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• 

  To sell, or not to sell? That is the question (in deceased estates)

  Rare are the circumstances where “The Tax Man” offers any dispensation from our tax-paying duties.  Death is one of those circumstances.

  Deceased estates enjoy roll over relief from the payment of capital gains tax.[1]  One power of an executor (or administrator, where there is no will) is to decide how assets within an estate are dealt with.  Subject to any specific direction in a will, an executor will ordinarily have the power to sell assets.  They will also have the power to appropriate certain assets in-specie, and apply them towards a beneficiary’s share of the estate.

  For example, an estate may have two equal residuary beneficiaries with the assets comprising $200,000.00 cash and shares Medibank Private Limited also valued at $200,000.00.  In discharging their duties, the executor could give beneficiary 1 $200,000.00 and could transfer the shares to beneficiary 2.  While these types of decisions are often made in consultation with the beneficiaries, the executor generally does not require the consent of the beneficiaries to make these decisions.

  Where there are multiple beneficiaries of an estate, from a practical point of view, often the easiest thing for an executor to do is say “show me the money”.  That is, an executor elects to sell an asset within the estate.  It is then easy to divide the sale proceeds among the various beneficiaries with little argument.  Executors are often pressured by beneficiaries who have large debts and would prefer to receive “liquid” funds.  However, from a tax perspective, often it is not prudent for an executor to engage their powers of sale.

  The sale of assets within an estate will often attract the payment of capital gains tax liabilities.  However, where assets are transferred to beneficiaries of an estate, there are no immediate tax consequences.[2]  On transfer, The Tax Man allows you to “roll over” or defer the tax consequences until some later time or event.

  The general rule of thumb is that if the deceased person would have been entitled to reduce or disregard a capital gain while they were alive, that right continues in the estate.  The right continues for a two year period beyond the date of the deceased’s death.[3]

  For example, let’s say that at the date of Lucy’s death, she:

  • owned 500 Commonwealth Bank shares in her sole name, valued at $36,650.00. Lucy purchased the shares in 2005 for $20,000.00 (at $40.00 per share);
  • owned 500 National Australia Bank shares in her sole name, valued at $12,240.00. Lucy purchased the shares in 1984 for $7,500.00 (at $15.00 per share); and
  • was the sole Registered Proprietor of her home, where she lived until she died.

  Lucy left a will appointing Matthew her as her sole executor and nominating James as her sole beneficiary.

  On Lucy’s death, if Matthew transferred the Commonwealth Bank shares to James, there would be a capital gains tax rollover.  No tax is payable on the transfer.  James would enjoy the assets with the benefit of regular dividend payments.  For calculating any future capital gains tax, James would acquire Lucy’s cost base when she initially purchased the shares ($40.00 per share).

  If James later sold the shares for $40,000.00 ($80.00 per share), he would have to pay capital gains tax on $60,000.00 (the difference between the ultimate sale price and Lucy’s purchase price).  James may be entitled to a reduction in the tax depending on how long he retained the shares.[4]

  If Matthew, as the executor, elected to sell the Commonwealth Bank shares within the estate, there would be a capital gains tax event and the estate would be liable to pay tax on the gain.  This would reduce the overall “value” of the inheritance being received by James.

  The National Australia Bank shares were acquired by Lucy in 1984, before capital gains tax was introduced.  If Matthew sells these shares, there will be no tax payable.  If Matthew transfers these shares to James, there will also be no capital gains tax payable.  James would acquire the shares at their value on Lucy’s death.

  In relation to the main residence of the deceased person, there is an exemption from paying capital gains tax.[5]  While it is a complicated area of law, if an executor sells the deceased’s main residence, provided settlement is effect within two years of deceased’s death, the sale proceeds will be exempt from capital gains tax.

  Any income earned beyond the date of the deceased’s death (by way of dividend payments, share sales etc.) must be declared in a separate tax return filed on behalf of the estate.  This is another obligation of an executor.  The estate requires its own tax file number because it is a separate tax paying entity.  The estate is treated like an individual for tax purposes and can take advantage of the tax free threshold for three years.  Because of this, if assets within an estate are to be sold, there is merit in spanning the sales out over several financial years.

