Testamentary Discretionary Trusts – Essential Clauses

All families are different and all Wills are different to meet the needs of each unique group and asset structure.

Whether you are employed or own a business, if you are retired or accumulating money in your superannuation fund, are all questions that need to be addressed in the drafting of your tailored estate plan.

Asset protection

The asset protection of a testamentary trust is very important for at risk professionals that may be subject to claims for negligence or business creditors. If you have deliberately structured ownership of your main residence in the name of  a spouse then it is a problem if they die leaving it directly to you as sole beneficiary. It may be better for the family if the asset is held in a trust to protect it from those risks. Having the choice to receive a property in your name or held on trust is a key element to a well drafted Will. In the same way, shares and control of trusts that hold significant assets, must be considered carefully. If you have created “investment” trusts and “bucket companies” to hold assets away from your trading business entity, then you need to consider how those shares or the control of those trusts are owned. Perhaps the shares should be held “on trust” so that they are not exposed to these risks.

Choice to dispense with estate trust

It is a big question whether you leave the power to dispense with an estate trust in the hands of a beneficiary or knowing their circumstances you oblige them to create a trust that protects the capital and ensures an income stream for a longer term. Consider if they may need to access part of the capital for medical or other emergencies.

Future Control of estate trusts

It is crucial to look forward and think about what pressures will be faced by your beneficiaries to access the capital and if they are in any way vulnerable to external influences. They may have a history of financial risk, alcohol or drugs, gambling and just plain spendthrifts. It may be better to require a jointly controlled trust with a sibling or independent trustee, to ensure that they are not accessing the capital in a wasteful or speculative way. You might need to consider who can control the trusts if you want the capital to flow through to the next generation as part of your bloodline. Perhaps excluding spouses from controlling a trust, is a way to prevent loss of the trust capital and ensure the grandchildren get their share.

Powers of appointment

The key to protecting assets in an estate trust is by defining who is “eligible” to be a trustee and exercise power over the trust. If a person becomes insolvent, is subject to a matrimonial dispute or suffers a disability, then a default clause should deem them ineligible and the executors or a nominated person are then appointed. This removes the control of the capital away from the affected person and protects it for that person and the other beneficiaries. That control might be restricted to lineal family members and ultimate control might vest in the grandchildren.

Class of Beneficiaries

It is a crucial element of the estate trust to define the “class” or potential individuals that can receive distributions of capital or income from the trusts. The most common way is to include all descendants of a nominated test person usually the Will makers parents, as well as any companies or trusts in which any of those people have an interest. Consider if real property is involved whether foreign beneficiaries should be excluded if there are children who are non-resident taxpayers as a beneficiary and if a separate trust must be set up for them. This is because capital gains tax exemptions will not apply to non-residents and penalty rates of land tax may be incurred.

Assets to be held and ongoing management

It is very important to think about what type of assets are going to form part of the estate and how management of those assets will need to be addressed into the future. If it is a share in a trading company that owns a business perhaps a buy/sell agreement is required, so the cash is released from the asset and no further trading risk is incurred by your successor. This can be achieved by a special purpose life policy to ensure the proceeds are deemed to be the consideration for the share sale price. If it is a passive real estate investment then it may require a common trustee where there are several beneficiaries holding that property in their respective trust.

Administrative Requirements on establishing a trust

All estate trusts are created as at the moment of death and the assets are held by the executors until such time as the estate can be distributed. Probate or proving the Will by lodging an Application in the Supreme Court is usually required. This enables the assets to be sold, transferred or collected and all tax and expenses paid. Once a net amount is realised the executor can then transfer the share of the estate to the Primary Beneficiaries as trustee of their own trust. This is as simple as opening a bank account with a bank or finance institution in the name of the trustee for the trust as named in the Will.

It is crucial to remember that once money is taken out of a trust it cannot be put back in. For example if it is used to pay for part of the purchase price of a main residence, especially if held jointly with a souse. The capital is then out of the trust and at risk. It is better to “loan” the funds by a commercial loan document, so on sale of the property the money is returned to the estate trust.

You cannot add money or assets to an estate trust, otherwise it will lose its status as a trust that can distribute “excepted trust income”, to children under 18 years. The trust can sometimes “gear” its assets, or borrow to purchase an asset, subject to the restrictions set out in the Will.

The trustee can then apply for a tax file number and open an investment account just like any individual to purchase shares, managed funds or other assets. Real property is then transferred into the name of the trustee and they can start to receive the rent and will need to pay the outgoings such as rates and utilities for the property. Each year before 30 June the trustee must sign a resolution declaring how the income and capital gains are to be distributed to the “class” of beneficiaries. This enables the person to allocate income to children in the family under 18 years of age and they take it as “excepted trust income”, which is taxed at adult rates. This can minimise the tax burden on a family group over many years and will most likely pay for the costs of setting up the trust many times over.

Vesting the Trust

It is important to remember that the estate trust once established can run for up to 80 years from the date of death of the person from whose estate it is derived. This means that a family group over many generations can create a means of investing the capital and they can all share income from the trust each year. The capital can grow and be used at important stages of their lives such as deposits for homes, cars, study and overseas travel. If the capital is reduced and the tax advantages are limited, it may be within the discretion of the trustee to wind up the trust and distribute the balance of the cash. A Will maker can restrict the access to the capital until specific age requirements are met. For example access to capital might be limited to 25% at age 25 years, 25% at 30 years and the balance 50% at age 40 years, if it is a substantial amount. This staged control, can achieve the long term goals of the willmaker to ensure a secure income stream for the beneficiaries and capital protection for as long as possible. The appointment of joint trustees can assist in achieving these goals.

So you can see there are many aspects to estate trusts and thousands of ways to draft the Will to cover all family circumstances. We recommend a very detailed discussion with your financial planner and accountant to ensure the best possible outcomes and benefits for all family members. Ask us how. Go to our website www.perspectivelaw.com and click “Start My Estate Plan Now”.

Testamentary discretionary trusts – are they right for me?

