A detailed presentation on trust structuring (including asset protection strategies and updating trust deeds), Division 7A and Unpaid Present Entitlements, and effective estate planning strategies used to protect wealth.
2. Overview
The right structure
Asset protection
Read the deed!
Updating trust deeds
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3. The old world – discretionary trusts
Flexibility
Retained profits
CGT discount
Division 7A
One family
Partnerships of
discretionary trusts
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4. The old world – companies
30% tax rate
No CGT discount
More than one family
Top up tax dividends
Larger business
Shares held by
discretionary trusts
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5. What has changed
Bamford etc
Division 7A
TR2010/3 and PSLA 2010/4
The ‘interim’ legislation
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6. Problem areas
Problem area no. 1 - streaming
need an attribution clause
otherwise – proportionate approach
ATO attitude – Bamford DIS
is the ATO right?
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7. Problem areas
Problem area no. 2 – the interim rules
July 2013 at the earliest – 3 years
the process/steps
unrealistic timeframes for distribution
resolutions and minutes
timing generally
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8. The six steps for trust distributions
Step 1 – application of Division 6 without
modification
check definition of income for what is included
capital gains
franking credits
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9. The six steps for trust distributions
Step 2 – calculate adjusted Division 6 percentage
exclude amounts to which beneficiaries are specifically
entitled
relevant for ‘unstreamed’ amounts
proportionate approach
blending of income, dividends and capital gains
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10. The six steps for trust distributions
Step 3 – apply Subdivision 115-C
is discount amount included in income?
capital gains
capital distribution if not (and if possible)
quantum approach
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11. The six steps for trust distributions
Step 4 – apply Subdivision 207-B
dividends
Step 5 – Division 6E recalculation
Step 6 – overall calculation
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12. Problems with the interim rules
Streaming power – read the deed
Specific entitlement
capital gains
dividends
associated expenses
‘recorded in is character’
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13. Problems with the interim rules
Chains of trusts
Allocation of expenses
resolution timing
deed provisions
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14. Are capital gains income?
Depends on the definition of income
Section 95 – yes – Discount capital gain
is part of assessable income
Income on ordinary concepts – no: need
capital distribution power
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15. Are capital gains income?
No definition – no
Trustee can determine – trustee decides
Discount amount
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16. Timing of resolutions
What does the deed say?
30 June and 31 August resolutions
Withdrawal of IT 328
Resolutions v minutes
What to do
Default or accumulation?
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17. What you cannot stream
Negatively geared shares
Capital gains – market value substitution
rule
Deemed capital gains
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18. What you cannot stream
50% discount depending on the income
definition
Where net financial benefit flows
elsewhere
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19. Getting it wrong
Franking credits are not income
Mixture of normal income, franked dividends and
capital gains
Capital gains end up in companies
Default beneficiaries
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20. Conclusions
Read the deed
Income definition in particular
does this include CGT discount
separate capital distribution (is there power in the deed)
Section 95
Trust law income
Different from tax law income
Preference – trustee has ability to determine
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21. Some possible solutions for structuring
Horses for courses
Separate trusts for shares/dividends
Beware of family trust elections
Beware negatively geared shares
Pooling of dividends
‘Recycle’ bucket company dividends to overcome
negative gearing
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22. Some possible solutions
Business Licence
Corporate beneficiary owns business
assets
Business held by a company and shares
held by a trust
Separate trust for capital assets, to deal
with capital gains
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23. Some possible solutions
Still be wary to distribute the discount
amount
Read the deed
Trust ordinary income with corporate
beneficiary
Using a company for investments
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24. New structures versus restructures
Easier for new structures
Revenue costs of restructure
Stamp duty, properties not shares
Capital gains tax
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25. Key issues
We have started doing some things differently
Asset protection from relationship breakdowns
Estate planning
Other recent cases
Audit process
Deed updates
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26. Div 7A & UPEs
Matthew Burgess – Partner
March 2012
27. Summary
UPE refresher
ATO view – TR 2010/3 and PS LA 2010/4
Solutions - the subtrust approach
The impact of not adopting the subtrust
approach
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28. Summary
Alternatives to the PS LA options
Restructuring business entities to prevent UPEs
arising in the future
WHAT should have HAPPENED BY 30 JUNE 2011
Questions
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29. Section 2 loans
Unpaid present entitlement can be a Div 7A loan if:
explicit agreement between the company and
trustee
implied agreement by crediting a loan account
with authorisation by the company (express or
acquiescence with knowledge)
note assumed family knowledge
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30. Section 2 loans
the terms of the trust as set out in the Deed
permit the trustee unilaterally to apply the UPE
by way of a loan to the trust
Investigate further if
UPE described as a loan in accounts
UPEs added to or set off against other loan
accounts
Take action by 31 December 2011
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31. Section 3 loans
ATO view - Unpaid present entitlement can be a
Div 7A loan if......
