Dominique Perry

The ATO refuses to accept a tax return from an intestate deceased estate unless it is signed by the Administrator of the estate. But what if there is no Administrator? Townsends’ Dominique Perry explains.

Jane passed away in her early eighties. Almost everything of any value that she owned she held as joint tenant with her husband who automatically inherited all her assets pursuant to the rules of survivorship. Her estate was therefore worth next to nothing. Knowing this would be so she didn’t bother making a Will.

The death of a loved one can be a stressful and emotional process. Complexities can arise when dealing with the Australian Tax Office (ATO) with deceased estates particularly when only an administrator or executor is entitled to deal with the process.

If the deceased’s estate is very small their executor under their Will may not consider it is worthwhile going to the expense and inconvenience of applying for a formal grant of probate.

Likewise, if the deceased dies intestate (i.e. without a Will like Jane did), the next of kin (generally the spouse, child or a close family member of the deceased) are able to be appointed by the Court as the administrator of the estate, but again may not consider it practical to bother doing so for a small estate.

The ATO says the administrator must 

• notify the ATO of the death and provide a death certificate and proof that the administrator has the authority to deal with the tax affairs of the deceased person
• lodge any outstanding prior year income tax returns or prior period business activity statements of the deceased person
• lodge a final (date of death) income tax return, or a non-lodgement advice, on behalf of the deceased person as necessary and,
• lodge a final BAS for the concluding tax period (which ends the day before the death) and cancel the deceased’s GST registration (if they were registered for GST).

What if there is no Will, executor or administrator of the estate?

Jane’s daughter Rachel made the decision not to incur the expense and go to the trouble of applying to be appointed as the administrator of her late mother’s estate (officially called “letters of administration” – a document issued by the Court allowing the administrator to manage and distribute the deceased’s assets) given that Jane’s estate was so small.

But wanting to do the right thing Rachel simply tried to lodge the tax return for her mother up to the date of death. The ATO refused to accept the tax return for the financial year unless it was signed by the deceased’s legal personal representative i.e. administrator.

Jane explained she wasn’t going to apply to be appointed as the administrator. The ATO requested letters of administration. What is wrong with this picture?

Rachel cannot apply for letters of administration because the NSW Court will not make a grant of letters of administration if there are no assets for administration which are held in New South Wales. Jane had no such assets. Note that Rachel is not legally obliged to make such an application.

Rachel was frustrated and lodged a formal complaint to the ATO. The ATO told her to lodge a Notification of Deceased Person and a certified Death Certificate to verify that Jane had deceased and to officially notify the ATO. She did this.

The ATO then reiterated that the tax return couldn’t be lodged except by Jane’s administrator. Rachel was going round in circles.

Rachel has decided to do nothing. If the ATO don’t want the final return for her mother that’s up to them. Rachel tried.

The Inspector-General of Taxation and Taxation Ombudsman (IGTO) understands that the ATO is working on policies rectifying these issues. The ATO’s challenges in this area of deceased estates go a lot further than just Rachel’s problems and they include:

• a lack of acknowledgement from the ATO following notification of the death of a taxpayer
• difficulties or delays obtaining a deceased estate tax file number
• inconsistent steps for executors to provide their identity to access information, which is made more challenging in instances where the taxpayer died intestate
• inconsistent advice and requirements to obtain probate or letters of administration
• inability to appoint registered tax practitioners or solicitors as authorised contacts
• difficulties or delays in accessing taxpayer information for the purposes of finalising taxpayer and deceased estate trust returns, and
• denial of access to the ATO portals.

All taxpayer advisers (tax practitioners, financial planners, trustees and estate service providers) are welcome to provide to the ATO and/or the IGTO examples and suggestions for improving the administration of the tax laws and systems for deceased persons.

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Dominique Perry

Dominique Perry from Townsends Lawyers has produced a two-part overview on whether a discretionary trust protects beneficiaries. This is the first in the series. 

One of the supposed benefits of a discretionary trust is that it protects the assets of the key beneficiary(s) of the trust from attack by their creditors because although those beneficiary(s) might control the assets they don’t actually own them (they’re owned by the trustee of the trust).

At one stage it looked like the Courts were going to overturn this principle.

Let’s look at what happened in several court cases:

Richstar case

The case of Australian Securities and Investments Commission in the Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) [2006] FCA 814 (“Richstar”), was quite concerning in relation to discretionary trust property.

The issue before the Court was whether a receiver could be appointed to property held in trust. S1323 of the Corporations Act allows the Court to appoint a receiver over the property of a relevant person.

The Court found that trusts of which the “relevant defendant is the effective controller, enjoying at least a contingent interest” constituted effective ownership of the trust property.”

This case created major concern over protecting property under discretionary trusts from creditors where a bankrupt beneficiary was in a de facto or legal control of the trust. Specifically, the combination of controlling the trust and being a beneficiary of the trust allowed the Court to appoint a receiver and freeze the assets of the trust.

