Trusts, assets & tax planning

Rob G. · 21-09-2007, 08:33 AM

I have heard statements claiming that the Richstar case has overturned hundreds of years of trust law. I am not convinced. I believe it has broken from the narrow view of accepting an arrangement on the mere formalities of what it is claimed to be, and not what it is effectively trying to achieve.

The court of Equity is all about conscience. Therefore setting up trusts for illegal, immoral or unethical purposes will be ineffective.

Just what is unethical ? Well here is a quote from Young J in Gregory v Hudson, (emphasis is mine):

" When one sees that discretionary trusts are used for the anti-social purpose of MINIMISING TAXATION or defeating the rights of wives (....), there does not seem to be any reason in conscience why a court of equity should take any notice of them at all."

This was back in 1997. Is this a warning to tax advisors ? If so, I don't see much restraint. Look at the proliferation of hybrid trusts for gearing tax advantages.

When your Accountant or Lawyer advises you to be careful how you arrange your trust affairs, I suggest you take notice. It usually means that there has been a development in the status quo which has made this area of law less certain (see Richstar).

It is only a matter of time before the ATO tries to test the limits of interpretation. We know the Commissioner hates discretonary trusts.

BOTTOM LINE: Keep it clean, don't shop around for opinions until you get an aggressive advisor who tells you what you want to hear. The ultimate responsibility rests with you as Trustee.

Cheers,

Rob

Sim · 21-09-2007, 09:51 AM

Funnily enough, I actually beleive that in many circumstances (mostly due to our negative gearing laws), ordinary discretionary trusts are actually LESS tax effective than owning assets in your own name.

Nigel Ward · 21-09-2007, 10:33 AM

Rob

Thanks for your thoughts. My observations below

Quote:

Originally Posted by Rob G.

I have heard statements claiming that the Richstar case has overturned hundreds of years of trust law. I am not convinced. I believe it has broken from the narrow view of accepting an arrangement on the mere formalities of what it is claimed to be, and not what it is effectively trying to achieve. As I've observed, the saying that "hard cases make bad law" is apt here. I think we need to limit the decision to the facts at hand whilst being mindful of the potential broader implications.

The court of Equity is all about conscience. Therefore setting up trusts for illegal, immoral or unethical purposes will be ineffective.

Just what is unethical ? Well here is a quote from Young J in Gregory v Hudson, (emphasis is mine):

" When one sees that discretionary trusts are used for the anti-social purpose of MINIMISING TAXATION or defeating the rights of wives (....), there does not seem to be any reason in conscience why a court of equity should take any notice of them at all." I don't think you should place too much emphasis on that passage in isolation.

This was back in 1997. Is this a warning to tax advisors ? If so, I don't see much restraint. Look at the proliferation of hybrid trusts for gearing tax advantages.

When your Accountant or Lawyer advises you to be careful how you arrange your trust affairs, I suggest you take notice. It usually means that there has been a development in the status quo which has made this area of law less certain (see Richstar). Agree with that. Listen to your advisers and accept that if you're ultimately responsible.

It is only a matter of time before the ATO tries to test the limits of interpretation. We know the Commissioner hates discretonary trusts. There will no doubt be test cases about all sorts of issues (which sometimes the ATO funds because they too want certainty). I don't think discretionary trusts are a target per se. When -ve gearing is involved they are tax inefficient as losses are trapped in the trust.

BOTTOM LINE: Keep it clean, don't shop around for opinions until you get an aggressive advisor who tells you what you want to hear. The ultimate responsibility rests with you as Trustee. Ditto.

Cheers,

Rob