assist with company establishments opt to receive all documentation electronically, as opposed to the traditional provision of a physical folder to store the company register.

The ability to maintain a company register in electronic form only is a relatively recent innovation under the Corporations Act and particularly for accountancy firms who act as registered office for a number of their clients’ companies, is certainly one worth exploring.

Obviously, there are a number of issues that always need to be taken into account, however broadly, so long as the following issues are addressed, it should be possible to avoid the need for a physical register to be stored:

1. The company must resolve that it intends to maintain an electronic, as opposed to a physical, register.

2. The relevant technology steps need to be taken - McR often assists accounting firms in this regard.

3. The company must have a process by which a physical register can be produced if ever required.

Until next week.

'Same plane' provisions in wills

2010-11-01T09:18:00.001+10:00

Most estate planning lawyers recommend that every single will contain a 'calamity' provision.

This provision is also sometimes referred to as the 'same plane' clause – i.e. it is the one that applies if the will maker and all of their intended immediate beneficiaries die in the same accident.

Last week, we had a situation where the two clients (who were spouses) each had quite particular (and different) provisions that they wanted to see apply if the two of them and their children died at once. During the discussion it became clear that each spouse was considering the total combined assets as solely 'their' assets.

Our strong recommendation was that each spouse should in fact have mirror provisions under their respective wills and simply divide 50% of the entire estate according to each of their respective wishes.

The reason for this recommendation was that the only time a calamity provision does in fact apply is when both spouses and all of the immediate family have passed away. In other words, the estate should be viewed as one combined estate; not two separate ones.

Until next week.

Complete unity in relation to tax reform for trusts

2010-10-25T08:50:00.002+10:00

Many of you will have seen the announcement last week that each of the major taxation professional bodies have called for proper reform to the taxation of trusts.

Undoubtedly, the ongoing angst caused by the ATO’s approach on UPEs has been a significant catalyst for the call, however the reality is that the piecemeal approach to taxation of trusts has been a longstanding problem.

A full copy of the press release providing more context in this regard is set out below.

Until next week.

Four of Australia's leading professional tax and accounting bodies, representing over 100,000 accountants and tax advisers, have united to call for sweeping reforms of the antiquated laws governing the taxation of trusts.

In 2009 the ATO introduced a controversial crackdown on "unpaid present entitlements" – distributions by trusts to associated private companies that were not paid, but remained intermingled with other funds of the trust.

The professional bodies believe the Tax Commissioner's technical interpretation of the taxation laws (Division 7A of the Income Tax Assessment Act 1936) that apply to unpaid present entitlements is not supportable and is at odds with the original policy intent.

While the practice statement on unpaid present entitlements released by the ATO last week embraced some of the practical recommendations put forward by the professional bodies, the fundamental incorrectness of the ATO interpretation remains. This will increase the cost of a major source of financing typically employed in the SME market.

The professional bodies have called for an urgent test case to challenge the Tax Commissioner's interpretation of the laws that apply to unpaid present entitlements, and will raise the issue again at a meeting today in Canberra of the ATO's peak external stakeholder forum, the National Tax Liaison Group.

The recommendation is for the test case to be heard by the Federal Court and funded under the ATO's test case funding program, to provide judicial guidance on whether the Commissioner's position on this important aspect of the law is correct. The Tax Commissioner has accepted the proposition that a test case is an appropriate vehicle through which to resolve this issue.

The unpaid present entitlement issue, alongside a High Court decision earlier this year on the taxation of trust income and distributions, highlights the need for major review into the taxation of trusts. The Henry tax review, along with recommendations made recently in Treasury’s "Red Book," both indicate that the government should re-write the trust laws which are more than 50 years old and are not adequate to deal with the modern use of trusts as trading and investment vehicles.

Institute of Chartered Accountants in Australia National Institute of Accountants Taxation Institute Taxpayers Australia

Company owned business succession insurance

2010-10-22T11:32:00.001+10:00

Last week, we revisited with an adviser a strategy that had been put in some years prior by a trading company.

The trading company had obtained insurance policies for death and permanent disablement over each of the core principals who also controlled the ownership of the shares in the company.

The discussion centred on the tax consequences of a receipt by the company of the insurance proceeds and practically how the transfer of shares to the surviving principals would take place.

While from a simplicity (and Division 7A) perspective, company ownership of business succession insurance can be attractive, the disadvantages do normally outweigh the benefits.

Last week’s situation was no different given that on receipt of the insurance pay out by the company, steps would still need to be taken to:

1. Have the funds transferred to the exiting shareholder or their estate.

2. Ensure that the exiting shareholder transferred their shares.

As it turns out, primarily due to the significant increase in premiums that would be incurred to rearrange the current ownership structure, the adviser here is looking at other solutions to ensure that the existing structure can work as well as possible. It was however a timely reminder that business succession arrangements do require regular review.

Until next week.

Lineal descendant trust

2010-10-11T15:45:00.001+10:00

'Lineal descendant trusts' come in many shapes and forms.

Undeniably, the popularity of the structure has been significant not only in recent years, but right back to the establishment of trusts as an asset protection and tax planning vehicle in early English law.