How to create your strategic plan

Of course things quickly get complicated when you have established a multitude of companies and trusts to minimise tax and manage risk. Here are a few key points when thinking through the entire estate planning exercise:

1. Is there enough in the share of the estate to make it worthwhile to establish a trust? If the share of the estate is small perhaps for ease of administration a trust does not need to be set up. Consider if there are any tangible financial benefits or tax reduction options that suit.

2. Does the estate trust need to be commenced or can the person just dispense with it? In some cases it is more appropriate to just distribute the share of the estate but you need to confirm the power to do this if that is intended.

3. What is the real intention behind the trust? Is it to protect the asset from divorces, insolvency or a spendthrift family member? Often the prime motivation to establish a trust is to ensure people are protected from their own circumstances, such as a tenuous relationship, risk in business from creditors or their own vulnerability.

4. What kind of trust is appropriate for each beneficiary? Should there be an independent trustee holding control of the trust and assets? Should siblings jointly control each of their trusts? What are the practical implications of investing the assets over a long period and to suit each family group? These are important questions and not one size fits all.

5. What is a beneficiary is disabled or unable to manage their financial affairs? A special disability trust can be established in the Will and it will preserve the Centrelink pension entitlements if the person is assessed at a level of disability that complies. A main residence can be gifted into these trusts for the long term accommodation of the person even if they share with others with the support of  a carer. Careful drafting is required to ensure the model rules for the trust are created.

6 . What powers do the trustee have over the trust and who can they appoint to replace them as trustee? Often the cascading effect of  the estate trust is intended so that the capital is preserved and invested at least until the third generation has been appointed at a set age to act as trustee. There can be a requirement the trust must continue until certain specified beneficiaries reach that prescribed age as the will maker decides.

7. What powers should the trustee have? Can they invest in shares, real estate, a main residence, managed funds, exchange traded funds and can they borrow money against the capital of the trust? It is important to define the rights of the trustee so when managing investment accounts they have either the freedom or the restriction to deal with these assets.

8. What effect do the New tax Rules have? Section 102AG(2AA) was introduced to the ITAA starting July 2020. This imposed a new test income is not excepted income if it is generated from assets:

  1. acquired by or transferred to the trustee of the trust on or after 1 July 2019, and
  2. are unrelated to property of the deceased estate.

For example, if the deceased leaves $100,000 in a testamentary trust, this is excepted income as it formed part of the deceased estate. If this amount is invested, any return on the investment is also excepted income. However, if the trustee borrows $100,000 from a lender and injects it into the trust, this amount and any return is not excepted income. The borrowed funds have no connection to the deceased assets, so it does not satisfy the test under section 102AG(2AA).

The most important step is to take the time to get strategic advice for your individual estate plan. It is so easy to spend an hour by web conference talking to an experienced estate lawyer, who can have a detailed conversation with you and your accountant and financial advisor. Create the plan you need.

Commercial Deeds and Contracts Signing by electronic signature

In this age of emails, web conferencing, electronic communications and documents, we are often asked to advise on how a legal document can be validly signed. A degree of caution is required to ensure the document is binding as intended by the parties.

Changes have been made to the Justice Legislation (Covid 19 Emergency Response-Wills and Enduring powers of attorney Documents) Amendment Regulation 2020 (Qld) last week to extend the operation of these new rules for signing of Deeds. This opens a new way to getting these documents completed given the difficulties experienced, but it is only during the pandemic at this stage.

There have been a series of cases about signing electronic versions of documents, including Bendigo and Adelaide Bank, which has sought to recover loans to investors in failed Great Southern Group investment schemes. See Bendigo and Adelaide Bank Limited v Pickard [2019] SASC 123. This case considered the validity of signing of a deed of guarantee (special requirements exist for signing of deeds). The deed was “signed” by attaching the electronic signatures of officers of a company. Bendigo argued that this was in accordance with s 127(1) of the Corporations Act 2001, which allows two directors or a director and secretary of the company to sign for a company.

The company claimed the deed was signed after they obtained resolutions of its board generally approving the loan. However, there were no resolutions or authorisations from the officers to place their electronic signatures on the deed. The Supreme Court of South Australia ruled that this form of signing was invalid.

The Court also ruled that s 127(1) of the Corporations Act contemplates a document being executed by two officers signing it and so a single document must be signed by both officers. It is insufficient that two signatures appear on different counterparts or copies of the same document because no one counterpart or copy would be properly executed by the company. However, the Court also accepted that, if done properly, electronic signatures could be valid under s 127(1) of the Corporations Act.

Having failed on the validity of the execution of the deed, Bendigo argued that the contents of the deed were nevertheless a contract, and it sought to prove the existence of the contract. Bendigo failed in this also, because the Court ruled that there was no consideration, one of the essential requirements for a binding contract.

A document, including a deed, can be signed validly with an electronic signature, if the person personally authenticates his other signature on the document and contractually binds themselves to the procedure for signing (for example DocuSign).

A deed signed by a company under s 127(1) of the Corporations Act must be signed physically by both company officers on the same page or it is possible to be signed with electronic signatures with correct authority by special resolution and application of signatures on the one document.

Caution is required with electronic signatures and in cases of doubt, it is best to require physically signed “wet signed” documents.

Individuals (as distinct from companies) who are parties to a deed, must have their signatures correctly witnessed, by the person being present and seeing the signature. This requires great care and caution if it is to be done properly using an agreed electronic signature platform.

Note of caution, contracts that do not have to be deeds can be made valid, despite irregularities in signing. Note the reminder there must be a consideration for a valid contract to be made. Where there is no consideration, or the consideration is doubtful, the document should be signed as a deed. It is perfectly valid for different parties to a document to sign different counterparts of the same document if allowed by the document.

Ask us now how to get it right! www.perspectivelaw.com

Landlords and tenants Queensland: What next?

On Wednesday 22 April 2020 the COVID-19 Emergency Response Bill 2020 (COVID-19 Act) was passed. In our latest article, we look at the impacts of the Bill on commercial and residential landlords

Firstly, it is important to understand the intentions behind the Bill.

