Peter Townsend

Peter Townsend from Townsend Lawyers briefly explains how family provision waivers work. Often the waiver seeks to stop an ex-spouse trying to access more assets or actions. This is an excerpt from an estate planning presentation to financial advisers.

The provision is most often used when divorced couples reach a property settlement in the Family Court and want to ensure that their ex-spouse does not come back for more by making a family provision claim. However it can be used in other contexts as well.

Section 95 of the Succession Act requires that the Supreme Court approve of any release by a person of the person’s rights to apply for a family provision order.

So a person can release their entitlement to make a family provision claim provided the court approves.

Generally the Court will provide approval based on the affidavits of the parties provided the judge in chambers accepts the fundamental fairness of the deal. If in doubt they will ask for the matter to be heard in open court and or for more evidence of the arrangement and the parties’ circumstances to be provided before making a decision.

It would be open to a couple to seek such approval for their mutual wills agreement thereby preventing either of them from making a family provision claim after the death of the first in order to circumvent the agreement.

It would also be open for the surviving spouse to have their second spouse make an application for the approval for the limited amount going to the second spouse. In that case, the court would want to be very sure that the second spouse was not being unfairly treated and knew exactly what they were doing.

By Peter Townsend, Principal

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Peter Townsend

Peter Townsend from Townsend Lawyers briefly explains providing a life interest or life estate to the surviving spouse. It is an increasingly common strategy given growth in blended families. This is an excerpt from an estate planning presentation to financial advisers.

The post Giving only a Life Interest appeared first on AdviserVoice.

Peter Townsend

Trusts are most commonly established by a deed. Those deeds contain the terms or rules that control how the trust can be used, and the rights and duties the various parties to the trust have or owe. In our experience, trust deeds are regularly misplaced and lost.

A lost deed poses numerous problems, two of which are particularly worth noting:

First: trustee has responsibility to know terms of trust deed (equitable duty)

The trustee of a trust is under an equitable duty to know the terms of the trust that they manage. This may not sound like an issue for the pragmatic investor who simply uses their trust as an investment mechanism or for concessional tax outcomes. But Courts have shown little reluctance in concluding that a trustee does not know the specific terms of the trust when the deed has been lost.

A fairly recent example can be seen in the case of Jowill Nominees Pty Ltd v Cooper [2021] SASC 76. The Court held that it is very difficult for a trustee to discharge their duty to know and manage the trust when they don’t have a copy of the governing rules of the trust.

Second: can a trustee prove the original trust deed ever existed?

If the original deed is lost, then it may be difficult to prove that the trust exists at all. This was the case in Mantovani v Vanta Pty Ltd (No 2) [2021] VSC 771. In that case, the trust deed had been lost and there was not enough secondary evidence to show that the trust was in existence. By secondary evidence, we mean documents and dealings that clearly showed the identities of the beneficiaries, the property of the trust, and the nature of the trust (i.e. fixed, discretionary, SMSF, etc).

The Court held that the trust failed due to uncertainty, which means that without the trust deed the terms of the trust, and the parties to the trust, were unknown. This was arguably the better outcome for the trustee; had the court found that there was a trust then, pursuant Jowill above, the trustee might have been found to have breached their duty to the trust by not knowing the terms of the trust.

In Vanta, the Court then confirmed that a failed trust automatically gives rise to a resulting trust. A resulting trust means that the trustee holds the property on trust for the settlor. This means that the property of the trust ‘revests’ (effectively returns) to the person who contributed that property (i.e. an equitable interest returns to the settlor), rather than the beneficiaries.

This probably wouldn’t be a problem if the settlor still wanted to establish a trust with that property for the beneficiaries; but if the settlor had passed away, for example, then that property would go into their estate and be dealt with by the executor. There is material risk that the executor would not consider the trust beneficiary’s interest as relevant. And that’s not to mention the catastrophic tax consequences that could flow as a result of such a revesting.

Safety in scanning and holding trust deed in a digital vault

The importance of safely keeping the original establishment deed of a trust cannot be overstated, and yet deeds are lost with surprising regularity. Losing the deed can have deleterious consequences for both the trustee and the beneficiaries.

All deeds should be scanned as those electronic copies may be invaluable if the original is misplaced. Our sister company, SuperCentral, offers advice and services relating to lost deeds and an independent digital vault for scanned copies.

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Michael Hallinan

In this case a binding death benefit nomination was held to be invalid because it had not been given to the trustee, that is, not given to all the trustees of the fund.  The court found that only one trustee had been given the nomination.  (Case reference Williams v Williams [2023] QSC 90.)

The facts are relatively straightforward.  Anthony Williams and his wife Margaret Williams established the Boosey Doherty Superannuation Fund as a self-managed superannuation fund and they were the initial trustees and only members of the fund.  Margaret died in December 2014 and their elder son Paul was appointed as a trustee.  It seems Paul was never a member of the fund.

In 2019 Anthony married his second wife, Gayle Williams.  His second wife was never admitted as a member of the Fund and was not appointed as a trustee of the Fund.

