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ATO gives Clarity to Certain Executors about Personal Liability

If you act as executor or administrator of a deceased estate you may be surprised to know that, in certain circumstances, you may be personally liable for the deceased’s taxation liabilities.

The ATO has now issued Practical Compliance Guideline PCG 2018/4 giving executors or administrators (called a legal personal representatives (LPRs)) of smaller and less complex estates clarity about their personal liability where assets of the estate are distributed with notice of a claim or potential claim by the ATO.

 

When does PCG 2018/4 apply?

The guideline only applies to LPRs who have obtained either probate or letters of administration in situations whereby:

  • the deceased did not carry on a business, was not assessable on a share of the net income of a discretionary trust and was not an SMSF member in the 4 years prior to death;
  • the estate assets consist only of cash, personal assets such as cars and jewellery, public company shares or other interests in widely held entities, death benefit superannuation and Australian real property; and
  • the total market value of the estate assets at the date of death was under $5 million and none of the estate assets are intended to pass to a foreign resident, a tax-exempt entity or a complying superannuation entity.

 

When is an LPR deemed to have notice?

The ATO will treat an LPR as having notice of:

  • any amounts the deceased owed to the ATO at the date of death (including charges accruing in respect of those amounts following death, such as interest);
  • any liabilities arising from the assessment of income tax returns the deceased had lodged that had not been issued at the time of death;
  • any liabilities arising in respect of outstanding income tax returns the LPR is required by law to lodge; and
  • any liabilities arising from an ATO review or examination if the affairs of the deceased estate.

 

Significantly, the LPR will not be treated as having notice of any further ATO claim relating to returns the LPR has lodged (or has advised were not necessary), provided:

  • the LPR acted reasonably in lodging all of the deceased’s outstanding returns (or informing the ATO that they did not need to be lodged); and
  • the ATO has not notified the LPR that it intends to examine the deceased’s tax affairs within 6 months of lodgement (or advice of non-lodgement) of the last outstanding return by the LPR.

Furthermore, if the LPR becomes aware (or ought to have become aware) of any material inconsistencies in a tax return lodged by the deceased, the LPR has a responsibility to raise such inconsistency with the ATO, so the ATO can decide whether an amended assessment is issued.

 

What should you do?

If you act as executor or administrator of a deceased estate it is important you understand your responsibility to ensure the deceased’s taxation affairs are properly finalised.  Where the estate is not an estate to which this guideline applies, it is arguably even more important to get advice from your lawyer or accountant.

 

Effective Date

Practical Compliance Guideline PCG 2018/4 applies from its date of issue which was 22 August 2018. The ATO plans to reconsider the guideline from time to time to ensure it aligns with Australian taxation requirements as they may evolve.

 

By |September 20th, 2018|Uncategorised|0 Comments

Critical Decision Regarding Sole Purpose Test for Superannuation Funds

On 10 August the full Federal Court handed down its judgement for Aussiegolfa Pty Ltd (Trustee) v Commissioner of Taxation [2018] FCAFC 122.

This case may have significant implications for the sole purpose test under s 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which requires a trustee of a regulated superannuation fund to maintain it solely for the purpose of providing retirement benefits to its members.

The Court found that the leasing of a residential property owned by a father’s self managed superannuation fund (SMSF) to his daughter did not breach the sole purpose test (although the SMSF did beach the in-house asset rules).

 

The facts

Mr Benson is the sole member of the Benson Family Superannuation Fund (the Fund), of which Aussiegolfa Pty Ltd is the trustee (Aussiegolfa).

Aussiegolfa, Mr Benson’s mother and a superannuation fund of Mr Benson’s sister and her partner (the Related Parties) invested in the DomaCom Fund. This involved the purchase of a student accommodation property in Burwood (the Burwood Property), which was the sole asset of a sub-fund of the Domacom Fund. Aussiegolfa and the Related Parties were the sole unit holders of this sub-fund. Aussiegolfa invested approx. 8% of its assets in the DomaCom Fund.

In April 2017, and after two previous tenants had rented the Burwood Property, it was then leased to Mr Benson’s daughter at market rent.

The ATO declared, among other things, that the Fund breached the sole purpose test because the Burwood Property had been leased to Mr Benson’s daughter. This was confirmed by the Federal Court last year.

Aussiegolfa then appealed this decision to the full Federal Court.

 

The decision

On appeal, the full Federal Court held that leasing the Burwood Property to Mr Benson’s daughter was not a breach of the sole purpose test.