Secondly, it is crucial you do not agree to anything or sign any documents without careful advice and following a process. This includes getting the terms of any agreement to vary a lease in writing as to the fundamental points, getting a formal deed of variation signed on correct legally enforceable terms and preparing then lodging on the title the amendment to Lease. This is particularly critical for any extended term of the lease, Option exercise dates and market rental review dates.

Understanding the COVID-19 Act 

Its purposes are:

  1. to protect the health, safety and welfare of persons affected by the COVID-19 emergency;
  2. to facilitate the continuance of public administration, judicial process, small business and other activities disrupted by the COVID-19 emergency, including by easing regulatory requirements and establishing an office of the Small Business Commissioner;
  3. to provide for matters related to residential, retail and prescribed leases affected by the COVID-19 emergency; and
  4. to support the Queensland rental sector during the COVID-19 emergency period.

The Act effectively enables Ministers to make extraordinary regulations that override other Acts if the Minister is satisfied the regulation is necessary for the purposes of the COVID-19 Act.

What does it mean for Queensland landlords and tenants?

It allows Ministers of various Queensland Departments to make regulations to ensure the health and safety due to the COVID-19 emergency and the continuance of public administration, small business and other activities. This includes Retail Shop and Commercial leases as well as leases from Government owned buildings.

Regulations of the Act 

The regulations the COVID-19 Act will include, among others, are:

  1. The establishment of the Small Business Commissioner to provide a single point of information and advice, especially in relation to dispute resolution;
  2. Protect residential tenants who are not able to meet their obligations;
  3. Remove landlord obligations to undertake routine maintenance if the landlord is unable to enter the premises; and
  4. Introduce good faith leasing principles for landlords and tenants of non-residential tenancies.

At the time of writing, the only Regulation that has been tabled in the Residential Tenancies and Rooming Accommodation (COVID-19 Emergency Response) Regulation 2020 (Regulation).

The Regulation will override provisions in the Residential Tenancies and Rooming Accommodation Act 2008. The Regulation is detailed and provides for:

  1. Protection of tenants who suffer a 25% loss of income or where the rent payable is more than 30% of the tenant’s income;
  2. A moratorium on evictions until the earlier of 29 September 2020 or the last day of the COVID-19 emergency period;
  3. If a tenant is suffering excessive hardship an extension of the term until 30 September 2020; and
  4. A limitation to recover re-letting costs to one week’s rent if the tenant suffers a loss of income of 75% or more and the tenant has less than $5,000 in savings.

Retail and other prescribed leases

Part 7 of the Bill addresses retail leases and other prescribed leases by establishing a regulation-making power. The Bill itself does not lay down substantive rules of law governing the practical issues experienced by landlords and tenants through the COVID-19 pandemic, but merely provides for the passage of subsequent regulation dealing with those issues.

In reference to the explanatory notes of the Bill, the policy objective of the Bill is to provide a legislative framework to facilitate the implementation of the good faith leasing principles provided in the National Cabinet Mandatory Code of Conduct (Code of Conduct). The powers will allow regulation to be made that will:

  • prohibit the recovery of possession of premises
  • prohibit the termination of a lease
  • regulate or prevent the exercise or enforcement of any other right under a lease agreement
  • exempt a particular type or class of tenants from the protection of the Bill
  • require parties to comply with particular principles, a prescribed standard or code when negotiating or disputing a matter under a lease, and
  • provide a dispute resolution process throughout the coronavirus pandemic

At this stage the regulation-making power is time limited to 31 December 2020, but the Bill does not provide a time in which any regulation itself will cease to be of effect. This will likely be dealt with in the regulation itself.

Relevant leases

The type of leases that the Bill applies to are:

This means that the Bill itself gives a focus to retail leases but relies on the further regulations to further deal with other leasing agreements, such as commercial or industrial leases.

The Bill contemplates that any subsequent regulation will be applicable to relevant leases, sub-leases, licences or any other agreement to occupy premises, other than a residence.

Small Business Commissioner

The Bill also establishes an office of Small Business Commissioner, which is relevant to a lease of a premises used for a small business (small business lease) and for a dispute relating to the small business lease (small business tenancy dispute).

The purpose of the Small Business Commissioner is to deliver advocacy and dispute resolution support for small businesses and to provide small businesses with a single point of contact for leasing disputes. The Commissioner will have powers to enable the regulation to be used to prescribe the dispute resolution procedure for small businesses.

The functions of the Small Business Commissioner include:

  • providing information and advisory services about matters relevant to small businesses
  • assisting small businesses in reaching an informal resolution for disputes relating to small business leases, and
  • administering a mediation process in relation to small business tenancy disputes

The Land (Covid-19 Emergency Response-Waiver and Deferral of Rents and Instalments) Regulation 2020 passed last week. This only covers tenants of Government buildings and has a defined threshold requirement as well as a formula based resolution process.

The Commercial Leases of private owned properties are yet to be regulated

Consider the options:

Waiver of rental being irrevocable

Agreement to reduce rental for a fixed period

Agreement to defer rental for a fixed period linked to lock down or end of the declared covid crisis

Waiver for non-performance for a set period

Agreement to change the dates for performance of rental and outgoing or other requirements under the lease for a set date

Agree to vary the lease as to the Term, the Option exercise date, or market review dates.

Landlords and tenants must be very careful in the renegotiation process to ensure good faith and adequate legal representation.

We have developed a system for compliance by:

1 Negotiating a Terms Sheet that complies with the regulations to ensure all fundamentals are clearly recorded including a working example;

2 Drafting and signing a formal Deed of Variation of Lease signed by both parties and on independent legal advice;

3 A formal Amendment to lease signed and lodged for registration on the title to the property to ensure all subsequent owners are alerted to any changes and it is binding.

Please call or email to arrange a web conference to discuss your circumstances.

Advantages of estate trusts and issues

Australian Will trusts

There are distinct advantages to establishing a trust for your beneficiaries in the terms of your Will, including asset protection from Family Law proceedings and tax minimization. (a testamentary trust”)

Asset protection

If your spouse or a child inherits through your Will, their trust can be created in a way that protects the asset from bankruptcy, disability and matrimonial property claims. The terms of the trust are critical to how the estate assets can be protected, invested and distributed to a class of beneficiaries within a family group. The trust only begins when you die and is put into effect once the assets are distributed through your estate. It involves establishing a separate account in the name of the person nominated acting “as trustee” for the estate trust, which means they “control” the assets but do not “own” it as such. If there is a problem by bankruptcy or divorce, the terms of trust can dictate they become “ineligible” to act and by default can appoint the Executor or another family member. They then control the trust until the legal issues are resolved.

