October 19

Trustees of a Family Trust

The position of a Trustee is an important position. The Trustee’s duties are covered between legislation in each state, commonwealth legislation and case law. Trustees can be individuals, one or more than one and also companies.

Trustee’s Duties

Trustees of family trusts have many duties. Many of these have been formulated by Judges through case law over the ages. Broadly speaking, the Trustees:

  • Must act in good faith
  • Must act personally
  • Must act unanimously where multiple Trustees are involved
  • Must not be dictated to by others (ie beneficiaries)
  • Have a duty to consider how distributions should be made and to whom
  • Have a duty to avoid fettering of discretion.

The Trustee also has fiduciary duties which exist alongside the various statutory obligations imposed on Trustees.

Let’s have a look at some of these duties more closely .

Duty to act personally.

This duty cannot be delegated unless permitted by the trust instrument (deed), statute or court order. The office of Trustee is viewed by the courts as one of trust and personal confidence. A common mistake is for a Trustee to execute a power of attorney to a third party (the attorney) granting the attorney general or wide ranging powers relating to the authority of the Trustee. More often than not these powers of attorney, if granted outside the scope permissible by law, will not be enforceable and can have severe consequences if acted upon.

In Victoria, under the Powers of Attorney Act 2014, a delegation of the Trustee’s powers under a general power of attorney is not permitted under section 7(2)(b). The same applies for enduring powers of attorney.

Whilst, as a general rule, the law of equity prohibits a Trustee from delegating its duties, a Trustee may appoint agents to help administer the trust.
State legislation also covers the conditions of the appointment of agents to the trust.

Duty to Act Unanimously

What happens when there is more than one Trustee – can one Trustee not consider a matter and leave it to the other Trustees to decide upon?

In essence where multiple Trustees are involved, any decision by them must be joint and unanimous.

Please note , a statutory exception exists for trustees of Self-Managed Superannuation Funds .

August 4

Family/Discretionary Trust – Corporate Trustee versus Individual Trustee

The last 3 decades have seen a substantial growth in the number of people in Australia establishing a family/discretionary trust. The benefits of such an arrangement have been largely touted by professionals around 2 areas – asset protection and tax benefits.

The issue of whether a corporate trustee is best suited as opposed to an individual trustee for a family/discretionary trust is relevant on the area of asset protection and succession planning.

Trustee Liable for Trust Debts

Under trust law, a Trustee is personally liable for trust debts.

To discharge the trust debts the Trustee normally has a right of indemnification against the trust assets. This right of indemnity is established from 3 sources:

  1. Equitable principle as set out by the Courts;
  2. An indemnity clause which is contained in most trust deeds; and
  3. State Statute law – the Trustees Act.

What Liabilities are Covered by the Trustee’s Right of Indemnity?

The cases generally state that the indemnity is limited to liabilities or expenses that have been properly incurred by the Trustee in the execution of the trust. If the Trustee’s action was unauthorised and exceeds his power, there is no right of indemnity.

What Happens if The Trust has Insufficient Assets to Cover the Trust Debts?

Individual Trustee – if there is a shortfall in the assets of the trust fund then the individual Trustee will be liable for the shortfall. This amount, if substantial to the individual Trustee’s personal asset pool, may result in the individual Trustee declaring bankruptcy or entering into a Part X arrangement. If this course of events took place, then this would defeat one of the potential benefits of establishing a discretionary trust in the first place.

Corporate Trustee – In this scenario the corporate Trustee will probably go into liquidation or administration. As the corporate Trustee usually has no or minimal assets, this may not be too detrimental to the parties who had established the trust in the first instance. Under corporation law the individual shareholders are not liable for the debts of the company. There are exceptions. One example is where the shareholders have signed a guarantee/indemnity in favour of a creditor.

The directors of the Trustee company will normally be immune from the debts of the Trustee company.

Can the Appointor of the Trust Sack the Trustee to Allow the Trustee to Avoid Personal Liability?

In short, the answer is no. Once the debt or cause of action is established then the Trustee is liable for the debt. Simply removing the Trustee does not extinguish his liability.

Other Problems Associated with an Individual Trustee – Asset Identification

Should the Trustee be in the unfortunate position of having assets seized by way of court order or by a person exercising rights under a security arrangement, then the situation may arise where there is a dispute as to which assets belong to the trust or the Trustee in his own right. This situation is more likely to occur where the Trustee is an individual as opposed to a company. Inadequate record keeping may simply record assets in the name of the Trustee without reference to the trust, leaving open the issue as to who owns the asset.