Whenever considering the establishment of such a trust (or reviewing a pre-existing trust), it is critical to understand how the legal firm involved in crafting the document has approached the task.

Some common themes for the structure of this kind of trust include:

1. Providing that income distributions can be fully discretionary amongst both lineal and non lineal descendants, with capital only able to be distributed to lineal descendants;

2. Both income and capital distributions being limited to lineal descendants;

3. Income and capital distributions limited to lineal descendants, unless otherwise approved by, say, the appointor.

Until next week.

When is a trust not a trust

2010-10-05T16:32:00.000+10:00

One adviser contacted me after the blog a couple of weeks ago about powers of variation and sent a trust deed for a brief initial review to our office.

For probably the 5th or 6th time in recent years, we discovered a situation where the trust itself had in fact already ended.

In other words, the vesting day for the trust had passed and, unfortunately, neither the client nor the adviser had realised that this event had taken place.

Practically the question as to whether the power to vary was wide enough, was easy to answer – it was irrelevant as there was in fact no longer a trust.

The more problematic issues however revolved around how exactly the income and capital of the trust should have been dealt with over the last 3 years since the trust had ended and what issues need to be addressed under -

1. trust law;

2. trustee liability;

3. tax legislation; and

4. stamp duty law.

Until next week.

ATO feedback on tax payer alerts

2010-09-30T09:17:00.000+10:00

Many of you will have seen the recently released minutes from the National Tax Liaison Group meeting held on 23 June.

One item of interest relates to the ATO’s view on taxpayer alerts (TA).

In particular, the ATO claims that TAs are simply intended as an 'early warning' to taxpayers and their advisers of significant new and emerging higher risk tax planning issues or arrangements the ATO has under risk assessment.

The ATO claims TAs are essentially a 'press release' about issues causing it concern which it releases 'in the interests of an open tax administration'. The ATO stressed that TAs are not expected to replace rulings, and are not meant to be an ATO view of the law.

Until next week.

When a power to vary is not a power to vary

2010-09-24T14:34:00.001+10:00

Last week, we touched on the fact that many trust deeds do not have any power to vary in them.

There are similarly many trusts that do have a power to vary, but that power to vary is not as comprehensive as may otherwise be assumed.

Two recent examples that we have seen are summarised below.

The first example (which was highlighted in quite a high profile case last year) turns on whether a power to vary extends to all aspects of the trust instrument. In particular, some powers to vary are restricted to either:

1. The formal provisions that actually establish the terms of the trust.

2. Alternatively, the power to vary might be restricted to the actual powers that the trustee has to run the trust.

Care should always therefore be taken to understand exactly how comprehensive the power to vary is.

Similarly, some powers to vary are subject to specific prohibitions. For example, a power might extend to all parts of a trust other than the rules regulating the appointor provision.

In these types of situations, it is generally impossible (unless court approval is obtained to vary the relevant clause), even if the affected party (for example the appointor) were to consent to the variation.

Ultimately (and generally in complete contrast to superannuation trust deed variations), there is always the need to very carefully review the exact basis on which any purported variation to a family trust is to be implemented before making a change.

Until next week.

Trust deed updates - Start at the start

2010-09-17T09:50:00.001+10:00

Due to the recent decision in Bamford, we have seen a significant increase in the number of advisers recommending to their clients that a complete review of, particularly family trusts, be done for each client.

As part of this review process, there is often a subsequent recommendation that the trust deed needs to be updated for all recent changes in the law, or at the least to make the deed 'Bamford compliant'.

Previous blogs and articles by McCullough Robertson have touched on some of the issues that arise in this regard. This week, I was reminded, however, about the importance of getting the basics right in relation to any deed update.

Arguably the most fundamental issue that needs to be considered in any deed update is whether there is in fact a power to vary the document.

There are an amazing number of trust deeds that, for whatever reason, in fact do not have any power to vary under them at all.

In these situations, the only way to amend the trust deed is to apply to court – which is obviously an expensive and time consuming exercise. In some situations however, it is a step that commercially must in fact be taken.

Next week, I will try to detail two further issues that arise in relation to deed updates that should also be kept in mind.

Finally, thank you for all those who have provided feedback on last week's post about the ATO ruling on insurance trusts. I have emailed all those who have emailed me about the posting, however if there is anyone who would like further comments please let me know.

Until next week.

ATO ruling on insurance trusts

2010-09-08T09:29:00.004+10:00

Last week the ATO released a Product Ruling (PR2010/18) in relation to the capital gains tax consequences for the beneficiary of an insurance trust deed.

In many respects the ruling reflects what most specialists in this area (including McCullough Robertson) have been saying for many years. That is that a properly crafted insurance trust deed should provide appropriate protection for the principals of a business without any significant tax detriment, notwithstanding that there may be other commercial issues to consider regarding the structure.

Unfortunately the positive aspects of the ruling are largely undermined by the fact that the outcomes are based on the assumption that the insurance trust deed will create absolute entitlement for each beneficiary in the relevant insurance policy. As many advisers who work in this area will know, the expressed views of the ATO concerning absolute entitlement are somewhat contentious and the ATO continues to refer to a draft ruling that has never been finalised - despite being issued in 2004.