Discretionary, fixed and special disability Trusts

These trusts can be structured to take account of different circumstances of a beneficiary such as disability or issues such as mental health. The trusts can be totally up to the choice of the person (a fully discretionary trust) or they can be partly fixed as to the level of income or capital (a fixed trust). The access to the capital of the trust can be subject to an age limit or staggered over a longer period of time (a conditional access trust). As unique as your family situation may be, a number of different trusts can be established to suit the needs of everyone. If you have a disabled child, a type of protected trust can be created to ensure all health care assistance and Government support are able to continue for that person. (a special disability trust).

Tax Minimization

A major benefit of establishing a trust in your Will, is the distributions of income or capital gains, are taxable at adult marginal rates, even though a child or grandchild is under 18 years of age. The income each year for the life of the trust (which can be up to 80 years duration) can be more widely spread throughout all family members even though they may be only children and the entire tax payable can be minimiz

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ed. You do not need to be wealthy for this to have a very significant tax benefit over time and to enable the additional savings to be accumulated and invested through the trust to provide additional growth of the assets. Tax and financial advice should be obtained to ensure the circumstances are suitable and the trust terms drafted appropriately.

You are able to transfer assets “in specie” or in kind, directly into a trust, such as an investment property or directly held shares. This can also be very beneficial if the asset was acquired prior to September 1985 and as such is a pre-capital gains tax asset. Preserving this status is significant and will provide greater benefit to your family.

The best outcomes are achieved by careful planning and making sure the drafting of the Will, including estate trusts are tailored to suit your individual circumstances. This a conversation best conducted between the accountant, financial planner and your legal advisor.

Foreign Beneficiaries

Consider carefully if any of your chosen beneficiaries are living overseas and are no longer Australian resident taxpayers. The advantages are there for asset protection, but the tax implications will be different. If they buy property in the name of the trust in Australia the tax issues that arise for a foreign resident must be looked at closely. Additional stamp duty and land tax will be applied and are payable by the trustee of a foreign based trust.

Due to these additional taxes many estates have been affected according to the laws that apply to a foreign ownership of property. Technically Wills creating trusts for foreign beneficiaries are affected and some concern has been raised about existing drafting of these documents.

A new Bill introduced in New South Wales gives some relief  for trustees of discretionary Will trusts, which, may have triggered potential duty, to clearly exclude all foreign potential beneficiaries, or risk higher land tax charges. These are amendments to the Duties Act 1997 and the Land Tax Management Act 1956 . The changes would deem a trustee of an Australian discretionary trust to be a foreign person, unless the terms of the trust specifically excludes  foreign persons  The effect  would be to trigger  an extra 2 per cent land tax charge from the 2018 land tax year onwards, plus  transfer duty of up to 15 per cent on any residential land purchased.

The implication was that all discretionary trust deeds, including Wills, would have to be amended to satisfy the ‘no foreign beneficiary’ requirement by midnight on 31 December 2019. The government later delayed this deadline.

The particular difficulty facing practitioners was in amending testamentary trusts. Although cases where the testator had already died were not caught by the proposed legislation, still-living clients with existing wills incorporating trusts were in danger of being caught. The 2019 Bill would thus give estate planners the huge task of identifying which living clients had Wills incorporating testamentary discretionary trusts, contacting those clients and then persuading them of the importance of amending their wills to exclude foreign beneficiaries.

However,  The State Revenue Further Amendment Bill 2020 (NSW), now awaiting a start date, exempts the trustee of an Australian testamentary trust from being deemed a foreign trustee if the trust arose from a Will executed on or before 31 December 2020.

Exemptions from the deemed-foreign rule are also granted for an intestate estate (where there is no Will ) where the deceased died before, or within two years after, the commencement of the Act , and some  other circumstances. The 31 December 2020 deadline also applies to inter vivos trusts. (trusts created during your lifetime). These new timelines should give practitioners and their clients sufficient time to act to avoid being caught out, but all new trusts in Wills should take account of these laws.

 

Ask us how we can tailor a Will including trusts for your family specific to your circumstances.

We are able to meet by web conference and you can start your Will on-line via our website www.perspectivelaw.com

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Covid 19 What are the main points

It has been a hugely disruptive and worrying time with the challenge of the COVID-19 Virus and the subsequent effects of lock down. There is no better time to check your legal position. Every aspect of our lives and our economy have been turned upside down. Rapid Government announcements and fundamental changes to our laws have been rolled out in a short time. Our clients are concerned about a range of issues from commercial agreements being frustrated, employment rights, settlements for residential or commercial property sales and new rules for dealing with tenancies. Here are some basic details for business and owners and investors.

The National Cabinet agreed that states and territories would implement the mandatory Code of Conduct (the Code), including via legislation or regulation as appropriate, to implement the principles agreed on Friday 3 April.

The purpose of the Code is to impose a set of good faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants, in circumstances where the tenant is a small-medium sized business (annual turnover of up to $50 million) and is an “eligible business” for the purpose of the Commonwealth Government’s JobKeeper programme.

National Cabinet agreed that there would be a proportionality to rent reductions, based on the tenant’s decline in turnover, to ensure that the burden is shared between landlords and tenants. The Code provides a proportionate and measured burden share between the two parties while still allowing tenants and landlords to agree to tailored, bespoke and appropriate temporary arrangements that take account of their particular circumstances.

Our strongest advice is get advice before you sign any document and ensure all variations are formally documented and registered.

National Cabinet again noted that it expects Australian and foreign banks along with other financial institutions operating in Australia, to support landlords and tenants with appropriate flexibility as they work to implement the mandatory Code. We caution clients to check carefully the terms of approval continue to apply before reliance on the documents issued prior to COVID-19. Off the plan contracts and business covenants in loans require special attention.

