The Law Society of NSW Specialist Accredititation 

BLOGS

Any information contained in a blog on this website is general in nature only. The content of any blog posted below reflects information which is known to us as at the date of the posting of the blog. Please be aware that the law regularly changes. Please do not rely on the general information contained in the below blogs, instead we recommend that you contact us to obtain legal advice tailored to your own specific situation.

 

Jun23

The NSW Legislative Council passed the State Revenue Legislation Further Amendment Bill 2020 on 18 June 2020.

This is particularly relevant if you own real estate in NSW or are likely to own real estate in NSW and have  been thinking about leaving your property to your beneficiaries via a testamentary trust.

If this applies to you - then you you need to consider the effect of potential foreign persons surcharges when making your Will.

From 1 January 2021, if you leave NSW real estate in a testamentary trust, then the foreign person surcharge land tax (which is an annual tax) will apply to that property unless you have specifically and irrevocably excluded foreign persons from being eligible beneficiaries of the trust.

Likewise if the trust were to purchase any property, the foreign surcharge duty would apply.

This may not be particularly important if you are certain that none of the potential beneficiaries would be foreign persons, as in such a case an appropriate exclusionary clause can be included in your Will.

However,  if your intended beneficiaries are foreign persons or even if they might marry foreign persons, then to allow your testamentary trust its greatest level of flexibility, (and subject to you not being a foreign person) you should consider executing your Will before 31 December 2020 (ie this year) - so that it is not caught in the changes that will apply from 1 January 2021.

Please contact Andrew Graham (email amg@peacockes.com ) or Jeremy Tooth (email jrt@peacockes.com ) or phone our office on 02 6882 3133  if you wish to obtain advice on this issue or your succession planning.

Dec05

WILLS AND ESTATES

Amanda Quin - Thursday, December 05, 2019

Blog by Andrew Graham Contact Email: amg@peacockes.com

 

REVENUE ISSUES RE WILLS AND ESTATES 

A.Testamentary Trust 

The use of testamentary trusts has been widely promoted over recent years by those in the financial planning industry and also by accountants and lawyers. The principal reason for the use of the testamentary trust, from the point of view of potentially saving tax, is due to the notion of “excepted trust income” under Section 102AG(I) of the Income Tax Assessment Act, 1997 (“the Act”).

Normally minors who derive non-personal service income by a distribution from a discretionary trust are taxed at penalty rates under Division 6(iv) of the Act where the income received exceeds $416.00. However, where the minor receives income from a trust created in the Will of a person, the income is treated as “excepted trust income” and the minor is taxed on that income as if the minor were an adult. This allows the recipient of the trust income to receive the first $18,200.00 tax free (if the minor has income from no other sources) and also allows the minor the benefit of the progressive tax rates where the income received exceeds $18,200.00 up to the maximum tax rate of 47% (including the 2% Medicare levy) where the income exceeds $180,000.00.

Accordingly, potentially significant amounts of tax may be saved where the children of an elderly person have children under the age of eighteen (18) years. The testator, instead of leaving the whole or part his estate to his child or children could instead establish a testamentary trust for the benefit of that child or children and their wider family members. Typically, each child is appointed as the trustee of the testamentary trust and the beneficiaries, being discretionary, include members of that child or children’s family. The tax payable by the family unit will be significantly less than it would have been had the testator left his estate directly to his child, or children.

There are other potential advantages of use of testamentary trusts, but this blog concentrates solely on the revenue implications (both positive and negative) of such trusts.

Whilst significant tax savings may be achieved where minor beneficiaries are eligible to receive income of the testamentary trust, caution should be exercised before concluding that testamentary trusts are the panacea of estate planning. The following potential disadvantages of testamentary trusts should also be taken into account:-

1.Principal Place of Residence – A testamentary trust does not enjoy the principal place of residence exemption for capital gains tax purposes. Accordingly, if it is intended that a beneficiary of a testator use a property received under the Will of a deceased as his or her principal place of residence, if such property were devised to the trustee of a testamentary trust (as indicated above, usually by a child of the deceased) any profit realised on the eventual sale of the property by the testamentary trust will not be free of capital gains tax. The net capital gain may be reduced by 50% if the property is held for more than twelve (12) months, but the CGT free status of the principal place of residence will be lost.