In December 2021, Anthony died being survived by Gayle and his two sons, Paul and Mark from his first marriage with Margaret.  Mark was the executor of Anthony’s estate and in that capacity was appointed as the second director in March 2022.

Anthony made two binding death benefit nominations, the first in February 2018 and the second in March 2018.  It seems both nominations were materially identical in that Anthony provided that 50% of his death benefit was to be paid to Gayle and 50% to his Estate.  The reason for making two materially identical nominations was not discussed in the judges’ reasons.  The March 2018 had a provision, the effect of which was to revoke all prior nominations.

Gayle sought a declaration from the Court that the March 2018 nomination was valid and an order for the removal of the current trustees (Paul and Mark) and the appointment of an independent professional trustee.  The current trustees argued that the March 2018 nomination was invalid as it failed to comply with the requirements of the trust deed and they also opposed the order for their removal.

This situation raised a number of issues:

• Why was the first nomination invalid?
• Why was the second nomination invalid?
• Did the fund satisfy the definition of a self-managed superannuation fund?
• If not, what are the consequences?
• Should either or both of the sons be removed as trustees?

Invalidity of the first nomination

This is not discussed in the reasons.  Most likely, the first nomination suffered from the same procedural defect as the second nomination.  However, the second nomination did expressly revoke the first nomination.  This raises the question, if the second nomination is invalid, can it still operate to revoke the first nomination?  Possibly the answer to this question is that the written instrument which constitutes the nomination has two aspects – the nomination and the revocation.  The fact that the nomination is invalid does not mean that the revocation is also invalid assuming the revocation satisfies the specified requirements of the trust deed.

A contrary argument is that revocation is conditional upon the second nomination being valid.  The contrary argument may be more pervasive if the instrument explicitly stated that the revocation was conditional upon the second nomination being valid.

On balance it seems that as a prior nomination can be revoked without making a replacement nomination, in the absence of the revocation being conditional upon the second nomination being valid, the revocation can be effective while the second nomination is invalid.

Invalidity of the second nomination

The second nomination was held to be invalid as the second nomination was not given to the “trustees”, that is Anthony and Paul.  The trust deed for the fund expressly provided that a nomination is binding on the trustees if, amongst other things, the nomination must be in writing and be given to “the Trustees” and “the Trustees” must by written resolution, accept the terms of the nomination.

The second nomination was not given to Paul.  Further, as the nomination was not given to Paul, the nomination could not be accepted by the Trustees and that acceptance could not be evidenced by a written resolution.  Consequently, the Court held that the second nomination was not binding on the Trustees.

The second nomination did contain a “trustee confirmation” provision in which Anthony recited that, in his capacity as trustee, he confirms acceptance of the nomination.  This “confirmation” was held to be insufficient and did not operate as a substitute for the trust deed provisions dealing with the acceptance of nominations.

Arguments for the validity of the second nomination

Lawyers for Gayle gallantly, valiantly and lawyerly argued for the validity of the second nomination.  The argument was to the effect that the deed contained a general interpretation clause (as almost all deeds do) which was to the effect that the singular includes the plural and vice versa.  Using this general interpretation clause, the lawyers argued that the term “Trustees” could be read as referring to only one trustee.  If so read, the argument went, the requirement of acceptance had been satisfied as Anthony, as trustee, by the trustee confirmation provision, accepted his own nomination.  Presumably, the trustee confirmation also satisfied the requirement of written acceptance.

General interpretation provisions are usually preferred by the qualifying words “unless the context otherwise requires”.  The lawyers for Paul and Mark argued that the trust deed provisions dealing with binding nominations provided the relevant context and the context otherwise provided.  The Court agreed.  For a nomination to bind the trustees under the terms of the trust deed, all trustees must be given the nomination.  This substantive requirement cannot be avoided or side stepped by the application of a general interpretation clause.

In the end both nominations were held to be invalid.

Did the fund satisfy the definition of “self-managed superannuation fund”?

A superannuation fund which has elected to be regulated under the Superannuation Industry (Supervision) Act 1993 (SIS Act) will be a self-managed superannuation fund if the membership/trustee structure of the fund satisfies the elements of the definition.

There is no requirement that the elements must be embedded into the terms of the trust deed.

Additionally, including a provision that a superannuation fund must be a self-managed superannuation fund or that the trustee or trustees must ensure that the fund is a self-managed superannuation fund does not cause the fund to be a self-managed superannuation fund.

The definition of a self-managed superannuation fund as it applies to superannuation funds with individual trustees has two limbs – one for single member funds and the other for multi-member funds.

In the case of a single member fund, either the fund has two individual trustees one of whom is the member or the fund has a one corporate trustee where the member can be the sole director or one of two directors.

In the case of multi-member funds, each member must be a trustee or director of the corporate trustee and each trustee or director of the corporate trustee must be a member.

These are the general rules, there are exceptions and qualifications dealing with members who are minors, members who have appointed a legal personal representative (under a power of attorney) and executors of the estate of deceased member being appointed pending the allocation and payment of the death benefit of the deceased member.