provision of ‘financial accommodation’
company acquiesces (i.e. by company not calling
for UPE funds)
with knowledge of the use of the funds for trust
purposes
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32. ‘Knowledge’
Where trust and corporate beneficiary part of
same family group
in absence of sufficient evidence to the contrary
ATO view is company has requisite knowledge of
the use of the UPE for trust purposes
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33. UPE Solutions - manage
Broadly, two ways to prevent Division 7A
First - ensure funds are held on sub-trust for the
sole benefit of the private company
PS LA 2010/4 sanctioned arrangements
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–
–
–
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option 1 – a 7 year ‘interest’ only ‘loan’
option 2 – a 10 year ‘interest’ only ‘loan’
option 3 – specific investment in main trust
‘Return on investment’ arrangement (option 4)
34. UPE Solutions - restructure
Second - ensure no UPE arises
Asset licenses
Rollover of assets
Pay UPE and acquire depreciating assets in
company
Other planning strategies
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35. Why we care now
Unlike a number of other controversial ATO views
the ATO has not withdrawn from its position
many will have received an ATO letter identifying
the clients that have company’s that have
received trust distributions
Fundamentally action in respect of the 30 June
2010 distributions by trusts to companies needed
to occur by 30 June 2011
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36. Sub trust overview
General guidelines - ATO accepts sub trust if
sub-trust invests in main trust on commercial
terms
all benefits flow to sub-trust and company
all benefits actually paid by lodgement day of ITR
of main trust for year of benefit
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37. Sub trust options
Apply above or adopt specific options from PS
LA 2010/4
option 1 – a 7 year ‘interest’ only ‘loan’
option 2 – a 10 year ‘interest’ only ‘loan’
option 3 – an investment by the main trust in an
income producing asset
option 4 - ?
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38. Option 1
Better than a Div 7A loan – interest only
Option 1 – UPE funds repaid within 7 years
interest at Div 7A benchmark interest rate
(7.40%) or
Payable by ITR due date
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39. Option 2
UPE funds repaid within 10 years RBA small
business variable overdraft rate for prior May
(10.65%)
ATO: terms of investment must be documented
and need to be legally binding
could be as part of ITR working papers
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40. Options 1 and 2 - risks
how is ‘legally binding’ possible?
documentation issues ‘investment agreement’
if merely allocation of main trust income (as
draft allowed) – not legally binding
if actual loan - parties are main trust and subtrust?