In coming to this decision, the Court placed emphasis on the way in which the Fund was objectively maintained, rather than subjective factors or whether the Fund was dealing with related parties.

A determinative factor was that the Burwood Property was leased to Ms Benson at market rent. Due to this, any non-financial benefit or current day benefit of comfort, convenience or accommodation derived from the arrangement was incidental or not relevant.

Additionally, the Court took into consideration the fact that two non-related parties had leased the Burwood Property prior to Ms Benson.

However, the Court cautioned it would have “probably” come to a different conclusion if the lease was not at market rent or if the investment policy of the SMSF had been affected by the leasing of the property to Ms Benson.

Further, the Court held that the investment was an investment in an in-house asset (i.e. an investment with the Related Parties directly into the sub-fund of DomaCom) and confirmed that the ATO had the power to deem the investment to be an in-house asset under the in-house asset anti-avoidance provision in section 71(4) of the SIS Act.

 

Implications

This decision is significant for trustees of superannuation funds regarding how they invest and the use of SMSF assets.

In the past, the ATO and SMSF auditors have taken a broad view of the sole purpose tests so as not to allow related party use of SMSF owned residential property. The full Federal Court’s ruling indicates that in certain circumstances (including where there are arm’s length terms) there is scope for related party use without triggering a breach of the sole purpose test.

If you or your clients are contemplating an SMSF investment and require assistance please contact Thalia Dardamanis. Any permissible related party use of SMSF assets is highly circumstantial and requires appropriate consideration and advice.

 

By |September 17th, 2018|Uncategorised|0 Comments

Binding Death Benefit Nominations and Enduring Powers of Attorney: New Developments

The Supreme Court of Queensland in Re Narumon Pty Ltd [2018] QSC 185 has recently considered:

  • whether an ineffective variation to a fund’s trust deed means that a subsequent variation to that deed will also be ineffective and any resulting death benefit nomination;
  • whether lost documents establishing a reversionary pension means the pension cannot revert to the reversionary beneficiary; and
  • whether financial attorneys have the power to make, renew and/or amend a binding death benefit nomination.

 
The judgement handed down on 24 August of this year related to the John Giles Superannuation Fund (the Fund) – an SMSF of which Mr John Giles was a member.

Mr Giles passed away on 14 June 2017 leaving behind his wife Mrs Narumon Giles, their son Nicholas, four adult children from a previous relationship and a sister Mrs Roslyn Keenan. Mr Giles’ estate (over which a family provision claim was made by one of Mr Giles’ adult children) had a net value of approx. $200,000. Outside of Mr Giles’ estate were his benefits in the Fund, comprising an accumulation account of approx. $1 million and a lifetime complying pension with a value of approx. $3 million.

Mrs Giles, as the then sole director of the trustee of the Fund (Narumon Pty Ltd), sought declarations from the Court regarding the administration of the Fund, including how to pay Mr Giles’ reversionary pension and death benefits.

Of particular importance was the declaration sought regarding whether a binding death benefit nomination (BDBN) signed by Mr Giles’ financial attorneys in 2016 was valid. This is the first time the courts have had to consider such an issue.

 
Background

History of trust deed variations

The Fund’s trust deed was amended multiple times in its history of its operation. An amendment made in 2007 (the 2007 Deed) was signed by Mr Giles in the wrong capacity and was therefore ineffective. To address this problem, a deed of ratification and variation was executed in 2014 (the 2014 Deed). Unfortunately, the recitals of the 2014 Deed referred to the ineffective 2007 Deed instead of the previous deed made in 2004. The 2014 Deed set out the requirements to make an effective BDBN.

Reversionary pension documents

The Fund’s financial statements showed that Mrs Giles was nominated as the reversionary beneficiary of Mr Giles lifetime complying pension. The documents establishing the pension and nominating Mrs Giles as the reversionary beneficiary could not be located, however, various correspondence between Mr Giles and his former adviser over several years referred to such arrangements. Further, material produced by the entity which prepared the pension documents confirmed that the pension would revert to Mrs Giles.

BDBN by financial attorneys

On 5 June 2013 Mr Giles appointed Mrs Giles and Mrs Keenan as his attorneys for financial matters pursuant to an enduring power of attorney. On the same day Mr Giles made a new BDBN (he had made several previous nominations) which was to expire 3 years later on 5 June 2016. It directed the trustee of the Fund to pay his death benefits 47.5% to Mrs Giles, 47.5% to Nicholas and 5% to Mrs Keenan.

Mr Giles lost decision making capacity soon after making this BDBN.