  While selling assets within an estate may seem like an easy and efficient way to approach the estate administration, executors should seek legal and accounting advice before relying on the powers of sale bestowed upon them.

   

  [1] Income Tax Assessment Act 1997 (Cth) Division 128.

  [2] Provided those transfers are consistent with the terms of the will or the applicable intestacy laws.

  [3] Income Tax Assessment Act 1997 (Cth) Section 152.80.

  [4] Income Tax Assessment Act 1997 (Cth) Division 115.

  [5] Income Tax Assessment Act 1997 (Cth) Division 118.

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  Co-Operatives and the Power of Blockchain

  In our first article in this series, we stepped through the basics of blockchain and how it might influence the way we transact with one another. Blockchain is rapidly finding its way into all sorts of enterprises, presenting exciting opportunities for businesses to optimise their business operations. It might be surprising to consider that there are few pairings that are more natural—and perhaps less expected—than blockchain and co-operatives.

  Co-operatives and blockchain share a theme of mutual benefit: they exist to serve their members. At their core, the members are a group of people working together towards achieving shared social, cultural or economic goals. Importantly, this form of organisation is distinct from many typical corporate structures where the ultimate purpose for directors is always to serve their shareholders.

  In simple terms, a co-operative is a legal entity owned and democratically controlled by its members, who typically have a close association with the business of the co-operative. Common and historically successful co-operatives are those in the agricultural sector, including those in the dairy, grain, and meat export industries. The co-operative model shares risk and reward amongst its members. They are also “decentralised” in that there is no one member in a position of power or control above the others. This element of democratic control is a core element of the co-operative structure. Coincidentally, this decentralised notion of power and democratic control is also a core element of blockchain.

  Blockchain is the technology that allows, for example, crypto-currency such as Bitcoin to exist without a central bank. It provides a secure, decentralised and un-editable record of all transactions.

  So, think of a co-operative as the corporate structure and blockchain as the technological vehicle.

  Governance

  Blockchain may be of particular use to co-operatives in relation to their governance. For example, it can enable co-operatives to operate on a system in which by-laws, amendments, terms of membership and voting rosters are all written into a blockchain, providing an irrefutable history of all legal and administrative procedures.

  Blockchain can provide a trusted mechanism for operational activities such as decision-making, finance and record-keeping without the need for physical proximity. That is, with blockchain, a co-operative can be governed remotely, without the need for members to physically meet or even align schedules (possibly in different time zones) for teleconferences. It can be coded to action and deal with common business matters like voting functions, for example, which could be “built-in” to the chain to record (and action) acceptance or rejection of by-laws, amendments, membership and other matters requiring a vote.

  Provenance

  Beyond these legal and administrative functions, co-operative entities around the world are utilising blockchain technology in various ways to support their activities. For example, one of the world’s largest consumer co-operatives, Co-Operative Group Ltd (UK), is working with an organisation called Provenance to use blockchain to trace the journey of fresh produce from ‘paddock to plate’ in real-time. By referring to this immutable and time-stamped record of a product’s processing, final purchasers can be assured of the origin and quality of the product, as well as environmental and social impacts of the business.

  Blockchain undoubtedly has the ability to enhance trust and efficiency to the operational activities of a co-operative. We look forward to seeing the benefits of this technology become a reality in Australia.

  If you have any questions about how blockchain might benefit you or your business, please get in touch with Shaneel Parikh. If you have any questions about co-operatives, please get in touch with Katie Innes.

  Written by Shaneel Parikh and Bryce Robinson.

   

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  PPSR: Your registrations may be expiring soon!

  The Personal Property Securities Register is turning seven! The PPSR came into effect on 30 January 2012 so a number of security interests first registered in 2012 will be due to expire in the coming year. As we have said time and time again, the Personal Property Securities Act and the PPSR are about registration; it is no longer about ownership rights. So maintaining and protecting your registration is essential.