The concern was somewhat alleviated by an analysis of the differences between the Bankruptcy Act and the Corporations Act. In particular the Bankruptcy Act states that property of a bankrupt at the time the person became a bankrupt pass to the trustee in bankruptcy. However, property held on trust for another is specifically excluded. Division 4A of the Act, specifically sets out provision for circumstances where a bankrupt controls a trust. It can be argued that the Act recognises that the contingent interest of the bankrupt in a discretionary trust (contingent on the trustee making a distribution from the trust in favour of the bankrupt) is not transferable to a trustee in bankruptcy.

Smith case

Since the concern of Richstar, we have seen Courts reluctant to follow the case.

In the case of Smith, the issue was whether property that was owned by a discretionary trust could be considered as being owned by a person, who was also the sole shareholder and director of the corporate trustee, to permit the assets to be gifted via that person’s Will.

The Court discussed the analysis between actual ownership and effective ownership and concluded that the will maker was not the actual (beneficial) owner of the trust assets.

In relation to Richstar it was noted the Court in that case: ‘Did not say that it followed from the defendant’s position as beneficiaries of discretionary trusts and their control of the trustees that this amounted to actual ownership as distinct from effective control’.

In Smith the Judge said: ‘I do not understand ASIC v Carey (No. 6) (i.e. Richstar) to establish that because a beneficiary of a discretionary trust controls the appointment or removal of the trustee or controls the exercise of the trustee’s power and can appoint trust property to himself or herself, that the holder of such a power is the beneficial owner of the trust property irrespective of the terms of the trust deed’. The above reasoning in Smith was applied by the same judge in a subsequent 2008 case.

Fordyce case

In the case of Fordyce, we can again see a Court’s reluctance to follow Richstar. In that case there were three trust structures and the trustee in bankruptcy applied to appoint a receiver to wind up the trusts.

The trustee in bankruptcy relied on the Richstar case stating that “the bankrupt’s right as a general beneficiary under a discretionary trust should be property under the Bankruptcy Act vested in the trustee in bankruptcy.”

It was held in Fordyce that the “beneficiaries/trustee’s legal or de facto control of the trustee of the discretionary trust in the bankruptcy context, does not alter the character of the interest of the beneficiary as to constitute property of the bankrupt if the beneficiary becomes bankrupt.”

The Court relied on general law principles that the interest of a beneficiary in a trust is a mere discretionary interest being a right to be considered and a right to enforce due administration of the trust being a personal right that does not pass to the trustee in bankruptcy.

In other words,

• a bankrupt’s right as a general beneficiary does not vest in the trustee in bankruptcy as property of the bankrupt, and a beneficiary’s right to be considered and to enforce due administration of the trust is a personal right that does not pass to the trustee in bankruptcy;
• a trust validly created does not alter the interests of a bankrupt beneficiary because of his or her actions or influence in causing the trustee to make distributions of income to himself or herself; and
• distributions out of a trust to a bankrupt will fall into the bankrupt’s estate as after-acquired property.

Conclusion

The discretionary trust is not dead as a vehicle to protect the assets of a beneficiary even if that beneficiary is also the trustee or director of the trustee of the trust and therefore in control of the trust’s assets and the distributions from the trust.

Next month in Part 2 on this series we will look at whether the discretionary trust protects the beneficiary’s assets from a Family Court order effectively splitting those assets with the beneficiary’s estranged spouse.

The post Does a discretionary trust protect beneficiaries? Part 1 appeared first on AdviserVoice.

Dominique Perry

Has the relationship with your attorney tarnished?

An Enduring Power of Attorney (POA) is a significant legal document necessary for empowering an ‘attorney’ to make decisions on your behalf. These decisions can be related, in some States just to financial issues, superannuation and asset management and in others extending to residence, health services and more.

Considering how personal and influential these decisions are, it is crucial to appoint an attorney you trust. You may consider your attorney to be a:

• family member
• spouse
• solicitor
• close friend
• carer.

There are various reasons why a principal may wish to revoke an attorney. You may no longer trust your attorney, circumstances of yourself or your attorney have altered, they are no longer suitable to make decisions, or events where relationships change.

Note: separation and divorce may not automatically terminate a POA

Angelina appointed her husband Brad as her enduring power of attorney. Unfortunately, 10 years later, Angelina and Brad grew apart and mutually decided to divorce.

It is important to note, separation and divorce may not automatically terminate the enduring power of attorney. It will still be a valid appointment.

Most legislation dealing with powers of attorney allows principals to revoke their attorneys. Angelina must officially revoke the appointment and she should seriously consider appointing a new attorney.

Angelina must have legal capacity. A person without legal capacity can neither appoint nor remove an attorney so if you or a loved one are at risk of losing legal capacity through dementia you need to act sooner rather than later.

In NSW, there is no specific form for revocation. However, the revocation must state the following:

• the name of principal (Angelina)
• name of attorney (Brad)
• date of appointment
• registered number of power of attorney (if registered)
• date of revocation
• state the words ‘hereby revoke’
• signed and dated and,
• witnessed.

Angelina must register her revocation with the NSW Land Registry Services.

Angelina must notify Brad of the revocation in writing.

By Dominique Perry, Lawyer

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