One practical issue is that the ruling released last week confirms that in order to ensure absolute entitlement the relevant beneficiary must be able to call for the asset at any time. This largely undermines one of the main reasons advisers had historically recommended insurance trusts - that is that the trustee will have the ability to ultimately control the payment of any insurance proceeds received.

A further practical issue, given the way in which many providers have traditionally structured trust arrangements is that the product ruling only relates to insurance trust deeds where the company acting as trustee is an entity owned and controlled by the principals involved in the business entity and the relevant insurer is not be a party to the arrangements.

For those interested in reading a full copy of the ruling is at the following link -

http://law.ato.gov.au/atolaw/view.htm?docid=PRR/PR201018/NAT/ATO/00001

Until next week.

The price of love

2010-08-23T12:20:00.001+10:00

Two weeks ago, we touched on a situation where the gifting of a family home was potentially exposed under the bankruptcy clawback rules.

As I mentioned, if the original transaction had been structured slightly differently, around 20% of the value of the property could have been protected.

In simple terms, instead of a straight gift of the property, the following steps could have been taken:

1. The house could have been sold by the husband to his spouse for its market value 3½ years ago.

2. The transaction should have been structured under a vendor finance arrangement.

3. Following completion of the sale transaction, the husband could have forgiven the outstanding debt for 'natural love and affection'.

4. Assuming that all steps would have been properly legally documented, then the wife would have had at least a reasonably arguable case that the capital growth in the asset since the date of the initial transfer would have been quarantined to her benefit and not available to creditors on the bankruptcy of her husband.

Until next week.

Matthew Burgess

Unpaid present entitlements (UPE) & the election

2010-08-16T08:39:00.000+10:00

Last week, the National Institute of Accountants (NIA) sought to turn the UPE issue into an election topic.

An extract from the Weekly Tax Bulletin released on Friday is set out below.

It highlights, as many have, that the changed approach by the ATO effectively renders the specific provisions under Division 7A in relation to UPEs irrelevant.

Until next week.

The NIA has called on both political parties "to show their small business credentials and intervene to put a stop" to the ATO's changed view of the treatment of unpaid entitlements to corporate beneficiaries. The NIA said that Taxation Ruling TR 2010/3 now confirms the ATO view that unpaid present entitlements (UPE) to corporate beneficiaries will be treated as loans and potentially deeming them as unfranked dividends.

NIA chief executive officer Andrew Conway said this new approach puts an end to a 12 year long standard practice of not treating unpaid entitlements to corporate beneficiaries as loans. "For the majority of cases the use of such funds by the trust is solely for business working capital related purposes. We have been reminded that the mischief which the ATO is trying to address is where these funds are used for private purposes within the trust," he said.

The NIA says there is strong evidence to indicate that it was never the intention of Div 7A to extend to UPEs and that "this latest change of heart by the ATO has no legislative basis". The ruling contradicts the underlying policy intent of Div 7A, the NIA said.

House transfers and real love

2010-08-10T10:34:00.001+10:00

Last week, I was reminded about the importance of proper planning when implementing asset protection strategies.

The particular scenario involved the potential clawback under the bankruptcy rules of a family home that had been gifted by a husband to a wife approximately 3½ years before a bankruptcy event. Many of you will be aware that changes to the bankruptcy rules extended the clawback period from 2 to 4 years a few years ago.

Whether the transfer could in fact be clawed back for this client was an issue which is as yet unresolved. The issue last week, however, was in relation to whether the value of the house as to today’s date could be clawed back or whether its value 3½ years ago was the relevant value.

The question was quite critical because notwithstanding the intervening GFC, the value of the house had gone up by more than 20% over the 3½ year period.

As the original transfer had been crafted simply as a gift for 'natural love and affection', we had to advise the client that the house itself was the asset that would be exposed and therefore the value at today’s date was at risk.

Next week, I will try to provide an example of how the original arrangement could have been structured differently to potentially limit the total value exposed under the clawback provisions.

Until next week.

Matthew Burgess

Trustee companies multitasking

2010-08-02T09:22:00.000+10:00

Last week we touched on the importance of trustee companies not accumulating assets in their own right.

The specific example that inspired last week’s blog related to a recent client situation where the trustee company had been used to receive distributions out of the trust that it acted as trustee for.

Often advisers assume that it is not in fact possible at law for a trustee company to also act as the corporate beneficiary. While this is often a good assumption, it is not necessarily the case.

The question of whether a trustee company can in fact be a beneficiary of the trust it acts as trustee for depends on the terms of the trust deed.

Even where a trustee company is listed under the trust deed as a potential beneficiary of the trust that it acts as trustee for, we normally strongly recommend against it being used as a corporate beneficiary.

This is because the trustee is liable for any difficulties that arise against the trust.

It is therefore preferable a completely 'cleanskin' company acts as the corporate beneficiary in order to ensure that the accumulated profits of the trust are quarantined from any litigation against the trustee from time to time.

Until next week.