The Commonwealth Government is also acting as a model landlord by waiving rents for all its small and medium enterprises and not-for-profit tenants within its owned and leased property across Australia. Check carefully if this applies and to what extent.

The Rent Relief Policy will include a mutual obligation requirement on the small and medium sized enterprises and not-for-profit tenants to continue to engage their employees through the JobKeeper initiative where eligible, and if applicable, provide rent relief to their subtenants. Check how the exchange of information will occur and eligibility will be documented between the parties.

You must follow the national guidelines and should record any option you decide on including:

An agreement to waive the tenant’s obligation to pay rental for a period under the Lease which cannot be revoked;

An agreement to reduce the rental payable by the tenant for the relevant period as a variation to Lease;

An agreement to defer the rental or outgoings payable by the tenant

An agreement to waive, reduce or defer the rental and outgoings payable is for a fixed term or a variable period or conditional on the Government lifting or changing a lock down period

Agreement to waive al rights for non-performance under the lease or comply with obligations for a fixed or variable period

Include tax and GST consequences for invoices issued and GST paid or payable

Consider how this affects assignment of a lease

Consider any security around obligations for tenants

Consider consent of financier secured over premises needing to consent to the agreement

Include a practical working example of how the changes work

COVID-19 Emergency Response Act 2020 (Qld)

The Act is similar to the emergency powers passed in other states in that it enables regulations to be passed prescribing limits on landlords’ and tenants’ rights. The key difference is that the Act has been passed after the Code was issued and therefore includes specific provisions referencing Code principles. The regulation-making power is broad as it allows for regulations to be made under both the Act itself or the Retail Shop Leases Act 1994 (Qld) in relation to a “relevant lease” in response to the COVID-19 emergency. Careful documentation must be prepared and signed to record accurately any agreement. If it is a registered lease, then register the variation and extension of term.

Part 7 of the Act deals with retail and other prescribed leases (but not residential leases which are dealt with in Part 8). A relevant lease for the purpose of that Part is a retail shop lease under the Retail Shop Leases Act 1994 (Qld) or a “lease prescribed by regulation”. A lease includes any agreement under which occupancy rights are granted (except for residential leases).

By defining relevant leases in this way, the Act leaves open the categories of leases that may be affected by the regulations: the underlying Code leasing principles may have an application to a broader range of tenancies than was initially contemplated by the National Cabinet. Like the Code, Part 7 of the Act has a tenant focus. It allows regulations to be made which:

prohibit lessors from recovering possession of premises

prohibit lessors from terminating a lease

regulate or prevent the exercise or enforcement of another right of a lessor

exempt a lessee (or class of lessees) from the operation of a provision of an Act, lease or other agreement relating to the premises

require parties to have regard to principles or a code in negotiating or disputing matters

require mediators to have regard to principles or a code when mediating

provide for a dispute resolution process

prescribe other matters necessary to facilitate the above

provide for a maximum penalty of 20 penalty units for a breach of the regulation.

Any regulation made under the Act can have retrospective application to 23 April 2020 and expires on 31 December 2020. Depending on the time taken for the current “lock down” measures to be relinquished, the regulations have the potential to regulate landlord and tenant conduct well after businesses have resumed normal operations.

Part 6 of the Act provides for the appointment of a Small Business Commissioner to provide dispute resolution support for small businesses including mediation for tenancy disputes.

Residential Tenancies and Rooming Accommodation (COVID-19 Emergency Response) Regulation 2020 (Qld)

These regulations require certain forms and procedures to be followed strictly when dealing with issues between Landlords and tenants and specific advice must be obtained in each case.

Payroll Tax

You may be eligible for one or more of a range of payroll tax relief measures as a result of the impacts of coronavirus (COVID-19).

These include:

refunds of payroll tax for 2 months

a payroll tax holiday for 3 months

deferral of paying payroll tax for the 2020 calendar year.

As part of this relief package, the refund and payroll tax holiday do not have to be repaid.

If you are an employer (or part of a group of employers) who pays $6.5 million or less in Australian taxable wages, you may have received an email about a:

refund of your payroll tax for 2 months (November and December 2019)

payroll tax holiday (i.e. no payroll tax to be paid) for 3 months (January to March 2020).

You can also apply for a deferral of payroll tax for the 2020 calendar year. (If you have already applied for a deferral, you do not need not reapply – it will be extended.)

If you are an employer (or part of a group of employers) who pays more than $6.5 million in Australian taxable wages and have been negatively affected (directly or indirectly) by coronavirus, you can apply for a:

deferral of payroll tax for the 2020 calendar year (If you have already applied for a deferral, you do not need not reapply – it will be extended.)

refund of your payroll tax for 2 months (January and February 2020).

Land Tax

You may be eligible for one or more of the following land tax relief measures:

a land tax rebate reducing land tax liabilities by 25% for eligible properties for the 2019-20 assessment year

a waiver of the 2% land tax foreign surcharge for foreign entities for the 2019-20 assessment year

a 3-month deferral of land tax liabilities for the 2020-21 assessment year.

You do not need to apply for the foreign surcharge waiver or the 3-month deferral. OSR will reassess land tax to apply the waiver and provide a refund where the assessment amount has already been paid.

However, you will need to apply for the land tax rebate. You may be eligible for the land tax rebate if at least one of the following circumstances applies to you.

You are a landowner who leases all or part of a property to one or more tenants and all the following apply.

The ability of one or more tenants to pay their normal rent is affected by the coronavirus (COVID-19) pandemic.

You will provide rent relief to the affected tenant(s) of an amount at least commensurate with the land tax rebate.

You will comply with the leasing principles even if the relevant lease is not regulated.

You are a landowner and all the following apply.

All or part of your property is available and marketed for lease.

Your ability to secure tenants has been affected by the COVID-19 pandemic.

You require relief to meet your financial obligations.

You will comply with the leasing principles even if the relevant lease is not regulated.

If you are eligible for the land tax rebate under both the above circumstances, it is expected you will apply the rebate firstly to provide rent relief to your residential or commercial tenants. You can then apply any remaining rebate to your own financial obligations (e.g. in relation to debt and other expenses).

