Superannuation death benefit disputes: Can an executor claim for super?

Conflicts continue to arise between executors, trustees and potential beneficiaries regarding claims for death benefits where no valid superannuation binding death benefit nomination exists.

The recent decision of Brine v Carter is another example of such conflict, and highlights where an executor may be at risk of breaching their duty.  Ms Carter was a co-executor of her domestic partner, Professor Brine’s estate, (the deceased), and the beneficiary of a life interest under his Will.  The deceased’s three sons from a previous marriage were the other executors, and residuary beneficiaries under the deceased’s Will.   

Ms Carter applied for the deceased’s death benefits to be paid directly to her from his superannuation funds (the Fund).  Ms Carter did not initially inform her co-executors that they, and the estate, could make competing claims for the benefits. Once the sons became aware, they applied for the benefits to be paid to the estate. The trustee of the Fund exercised its discretion in favour of Ms Carter, paying her $630,299 directly.

The sons argued that Ms Carter, as executor, breached her fiduciary duties in claiming and receiving the superannuation benefits in a personal capacity. A fiduciary is said to be under an obligation not to pursue a personal benefit in conflict with the estate, unless authorised by the Will or with consent of the beneficiaries.

Ms Carter argued that as the deceased appointed her as an executor, there was consent for her to act in a conflicted role and pursue a personal benefit.  The court did not agree with her.

However, the court found that once the sons were aware of their potential to make a claim, yet allowed Ms Carter to pursue hers, without resigning as executor, they had consented to her doing so.  On this reasoning there was no breach of her fiduciary duty, and Ms Carter was not liable to account to the estate for the superannuation benefits she received.  However, it is important to note that if the sons had not been aware of their rights, and had not made a claim, Ms Carter would have been in breach and liable to account.

This case is a reminder to will makers to understand the nature of their wealth, understand potential conflicts and to be careful in selecting an executor. It also a warning to an executor who wishes to make a personal claim for death benefits that they risk breaching their duty.  

Finally, to reduce possible family and other conflicts it is important to seek proper advice.  We have an experienced estates, superannuation and taxation team available to advise on such issues.

By |March 11th, 2016|News|0 Comments

Providing for a second spouse: How much is enough?

The contest between a deceased’s obligations to a second wife and his obligations towards adult children by his first wife is a familiar one.  Recently, in Thompson V Thompson the Victorian Supreme Court considered a claim against an estate by a second wife, aged 77 (widow).  

The facts: Jack Thompson (the deceased) died in 2013 aged 93.  His estate consisted of a half interest in a Collingwood apartment valued at $475,000, (his widow owning the other half) and gross assets of almost $200,000. The deceased left his widow some cash, chattels, a car and a simple non-portable life interest in the apartment. On her death his share of the apartment was to pass to his two adult children from his first marriage.  

The claim: The widow claimed full ownership of the apartment. She argued that a non-portable life interest was inadequate proper provision due to a lack of flexibility, absence of independence, lack of security, for example if funds are required for medical expenses or if more suitable housing is required, as well as the prospect for ongoing disputes with the executor.

The Defendant, being the executor and son of the deceased, agreed that a simple life interest was inadequate, but argued that any enlarged provision should be limited to giving the widow a ‘portable’ life interest in the Collingwood apartment with additional rights to use the proceeds of sale of the property for alternate accommodation such as a retirement village or nursing home.

The Court noted that during their long relationship, the widow and deceased maintained separate ownership of the apartment, both contributed to its purchase and that this was not uncommon in second marriages where both wished to preserve assets to be left to their respective families.   

The law: The Court noted that the normal duty of a testator, in traditional terms, is to provide a widow with security of a home, secure income and a fund for unforeseen contingencies.  A mere right to reside will usually be unsatisfactory where the widow can no longer live in the property.   This duty is seen as high in a long and happy marriage in the absence of competing claims.  

The decision: In the circumstances of this case, the Court held that further provision be made for the widow by way of providing for her an extended portable life interest in the Collingwood apartment.   This provided a more flexible arrangement for the widow, for example improved accommodation options and the right to earn income if the apartment is sold, while also preserving the deceased’s wishes that his financial interest in the apartment passes to his children on his widow’s death.  

A final note of caution is that every case turns on its own facts, but a good lesson from this case is that a simple “right to reside” for any spouse, is open to being challenged.  

