+ Business Succession Law Update-Spring 2008

Printer Friendly Version

 Who is an ‘affiliate’?

In 1988, the partners of a legal firm arranged for a property to be purchased by the trustees of seven discretionary trusts as tenants in common in equal shares.

Each of the trusts was controlled by a partner of the legal firm.  The share of one partner, Mr Stephens, was acquired by Enizer Pty Ltd as trustee for the Stephens Family Trust (“Enizer”). The legal practice paid rent for its occupation of the first floor of the office space, but there was no formal lease.

In 1997, the legal practice was transferred to an incorporated practice company (NF Legal), of which the former partners became directors. Again, NF Legal paid rent but no formal lease was signed.

The partnership of trusts later refused a tenancy application for one of the ground floor shops because the applicant was a competitor of NF Legal.

The property was subsequently sold, resulting in a capital gain to Enizer. Enizer applied the small business CGT concession on the basis that its interest in the property was an active asset, having been used in the business carried on by NF Legal.

In the AAT’s decision, Stephens-v-Commissioner of Taxation [2008] AATA 176, the Tribunal considered the question of whether the incorporated legal practice NF Legal acted in concert with Enizer. If it did, then it was an affiliate of Enizer and accordingly the Division 152 CGT concessions would become available to Enizer.

Reading between the lines, the legal practice had undergone substantial changes since it was first formed, including the departure of partners, the sale of one property interest and the appointment of new directors of NF Legal who did not hold a property interest. The views of those persons were not in evidence and should have been. Cases are won or lost on preparation!

The Rule against Perpetuities

The Trusts (Hague Convention) Act 1991 (Cth) provides inter alia that where no applicable law has been chosen by the settlor of a trust, the trust shall be governed by the law with which the trust is mostly closely connected, taking into account:

·             the place of administration

·             the situs of the trust’s assets

·             the place of residence or business of the trustees; and

·             the objects of the trust and the places where they are to be fulfilled 

The South Australian Law of Property Act abolished the rule against perpetuities ages ago and a trust’s assets accordingly never need to vest in beneficiaries if it is governed by the law of South Australia.  So -  make your discretionary trust subject to South Australia law and potentially avoid the application of CGT Event E5.

We say “potentially” because there is no case of which we are aware that has considered whether a South Australian Court will enforce a  ‘foreign trust‘ (i.e. a trust  the proper law of which, at first sight, would be outside South Australia) that declares it is subject to South Australian law.

Not More on Restraints of Trade !

Yes, the courts are tightening up. A restraint of trade in excess of six months runs the risk of being declared void. The most recent case on the point – BearingPoint Australia Pty Ltd v Hillard [2008] VSC 115 - makes it clear that anything over six months is simply “too long”. 

You can’t give what you don’t own   - or can you?

In Public Trustees -v- Smith [2008] NSWSC 397, Ms Smith argued that because the deceased (Dr Ward) was the sole director and shareholder of the corporate trustee and was also a beneficiary of the trust, Dr Ward should be viewed as the beneficial owner of the trust property. If she was beneficial owner of the trust property then occupation rights given to Ms Smith under the will of Dr Ward, would flow to Ms Smith.

The Court rejected this argument for incidental reasons but went on to say that the beneficiary’s ability to control the trust may convert an expectancy to a contingent interest - agreeing with Richstar (ASIC v Carey [2006] FCA 814) - and therefore (extending Richstar) a proprietary interest in the trust funds.

No doubt the next test case will be by a bankruptcy trustee arguing that the assets of a family discretionary trust which the bankrupt controls and of which the bankrupt is a beneficiary is effectively a “proprietary interest” of the bankrupt, and therefore property divisible amongst the bankrupt’s creditors. We wonder which bankruptcy trustee will take the plunge?

Back