The land tax rebate will only apply to each property that meets the above eligibility requirements and conditions, rather than the rebate applying to entire taxable landholdings.

Where there are multiple tenants for a single property, including mixed-use developments, if the eligibility requirements and conditions are met for at least one tenancy, then the whole property is eligible for the land tax rebate.

The land tax rebate does not need to be repaid if the eligibility requirements and conditions are met.

You can apply for the land tax rebate up to 30 June 2020.

You need to create or log into your account with Office State Revenue to apply.

Other support for business announced by Queensland Government

Relief for businesses renting government premises.

$500 rebate on electricity bills for all Queensland small and medium sized businesses that consume less than 100,000 kilowatt hours. This will be automatically applied to electricity bills.

Liquor licensing fees waived for business impacted by enforced safety industry shutdowns.

Industry Support Package

 The Industry Support Package will assist large businesses through this period to ensure they will be able to scale up and service the community when economic activity improves.

For further detail on the Industry Support Package email covid19ISP@treasury.qld.gov.au

Commercial Transactions and Agreements

 Consider getting specific advice before signing any Contracts and including a COVID-19 Clause to cover changing circumstances.

The COVID-19 Pandemic and government responses may have a significant impact on commercial transactions, including due to closures and reduced availability of some parties solicitors, accountants, financial institutions, titles office, search providers and franchisors.  It may also trigger changes to the views, attitudes and positions of key parties in relation to some transactions.  These things may be outside the control of the parties to the transaction and may not be foreseeable.

Throughout the duration of the COVID-19 Pandemic and government responses:

Key steps or conditions in relation to a transaction may not be able to be achieved or may be significantly delayed. This may include usual steps like – engaging third parties, doing inspections, undertaking searches, obtaining certificates, signing documents, transferring funds, obtaining consents and approvals, handing over possession of documents / business assets, passing company resolutions and updating registers and business records].  Transaction parties do not usually have a general right to extend time merely because a key step cannot be undertaken or is delayed, unless their particular transaction documents provide for the same.

Many financiers will reserve the right to withdraw from their commitment at any time prior to advancing funds for any number of reasons.  Those reasons might include changes to the party’s personal financial circumstances, or other material adverse events in the wider commercial environment

In cases where a finance approval is withdrawn, or sufficient finance is otherwise unavailable, the relevant party may still be obliged to proceed with the transaction if the transaction document is binding and is no longer conditional on appropriate conditions.  If this happens and the party does not have sufficient funds to proceed, then the counterparty may seek to terminate the transaction or seek to have the transaction specifically performed.  In both instances, the counterparty may also seek to claim compensation (such as loss of profits and other damages, which may be significant). Our strongest recommendation is to have a COVID-19 clause in every agreement to cover an extension or termination where affected and perhaps a force majeure clause.

Please also consider this proposed transaction in light of the duties of your directors to act in good faith, in the best interests of the company and with due care and skill.

In these uncertain times you may consider not proceeding with the transaction at all.  Alternatively, you may consider undertaking further due diligence and/or asking us to seek to include targeted clauses in the transaction documents to attempt to minimize the risks to you.

There may also be greater uncertainty and unpredictability around whether a party will ultimately be able to satisfy conditions, obtain any necessary consents or approvals, and do other things required for the transaction to successfully proceed. Asset values, trading conditions and market outlooks may also change rapidly and without notice.

Insolvency Laws Safe Harbour from Director Liability

First, there needs to be a clear understanding of the precise nature of the solvency of the entity. Solvency goes principally to the company’s working capital and cash flow position. Is this a temporary liquidity crisis, triggered by what are temporary challenges to supply chain, or has this exposed an existing and potentially fatal weakness in the company’s financial position and prospects?

Second, to secure the benefit of safe harbour, the directors must actually be developing courses of action that are reasonably likely to lead to the better outcome. Relevant factors here include obtaining advice from an appropriately qualified advisor, who is given enough information to give appropriate advice, and the development or implementation of a restructuring plan.

Third, there are gateways which need to be satisfied before safe harbour can be relied on, including the payment of all employee entitlements, by the time they fall due and the maintenance of appropriate taxation records.

Employment Laws

Statutory personal/carer’s leave and COVID-19-when is it payable

Paid statutory personal leave is a minimum employment standard for all national system employees, with the exception of casual employees, under the National Employment Standards (NES) in the Fair Work Act 2009 (Cth) (FW Act).

To qualify for paid statutory personal/carer’s leave, an employee must be absent from work due to the employee either:

Not being fit for work because of personal illness or injury affecting the employee. In practice, this element of paid statutory persona/carer’s leave is often referred to as sick leave or personal leave and could be used by employees who are suffering the effects of a COVID-19 infection.

Providing care or support to a member of the employee’s immediate family or household who requires care or support due to a personal illness or unexpected emergency affecting the family or household member. In practice, this element of paid statutory personal/carer’s leave is often referred to as carer’s leave, and could be used by employees who:

are caring for family or household members who are suffering the effects of a COVID-19 infection; or

are caring for children who have unexpectedly been sent home due to day care or school closures resulting from the COVID-19 pandemic (noting as at 18 March 2020 the position of all levels of government was to not close schools, see What restrictions have been imposed by the government in response to COVID-19?). Note that the eligibility for this form of paid personal/carer’s leave is an unexpected emergency, and arguably would not cover a situation where the employee was on notice of impending or potential day care or school closures.

 Under the NES, full-time and part-time employees accrue ten days of paid personal/carer’s leave per year, paid at the base rate of pay for their ordinary hours of work, and accumulating from year to year. The entitlement is limited to the number of days an employee has accrued, meaning at any given point an employee may have more or less than ten days of paid personal/carer’s leave available.

Assuming the employee is not fit for work because of personal illness or injury or cannot attend work due to providing care or support to a member of their family or household and meets the notice and evidence requirements for taking leave detailed in the FW Act, the employee can use all of their accrued personal/carer’s leave balance.

In what circumstances is unpaid personal/carer’s leave, and compassionate leave, available?