On 16 March 2016, Mrs Giles and Mrs Keenan, as financial attorneys for Mr Giles, signed an “extension of binding death benefit nomination” (the BDBN Extension). This extended the BDBN made by Mr Giles on 5 June 2013 for another three years.

At the same time (and in the alternative) Mrs Giles and Mrs Keenan signed a new BDBN (the New BDBN), which nominated Mrs Giles and Nicholas equally to receive Mr Giles’ death benefit. The reason for removing Mrs Keenan as a recipient was because she was not a dependant of Mr Giles’ for the purposes of the superannuation law.

 
Decision

Regarding the flawed trust deed variations, the Court found that signing the 2007 Deed in the wrong capacity made that deed ineffective. The Court also found that although the 2014 Deed referred to the wrong trustee power in its recitals, its operative provisions were drafted more broadly so that the amendment was valid and effective.

Regarding the missing reversionary pension documents, the Court was willing to accept the existence of a reversionary pension without locating the establishing pension documents. The evidence produced from the extensive search carried out by the trustee of the Fund and its advisers helped the Court to come to this conclusion.

Regarding the scope of the attorneys’ power to make the BDBN Extension and/or the New BDBN, the BDBN Extension was held to be a valid exercise of the attorneys’ power executed in accordance with the Fund’s current trust deed.

The Court considered the conflicts of interest at play. This being that Mrs Giles and Mrs Keenan were acting as attorneys whilst also recipients of Mr Giles’ death benefit.

However, the conflict had no bearing on the validity of the BDBN Extension because Mrs Giles and Mrs Keenan were confirming the pre-existing wishes of Mr Giles to ensure his estate planning wishes remained in effect.

The Court did not turn its mind to the New BDBN due to its findings on the BDBN Extension. However, it did caution that the fact Mrs Keenan was removed as a recipient could result in invalidity of the New BDBN.

 
Implications

This case demonstrates:

  • the lengths to which historical amendments to the trust deed of a fund will be analysed by litigants and the Courts to ultimately determine whether a death benefit nomination is valid;
  • the necessary document trail required to prove the terms of a pension and any reversionary beneficiary nomination;
  • the importance of having quality documents to govern any death benefit payment and seeking to update a trust deed which does not allow for non-lapsing death benefit nominations (if the member wishes to make such a nomination);
  • the tensions that can arise between superannuation arrangements and estate planning, particularly where family members may be acting in dual capacities. Conflict clauses can be inserted into powers of attorney, but this also requires careful consideration. Complications may manifest if an attorney is given too much power.

It is cause for reflection on the superannuation fund trust deeds and estate planning documents that your clients have in place. Should you require assistance or advice with this please contact Thalia Dardamanis.

By |September 14th, 2018|Uncategorised|0 Comments

ATO Attack on Rental Property Expense Claims

We have recently helped a number of taxpayers who have had their rental property deduction claims queried, and often disallowed, by the ATO.

The property is usually in a ‘holiday town’ and is advertised as being available for rent all year but is also occasionally used by the taxpayer and their family to stay in. The taxpayer’s use is usually only a couple of weeks each year.

The ATO argues that the taxpayer is only allowed to claim deductions for interest etc. up to an amount equal to the actual income derived. So if the property is actually only rented out for 6 weeks and derives rent of $3,000 then the ATO says the taxpayer is only allowed to claim deductions of $3,000. This is despite the fact that the property was available for rent for 50 weeks of the year (the taxpayer staying in it the other two weeks).

The ATO argues that the property was not genuinely available for rent even though it has been advertised on the internet and listed with a real estate agent. The ATO tends to rely on very old Board of Review and Administrative Appeals Tribunal cases that have different facts to support its view. But other, more recent cases, indicate that provided the property is available for rent (e.g. listed with a real estate agent for rental) then the expenses incurred can be claimed for that period as well as for the period the property was actually rented out.

We believe the ATO is taking too harsher stance in these circumstances. The cases the ATO relies on arose in the pre-internet era. We reject the ATO’s view that advertising a property on the internet is not sufficient for the property to be genuinely available for rent. Hopefully there will be a test case in the near future.

 

If you or your clients need help in challenging the ATO’s disallowance of expenses, or in responding to the ATO’s position paper, please contact Rob Warnock or Patrick Cussen on 1300 267 529.

 

Below is a link to the ATO’s website page ‘Focus on holiday home rentals’

https://www.ato.gov.au/media-centre/focus-on-holiday-home-rentals/

 

By |June 6th, 2018|Uncategorised|0 Comments