Matthew Burgess

Trustee companies and specialisation

2010-07-26T13:28:00.002+10:00

Today’s blog relates to an asset protection issue that unfortunately is too often overlooked.

Many of you will have heard our firm (and other lawyers) referring to the 'domino theory'.

This theory is one of the very basic asset protection concepts of ensuring that there is a deliberate limit placed on the number of assets owned by any one entity. Furthermore, the assets owned by a particular entity should be of comparable risk profiles.

A similar issue arises in a slightly different context where a company acts as trustee for a trust. In this situation, while the company will be the legal owner of all assets of the trust, it will not have beneficial ownership.

In a number of instances recently, we have seen situations where the trustee company does in fact own assets in its own right, even if this is simply cash, unpaid entitlements or at call loans.

In these situations, those assets are unnecessarily exposed to difficulties that might be encountered by the trust.

In order to maximise the trustee company structure, care must always be taken to ensure that its assets are no more than the initial capital paid up on establishment of the company (i.e. $2).

Next week, we will look at the specific scenario today’s blog was inspired by, that being a trustee company that had also been used for many years as the corporate beneficiary for the trust.

Until next week.

Matthew Burgess

Insurance funded buy-sell arrangements

2010-07-19T11:20:00.006+10:00

Over the last 2 to 3 years, there has rarely been a week gone by where we have not been fortunate to help a risk adviser implement an insurance funded buy-sell arrangement with their clients.

One issue that comes up surprisingly more regularly than it probably should occurred again last week in relation to the structure of these arrangements and the use of options.

There is an enormous amount of material on insurance funded buy-sell deeds (if you are interested, spend some time looking at our website – see the following link http://www.mccullough.com.au/services/services.aspx?p=2708).

Invariably, most advisers in this area will, for a multitude of tax and wider commercial reasons, recommend an option based contractual arrangement – these arrangements provide the most amount of flexibility possible for each party.

Where however a discretionary trust is involved in the business structure, it is generally the case under trust laws that the trust deed must expressly permit the granting of options.

The technical reasons for this position revolve around issues concerning the fettering of a trustee’s discretion – practically however the position is that unless the trust does have the power to grant options at the date the buy-sell agreement is signed, there is a risk that the agreement may not be enforceable as otherwise anticipated.

Until next week.

Matthew Burgess

Can an enduring attorney be a company?

2010-07-12T11:36:00.000+10:00

The issues in relation to attorney appointment over the last couple of weeks have generated a number of questions and comments.

One common theme has been in relation to the distinction between the appointment of an attorney and the role of an executor and/or trustee under a will.

There are a number of distinctions between these various roles, however one of the overriding practical points is that the appointment of an attorney can generally only be of an individual person.

In contrast, the appointment of an executor or trustee can be of a company or a particular role – for example, you will often see the executor of a will being crafted so that it is the 'senior partner from time to time in the firm of . . . . . .’.

Until next week.

Matthew Burgess

Should I act as an attorney for a client?

2010-06-28T09:54:00.003+10:00

A number of people contacted me following recent blogs with questions in relation to the consequences of an accountant or financial adviser (or for that matter a lawyer) acting as an attorney for a client.

Many of you will have either professional body guidelines or guidelines that your firm has agreed to implement about the basis on which (if at all) you can take on the role of an attorney.

In a practical sense, the two biggest issues you need to ensure are addressed:

1. The conflict of interest rules are very strict in this area. It is always preferable to have a very clear statement in the attorney appointment document confirming that the person appointing you as their representative waives any prohibition on you acting due to an issue of conflict.

2. Similarly, on a number of levels, it is always our strong recommendation that the professional adviser be permitted to charge their standard professional fees. This ability should be clearly set out in the appointment document.

Until next week.

Matthew Burgess

Further trust deed tips

2010-06-21T09:18:00.001+10:00

A few weeks ago (see the posting 'Trust deed tip'), I mentioned the trust where a number of variations had been implemented over the years, but those variations did not comply with the rules set out under the trust instrument.

The short term fix (in order to satisfy financier requirements) was to implement a deed of confirmation of the historical changes.

To try and minimise future difficulties, we are also implementing the following:

1. With the settlor’s consent (given that he is still alive and has capacity to do so), we are removing the requirement for him to consent to any future changes. This step has some potential tax and stamp duty consequences, however on balance, the client’s accountant has agreed with us that it is the most logical next step.

2. We are also clarifying the requirements around the consent of primary beneficiaries. For this particular situation, all primary beneficiaries are currently over the age of 18 and alive, however the client did not want a situation in the future where there were infant beneficiaries (or beneficiaries that were no longer alive) given third parties might seek to challenge whether a future purported variation was in fact effective without the consent of those people.

Until next week.

Matthew Burgess

Corporate trustee duty (part 2)

2010-06-15T08:45:00.003+10:00

Again special thanks to Duncan Bedford for improvements he suggested, today's blog is a repost of an earlier posting.

Last week, I mentioned the unique way in which the Queensland stamp duty rules can operate in relation to the transfer of shares in companies that act as trustees for discretionary trusts.