We are experienced in providing strategies for blended families and their advisers – contact us for expert advice.   

By |March 11th, 2016|News|0 Comments

Foreign resident capital gains tax withholding payments

From 1 July 2016, a person spending $2 million or more on real property or who acquires interests in a company or trust that owns real property will need to confirm the residency status of the vendor.

The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016 came into force on 25 February 2016.

This Act includes provisions relating to a new withholding tax regime on payments for certain Australian based assets sold by non-residents.

From 1 July 2016, a “CGT withholding tax” equal to 10% of the purchase price of an asset will be payable if a person acquires:

  1. real property;
  2. mining, quarrying or prospecting rights;
  3. 10% or more of the interests in an Australian entity where the majority of the assets of the entity are real property or mining, quarrying or prospecting rights; or
  4. an option to acquire such interests

from a non-resident unless one of the exceptions applies.

The process for confirming the residency status of the vendor is prescribed in the legislation and must be followed carefully.

The major exception to these rules is for purchases of real property valued at less than $2 million.  

If a purchaser does not withhold the amount and remit it to the ATO, the purchaser may be subject to a penalty equal to the amount that should have been withheld.  

It is particularly important to keep these changes in mind when a person is acquiring interests in a company or trust that owns real property (as no transfer of land is prepared, the purchaser’s obligations to withhold payment may be overlooked).  

It also is important to keep in mind the state duties that may be payable on acquiring interests in landholders.

By |March 11th, 2016|News|0 Comments

CGT and earnouts

Finally, after more than 22 years (the original ruling was issued in 1993), the saga regarding the CGT consequences of earnout arrangements has come to an end, well mostly to an end. The new CGT and earnout rules in Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 have been passed by both houses of parliament and received Royal Assent. The new rules mostly apply to earnout arrangements entered into after 23 April 2015 although taxpayers who applied the look through approach to an arrangement entered into before 24 April 2015, in anticipation of the new rules coming into force, will be protected. A brief summary of the new rules follows.

Under a standard earnout arrangement the buyer agrees to pay the seller additional amounts if certain performance thresholds are met within a particular time. Under a reverse earnout arrangement the seller agrees to repay amounts to the buyer if certain performance thresholds are not met within a particular time.

As anticipated, a look through approach will apply. Under a standard earnout arrangement any additional amounts received by the seller will be treated as part of the consideration received for the disposal of the underlying assets and thus in determining the amount of capital gain or loss made. As well the additional amounts will be included in determining the cost base or reduced cost base of the asset acquired by the buyer. For example, a seller sells its business goodwill to a buyer for $3 million to be paid at settlement plus a further $500,000 to be paid 2 years later if net profit of the business exceeds certain amounts in the those two years. The targets are met and so the buyer pays the seller the additional $500,000 two years after settlement of the original sale. For CGT purposes the goodwill is treated as being sold for $3.5 million.

Under a reverse earnout arrangement any amounts repaid by the seller to the buyer will reduce its cost base and the seller will reduce its capital proceeds (and thus capital gain). The effect of the look through approach is that taxpayers will need to amend their tax returns for the year the CGT event happened to take into account the change in consideration. The new rules allow for these amendments to be undertaken after the normal two or four year amendment periods (and also allow the ATO to make amendments).

One significant advantage of the look through approach is that if the seller can satisfy the conditions to obtain the small business CGT concessions then the concessions will also apply to the earnout amounts received. The view in the ATO ruling was that the concessions did not apply to such amounts.

The new rules apply to a ‘look through earnout right’. In order to be a look through earnout right a right must satisfy all the following conditions:

  • The right is a right to future financial benefits that are not reasonably ascertainable at the time the right is created;
  • The right is created under an arrangement that involves the disposal of a CGT asset;
  • The disposal cause CGT event A1 to happen;
  • Just before the CGT event the CGT asset was an ‘active asset’ (as defined in the small business CGT concessions, but an alternative test can apply for shares) of the seller/disposer;
  • All the earnout payments must be paid within five years after the end of the income year in which the CGT event happens;
  • Those payments are contingent on the economic performance of the CGT asset sold or a business in which the CGT asset will be used;
  • The payments reasonably relate to that economic performance; and
  • The buyer and seller deal with each other at arm’s length in relation to the earnout arrangement.

As always, the devil is in the detail and the tip is to ensure the detail is understood so that taxpayers are not caught out.

By |March 11th, 2016|News|0 Comments