  Security interests can be registered for seven years or less, more than seven years but less than 25 years, or with no stated end time. A number of businesses may have chosen to register a security interest for seven years or less for two reasons:

  1. it is the cheapest available registration; or
  2. it is the maximum timeframe you can register an interest over ‘serial numbered goods’ – think motor vehicles, aircrafts, and intellectual property.

  To maintain your security interests (and protect your priority against other creditors who may have registered subsequently) you need to ensure that your registration doesn’t expire. Renewing and extending the registration is simple; the same fees apply to extending a registration as creating a new registration. The PPSR also allows secured parties to generate reports on which registrations are due to expire so you can manage your interests.

  The risk to you – once your security interest has expired, is that you cannot extend or renew it. Instead you will have to re-register your security interest and potentially lose your priority to other creditors who have registered earlier.

  If you have any questions about when your security interests may expire or security interests generally, please get in touch with our Business team.

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  GST Withholding Tax

  We have now had the best part of 5 months to ‘wrap our minds’ around the new GST withholding law in action. The new law broadly means that when new residential premises or potential residential land is sold, it is now the buyer who must account to the ATO for any GST payable. With the exception of the withholding notice that is to be provided to the buyer, the administration of GST in respect of the sale of second-hand residential property has not changed (in most cases), it is still GST exempt as an input-taxed supply.

  The result of this law[1] change is nothing new- GST has always been payable on sales of new residential premises and potential residential land. The change means that instead of asking the seller to make sure the GST is paid to the ATO upon the sale of the property, the buyer is now tasked with the job. This change effectively means that the buyer gets to play the role of both compliance officer and tax collector (which, let’s face it, is a bonus for all those buyers out there). But we shouldn’t ‘scoff’; according to the Explanatory Memorandum of the Bill that introduces the change, the GST debt in respect of insolvent entities was at almost $2 billion as of November 2017.

  Obligations of Note

  The obligations initiated by the changes are not overly onerous but they are important for anyone looking to either sell or buy one of the qualifying properties. Primarily, the reason for this is the penalties that can be imposed. For instance, if a buyer forgets or fails to withhold and pay to the ATO the required GST amount, then the buyer can be liable for a penalty that matches the GST amount that they should have remitted. Similarly, if the seller forgets or fails to notify the buyer of the need to withhold GST, harsh financial penalties can also be imposed on them as well ($21,000 for individuals and $105,000 for companies).[2]� With this in mind, we urge anyone looking to buy or sell to seek advice in relation to these obligations prior to exchanging contracts.

  Issues of Interest

  The ACT and NSW Law Societies have adjusted the standard legal provisions used within contracts of sale to reflect these changes; however, we have found that many legal firms are including their own specific clauses to deal directly with the changes. It is important that any potential buyer or seller ensures that they understand these provisions as they won’t always be uniform from firm to firm. If these clauses are drafted incorrectly and do not mirror the law’s requirements they can potentially expose both parties to the onerous penalties outlined above.

  Something else to keep in mind here is the actual payment of the GST. For instance, many sellers require that the GST amount is provided to them at settlement to ensure expediency of payment and to allow them to claim the requisite credits in their correct BAS. Buyers on the other hand, need to be wary of this arrangement as it does not (arguably) extinguish their obligations under the law, potentially opening them up to the penalties mentioned above.

  Arguably one of the more confusing aspects of the new regime for sellers relates to which entity is actually responsible for the payment of GST. Under the new regime the seller is required to notify the buyer of certain information so that the buyer can make the appropriate payment to the ATO. This information includes the supplier’s name (and other details like ABN etc.).� Normally, the supplier is the seller, however in practice this is not always the case. This could be due to the seller acting as trustee of a trust- in this situation the trust itself may be the entity liable for the GST, or there may be a number of sellers which make up a partnership and that partnership may be the entity registered for GST and liable for the GST on the sale. The seller could also belong to a closely held group of entities and another member of that group is in fact the one responsible for the GST.