Unpaid statutory personal/carer’s leave, and statutory paid or unpaid compassionate leave, is a minimum employment entitlement under the NES and available to all national system employees, including casual employees

There is no entitlement to unpaid carer’s leave if paid personal/carer’s leave is available to the employee.

Like paid personal/carer’s leave, the entitlement to unpaid carer’s leave is triggered for each occasion that a member of the employee’s immediate family or household requires care or support due to a personal illness or unexpected emergency affecting the family or household member. Employees are entitled to two days unpaid carer’s leave for each permissible occasion.

Compassionate leave is paid leave except for casual employees, who take compassionate leave as unpaid leave. The entitlement to compassionate leave is triggered when a member of the employee’s immediate family, or a member of the employee’s household, contracts or develops an illness, sustains an injury that poses a serious threat to their life or dies. Employees are entitled to two days paid or unpaid carer’s leave for each permissible occasion.

Where an employee refuses to attend work due to fears about COVID-19, what action can an employer take and what pay are they entitled to?

If the employee can work from home, this may well resolve the issue.

If not, the employer would need to consider the public health advice, the specific reason that the employee is concerned about attending the workplace, and whether it would be discriminatory to refuse working from home, take disciplinary action or withhold pay in light of the employee’s refusal.

We consider some of the potential forms of discrimination include standing down or terminating an employee sole on the basis of a COVID-19 event affecting them or their family.

If there is no discrimination angle, and the public health advice is such that the employee could reasonably be asked to continue to attend work, then it is possible that the employee could be investigated for refusal to follow a reasonable and lawful direction, and unauthorised absence. Depending on the reasons given by the employee, it may be necessary for the employer to require the employee to provide medical evidence in support of their inability to attend for work, or to subject to independent medical examination. If the absence is unauthorised, then the employee is likely not entitled to pay as they are not ready and willing to attend work.

So, these are a few areas which may cause concern on a daily for business owners and investors. It is prudent to seek specific advice in every set of circumstances and to ensure that compliance with the new laws and regulations is achieved in each case. Be sure and check your situation before making a decision.

Please contact me if you need assistance tony.crilly@perspectivelaw.com

We are available when you need after hours service by web conference or phone.

TECHNOLOGY AND THE MECHANICS OF MODERN SUCCESSION LAW.

Australians embrace technology in nearly every aspect of our lives. However, when it comes to making a Will, there is an overwhelming need to comply with formal requirements in the Succession Act (Qld). In late 2017, the Queensland Supreme Court (QSC) delivered the highly-publicised decision of Re Nichol [2017] QSC 220 (‘Nichol’). This startling decision expanded the circumstances in which the courts may use a power of discretion to dispense with the rules and hold an informal Will valid. This decision proves the importance of making a valid formally signed Will to avoid your estate being involved in prolonged litigation after your death. Two days before mark Nichol’s death, his wife unfortunately separated from him. Immediately prior to committing suicide, Mark constructed, but did not send, a text message to his brother to act as a will. A recreation of this can be seen above.
Under this ‘text message Will’, Mark’s brother and nephew were set to inherit. Mark’s wife contested that the text message was not a will and accordingly, there was a total intestacy meaning Mark’s wife and son should inherit. The court had to determine if the message was in fact an ‘informal’ will.

Making a Formal Will

In order for a person to make a valid Will in Queensland, the document must follow the forma requirements of being in writing, signed by the Will-maker, witnessed by two independent people (unrelated to them) present at the same time. Despite being an inconvenience in a busy life, these requirements have a vital purpose. They ensure that the true intentions are contained in the Will and protect against any fraud, lack of capacity or undue influence or coercion.

 

Compliance with these requirements is not the only way in which a document can express testamentary intentions, but following these requirements provides the greatest certainty in achieving the outcome desired for transfer of an estate asset upon death.

Despite informal wills being accepted by the courts often, these cases confirm the vital need to obtain qualified legal advice from an estate practitioner to draft and organise proper execution of a formal Will. If you decide not to create a formal valid Will, you are leaving open the opportunity that their wishes will not be upheld. In effect, you are passing up the ability to use an array of clever and effective succession structures and drafting mechanisms available to maintain maximum benefits and asset protection strategies for the family. It was demonstrated in Nichol, that an estate will be involved in costly litigation over an extended period to seek a resolution. Given the estate in Nichol was modest, there was not much left for the beneficiaries to inherit after visiting the Supreme Court. We are all reminded of the importance of planning for the future by ensuring you set your wishes in unequivocal written and signed terms to provide absolute certainty.

 

There have been a number of other cases in which informal Wills have been upheld despite the lack of formality around the signing. However, every time a lack of formality occurs, there is always the cost of additional court costs to “prove” the Will.

 

Note during 2020, we have an extraordinary series of events arising from the Covid-19 pandemic throughout the world. It sharpens the mind when thinking about your personal succession strategy and how you can achieve an update.

 

There is currently draft legislation being prepared in Queensland that may broaden the formal witnessing requirements to possibly include web conferences and signing the document after identifying a person and watching them sign the Will document.

 

We are open for business 7 days a week and you can click on our website www.perspectivelaw.com to start your estate plan immediately. We will receive the basic details and can contact you straight away to organise a web meeting to confirm your instructions from the comfort of your home. We can send the documents by courier or express post and arrange a witness procedure. If you need any assistance with your estate planning, call us to discuss how we can help you with your Strategic Estate Plan.

 

 

Business Sales-Key Questions

I have not had a chance to write for a while and wanted to list a few things I have observed about business sales. I hope these are helpful.

