We are pleased to provide our clients with the following information provided to us by Vale Legal Pty Limited in respect of the amendments to Section 54 of the Duties Act 1997 and the implications arising from the Bamford High Court decision. Both these issues were raised in our June 2010 newsletter.

First of all some house-keeping in relation to our postal address.

Change of our postal address

We have changed our postal address to PO Box 20247 World Square NSW 2002. The change is noted on our correspondence.

We have arranged for a redirection from our former GPO Box for 12 months so do not be alarmed if you have recently posted to this address.

SMSFs - Transfers to new or additional trustees - Amendments to Section 54 of the Duties Act 1997.

Further to our June 2010 Newsletter, Vale Legal Pty Limited have now clarified the position relating to the effect of the change to the definition of a 'special trustee' in subsection 54(1) of the Duties Act 1997.

The change will operate to catch transfers which currently attract nominal duty of $50. From 1 July 2010 trustees of SMSFs will now have to come within the scope of the exception under subsection 54(3) of the Duties Act in order to avoid transfer duty in circumstances involving the transfer of dutiable property as a consequence of the retirement or appointment of a trustee.

The exception requires the satisfaction of the Chief Commissioner that any continuing or incoming trustee is not and cannot become a member of the relevant superannuation fund.

Based on a review of DUT 37 and relevant case law, whilst it is possible to establish an SMSF with individual trustees, they will be very inflexible vehicles as any retirement or addition of a member/trustee will result in proportionate ad valorem duty on the dutiable property in the fund.

In summary:

• If the fund holds dutiable property in NSW (eg real estate or shares in a private company) any proposed retirement of an individual member/trustee or the addition of a new member/trustee must involve the retirement of all individual trustees and the appointment of a new corporate trustee with the continuing individual trustees and the new individual trustees as directors of the new corporate trustee.
• If it is proposed that a SMSF will hold dutiable property in NSW and that the membership of the fund may change by the addition or removal of a member(s), the trustee of the fund must be a corporate trustee to obtain the concession granted under section 54(3) of the Duties Act.

In conjunction with Vale Legal Pty Limited we will be updating our covering letter to alert you to the implications of this recent amendment to the Duties Act.

Getting It right - The impact of Banford on Trust Deeds and Trust Resolutions

Greg Vale of Vale Legal Pty Limited has kindly permitted us to reproduce his article on this important High Court decision. We hope you find it useful.

'On 30 March 2010 the High Court handed down its much awaited decision in FCT v Bamford [2010] HCA 10. In response to Bamford, on 2 June 2010 the ATO released a Decision Impact Statement ("DIS") and Practice Statement Law Administration PS LA 2010/1 which outlines how the ATO will treat the determination of trust income.

The High Court decision and ATO response are significant and affect every trust in Australia. In particular they affect how trust deeds and income distribution resolutions must be drafted to obtain the optimum tax outcome.

The significance of the High Court's reasoning in Bamford is that it confirms that it is possible to define and modify "trust income" through the drafting of one's trust deed. The advantage of being able to define and modify trust income is that it can create circumstances which remove adverse tax consequences or even allow more beneficial tax outcomes to be achieved.

Although the ATO accepts that Bamford means that trust deed clauses can be used to define trust income and can thus influence how the net income of a trust will be taxed, it provides a series of caveats, including the potential application of the general anti-avoidance rule or trust stripping rules in circumstances involving a deliberate mismatch between income entitlements and tax outcomes.

Great care is required in the drafting of the yearly income distribution resolutions. Following Bamford, there is a clear benefit in ensuring that one's trust deed confers sufficient powers to allow a trustee to determine trust income in each income year. Accordingly, in relation to the 2009/2010 income year and onwards, we consider that all trustees should undertake the following steps in light of Bamford:

Step 1 - Trust Deed Review

Trustees should review the trust deed in conjunction with their tax and legal advisors to determine whether:

1. the trust deed defines trust income and if so, how the definition operates to determine its capacity to minimise adverse tax consequences going forward;
2. the trust deed provides the trustee with adequate powers to modify trust income, including the power to reclassify items as income or capital and vice versa and allocate expenses and losses as appropriate.
3. there are appropriate streaming provisions and whether they are adequate going forward.

Step 2 - Consider amending the Trust Deed

Where the trust deed does not contain an adequate definition of trust income or powers to enable the trustee to stream or modify what constitutes trust income, then trustees should consider whether it is beneficial to amend the trust deed to resolve these deficiencies. Tax and legal advice should be sought prior to amending the trust deed so as to avoid any adverse tax consequences. For example, the ATO have already flagged the issue of trust resettlements in this context.

Step 3 - Review the drafting of Trustee Resolutions

Trustees should review how they draft their distribution resolutions to ensure that an appropriate tax outcome will be achieved.

Vale Legal Pty Limited can carry out the necessary review of your client's trust deeds and provide advice as to the appropriate amendments in the wake of the decision in Bamford and considerations to take into account when drafting income distribution resolutions for a total of $250 (unless advised otherwise in advance).

Separately, for an additional charge to be advised as part of the trust deed review, Vale Legal Pty Limited are able to draft the relevant deeds of amendment and provide tax and legal advice on the issue of resettlement as appropriate. Further, any deeds of amendment will be accompanied with advice as to the types of resolutions appropriate for that deed.

If you have any questions please do not hesitate to contact Vale Legal Pty Limited on (02) 9993 3833.

Disclaimer

The information provided in this document is for your general information only. It is not intended that anyone adopt this information to their personal circumstances without first seeking professional advice.

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