  What this all means is that if the incorrect entity is noted as the supplier and therefore liable for the GST, the associated input tax credits will not be assigned to the correct entity (that is, the one actually registered for GST and liable for it).

  On its face this law seems relatively simple to grasp and in most respects it is. The administrative obligations of the new regime (some of which are identified above) are ‘necessary evils’ to facilitate compliance with the law. They are important and both sellers and buyers alike need to be aware of them and the consequences associated with failure to comply.

  If you require assistance with GST withholding issues, please contact Richard Cook.

   

  [1] Treasury Laws Amendment (2018 Measures No. 1) Bill 2018

  [2] Paragraph 5.42 of the Explanatory Memorandum to the Bill

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  ACT Supreme Court 2018 Year in Review - Estates, Probate and Family Provision

   

  This year did not see a great deal of activity in the ACT Supreme Court with regard to Estates, Probate and Family Provision.

  There were three ex-parte applications before the ACT Supreme Court (each before Associate Justice McWilliam) concerning section 11A Wills (�informal Wills�). The cases of In the Estate of Kay Maureen Leighton[1], In the Estate of Socrates Paschalidis[2] and In the Estate of Peter Ronald Wiseman[3] coincidentally each had very similar facts. Each case involved an informal Will that had not been correctly executed. Each �Will� had been signed by only one witness or no witnesses at all.

  There was one �extension of time� Application which was considered in the case of Buckman v Lindbeck[4]. This case involved an Application made by the child of the deceased to extend the time to file with the Court a Family Provision Application to receive greater provision from his father�s estate. In the ACT, the time limit within which a Family Provision Application must be made is 6 months of the Grant of Probate being made by the Court.

  In this particular case, Probate was granted on 7 December 2016 which would have meant the Family Provision Application was required to be filed on or before 7 June 2017. The Family Provision Application was filed on 28 August 2018, almost 1 year and 3 months out of time.

  The Deceased�s Will gave his two sons Paul (the Applicant in this case) and Anthony the sum of $25,000 with the residue of the estate being divided between the deceased�s three other children, who were also the executors and defendants in this case. Each residuary beneficiary received at least $220,000 from the division.

  The Deceased acknowledged in his Will that the reason for the differing gifts between his children was due to the �lack of support [I] received from, and contact I have had with, either son over a significant period of time�.

  On the same date the Application for the extension of time was filed with the Court, the executors made an interim distribution to themselves following the sale of a major asset in the estate. Despite probably not having been served with the Application on the date it was filed, the executors had notice of the Applicant�s intended Family Provision Application due to correspondence between both parties� solicitors prior to the Application being filed.

  In deciding whether an extension of time was warranted, the Court (Associate Justice McWilliam) was guided by the case of Smith v Public Trustee of the Australian Capital Territory[5]�and had regard to three considerations which must be considered in an �Extension of time application�

  • explanation for the delay;
  • the strength of the Applicants case if an extension of time was granted;
  • the prejudice to other beneficiaries that might arise; and
  • a forth category was added in the case of Warren v McKnight[6] – whether there has been any unconscionable conduct by the Applicant.

  The relevance of the above factors to the present case was as follows:

  1. The prejudice to other beneficiaries that might arise � the executors argued that the prejudice to them in granting an extension of time was significant as the majority of the estate had been already distribution. The Court however held that the prejudice was of the executors own making, having made a distribution with notice of an impending Application, and not having filed a Notice of Intended Distribution.
  2. Explanation for the delay � the Applicant�s explanation for the delay was that he was never given a copy of the Will by the executors and did not know Probate was granted. The Court recognised there had been some delay on part of the Applicant from the time he received a copy of the Grant of Probate until formally filing his Application, but ultimately held significant delay arose due to the executors failing to give the Applicant a copy of the Will.
  3. The strength of the Applicants case if an extension of time was granted – the Court recognised that the Applicant was in a dire financial position. He was a truck driver with no real property and significant debts. His partner was unemployed and the Court therefore held the Applicant hat reasonable prospects of a successful claim if an extension of time was granted.
  4. Unconscionable conduct by the Applicant �the Court found no evidence of unconscionable conduct by the Applicant.