When the Boosey Doherty Superannuation Fund was established, there were only two members and each member was a trustee and there was no trustee who was not a member.

On the death of Margaret, the fund had only one surviving member, Anthony and one trustee, again Anthony.  Did the fund cease to exist at this time due to the identity of trustee and beneficiary?  The better view is no as there was an interest in the fund (being the death benefit of Margaret) so there was no complete identity of interest between the trustee and the member.  Further, the fact that the fund is a regulated superannuation fund would probably constitute a statutory override of the legal rule about identity of interests.

The fund will remain a self-managed superannuation fund for 6 months after the death of Margaret, as the SIS Act deems the fund to have satisfied the definition of self-managed superannuation fund, for a grace period of 6 months.  After the expiration of this 6-month grace period (assuming the trustee structure of the fund has not changed) then the fund will no longer qualify as a self-managed superannuation fund.  The 6-month grace period does not apply if the reason (or one of the reasons) that the fund ceased to satisfy the definition of self-managed superannuation fund is there is a breach of the 7-member rule or if an individual is admitted as a member without that individual (or their LPR or parent or guardian in the case of a child) being a trustee or director.

While the fund is now not a self-managed superannuation fund, the fund is still a regulated superannuation fund (the election to be regulated is irrevocable) and the fund does not become a non-complying fund merely because it has ceased to satisfy the definition of self-managed superannuation fund.  However, the fund is now a registrable superannuation fund.  This change will have significant issues for the trustees – they must be licensed by both APRA and ASIC; they must register the fund with APRA and the exemption from issuing superannuation interests without a PDS no longer applies and they must have a Target Market Determination – amongst other matters.  However, the main consequence is that the trustees (as they are unlicensed by APRA) will be committing an office.

It should be noted that if Anthony was the executor of the estate of Margaret, then in the period from Margaret’s death until her death benefit has been used to commence a pension or paid as a lump sum, the fund will continue to be a self-managed superannuation fund as the fund will, for this period, satisfy a permitted exception to the main definition.  This exception to the general rules is the “Legal Personal Representative” (LPR) exception.  Once the death benefit is allocated, then the 6-month grace period would apply.

On the appointment of Paul as the second trustee the Fund would once again satisfy the definition of self-managed superannuation fund.  In this situation, the fund has one member (Anthony Williams) and two individual trustees where the second trustee is not a member – which is a permitted variation of the structure rules.  There is no tax issue arising from the fund again satisfying the definition of self-managed superannuation fund.

On Anthony’s death on 28 December 2021, Paul became the sole surviving trustee.  Paul, it seems was not the executor of Anthony’s estate, consequently the LPR exception did not apply. From this time the fund again failed to satisfy the definition of self-managed superannuation fund.  However, the 6-month grace period commenced on 28 December 2021.  Mark who was the executor of Anthony’s estate was appointed as trustee on 25 March 2022, within the grace period.  Consequently, from the time of Mark’s appointment the Fund satisfied the definition of self-managed superannuation fund.

The important point is that a regulated superannuation fund which ceases to be self-managed superannuation fund does not become a non-complying superannuation fund simply because the fund ceased to be a self-managed superannuation fund.

Order for the removal of Paul and Mark as trustees

The Court has the power to remove trustees from a trust, whether a superannuation fund or family trust – or any other trust, if the continuation of the trustee is detrimental to the welfare of the trust (and the beneficiaries of the trust).

The Court resolved that both Paul and Mark be removed as trustees and that they be replaced by independent trustees.

This decision was reached, it seems, because of the past actions of Paul which had shown an unfitness for the office of trustee; for the irregularities in the appointment of Mark and as both Paul and Mark are potential beneficiaries of the death benefit of Anthony they are in a conflicted position.

Paul only provided relevant information about the fund and death benefit to Gayle because of a Court Order to provide that information (and even then, reluctantly).  He had also formed the view that Anthony had acted dishonestly and that his benefit was for this reason forfeited to the fund.  He also required Gayle to provide a satisfactory explanation of Anthony’s alleged dishonest conduct.  This behaviour indicated to the Court that Paul was likely to not discharge the duties of a trustee in the appropriate manner.

In relation to Mark, the Court focused on the irregularities in his appointment as a trustee.  While he was named as executor of Anthony’s estate, probate had not been obtained in relation to the Will.  The trust deed required, as a precondition for the appointment of the executor for the deceased member as a trustee, that probate had been granted to the Will.  In the case of Mark, while he was named as the Executor, probate of the Will had not been granted.  Consequently, a necessary precondition for his appointment as trustee had not been satisfied and this appointment was defective.

Also, the instrument by which Mark was appointed as a trustee was a deed dated March 2022 (3 months after Anthony’s death) which had three parties – Anthony, Paul and Mark.  The deed purports to remove Anthony as trustee (on his death, he ceased to be trustee, so Anthony already had ceased to be trustee in December 2021).