  1. Get your details in order- We find that by engaging with a quality agent you will be encouraged to collate all documentation regarding the business and this includes both financial and legal documentation. The correct A.B.N, A.C.N, name of entity or trust and the registrations are all critical to getting it right on the contract;
  2. Get tax advice before you transact- Getting the structure of the purchasing entity right is critical to the tax outcomes later. You need to ensure the actual net amount you expect to receive and the tax concessions available are understood from the outset, so you can negotiate on a figure with confidence;
  3. Check what loans are secured over the business- You need to understand what loans must be repaid at completion to give clear title to a buyer. Check what facilities are required to be reduced and to what level. Find out what securities are held including P.P.S.A, home loan mortgages or guarantees, that need to be released and plan ahead with your lender;
  4. Work out what adjustments must be made- If you have significant stock or work in progress, you need to figure out exactly how to deal with this as part of the terms of Contract. Find an independent experienced stocktake consultant and ensure the costs are covered in the deal. If you have large amounts of work in progress you need to ensure a clear method to calculate this is written in the Contract. This might be identifying a percentage of an uncompleted project fee;
  5. Consider the structure of payment- It is very often required that as a Seller you need to offer some part of the sale price as a financed amount over a set period. Figure out what percentage is acceptable as a risk, how it can be secured and how it is helping the deal get across the line. Consider profit earn out amounts if you are expecting a rise in sales due to a delay or condition arising after completion. Find out how these extra amounts are taxed. Think about making it easier for the buyer to borrow and if a separate consultancy agreement can assist with concerns over restraint of trade after the sale.
  6. Terms Sheet- Make sure you start with a terms sheet on agreed fundamental points. Do not waste legal or accounting costs by engaging  with a party if you cannot agree on the big ticket items, like price, or stuff that is essential. Do not have legal advisors renegotiate fundamental terms, or go too far into a deal unless you know the other party can complete on those terms (including adequate finance).  So call us if you are considering buying or selling so we can have an early discussion about the important questions to be resolved before you start.

Succession Changes

Hi everyone! There have been a number of changes that affect strategic succession plans as a result of reforms to tax during the last year. As a business owner or investor you should note:

  1. Foreign Residency– If you are or became a foreign non-resident taxpayer and you own real estate, you need to consider the impact of capital gains tax reforms on the sale proceeds (hint:check your residency status which depends on the circumstances);
  2. Family Trusts– when can you split assets into separate trusts? Tax Determination TD 2018/D3 sets out when a “re-settlement” occurs over assets causing a tax liability. This might deem a declaration as a new personal right or obligation giving rise to an E1 CGT event to happen and a liability to arise; (high caution splitting trusts)
  3. Inter-company loans and loans by individuals from family companies.  There are specific requirements for compliance defined under TD 2018/13 where a loan is an “ordinary commercial transaction”. Ask the question is it “solely or mainly part of an arrangement involving a payment or loan to a shareholder or shareholder’s associate (target entity) causing it to be a “deemed dividend”? (and taxable income in that financial year);
  4. Division 7A Loans– The benchmark interest rate for these loans is now 5.20% per annum (TD 2018/14); (check your loan documentation)
  5. Small Business Company Tax Change–  Check Tax Ruling TR 2017.D7 and Practical Compliance Guideline PCG 2018/D5 which defines what to assume for  imputation purposes when deciding a corporate tax rate. This requires a “carrying on a business test” and a practical administrative approach to choose a simple method;
  6. Central Management and Control– Where is the jurisdiction for a company sit in terms of “central management and control” and are the profits taxable in Australia?. A PCG on TR 2018/5 regarding residency is set out in PCG 2018/9 with reference to where it is controlled and directed as a “matter of substance” and how its control and direction is exercised over time. A change in residency of a Director shareholder will have a significant impact. The place where meetings are held or the Directors are located will have an impact;
  7. Self Managed Super Funds– A Decision Impact Statement in response to the case Aussiegolfa Pty Ltd (Trustee) v FCT  states a super fund trustee can never breach the”sole purpose test” simply because market value was paid when leasing an asset to a related party.  Consider if this influenced the “investment policy” for the fund. For example, buying residential property and leasing to an associate, even at market rates, is contravention of the test;
  8. Land Tax – Caution must be exercised regarding family trusts that have a foreign resident beneficiary under the relevant state based Duties Acts. (consider amending the Deed to remove a foreign non-resident taxpayer).

There are just a snapshot of some of the tax issues that arise when reviewing succession plans and structures for client that have changes in circumstances. Perhaps it is a smart investment to have a broad discussion with both your accountant and legal advisor to coordinate the strategy, cheers

Mobile phones videos and Wills

‘Informal Wills’ – Just not Worth the Risk or Expense!

A recent trend in decisions by the Supreme Court of Queensland highlights the importance of getting good legal advice when making a Will.

In order for a Will to be valid in Queensland, it must meet certain formal requirements. These requirements exist to ensure that the Will expresses the Willmaker’s true testamentary intentions. It also assists by ensuring that the Will is not the result of  impaired capacity, undue influence or fraud.

Legislation in Queensland allows the Court to dispense with these requirements and to accept what are known as ‘informal Wills’. The Court will only accept an informal Will if it is satisfied that there is a document that records the Willmaker’s intentions, and that the Willmaker intended that document to be their final Will. The Courts have been asked to determine the validity of various “documents” including a Will written in the page of a diary and not witnessed, a document saved on a hard drive of a computer but not printed or signed and suicide notes.

Recently, an unsent text message was accepted by the Court (in QLD) to be a valid Will (Re Nichol). The text contained directions about who should receive the writer’s property after his death, and what should be done with his remains. The text message signed off with the words ‘my will’.

A video recording contained on a DVD was found to constitute a will (Mellino v Wnuk;Re Estate of Wai Fun Chan, Deceased). 

 The Court has also recognised the validity of an electronic ‘will’ created on an iPhone (Re Yu) and in recent weeks, Judgment was given and probate granted in a well-publicised case regarding a mobile phone video will.

 On the contrary, the Courts have rejected arguments concerning instructions for new Wills and draft Wills which have not been signed (Wood & Anor v Trudinger; in the will of Alan Stewart Trudinger [2017] QSC 245).

While informal wills can sometimes be accepted by the Court, these recent cases only go to further reinforce the importance of obtaining legal advice in succession when preparing and executing Wills. By not doing so, not only do you leave open the possibility that your true wishes may not be followed but you pass up the opportunity to consider the various structuring opportunities that might be available to your family after your death. This may also result in your estate being required to fund time consuming and costly litigation.

If you or your clients wish to begin the succession planning process, please contact us.