  The Court granted the extension of time. At the date of this article, there has been no reported judgement on the Family Provision Application by the Applicant in the present case (and there may not be a reported judgment if the case is ultimately settled between the parties). All parties, including the executors and the other interested beneficiary (Anthony) will of course need to be party to any Family Provision proceedings filed by the applicant and subsequent �out of Court� settlement� (if any).

  Other notable matters to be aware of in the �Estate space� that do affect us in the ACT include:

  • The replacement of the Superannuation Complaints Tribunal with the new Australian Financial Complaints Authority (AFCA) from 1 November 2018;
  • The NSW Law Reform Commission is in the process of examining and reporting to the NSW Attorney General on laws that affect access to a person�s social media accounts and other digital assets in the event of death or incapacity. The report by the Commission will provide some useful guidance to practitioners in the ACT (and Australia wide) when advising their clients on their digital assets; and
  • The changes announce in the 2018 Federal Budget with regard to Testamentary Trusts, Estates and Elder Abuse.

  Written by�Golnar Nekoee,�Director,�Wills and Estate Planning

   

  [1] [2018] ACTSC 75

  [2] [2018] ACTSC 122

  [3] [2018] ACTSC 292

  [4] [2018] ACTSC 313

  [5] [2012] ACTSC 4

  [6] (1960) 40 NSWLR 390

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  Sunsets, no guarantee of a sunrise in your new unit - the importance of a sunset date when buying off-the-plan

  With the tightening of lending conditions, confidence in the housing market falling and a large number of developments in the pipeline, there poses great opportunity but also risk when buying a unit off-the-plan. Whilst there is of course the attractiveness of living in something �new�, with modern appliances and furnishings and living close to shops, cafes and other amenities, how long would you be willing to wait for your unit to be built?

  For many developments, banks (as part of their lending conditions) require the developer to obtain a certain number of pre-sales. This means that part of the development will need to be sold before construction commences. Whilst this may not be an initial concern for most buyers there lies an obvious risk in that the developer may have difficulties obtaining the requisite number of pre-sales and the construction of the development is delayed as a result.

  To accommodate the risk of a delay, whether due to funding or the construction itself, developers will include a provision in the contract to allow for the developer to extend the anticipated date of completion (usually tied to the registration of the units plan) at its discretion. The obvious consequence for buyers then is that they may be bound to a contract under which the construction of their unit may not commence or be completed for a number of years, despite there being initial timeframes stated in the contract.

  To be able to �opt out� of the contract in such circumstances, buyers should ensure a sunset date is included in the contract. A sunset date gives both parties the right to rescind the contract (and for the return of the deposit) where construction of the development has not been completed by the date specified in the contract. In our experience, such a request is generally accommodated if the sunset date provides the developer a reasonable time to complete the development.

  The use of a sunset date though is a double edged sword. It poses another issue: what happens if the value of the unit increases and the sunset date passes, should the developer be entitled to rescind the contract to take advantage of the price increase?

  This practice has occurred in Victoria and New South Wales, leading to the introduction of legislative restrictions. In NSW, the Conveyancing Amendment (Sunset Clauses) Act 2015 requires developers to seek the buyer’s consent prior to bringing the contract to an end once the sunset date has passed. Where the buyer does not consent, the developer must seek an order from the Supreme Court allowing the developer to rescind the Contract with such orders only being granted if the Court considers it just and equitable to do so. Similar restrictions will be introduced in Victoria under the Sale of Land Amendment Bill 2018 (if passed)

  So, will the ACT follow the lead of NSW and Victoria? Or will the ACT follow Queensland and introduce mandatory sunset dates? Whatever the path, clearly the introduction of any such legislative amendments will have a significant impact on both buyers and developers and each should watch this space.

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