Finally, the trust deed provided that a trustee could be appointed by a 2/3^rds majority resolution of the members.  The March 2022 deed purported to satisfy this requirement by a “resolution” of Anthony and Paul.  Unfortunately, on Anthony’s death, his membership terminated and Paul was never admitted as a member.  Consequently, the basis of the appointment of Mark as trustee did not satisfy the requirements of the trust deed.

In relation to the conflicts issue, clearly Paul and Mark were in a position where their duties as trustees conflicted with their interests as potential beneficiaries.  This conflict is almost statutorily embedded in self-managed superannuation funds, given the statutory definition.  Most trust deeds for self-managed superannuation funds deal with this inherent conflict by containing a provision which overrides the general law rule and allows trustees (or directors of corporate trustees) to act notwithstanding the conflict.

NOTE:  This article was prepared as at May 2023.  The article has not been updated in light of subsequent developments.

By Michael Hallinan, Executive Consultant – Self Managed Superannuation

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Peter Townsend

The rules relating to what a self-managed superannuation fund can and cannot invest in are complex and for the uninitiated appear confusing and alien. But there is a basic logic to them.

The purpose of superannuation is to provide money for the member to live on in retirement, thereby taking pressure off the Government age pension. Because the Commonwealth Government provides substantial tax concessions to super funds in an effort to attract people to invest in their super, it sets very strict rules to ensure that the funds and the members are doing everything necessary to achieve the goal of maximising retirement benefits, and not jeopardising that goal by using the super money prematurely or in a manner that could result in the super being lost.

Government regulation prohibits using your super to invest in your other businesses or investment schemes, your family’s business structures or other investments where what you are doing is supporting the investment because of the relationship rather than adopting the independent and objective investment assessment that you would do if the investment were totally at arm’s length.

An investment that is too closely connected to the member of the fund is called an ‘in-house asset’. Assets controlled by people, companies or trusts that are ‘associates’ of the member are in-house assets. The definition of ‘associate’ in the legislation is eye-wateringly complex and designed to throw the net as wide as possible to avoid the ability to side-step the rules. A super fund cannot invest more than 5% of its total value in ‘in-house assets’.

Having said that, there are ways that you can use your super to support your other investments. Which brings us to Ted and Alice.

Ted and Alice have an SMSF. Their close friends, Roger and Diane, have a family trust. The two families are considering a property development where the super fund and the family trust provide the capital to buy the land and carry out the building work. The advice from their accountant is to use a unit trust as the vehicle for the development.

Will that unit trust be an in-house asset? Yes, if the unit trust is a so-called “related trust.” The unit trust will be a related trust if the super fund controls the unit trust. The concept of ‘control’ is very strictly and broadly defined as well.

So if the super fund holds more than half of the units or has more than half the votes at unitholder meetings it will be said to control the unit trust.

Alternatively, if Roger is Ted’s business partner, then they would be ‘associates’ and together would control the unit trust, again making the unit trust an in-house asset. The super fund could not then invest more than 5% of its worth in the unit trust.

The Government will allow an investment into what might otherwise be an in-house asset but prescribes the eligibility criteria in such a way as to try to ensure that the investment is as ‘safe’ as possible. The rules are set out in Superannuation Regulation 13.22C and so naturally the trust is called a 1322C trust.

A super fund can invest in a 13.22C trust like any other investment by the fund but qualifying as a 13.22C trust can be difficult for the parties involved and if at any time the unit trust fails to meet any of the qualifying criteria, it can never again be a 13.22C trust.

A 13.22C trust cannot operate a business, borrow money, mortgage its property, hold an interest in another entity, lease property to a related party (business real property excepted), loan money or acquire an asset from a related party and all of its dealings with other parties must be at arm’s length.

A super fund wanting to partner with others in another legal entity to develop real estate or engage in some other investment must consider carefully whether that entity is an in-house asset and if so whether an alternate structure, including potentially a 13.22C trust, is necessary for the fund to remain compliant with the law and avoid the allegation of back-door benefits.

By Peter Townsend, Managing Director

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Michael Hallinan

Is it possible to make a last minute withdrawal before you die and the payment, if made after you have died, still be treated as being tax free?  Well Yes – according to a recent private binding ruling from the Commissioner (PBR 1051988780639). But first some imaginary background to set the scene …

Tarquin has three independent adult children.  His wife of many years, Flavia, having died some time ago.   Tarquin has is receiving a pension from this self-managed superannuation fund and is currently drawing down $60,000 per year.  His pension balance is about $1,500,000.  When he first commenced the pension, the tax-free percentage of each pension payment was set at 10% with the taxable balance being 90%.  Having 90% of his $60,000 annual pension payment is not an issue for Tarquin as he is over 60 years of age and each pension payment is tax free in his hands – even the taxable portion.

Tarquin has been actively involved in the management of his SMSF for many years.  He is a director of the corporate trustee (and has already applied for this Director Identification Number).  His co-director is his brother, Gaius Julius.  Tarquin has in place a Binding Death Benefit Nomination^[1] providing that on his death that his benefit is to be divided equally between his three children.