As touched on last week, the provisions are such that the transfer of shares in these companies can be charged with standard stamp duty rates based on the underlying market value (ignoring any debt) of the dutiable assets in the discretionary trust located in Queensland or Western Australia.

In Queensland there is however the ability to legitimately avoid this stamp duty cost, if the transaction comes within an exemption set out under the stamp duty rules.

Broadly these rules provide that so long as the transfer of shares is between individual members of a family group, and the trust is established primarily for the benefit of members of that family, then there will be no duty payable.

As the ability to access the stamp duty relief is subject to the discretion of the Stamps Office, there is the ability to get an indication on whether stamp duty relief is likely to be available and with the client that I mentioned last week, we have submitted a ruling application on their behalf.

If an unfavourable ruling is received, we will need to explore other, less commercially appropriate, alternatives to achieve the client’s overall objectives.

Until next week.

Matthew Burgess

Stamp duty and corporate trustees

2010-06-07T08:23:00.001+10:00

With special thanks to Duncan Bedford for improvements he suggested, today's blog is a repost of an earlier posting. Duncan is one of the leading specialists in this area, having worked with Damien Clarke here at McCullough Robertson for a number of years.

Stamp duty is a constant source of angst for many advisers we work with, not least of which because the rules are frustratingly different in each state.

Recently I caught up with an accountant who was implementing a transfer of shares in a company registered in Victoria.

Victoria was one of the first states to abolish stamp duty on the transfer of shares in companies registered in that state, so for a few years, many organisations who established companies (McCullough Robertson included) were often asked to establish companies under the Victorian legislation.

The company was the trustee of a trust without any dutiable assets and therefore had no real value and the share transfer could proceed without any real issue.

In the same client group, there was another trust – the trustee of this trust however was a company registered in Queensland and the trust also had Queensland dutiable assets.

The Queensland and Western Australian stamp duty rules are the only ones in Australia that have a separate duty provision that can be triggered on the transfer of shares in a company (no matter where it is registered) which acts as trustee for a discretionary trust.

The way in which the rules work in Queensland means that the shares in the trustee company (although for tax purposes worth only a nominal amount) can be notionally attributed a value equal to the underlying market value of the dutiable assets of the trust (ignoring any debt).

If applicable, stamp duty is paid on the notionally uplifted value of the shares based on the standard stamp duty sliding scale (i.e. currently up to 5.25%).

Practically then, for this client, they faced a situation where there were two share transfers that looked to be virtually identical, but one had a zero stamp duty cost and the other had a cost of approximately $300,000.

Unless something more relevant comes up during the week, next week I will explain the way in which we were able to eliminate the $300,000 stamp duty bill.

Until next week.

Matthew Burgess

Trust deed tip

2010-06-03T15:58:00.000+10:00

Again this last week, we have had some more issues arise in relation to family trusts.

As is often the case, the issue from this week was identified by a financier.

The issue arose due to a review of some historical variation deeds to the original trust documents.

Due to a relatively unusual provision, the original trust required that any variation could only be made with the consent of the settlor (i.e. the person who originally set up the trust) and all of the 'primary' beneficiaries who were set out in the schedule to the trust.

None of the earlier variations had received consent from any of the relevant parties.

The solution (which is still to be approved by the bank) was to implement a comprehensive deed of confirmation and obtain signatures from all relevant people – fortunately, the settlor was still alive and willing to assist.

Next week, I will touch on some other practical difficulties that we are going to need to consider and possibly address in the future.

Until next week.

Matthew Burgess

Testamentary trusts - is it ever too late?

2010-05-19T10:29:00.004+10:00

As you may recall from previous blog posts, there are significant advantages of utilising a testamentary discretionary trust (TDT) as part of an estate planning strategy.

We often receive queries from clients asking whether it is possible to establish a TDT to receive estate assets after a person's death.

While establishing a TDT in a person's will is by far the simplest approach, it is possible for an estate proceeds trust (or post-death TDT) to be established following a person's death to receive the estate assets.

Any property received from the estate may be transferred to an estate proceeds trust within three years for the date of death, provided the trust is structured to satisfy the requirements in the tax legislation. The focus article on the McR website (click here) explains the requirements in further detail.

Practically, the area where we see the biggest demand for estate proceeds trusts is in relation to receiving insurance proceeds from life insurance policies.

Matthew Burgess

Trust distributions 101 - Read the deed!

2010-05-10T15:43:00.001+10:00

Last week, an accountant and I caught up in relation to his review of trust distributions in previous years for a new client to his firm.

The main issue related to income that had been passed to a company over a number of years.

While the trust deed allowed distributions to companies, it had a relatively unusual provision that required all of the shares in that company to be owned by the 'primary beneficiaries' set out in the schedule.

Unfortunately the company that had been used had a share structure that did not comply with the provisions of the deed and we were trying to explore if there were some potential solutions available.

Each idea we have come up with to date has not been particularly satisfactory, so this week’s practical tip is simply to remember to ensure that whenever working with trust someone is made responsible to 'read the deed’.

Until next week.

Matthew Burgess

Deeds of variation and stamp duty

2010-05-04T15:30:00.003+10:00

As I flagged in my last blog posting, we had a very difficult day recently – all triggered by a simple typo in the schedule to a trust deed.