Succession Planning

Issues arise as to what happens to the trust should an individual Trustee die. The appointor of the family trust, under most trust deeds, should be able to appoint a new trustee to continue in that position. However, it is possible that the appointor and the individual Trustee are the same person – resulting in the trust being headless.

Under trust law the trust does not fail for want of a Trustee. The above circumstances can be avoided by careful estate planning and having the appropriate backup appointors in place in the trust deed or the appointor’s will.

With a corporate Trustee, the scenario will be easier to resolve as the company will continue to exist. The shareholders, if need be, can appoint a new director – should one director die. Again careful estate planning should be undertaken to contemplate this situation.

July 3

1 July new CGT withholding payments for real property sales of $2M or more

Key points

  • New requirements for contracts of sale of real estate worth $2M or more entered into from 1 July 2016.
  • All purchasers of such real estate must withhold 10 percent of the purchase price unless they are given a clearance certificate by the vendor.
  • Vendors of such property who are not foreign residents need to apply for a clearance certificate as soon as possible.
  • Real estate includes vacant land, residential and commercial property – no exceptions.

Introduction

New withholding requirements for purchasers of certain property in Australia will commence 1 July 2016.

  • While the aim of the legislation is to capture unpaid tax from foreign residents, any vendor selling taxable Australian real property worth $2million or more will be subject to the withholding tax unless they apply for and provide to the purchaser a clearance certificate by the time of settlement.
  • The legislation also applies to some indirect interests in Australian property including leases, mining and quarrying rights, and options to acquire interests in such property.

Background

The reasoning behind the legislation is to capture the tax payable on capital gains by foreign residents that has historically been difficult to recover after the funds from a sale of property go off shore.

Key obligations

A purchaser of a relevant CGT asset will be required to withhold 10 per cent or another amount specified, from the purchase price of the asset and remit that money to the ATO. Failure to do so will render the purchaser liable to penalties and interest.

Exceptions

  • The CGT asset is taxable Australian real property with a market value of less than $2million (subparagraph 14-215(1)(a) of the schedule).
  • The CGT asset is an indirect Australian real property interest, the holding of which causes a company title interest to arise with a market value of less than $2million (subparagraph 14-215(1)(a) of the schedule).
  • The CGT asset is either taxable Australian real property or an indirect Australian real property interest, the holding of which causes a company title interest to arise, with a market value of $2million or more but the vendor provides the purchaser with a clearance certificate stating that no withholding tax is required (subparagraph 14-210(2) of the schedule).
  • The entity provides a declaration that the CGT asset is a membership interest but not an indirect Australian real property interest and the purchaser is unaware the declaration is false (subparagraphs 14-210(3) and 14-225(2) of the schedule).Provide the name of any planning overlay affecting the land. See section 32C(d)(iv).

More exceptions can be found in subparagraph 14-215(1) of the schedule.

Assets which are caught

A CGT asset for the purpose of withholding is defined in subparagraph 14-200(1)(c) of the schedule as:

  • Taxable Australian real property. The Australian Taxation Office (ATO) has given the following examples:
    • land, buildings, both residential and commercial property
    • leases over real property
    • mining, quarrying, prospecting rights.
  • An indirect Australian real property interest. This means any interest in an Australian entity whose majority assets consist of taxable Australian real property.
  • An option or right to acquire taxable and/or indirect Australian real property.

Market value

The ATO has said that in most cases the market value of an asset will be the purchase price negotiated between a purchaser and vendor, acting at arm’s length as part of a competitive bargaining process

July 3

Changes to the Power of Attorney Act 2014

A Powers of Attorney Amendment Bill 2016 has been introduced to parliament. The Bill proposes to make various changes to the principal Act, the most welcome of which is to clarify that multiple alternative attorneys can be appointed for one principal attorney or supportive attorney.

Other notable changes include:

  • removing the option to make a power of attorney for both financial and personal matters
  • specifying that a later power will revoke an earlier power unless the later power specifies otherwise
  • where an attorney appointed as part of a majority power is no longer acting as an attorney and the remaining attorneys cannot act by majority then they must act jointly.

The Act, if passed, will come into operation on a day to be proclaimed or on 1 May 2017.

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