Tarquin is aware that super benefit has a taxable portion of 90% and so, consequently, on his death the pension will be commuted, the pension balance will revert to accumulation phase and then be paid as a lump sum to these three children.  If the pension balance was $1,500,000 then on his death each child would receive $500,000 which would consist of $50,000 tax free component and $450,000 taxable component.  On this basis each child may have to pay tax of up to $67,500 on their share: that is 15% of $450,000 being the taxable component.  In total up to $202,500 may be paid in tax.

Could Tarquin somehow have an arrangement already in place which will operate to withdraw his entire super balance shortly before his death and be payable to him?  If so, then the $1,500,000 balance could be paid to him and he would pay no tax at all on the $1,500,000 (as the taxable portion – still 90% of the payment – is not taxable in his hands).

Probably Yes and would it be effective – again probably Yes.

Tarquin would have to prepare and sign (but not date) a full cashing request in respect of his pension and the payment as a lump sum of the pension account balance to him.  When the time was appropriate Tarquin could date (or have his duly authorised agent date) and serve the full cashing request on the trustee.  Tarquin together with his brother, Gaius Julius, the directors of the corporate trustee, would then acknowledge receipt of the full cashing out request, note that Tarquin had a unilateral right to cash out his super which right has been exercised and authorise administrative processing of the full cashing out request.  Importantly, once the full cashing out request has been received by the Trustee, there is no further condition which must be satisfied to make the full cashing out request valid.  Once Tarquin has exercised his cashing out right, the relationship between Tarquin and this SMSF has changed.  Before the relationship was beneficiary-trustee and now the relationship is creditor-debtor.

Once the creditor-debtor relationship has been established, the payment of the benefit to Tarquin will be a superannuation member benefit rather than a superannuation death benefit^[2].  This will be the case even if Tarquin dies after the full cashing out request has been received by the Trustee and before the benefit has been paid.

In this event, the Trustee would transfer $1,500,000 to Tarquin’s bank account without any deduction on account of tax.  The $1,500,000 in the bank account would form part of Tarquin’s estate and then be allocated as specified in his Will.  As his Will specifies the estate to be paid equally to this three children, they will each receive $500,000.  This $500,000 is tax free in their hands.

The critical issue is whether Tarquin has an unconditional right to fully cash out his pension and whether he effectively exercised that right before he died.  Having served the cashing out request on the Trustee before he died clearly shows the exercise of this right.  Upon service of the full cashing request, Tarquin has the legal right to the immediate payment of his pension balance.  The fact that that Trustee only discharges that legal right after Tarquin’s death is irrelevant.  The fact that the Trustee is aware of Tarquin’s death is also irrelevant.  The fact that fund assets may have to be redeemed (whether before or after Tarquin’s death) to permit the bank transfer is also irrelevant.

Again the critical issue is whether Tarquin had an unconditional right to fully cash out his pension and whether he effectively exercised that right before his death.  If yes to both – then the payment to Tarquin’s bank account of the $1,500,000 will be a superannuation member benefit for Tarquin, no tax is required to be deducted from that payment by the Trustee and the payment will be not taxable.

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Michael Hallinan

Significant changes to the social security means test treatment of sale proceeds of the principal home.

The amendments will also modify the application of the Income Test by treating the sale proceeds (if and to the extent the proceeds are intended to be applied in the acquisition of a replacement principal residence) as a separate pool of financial assets which will only be subject to the low threshold deeming rate.

The Government is continuing its policy to remove financial barriers which currently inhibit age pensioners (and service pensioners) from downsizing due to the application of the means tests to the sale proceeds of a pensioner’s principal place of residence.

Currently, when a pensioner, say, Eleanor, sells her principal (and only) home, and does not immediately apply the sale proceeds in the purchase or building of a replacement principal home, the sale proceeds will be counted as an asset for the purposes of the Assets Test and, assuming the sale proceeds are credited to a bank account, will be treated as a financial asset and therefore subject to the deeming test.  Consequently, the deemed income of the bank account to which the sale proceeds have been deposited, will be counted as income for the purposes of the Incomes Test.

Consequently, Eleanor, by downsizing and not immediately applying the sale proceeds in the acquisition of the replacement principal residence, may result in the consequence that she has reduced or eliminated her age (or service) pension entitlement.  In short, by downsizing (and not immediately acquiring a replacement principal residence), Eleanor has converted an asset that is protected from the Means Tests to being an asset which is now subject to the Means Test.

Eleanor’s predicament is partially moderated by the current treatment that the sale proceeds (if and to the extent the proceeds are intended to be applied in the acquisition of a replacement principal residence) will not be counted as an asset for the purposes of the Assets Test for 12 months (or, for a further period of 12 months at the discretion of the Secretary of the relevant Department).  It is proposed that this current exemption period will be extended to a 24 month period (rather than the current 12 month period).  This discretion conferred on the Secretary of the relevant Department to further extent this period by 12 months will remain.