can this loan in itself cause Div 7A issues? –
interposed entity rules
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41. Options 1 and 2 - risks
potentially best solution for 2011 year
implement ‘investment agreement’
‘investment agreement’ needs to be drafted
correctly to preserve the position and satisfy the
ATO requirements
arguably still a UPE if documented correctly
cash flow ‘interest’ due by lodgment date for 2012 ITR
although ‘interest’ must accrue from 1 July 2011
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42. Options 1 and 2 - outcome
‘interest’ is ultimately assessable to company
beneficiary of the subtrust
if applied to income producing assets then ATO
position that ‘interest’ is deductible to main trust
that retains use of the funds
given that the ‘interest’ is potentially funded out
of the trust income it can give rise to a neutral
outcome
no separate tax return
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43. Option 3
Specific investment by trust in income producing
(or capital appreciating) asset
Separate accounts and ITR (not required for
options 1 and 2)
Arm’s length return
Payments must be made to company each year
by ITR due date
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44. Option 4
Not specifically recognised in final practice
statement
UPE in favour of company, placed on sub-trust
Sub-trust invests funds back into main trust
Main trust pays ‘rate of return to sub-trust’
Contemplated in draft PS LA 3362
Contemplated in TR 2010/3 at example 8 (an
‘investment on terms’ as opposed to legally binding
loan)
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45. Option 4 - outcomes
Possible to argue not a ‘loan’ but an ‘investment
agreement’
Repayments linked to performance of trust
business/investment
Lower or nil if losses in trust
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46. Rollover business into company
Restructure using trust-to-company rollover (122-A)
Sell business into company and operate in company at 30% tax rate
Could use small business concessions, if possible, rather than 122-A to
uplift cost base
Potential stamp duty issues
Assets
Trust
100% shares
Company
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47. Asset licence – depreciating assets
Commence or transfer business to operate in the company, retain capital
assets in trust (can also use 122-A rollover)
Business assets licence (‘goodwill licence’)
Stamp duty issues if transferring assets
Trust
Licence to use
assets
Company
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48. Asset licence – business operated
by Trust
Continue to carry on business in Trust
Pay the UPE to the Company
The company uses the funds to buy depreciating assets for the business
and license back to the Trust
Trust
Licence to use
assets
Company
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49. Business licence
Trust ‘licences’ business assets and operations to
a company
under written licence agreement
supply all assets, rights, customers lists etc
Licence fee arm’s length e.g. % of company turnover
Licence agreement terminates with say 1 month’s notice
and all assets revert to trust
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50. Business licence (cont)
If licence agreement structured correctly then
no CGT etc
limited stamp duty costs
company taxed at 30% on operating profit less licence
fee
future CGT issues for business sale should remain with
trust
NOT a goodwill licence (Murry)
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51. Special purpose company
Instead of option 3 – establish SPC
Trust distributes AND pays the entitlement to the
company which acquires the depreciating assets
lease or licence for a fee to operating trust
appropriate fee for depreciation deduction claim
Division 7A payment rules
109CA extended ‘payment’ definition
109CA(5) – ‘otherwise deductible’ rule
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52. Special purpose company
Division 43 improvements – funded / acquired by
SPC on trust’s land
Division 7A payment rules
otherwise deductible for use
issue if land owned by trust is sold – payment that is
not otherwise deductible
agreement for market value compensation
Capital appreciating assets
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53. UPE – complying loan
Strictly it is a UPE that is a ‘financial
accommodation loan’
BUT needs to satisfy 109N requirements
Risk - cannot do so without in substance
becoming a loan at law
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54. End option 1 or 2 ‘loan’
ATO position PSLA 2010/4 – para 74 & 86
needs to be repaid
Alternative rely on para 120 & 121
end of loan period becomes a section 3 loan
turn into a complying loan
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55. Accounting issues – Option 1 & 2
ATO guidance no separate accounting or tax
returns
‘Interest’ return journalised – then paid
Separate line item/s in accounts?
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56. Timing – 2010 UPE
30 June
2010
UPE arises
from 2010
trust
distribution
30 June
2011
2011
ITR due
date
30 June
2012
2012
ITR due
date
Record
2012
accrued
interest
PS LA
subtrust
options
if no
subtrust
loan
arises
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109N loan
agreement
P&I
repayment
Pay 2012
accrued
interest
57. Timing – 2011 UPE
30 June
2011
UPE arises
from 2011
trust
distribution
2011
ITR due
date
PS LA
subtrust
options
30 June
2012
2012
ITR due
date
Record
accrued
interest
(2012
part year)
30 June
2013
Pay 2012
accrued
interest
Record
2013
accrued
interest
109N loan
agreement
P&I
repayment
if no
subtrust
loan
arises
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58. Other strategies ?
Secured loans (including converting 7 year loans)
Capitalisation and on lending
Rollover of investment agreements
Dividend recycling
Absolutely entitled trusts
Limited and corporate partnerships
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60. Estate planning overview
Different strategies
More than a will !