One aspect that proved unnecessarily difficult due to the particular approach of the relevant bank officer was in relation to stamping.

Most Australian states (and particularly Queensland where this transaction was taking place) do not require administrative type changes to trusts to be charged with stamp duty.

In fact, in Queensland, recent changes have been made by the Stamps Office to actively discourage people from lodging these types of documents for assessment, given that the assessment is going to be returned as no duty payable.

Essentially then the only types of trust variations that need to be lodged for assessment in Queensland are ones that historically have been loosely described as 'resettlements'.

Practically, there is in fact no definition of a resettlement under the stamp duty rules and instead there is a series of other, relatively technical, provisions that need to be considered. For those interested in the general way in which these rules operate, please let me know and I can direct you to the relevant parts of the Stamps Office website.

Until next week.

Matthew Burgess

Typos and big legal bills

2010-04-23T12:04:00.001+10:00

Given Monday is a public holiday, the Blog for next week is posted below.

Yesterday ended up being a very long day and unnecessarily expensive (both in terms of time consumed and bank, accounting and legal charges).

The day was also a particularly frustrating one due to the relatively underwhelming cause of all the hassle – a typo in an on-line created trust deed.

While the typo was not ours, it served as an extremely timely reminder of how critical it is to get even the simple things right.

For those that attended our Master Class on trusts a few years ago (our Master Class series is run once a year and is a half day program built entirely around a practical case study), you may remember one of the examples (based on a real life situation) where the vesting (or ending) date of a trust was accidentally noted as 18 years instead of the more standard 80 years.

Yesterday, the error (which had been generated by a client’s former accountant using an online trust provider) was simply the spelling of the name Stephen with a 'v' instead of the 'ph' in the schedule.

While the trust had borrowed money from the bank before, no one had ever picked up on this typo.

Yesterday was the settlement day for a relatively large transaction and mid morning a Sydney bank officer identified the typo and insisted that the bank security could not be perfected because of it until the error was remedied.

After much (often quite illogical) negotiation, the bank finally agreed to a deed of variation being implemented.

As is often the way in these situations however, the deed (which ran to less than two sentences of actual substantive terms) was redrafted three times to satisfy the precise requirements of the bank.
Furthermore, even having produced the deed, there was the threat of the bank refusing to settle unless it was stamped prior to settlement.

The irony here of course is that the particular form of document is not liable to stamp duty in Queensland and due to recent changes at the Stamps Office trying to discourage people to lodge these documents for duty assessment (I might touch on this in more detail next week), it was going to be impossible to achieve a same day stamping.

Finally, based on a written undertaking provided by us, the bank did agree to settle.

Until next week.

Matthew Burgess

Bamford - What exactly does it mean?

2010-04-19T13:34:00.001+10:00

As many of you will be aware, we have updated our Intensive program over the last few weeks to include some initial comments on Bamford.

The Intensives have fully booked out and we are therefore also putting on some Wednesday Night Forums shortly which will focus exclusively on Bamford and the unpaid present entitlement ruling from the end of last year.

One very practical issue that has been raised regularly over the last few weeks has been in relation to trust deeds. In this week’s blog, I thought I would list out the answers to some of the most frequently asked questions in this regard.

1. Are McCullough Robertson deeds 'Bamford compliant' – essentially any deed from the last 10 years from McCullough Robertson will be Bamford compliant. Some of the earlier deeds may need to be reviewed.

2. Are trust deeds from other providers Bamford compliant – this is an issue that will need to be assessed on a case by case basis. Certainly the older the deed, the less likely it is to be compliant. There are also a number of non tax specialist deed providers who have not traditionally focused on some of the critical issues raised in Bamford.

3. Should we be looking to do wholesale updates of all trust deeds in our client base (similar to the recent super deed updates completed) – subject to the exact approach the ATO adopts in the decision impact statement that is due to be released shortly, we believe there is likely to be some benefit in at least conducting a full review of all deeds.

4. Are there standard distribution minutes available – as many of you will be aware, we have always been conservative in our approach to distribution minutes and strongly recommend that every trustee should independently consider both the trust deed and the exact nature of distributions on a year on year basis (in other words, not use a 'standard' minute).

Certainly given the confirmation of the proportionate approach, the crafting of minutes so that (for example) infant beneficiaries get a set dollar amount and then the balance goes in certain percentages will rarely (if ever) be appropriate.

We are already working with a number of accounting practices to develop an approach that suits the risk profiles of their clients.

All of the above issues will be dealt with in more detail in our upcoming Wednesday Night Forum series.

In the monthly update for May, we will also provide a more detailed analysis of the practical implications concerning McCullough Robertson trust deeds in light of the Bamford decision.

Until next week.

Matthew Burgess

Trust cloning is dead (or is it?)

2010-04-12T11:11:00.000+10:00

On Friday, a lawyer in sole practice and I caught up in relation to reviewing a purported trust clone.

As many of you will know, we have been fortunate (particularly in recent years) to do an ever increasing amount of work with suburban and regional lawyers who effectively use us as their external resource in areas where they do not have the time, energy or skills to otherwise assist.