2.Whilst stamp duty will not be payable upon the transmission of any dutiable property from the deceased to the Trust (so long as it “passes” under the Will of the deceased), any transfers by the Trust to any beneficiary of the trust will be liable to stamp duty. Careful consideration therefore needs to be given to the actual assets, especially real property, which are left to a testamentary trust by the testator.

3.A discretionary trust, unless the trust deed establishing the trust specifically excludes any foreign person from being a beneficiary, will be treated as a “foreign person” for the purposes of the Duties Act, NSW. This means that if a discretionary trust owns real property, not only does it pay land tax on the full value of the property (i.e. does not get the benefit of the tax free threshold, it is also required to pay the surcharge rate of land tax of 2% (in addition to standard land tax). Furthermore, for land tax purposes, the principal place of residence is not exempt, even though it may be used by the beneficiary as his home. The common testamentary trust is really a discretionary trust embodied in the will of the testator which comes to light upon the death of the testator. Significantly the terms of the trust cannot be amended (for example to exclude foreign persons as beneficiaries), unless the will permits it.

4.If the trustee of a testamentary trust uses money of the trust (inherited from the deceased) to purchase real property, foreign surcharge duty (calculated at the rate of 8% on the value of any residential land) could be payable even if the deceased was not a foreign person.

B.Partition of Estate

A device which can produce potentially large stamp duty savings is to partition an estate, rather than to agree on the division of specific assets under a deed of family arrangement.

The following simple example illustrates the potential savings in stamp duty:-

Assume that properties A and B are left to the two beneficiaries, X and Y equally, but that X wants to take Property A and Y wants to take Property B..

If property A has a value of $2,000,000.00 and

property B has a value of $5,000,000.00 then:

Option 1: Deed of Family Arrangement

Under a Deed of Family Arrangement X gets A (worth $2,000,000.00) and Y gets B (worth $6,000,000.00).

The total duty payable is  calculated as follows:-

   i.   A – duty payable on 50% of $2,000,000.00 ($1,000,000.00) = $40,490.00

   ii.  B – duty payable on 50% of $6,000,000.00 ($3,000,000.00) = $150,302.00

Total duty = $190,792.00.
 

Option 2: Partition

The alternative would be to partition the estate under Section 30 of the Duties Act, NSW.

Under the partition X gets 100% of A and Y gets 100% of B. The duty payable is then:

      i.  X – Duty payable $50.00

     ii. Y – Duty payable on $2,000,000.00 ($6,000,000.00 – 50% x $8,000,000.00) = $95,302.00

Total duty = $95,352.00

Therefore the stamp duty saved by choosing to Partition, rather than to use a Deed of Family Arrangement is $95,440.00

                  - - - - - - - - - - - - - - - - - - - - - -

The above demonstrates that careful planning can result in significant revenue savings by beneficiaries following the death of the testator.

It pays to get advice from a professional person having experience and expertise in revenue implications of estate planning and deceased estates and we at Peacockes Solicitors can guide you in the right direction.


 

Oct22

Acceptance and Disclaimer of Gifts left in a Will

Amanda Quin - Tuesday, October 22, 2019

Disclaimer of Gifts - Blog by Andrew Cannon - email aac@peacockes.com
 

Do I have to accept a gift left in a Will ?

Whilst it is uncommon and unusual for someone to want to refuse or be unwilling to accept a gift left to them in a Will, also known as a renouncement or disclaimer of gift, it is well-recognised that a beneficiary has the free will and discretion to do so. Courts of Equity, both past and present in Australia have confirmed the fundamental principle that a person cannot, under any circumstances, be forced to accept a gift left to them in a Will. This draws upon an authoritative statement set out by Justice Holroyd at 577 in the English authority of Townson v Tickell (1819) 3 B & Ald. 31 that:

“I think that an estate cannot be forced on a man. A devise, however, being prima facie for the devisee’s benefit, he is supposed to assent to it, until he does some act to show his dissent. The law presumes that when the contrary, however, is proved, it shows that he never did assent to the devise, and, consequently, that the estate was never in him”.