The amendments will also modify the application of the Income Test by treating the sale proceeds (if and to the extent the proceeds are intended to be applied in the acquisition of a replacement principal residence) as a separate pool of financial assets which will only be subject to the low threshold deeming rate.

The impact of the proposed changes can be illustrated by referring to Eleanor’s situation.

Example

Eleanor owns her principal residence.  She is planning to move to more suitable and modern accommodation.  She sells her current house and the net sale proceeds are $900,000.  She intends to use $850,000 to apply in the purchase of a replacement residence.  The remaining $50,000 is intended to be used as rainy-day monies.  As Eleanor has not found a suitable replacement home, she invests the money into a bank account and rents for the time being.  During this time, she locates a suitable replacement, users the entire $850,000 in the purchase of the replacement residence and moves in exactly 2 years and 8 months after the sale.

Under the current arrangements:

On the sale of her principal residence, Eleanor has sold an asset which was not counted as an asset for the Assets Test and acquired an asset, $900,000 which is both counted as an asset for that Test and also treated as a financial investment for the purposes of the Incomes Test.

However, the sale proceeds – to the extent they are intended to be used to acquire a replacement residence are not counted as an asset for 12 months following the sale.  Consequently, $850,000 of the bank account is not counted as an asset for the Asset Test.  However, the $50,000 rainy day money is counted as an asset.  If it were not for this concession, Eleanor would have immediately had her pension terminated.

This position would change 12 months later when the bank account to the extent of $850,000 would now be counted as an asset for the Asset Means Test.  This would reduce her pension to Nil which would be the case until she applied the $850,000 in acquiring a replacement residence.

Eleanor could seek to have Centrelink extend the non-counting of the sale proceeds for another 12 months, as Centrelink has the requisite power.  However, she would have to establish a good reason and for reasons beyond her reasonable control.

In relation to the Income Test, the entire bank account deposit of $900,000 is a financial asset which is subject to deeming.  At the current deeming rates (assuming it is entirely deemed at the higher rate of 2.25%) an amount of $779 per fortnight would be counted.  If Eleanor was on a full pension before the sale had fully utilised her free income limit, her pension post sale (due to the deemed income) would be reduced by $389 per fortnight which is a material reduction.

Under the proposed arrangements:

The sale proceeds (to the extent that they are earmarked for the replacement home) would not be counted as an asset for the Asset Means Test for 2 years following the sale.  Additionally, Eleanor could still apply to Centrelink for a further 12 month extension of this treatment of the asset (assuming there were good reasons to justify the extensions).

In relation to the Income Test, the portion of the financial asset earmarked for acquiring a replacement home (say $850,000 of the $900,000 of the sale proceeds) will constitute a separate pool of financial investments to which the deeming provisions will apply.  This separate pool will be deemed at the “below threshold rate” of 0.25% on the entire value of pool (namely $850,000).  The balance of the home proceeds ($50,000) will be included in the general pool of financial investments and the normal deeming rates will apply of 0.25% on the first $56,400 and 2.25% on the balance.

Under the proposed deeming arrangements, Eleanor will have $82 of deemed income per fortnight from the separate deeming pool for the sale proceeds and $43 of deemed income per fortnight (assuming the entire balance of the home proceeds at the higher deeming rate).   This would reduce her age pension by $62.50 per fortnight.

Without this treatment of a separate investment pool to which the 0.25% deeming rate applied, Eleanor’s age pension would have been reduced by $865 per fortnight.

Assessment of the proposed change

The example clearly shows the proposed beneficial treatment provided to the sale proceeds arising from the sale of principal home where there is a delay in acquiring a replacement home.

If the amending legislation is enacted before 31 December 2022, then the change is intended to apply from 1 January 2023.  If the amending legislation is enacted after 31 December 2022, then the change will apply one month after enactment.

The proposed change is set out in Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Bill, 2022

The post Incentivising pensioners to downsize appeared first on AdviserVoice.

Peter Townsend

Amendments made last month to the NSW Duties Act could cause material headaches to super funds holding real estate in NSW.

The only remedy for those headaches is good compliance documentation.

If you’re interested, the legislation was called the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW).

Under the Act, ‘ad valorem’ duty (i.e. duty based on the full value – like what you pay on your property purchase) will be levied on the making of a statement that has the effect of acknowledging that property vested, or to be vested, in the person making the statement, is held, or is to be held, in trust for a person mentioned in the statement.

Don’t yawn, keep reading if SMSF property held in NSW

I can hear you yawning but you need to stay with me if your SMSF owns property in NSW.

The now-commercialised and hellishly expensive land titles registration service in NSW responsible for administering the land titles register has the same policy as its public predecessor in refusing to register a trust on the land titles register.

If your SMSF owns real estate the title only shows the name of the trustee of the SMSF not the fund itself.  What happens if it becomes necessary to prove to a third party (bank, ATO, family court, creditor etc) that the trustee is in fact holding the property on trust for the fund?