Here the initial query was for the lawyer directly and in particular whether he had prepared documents for a client that satisfied the relevant trust law rules about how a trust cloning must take place. As it turned out, everything was fine on this point and similarly from a tax perspective, the transaction had been validly implemented prior to the tax rule changes on October 31, 2008.

What had not been resolved however was the way in which the transfer of assets between the two trusts was accounted for. In particular, the lawyer had crafted the documentation so that the consideration paid was the amount notified to the parties by the accountant.

As no notification had yet been made, we caught up with the accountant and quickly determined that there could be four possible alternatives, namely:

1. Nil.
2. $1 (or some other nominal amount greater than nil).
3. The historical cost base.
4. The market value.

Each of these four alternatives had quite dramatically different consequences both from an accounting and tax perspective and Friday's meeting was a timely reminder of the need for a truly collaborative approach between the various professional specialists on behalf of the underlying client.

Until next week.

Matthew Burgess

Pre CGT assets owned by family trusts

2010-04-01T10:30:00.002+10:00

Given the Easter break for many next week, and our promise to post a blog posting each week - the posting that would have been next Monday is being posted today.

Over the last eighteen months, we have had an increasing number of clients needing to consider various aspects of the capital gains tax (CGT) rules as they relate to assets acquired pre CGT (i.e. before September 1985).

Someone like Bernard Salt (Salt is a renowned demographic consultant out of KPMG in Melbourne – see his website at http://www.bernardsalt.com.au/) would undoubtedly be able to explain that the reason for this has something to do with the baby boomer generation – i.e. people who were in the early to mid part of their wealth creation in the 1980s are now looking at retirement and succession issues.

Two of the potentially trickier aspects of the CGT regime, relate to the deeming provisions under Division 149 (formerly section 160ZZS) and CGT event K6 (formerly section 160ZZT).

As an accountant reminded me last week, there is an old ATO ruling (let me know if you want a copy of it) that confirms Division 149 can in fact apply to discretionary trusts – i.e. the underlying CGT status of trust assets can be impacted on by the way in which distributions have been made out of the trust over the term that the asset was owned.

Best wishes for Easter.

Matthew Burgess

When is a share not a share?

2010-03-29T09:28:00.001+10:00

Special classes of shares have, at least in recent years, always been a hallmark of company structures.

One of the most common descriptions of shares that provide no other rights than simply a dividend at the complete discretion of the directors from time to time is a 'dividend access' or 'dividend only' share.

Last week, we helped an accountant whose client was the subject of a wider ATO audit. For the third time I am personally aware of in the last twelve months, one of the core issues the ATO was pursuing related to the application of the debt equity rules to a purported dividend access share.

For anyone that has spent time considering the debt equity rules, they will know how complex they are (indeed the position paper from the ATO on this point ran to around 15 A4 pages).

The bottom line in a practical sense is if you have clients wanting to implement a dividend access share arrangement and they are not willing to have you provide formal advice about the application (or otherwise) of the debt equity rules, you should get as a minimum confirmation from them that they understand the consequences of a share being treated as debt instead of equity.

More conservatively, you should probably refuse to implement the structure at all, although obviously commercially, this raises a number of difficulties.

For the client last week, if the ATO is successful in arguing that the dividend access share was in fact a debt instrument for tax purposes, it will mean that the 7-digit dividend that had been declared will be completely unfrankable.

Until next week.

Matthew Burgess

How many directors does it take to have a company ?

2010-03-22T09:15:00.001+10:00

Last week, I further explored the issues that came out of a relatively common situation of a loan or unpaid present entitlement owed to a company, where that company was a trading entity.

As mentioned last week, one asset protection strategy that often makes sense on a number of levels is ensuring that the only directors of a trading company are those people who, commercially, absolutely must be a director.

Often, we find situations where, for example, a husband and wife are both directors of a company when only one spouse in fact needs to be.

As directors carry personal liability, this is unnecessarily risky.

While this issue can normally be very easily solved by simply resigning the relevant director and giving notification to the company and the ASIC - care must be taken.

In particular, all companies, until the late 1990s, had to have at least two directors (and, other than in very limited circumstances, all public companies must still have three directors).

Therefore, even though the Corporations Law has been updated for about 13 or 14 years now, there are many company constitutions (or as they were formally known ‘memorandum and articles’) that still require two directors.

If a director resigns in breach of the company constitution, there can be a series of Corporation Law issues that need to be taken into account. These issues can all be avoided by simply ensuring the company’s constitution is updated before the resignation takes place.

Until next week.

Matthew Burgess

In times of peace - prepare for war

2010-03-15T15:29:00.002+10:00

Two weeks ago, I explained the importance of reviewing all loan accounts and unpaid present entitlements in the context of asset protection issues.

The particular comments can be found here.

As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:

1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.

Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.

The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.

As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.

Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.

As usual, until next week.

Matthew Burgess

Can a company own shares in itself ?

2010-03-08T08:12:00.001+10:00

A couple of days ago, a financial adviser and I were looking at helping a client to implement an insurance funded buy-sell arrangement.