Today, this statement on the disclaimer of gift has been endorsed in principle as evinced by Justice Ward in Tantau v MacFarlane [2010] NSWSC 22 at 77 that:

“… there is no doubt that it is open to a beneficiary to disclaim a gift made in its favour under a Will, though it is said that generally the disclaimer must be absolute (not partial) in its operation…”

Since Townson, Equity in Australia has arguably evolved the principles regarding disclaimer of gift in a Will. This ‘evolution’ is in the form of more modern requirements set out by the Courts which provide that a disclaiming beneficiary:

  1. Cannot disclaim a gift (where left to them in a Will) before the passing away of a testator;
  2. The gift must be refused by deed or positive conduct, to avoid any inference of ambiguity (It is confirmed that a beneficiary cannot disclaim a gift in a Will left to them merely by silence or a period of inactivity. Conversely, a beneficiary wishing to disclaim a gift is arguably best served to confirm such a decision in a deed of agreement, which is signed and witnessed by all the parties);
  3. The beneficiary cannot disclaim the gift/ beneficial interest after it is accepted (however the judicial and academic commentary on this point has been somewhat ‘stretched’ and unsettled by the concept of ‘initial acceptance‘ and retraction: See Tantau at [75] – [122] );
  4. Once the gift is disclaimed, the position of the disclaiming beneficiary is final and absolute;
  5. The beneficiary disclaiming their gift cannot choose whom is to inherit what would otherwise have been their share of the beneficial interest/gift.

When may a disclaimer/renunciation of a gift left in a Will be appropriate ?

In some circumstances, a beneficiary may have very good reasons for disclaiming a gift or beneficial interest left to them in a Will.

Such circumstances may include, but are not limited to:

  • A beneficiary of a trust may wish to disclaim their beneficial interest held in a Trust structure in order to avoid an undesired capital gain from arising ( ie. Cost/benefit where the cost of the possible adverse tax consequences may outweigh the financial benefit of receiving the gift/ beneficial interest; See Federal Commissioner for Taxation v Ramsden [2005] FCAFC 39; Smeaton Grange Holdings Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 1594;
  • A beneficiary may not wish to be restrained by a potentially onerous provision in a Will (such as a life estate) ; and
  • Personal, family and ‘moral’ reasons (particularly where accepting a gift/ beneficial interest would then create conflict and acrimony amongst family members and/or other beneficiaries).

Centrelink and testamentary gifts

Testator: When considering who you wish to benefit in your Will you should take into account whether an intended beneficiary is receiving or is likely to be receiving Centrelink and/or Veterans’ Affairs benefits.

A testator wishing to leave a gift/ beneficial interest to a current recipient of Centrelink and/ or Veterans’ Affairs benefits should carefully consider the nature and extent of the gift to provide for that person, and possible consequences of that person receiving it - for example, depending on the size of the gift and the circumstances of the beneficiary, it may reduce the beneficiary's entitlement to a pension.

See: Tantau v MacFarlane [2010] NSWSC 22, O’Sullivan Partners (Advisory) Pty Ltd v Foggo [2012] NSWCA 40, Commissioner of Taxation v Ramsden [2005] FCAFC, R v Skinner [1972] 1 NSWLR 307, De Santis v De Santis [2002] NSWSC 729, Lewis v Lohse [QCA] 199, Lawson v Lawson NSWSC (unreported) and Aljaro Pty Ltd v Weidmann [2001] NSWSC 206.”

Beneficiary: Care should be taken before disclaiming or renouncing a testamentary gift, particularly if the person who wishes to disclaim is in receipt of a Centrelink pension or payment or intends to apply for a Centrelink pension or payment within 5 years.

For a period of 5 years, a disclaimed gift may potentially be deemed  by Centrelink to still be an asset of the person who disclaimed it - despite that person never having actually received the gift.