Protecting wealth
creditors (bankruptcy)
matrimonial breakdown (divorce)
family provision application (challenge against estate)
‘spendthrift’ beneficiaries
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63. Option 1 - ramifications
Bankruptcy
Simplicity
Divorce
Cost
Estate challenge
Spendthrift
Tax on income
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64. Option 2 - testamentary trust
Trusts established pursuant to a will
Takes effect upon death of the willmaker
Concessional tax treatment:
distributions to minors from inter vivos trust
$416 tax free
balance taxed at up to 66%
distributions to minors from testamentary trust
$16,000 tax free (applying LITO)
balance taxed at marginal rates
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66. Option 2 - ramifications
Estate challenge
Bankruptcy
Divorce*
Spendthrift
Tax on income
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67. Bankruptcy provisions
May 2004 draft legislation – very significant
Withdrawn July 2004 – but did not go away
Bankruptcy requires
debt
failure to meet that debt
creditor seeks to appoint trustee in bankruptcy
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68. Clawbacks
Bankruptcy Act voidable transactions
undervalue transactions – 4 to 5 years
transactions to defeat creditors – no time limit
preference payments – 6 months
Corporations Act voidable transactions
uncommercial transactions – 2 years
involving related entities – 4 years
for the purpose of defeating creditors – 10 years
Start the clock running
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69. Richstar
Corporations Act v Bankruptcy Act
At least a contingent interest
Trustee the alter ego of the beneficiary or
otherwise subject to effective control – as good
as certain they will benefit
Something akin to proprietary interest
Combination of beneficiary, trustee, appointor
and control
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70. Richstar - effect
Freezing order only
Single judge decision
French J
Subsequent cases
Public Trustee v Smith
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71. Matrimonial breakdown
Asset or resource?
Kennon v Spry
Harris v Harris
Inter vivos trust v testamentary trust
Gift and loan back
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72. Spry – reheated
Kennon v Spry – 2008 High Court decision
Court ordered payment of discretionary trust
funds to satisfy an order under a property
settlement
Dr Spry appealed
Facts
Dr Spry not a beneficiary
Dr Spry was trustee
transferred trust property to other trusts –
transactions set aside
irrational behaviour
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73. Spry - the decision
The trust property was the property of the parties to
the marriage
The order of the family court to ‘do all things’
included making a trust distribution
Only extension of law is the definition of ‘property’
Family Law Act supports argument that ‘property’
includes assets that a party to the marriage may be
ultimately entitled to
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74. Spry – Practical implications
Other decisions after Spry
Less is more
The ‘Part IVA’ of family law world
50% x 5% x 5%
Another checkpoint for
‘Richstar compliant’ checklist
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75. Keech
Trust established by father of husband
Acquisition of home lived in by husband and wife
Specific evidence that father intended to protect
assets to the 'bloodline’
No evidence of a ‘fraud' Trust
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76. Harris
Assets at most a resource
History of wider family involvement
Pattern of distribution still relevant
Must have clear evidence if puppet argument to
succeed
Wrongful distributions (read the deed)
Contribution issues still a relevant factor, even if
a resource
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77. Option 3 – lifetime disposal
Appointor/trustee
Shane, or
after Shane’s
death, Liz
Shane
transfer
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Family
Trust
83. Atia v Nusbaum
Gift and loan back strategy
parties mum & son
if legal documents done – binding
fallout
query family trust use, not mum
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84. Amending trust deeds
Resettlement issues
income and capital entitlements
default beneficiaries
vesting date
Creation of a new trust
Statement of principles
Stamp duty and CGT
Clark decision
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85. Trust deed reviews
Rule 1 – read the deed
Checklists and training
Risk management – get all aspects right
Actively implement 1 of 3 models
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86. Clark
Commercial Nominees confirmed
Significant variations available at law
Always read the deed
Stamp duty (other states & trustee duty)
Private rulings
Splitting & cloning
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87. Super strategies
Special purpose trust
Embed into will or do post death
ATO attitude
'Quick death' tax
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