Particularly since the downturn over 2008 and 2009, there seems to have been an increasing focus on insurance protection in the context of business succession (quite aside from any keyperson insurance) and we are regularly seeing bank funding approvals being made conditional on the insurance at least covering the bank’s lending exposure.

As part of the audit process that we were jointly performing on the client's circumstances, the financial adviser identified that one of the shareholders in the trading company was the trading company itself.

This was not a simple case of the trading company having done some sort of share buyback arrangement – the company was listed under the ASIC records as a one third shareholder in itself.

Although it is an area that is not often considered, the Corporations Act expressly prohibits companies owning shares in themselves and there are a series of practical consequences (as well as potentially significant penalties) that can flow.

It looks as though there will be a solution for this client, however as with most breaches of the law, prevention would have been infinitely more palatable than the cure.

And no - a company can not own shares in itself.

Until next week.

Matthew Burgess

UPEs and an Asset Protection Trap

2010-03-01T09:20:00.004+10:00

This last week I had a timely reminder that while those tax driven issues are critical, they are in fact not as important as the underlying loan or UPE itself.

In particular, I was helping an accountant who had a client whose trading company had been served with litigation proceedings. My role was to help review all structures in the group from an asset protection perspective, although as the litigation lawyer here politely reminded us (I do not get involved in any actual court work if I can avoid it), it was probably not the most opportune time to be doing the asset protection audit - hence Friday's Twitter posting 'in times of peace - prepare for war' www.twitter.com/mwb_mcr

In any event, while the overall structure of the group was fairly sensible, there was one, very large asset on the trading company’s balance sheet. That asset was a UPE (or if the ATO chooses to ignore industry feedback and finalises its draft ruling – a loan) owed to the trading company by a passive investment trust.

Despite bankruptcy clawback rules, there may be a solution for this client that we are currently exploring. The situation they have to address, now urgently, is of course less than ideal and was a timely reminder that all clients should be encouraged to undertake an asset protection 'audit' regularly.

For those interested, the particular solution potentially available to the client here was somewhat unique and fairly complex and I have added it to the list of ideas for presentation topics at a future Intensive or a Master Class by our firm.

Next week (or if another more relevant topic arises, within the next few weeks), I will relay one other difficulty with this client’s structure that is likely to not be able to be addressed – but could have been with some forward planning.

Matthew Burgess

What exactly does 'jointly' mean?

2010-02-22T08:01:00.012+10:00

On three separate occasions last week, the issue of 'jointly' owned assets arose.

A concise summary of the difference between owning something as joint tenants and tenants in common can be found in many places, perhaps most easily at Wikipedia (see – http://en.wikipedia.org/wiki/Concurrent_estate).

Practically, the distinction normally becomes most relevant at times when it is too late to implement a change – for example on death, litigation or relationship breakdowns.

As a general rule (although there are always exceptions), for most business owners, professionals or people in long term relationships, jointly owned assets should be owned as ‘tenants in common’ to provide the greatest amount of flexibility. This conclusion is not always the case and in fact often the preferred position is that one party has no ownership of the relevant asset – in other words, as part of the review process, it is transferred to another person or structure.

Ultimately, as I was reminded last week, there are two things you should keep in mind, namely:

1. Remember the distinction between the two joint ownership structures.

2. Make sure that in relation to each asset for any particular client, you know which ownership structure applies.

Until next week.

Matthew Burgess

MCR's Adviser Services Daily Twitter Launched

2010-02-17T15:19:00.002+10:00

Having recently committed to a blog (at least weekly), today also marks the launch of a Twitter posting.

The approach in relation to Twitter is designed to be another, complimentary, web based service by one of the lead partners in the adviser services team at McCullough Robertson Lawyers.

Whereas the blog will be focused on providing weekly practical tips, the Twitter (in all likelihood on a daily basis) will provide 'snapshots' on success.

For many years, the overriding objective of the adviser services team at McCullough Robertson has been to help accountants and all financial and risk advisers help their clients become more successful.

As with many things in life, our passionate pursuit of this objective has seen us allowed to assist many passionate business people and in turn learn and be inspired to study success.

The goal of the Twitter which can be found at the following link http://twitter.com/MWB_McR is therefore simply to share on a daily basis any observation about success.

Matthew Burgess

MCR's Adviser Services Blogspot Launched

2010-02-16T09:39:00.001+10:00

Having provided blog like knowledge sharing for some time, I am excited to confirm the formal launch of a dedicated blog on behalf of the adviser services team at McCullough Robertson.

At least weekly, this blog will provide practical tips for accountants and advisers in areas such as tax, estate and succession planning, business structuring, asset protection, superannuation and all related areas.

The blog is one component of the ever expanding web based support that the team of lawyers specialising in adviser services support at McCullough Robertson now provide – to learn more visit our web page which is continually updated with information and tools at http://www.mccullough.com.au/services/services.aspx?p=1587

The goal of this blog, as well as all other aspects of our adviser services support, is to help accountants and financial advisers to help their clients become more successful.

As with all aspects of our web based support service, and our work more generally, we gratefully receive any feedback, particularly in areas where we can improve.

Matthew Burgess