As such, legal advice should be sought prior to disclaiming or renouncing any gift.

Sep30

If you operate a business or hold assets then you may be exposed to loss arising from a variety of sources which could include:

  • bankruptcy or liquidation; 
  • a liability/damages claim;
  • a family provision claim on your death; or
  • a divorce (either your own divorce or in the case of family succession planning, the divorce of your children).

 

However there are a variety of strategies that may be able be used to potentially protect your assets or reduce the risk of your assets being accessible to a claimant.

Of course, there are varying degrees of protection that are able to be achieved and it is particularly difficult to protect your assets from loss through your own divorce, although a binding financial agreement (which can be entered into before cohabitation commences or before marriage or during cohabitation/marriage) may be able to assist. However it would require the co-operation of your spouse.

 

In other cases, such as family succession/divorce of children and protection from potential bankruptcy/liquidation there are a number of other strategies that can be implemented to protect your assets  - providing that you plan and implement your strategy at the appropriate time, in general, the earlier the strategy is implemented, the more beneficial it is likely to be.

One strategy which could be considered is a gift via a promissory note and loan-back. This involves the owner of the asset gifting the value of the equity in the asset (but not legal title in the asset itself) to a discretionary trust and simultaneously the same amount is loaned back from the trust to the property owner, secured by a mortgage in favour of the trust.

As a result, the asset is still legally owned by the same person, but its equity has been transferred to a trust and therefore may be better protected from a liquidator, providing that the transfer of  the equity and  the mortgage/loan-back is undertaken well prior to any relation-back (claw-back) period.

There are pros and cons of undertaking such a strategy, including issues that may arise with any current financiers,  and depending on your situation there may be more effective or simpler strategies available to you.

Accordingly, the strategy in this example should not be implemented without first seeking legal and accounting advice specific to your situation. If you would like to discuss this or any other potential asset protection strategy then please do not hesitate to contact Andrew Graham or Jeremy Tooth on 02 6882 3133.

 

Oct12

(Blog post author: Andrew Graham)

It is important that Executors carefully consider the taxation implications before distributing assets of an estate.

An estate at law is a trust, where the executor (and also in most cases the trustee) is the trustee of the trust, and the beneficiaries stated in the Will are the beneficiaries of the trust. The terms of the trust are set out in the Will.

Ordinarily, a trustee will only be assessed to tax of the trust in cases where no beneficiary is presently entitled, namely under Section 99 or Section 99A (which contains penal provisions) of the Income Tax Assessment Act 1997 (“ITAA 1997”). The Commissioner of Taxation is happy to accept tax from the trustee under Section 99 of the ITAA 1997, where the trustee is treated as an individual tax payer. Under current income tax rates, no tax is payable on the first $18,200.00 of taxable income, tax at 19% is payable on incomes between $18,201.00 and $37,000.00, at 32.5% for incomes between $37,001.00 and $90,000.00; at 37% on incomes between $90,001.00 to $180,000.00 and 45% for incomes of $180,001.00 and over. (The Medicare levy, currently at 2%, is payable in addition to the above tax rates).

An estate may be continued for tax purposes for up to three (3) years after the date of death, being the financial year in which the deceased died and two (2) subsequent financial years. It is important that an executor consider whether it is preferable for the executor to pay tax on income of the trust estate (i.e. between the date of death and the end of the financial year of the date of death) or whether the individual beneficiaries should.

Ultimately this decision, and also when to make a final distribution of assets of the trust estate, will depend upon the estimated income of the estate and the likely tax rates of the beneficiaries.

In a case where some or all of the beneficiaries are not liable to tax (such as tax-exempt charities) or are subject to low rates of tax, then executors should carefully consider whether each beneficiary should be asked to pay tax, rather than the trustee. In particular where the estate is large and especially where significant assets of the estate are sold in the course of administration and which realise a taxable gain, executors should be particularly diligent.

It makes sense that if a tax-exempt charity receives its share of the deceased’s estate and is not liable for any tax on such share, no tax will be payable on the income relating to the share received.