Previously when asked to assist with this issue we’ve suggested an Acknowledgement of Trust – a document which created no new legal or equitable rights but simply acknowledged an existing trust. This now seems to be dutiable in NSW, with the person making the statement liable to pay duty on the dutiable value of the property.

This legislative change follows decisions like Chief Commissioner of State Revenue v Benidorm Pty Ltd [2020] where the Court of Appeal unanimously held that a document which does not effect a transaction, but merely acknowledges an existing legal position, is not liable to duty under the Act.

Potential minefield

It is not yet clear how these provisions will affect various legal documents in practice, however given the various acknowledgements of existing trusts in many legal documents it has the potential to be a minefield.

So how do you now prove that the registered proprietor of the land is holding that land on trust for the SMSF?

Have the necessary compliance documents:

• resolutions of the fund trustee
• resolutions of the fund members
• bank statements showing that all the purchase money came from the fund.

And, of course, keep all the records of the transaction like contracts, correspondence, legal files, duty payments etc.

Oh, by the way, the same applies to your Family Trust.

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Michael Hallinan

In possibly the most significant trust tax case since Bamford (2010), the High Court has held that the attempt to undo, by means of an “after the event” disclaimer, the tax consequences of a default distribution clause of a discretionary trust was ineffective for taxation purposes.

In short, the default distribution clause was engaged and operated (as intended) to ensure that the net income of the discretionary trust for the 2014 financial year was allocated to five named default beneficiaries.  The fact that the default beneficiaries attempted to disclaim the default distributions by signing disclaimers after the end of the 2014 financial year was irrelevant.

Six significant implications of Carter’s Case

The decision in Commissioner of Taxation v Carter [2022] HCA 10 has six significant implications:

1. The first is that default allocation clauses are legally effective.  The clause, once triggered, allocated the share of tax income of the trust to the five default beneficiaries in respect of the 2014 financial year and their tax liabilities were then crystallised.
2. The second is that a disclaimer (even if valid at general law) is not effective to undo the crystallised tax liabilities.  To use the colourful language of the decision, the disclaimers were “not effective to “retrospectively expunge” the rights of the Commissioner (of Taxation) against the respondents (i.e. the default beneficiaries) which were in existence at midnight on 30 June 2014”.
3. The third is that Division 6 of the Tax Act (1936) applies as designed: if the default beneficiary is presently entitled (for example by operation of the default distribution clause) to, or to a share of, the distributable income of the trust estate, that beneficiary will have included in their assessable income (automatically by force of s97) the net income (or share of the net income) of that trust estate.  This will be the case whether or not the beneficiary actually receives a trust distribution and whether or not the trustee even has the means to pay the distribution.
4. The fourth is that “present entitlement” of a beneficiary to the distributable income of the trust must be tested and examined at the close of the financial year, not some reasonable period of time after the end of the financial year.  This was the error of the Full Federal Court.
5. The fifth is that “after an event” disclaimers may be effective as between the default beneficiary and the trustee but, unfortunately, so far as the Commissioner of Taxation is concerned, the taxation train has already left the station heading with double green light for Assessmentville.
6. The sixth is that if a default beneficiary does enter into a legally effective disclaimer after the close of the financial year, the default beneficiary could find themselves in the doubly worst position of still being assessed on the net income (or share of the net income) and having foregone their rights to enforce the trustee to pay the distribution owed to them.

What’s the story?

Carter’s case concerned The Whitby Trust established in 2005.  The Whitby Trust was, it seems, a vanilla discretionary trust with the trustee conferred with the power to allocate the “distributable income” of the trust in respect of the Accounting Period (defined to be each year ended 30 June) to or amongst a class of beneficiaries with power to accumulate (i.e. not distribute but retain the income in the trust) if the trustee so decided.  If no decision was made by the trustee before the end of the financial year, the distributable income was automatically allocated to 5 named default beneficiaries in equal shares; the default beneficiaries being the children of the creator of The Whitby Trust.

For reasons which are not presently relevant, the trustee did not make a decision (whether to allocate or retain) in respect of the financial year ended 30 June 2014.  Consequently the default distribution clause automatically applied and the distributable income of the trust was allocated in equal shares to the 5 children.  As the distributable income of the trust was allocated to them, it followed automatically by the terms of s97 that 1/5^th of the net income of The Whitby Trust was included in their tax returns for the 2014 financial year.

For reasons which are not presently relevant, 4 of the children did not want to have their share of the net income included in their tax return.  Consequently they executed instruments to “disclaim” i.e. reject or not accept their share of the distributable income.  Again for reasons not presently relevant, the first and second disclaimers signed by them were held to be legally ineffective.  But third time lucky. Or so they thought, until the Commissioner of Taxation having lost before the Full Federal Court, appealed to the High Court on the single issue, of whether the third disclaimer (made 30 months after 30 June 2014) was effective to override s97(1) of the Tax Act 1936.

The Full Federal Court held that there was nothing in the in s97(1) of the Tax Act 1936 to indicate that a beneficiary’s liability was to be determined once and for all at the end of the financial year by reference to the legal relationships then in existence.  Accordingly, if a disclaimer made by a beneficiary was legally effective and made within a reasonable period after the end of the financial year, the disclaimer would be effective and override s97(1).