However for a beneficiary to be liable for tax on the income relating to its share of the estate, the beneficiary must be “presently entitled”. The principles governing present entitlement in the context of deceased estates is set out in Taxation Ruling IT2622. This ruling says that for a beneficiary to be presently entitled to a share of the trust income, the estate must have been “fully administered”. This involves a question of fact. That is, that the assets of the estate have been called in and the deceased’s debts and liabilities have been paid.

Importantly it is the deceased’s debts and liabilities which have to be paid in order to reach full administration, not those of the estate.

Accordingly, even though liabilities incurred in the administration of the estate (such as legal and accounting fees) may not have been paid prior to the making of a distribution of the proceeds of the estate, the relevant beneficiary will still be considered to be presently entitled.

It is common for an executor to sell assets of an estate (such as real estate, investments and shares) and then to make an interim distribution of the proceeds of sale before the executor has even sought confirmation of the taxation liability either of the executor or of the beneficiaries. Capital gains and capital losses made by the estate are aggregated to determine whether the estate has made a net capital gain or a net capital loss. A net capital gain is included in the estate’s net income (Section 95 of the ITAA 1936). Where a resident beneficiary of a trust estate (who is not under a legal disability) is presently entitled to a share of the income of the trust estate, Section 97 of the ITAA 1936 operates to include in the assessable income of the beneficiary, his or her or its share of net income of the trust.

So long as the estate assets have been called in and the deceased’s debts and liabilities have been paid, it does not matter whether or not the estate has reached the point of full administration or is at the intermediate stage. This is because the beneficiaries are presently entitled to any amounts that are actually paid to them by the executor. If the estate has not been finalised it does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid or to be paid to them or on their behalf. However had one or more debts or liabilities of the estate not had been paid prior to any distribution to a beneficiary of his/her/its share of the estate proceeds, the executor would be liable to be assessed on the income of the trust estate under Section 99 or Section 99A of the ITAA 1936.

It is not uncommon in large estates where a significant net capital gain could be derived from the calling in of the deceased’s assets. For example, where the net capital gain was $300,000.00, tax payable by the executor (under Section 99 of the ITAA 1936), the tax would be $108,097.00. If all the beneficiaries were tax exempt charities, no tax would be payable.

In the case where the net capital gain of the trust estate was $15,000.00 and comprised the only income of the estate, in most cases it would be preferable if the executor was assessed under Section 99 of the ITAA 1936 rather than each beneficiary were assessed under Section 97 ITAA 1936, because the net income is below the taxable threshold of $18,200.00 and no tax is payable.

The message for executors is to carefully consider the taxation implications of each estate, which will depend upon the size of the estate, the nature of the assets, the tax position of each of the beneficiaries and whether the debts and liabilities of the deceased have been paid prior to any distribution being made to any of the beneficiaries.

 

 


Sep04

Your Will and Aged Care Accommodation

Amanda Quin - Tuesday, September 04, 2018

Your Will and Aged Care Accommodation

If you (or your spouse) are considering entering Residential Aged Care then you should undertake a review of your Will.

Many people leave all of their estate to their spouse, however this is not always the best decision.

For example only:

  • If your spouse receives an aged pension and has entered into in Residential Aged Care and the Australian Government contributes to the Aged Care Daily Accommodation Payment for your spouse; and
  • If you have children or other beneficiaries who would benefit from an inheritance;

Then in some cases it may be beneficial to leave some or all of your assets to your children or other beneficiaries rather than to your spouse.

The reason for this is that if your spouse inherits assets then:

  • This may increase how much your spouse has to contribute to the costs of their Residential Aged Care.
  • It might reduce the amount of Aged Pension that your spouse may be entitled to.

However circumstances can vary greatly.

NB how you currently hold your assets is important, as the gifting rules may come into play if you need to sever joint tenancies and this could adversely affect your and your spouse’s pension.

Likewise the value of your and your spouse’s assets and how close they are to the relevant asset test thresholds may also make a difference.

We therefore recommend you obtain legal and financial advice specific to your situation prior to altering your Will.