The High Court unanimously held that s97(1) did apply on a “once and for” basis to determine the liability of a beneficiary at the end of the financial year by reference to the then legal relationships in existence.  Accordingly, anything done by the beneficiary (or trustee or both) after the end of the financial year could not undo, override or disapply the effect of s97(1).  Whether the (third) disclaimer was legally effective as between the trustee and the default beneficiary was irrelevant.

What should advisers do?

First – review the default distribution clauses of their client’s discretionary trusts to assess whether the default distribution clauses are appropriate.  In particular, whether the nominated default beneficiaries wish to be replaced or removed.  One of the surprising things about discretionary trusts, is that there is no prior consent required before an individual or entity can be named as a beneficiary – whether a discretionary beneficiary or a default beneficiary.

Second – ensure that their client’s appreciate the consequences of failing to make an effective decision to allocate (or accumulate) the distributable income of the trust before the end of the financial year. Generally clients rely on their accountant to make the arrangements to record the distributions before June 30 each year.  Accountants need to ensure that those arrangements are made to avoid a claim against them by the client when the distribution is not made and the default beneficiary takes the income instead.

Third – ensure that their clients appreciate that if a default distribution clause is engaged, the default beneficiaries will have enforceable rights against the trustee to honour the default distribution.  In particular, unpaid present entitlements do not form part of the trust corpus, though they may be invested with the trust corpus on a common fund basis where this is permitted by the trust deed.

What happens if a default beneficiary disclaims before the end of the financial year?

Presumably, the disclaimer would be effective (assuming it is legally effective) for taxation purposes as the disclaimer does not disapply s97(1) but rather removes the person as a default beneficiary before that section can apply to the beneficiary.  Consequently any purported distribution to the disclaimed default beneficiary would be ineffective and, if the distribution was paid, the former default beneficiary would hold the distribution as a bare trustee for the trustee.

What happens if a default beneficiary disclaims after the end of the financial year?

The disclaimer would not override the operation of s97(1) and the allocated share of the net income would be included in the tax return of the default beneficiary.  If the disclaimer was legally effective, presumably the trustee’s obligation to pay the share of the distributable income would be extinguished and if already paid to the default beneficiary, the default beneficiary would hold the distributed amount on a bare trust for the trustee.

The fact that the default beneficiary has disclaimed the distribution and either not received the distribution or repaid the distribution will not affect the operation of s97(1) and the allocated amount will be included in the tax return of the default beneficiary.

The default beneficiary may seek to have the Commissioner of Taxation waive the tax debt (to the extent it relates to the disclaimed distribution).  Whether the Commissioner would accede to such a request is problematic given the Commissioner may not have a legal basis to assess the disclaimed distribution to the trustee or another default beneficiary.  If so, waiving the tax debt would amount to the provision of a windfall tax benefit to the trustee or other default beneficiary.

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Elizabeth Wang

In essence a self-managed superannuation fund is a special form of trust and satisfies general trust law as the assets of the fund are held on trust by a trustee to provide retirement or death benefits for its members, with those members being the beneficiaries.

A superannuation fund can be wound up voluntarily or intentionally and the rules relating to winding up a superannuation fund are the same for any other trust.

Reasons why a superannuation fund may be wound up voluntarily include

• circumstances where all the members of the fund have left the fund or
• where all the assets of the fund have been paid out of the fund, either to the members as benefits or by rolling the assets over to another regulated superannuation fund, or
• where there has been a breakdown of a relationship between the members (including divorce) which may affect the ability of the members to effectively undertake their trustee/member obligations,
• where the members have relocated overseas indefinitely and the fund no longer satisfies the central management and control test, or
• where through age or infirmity the members are unable to effectively manage the fund.

A superannuation fund can also be intentionally wound up when directed by the ATO in circumstances where the superannuation fund has breached significant compliance issues.

To wind up a self-managed superannuation fund, the trustee will need to:

• notify the ATO within 28 days;
• deal with all assets of the fund so that the fund has no assets left;
• arrange a final audit of the fund; and
• complete the legal reporting responsibilities including the lodging of a fund annual return and finalising any outstanding tax liabilities.

Although, winding up an SMSF is a formal process that the SMSF can voluntarily and intentionally undertake, the trustee must be careful not to allow the superannuation fund to inadvertently have no assets at any time so as to immediately vest the trust unintentionally because a trust ceases immediately and automatically where there is no asset upon which it can operate.

The consequences of accidental vesting could be catastrophic from a tax and compliance viewpoint with the full marginal rate of tax being levied against whatever assets the fund should have retained and even criminal charges for conducting an early release scheme.

It is important to note that once a trust has vested it cannot be reactivated in a similar way to reinstating a de-registered company.

Please do not hesitate to contact our office for more information on winding up a fund or if you require assistance with preparing documentation to record the trustee’s decision to wind up a fund.

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