News & Events

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

    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

    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 registration

    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

    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

    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 fathers 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 Deceaseds 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 deceaseds 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 Applicants 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 Applicants 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 persons 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 byGolnar 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 otp

    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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  • The Problem with Smart Contracts

    The Problem With Smart Contracts

    Smart contracts—computer-encoded sets of instructions that ‘self-perform’ when certain pre-determined criteria are met—are poised to revolutionise the legal landscape in years to come.

    In our first article in this series, we explained the basics of blockchain technology and its application in smart contracts. Far more than a fleeting or niche innovation, smart contracts may have applications in sectors as far reaching as financial services, supply chains, car sales importation, real estate and insurance. However, although they pose exciting opportunities for a great range of businesses, there may be some significant legal challenges on the horizon.

    A square peg in a round hole: difficulties in applying the law

    One issue, yet to be considered by the courts, is the extent to which these smart contracts are valid and enforceable under contract law. Parties to a smart contract effectively cede control over an aspect of performance of a contractual obligation to a digitised process, which (once enlivened) cannot be reasoned with or influenced.

    Utilising the more ‘pure’ types of smart contract, consisting only in machine-readable code, means that the identity of the party is unknown; as such, there is no way to assess their capacity to enter the contract. Moreover, certain contractual principles such as frustration, duress, undue influence, unconscionable dealings or force majeure, by their very nature, require subjective interpretation of judgement on a case-by-case basis—something not countenanced by self-executing instructions.

    It will be necessary for lawyers to keep their finger on the pulse in this regard; although certain dealings could render a smart contract void at law, the activated contract may be unstoppable in the digital world. It will be interesting to see how the law develops and adapts to this problem, noting that practically speaking most modern remedies could be swept away, leaving mere damages.

    Another issue will be determining how rights and entitlements recorded ‘on the chain’ accommodate rights and entitlements that arise ‘off the chain’. For example, what happens if share ownership is recorded on a blockchain as vesting in one entity, but surrounding circumstances place equitable ownership in another? Or if a transfer of ownership of property is recorded on a blockchain but is sought to be set aside under the Corporations Act as a voidable transaction? The immutability of a blockchain system raises some interesting questions in this regard.

    Challenges in litigation

    The nature of the blockchain system means that the players involved will most likely be ‘distributed’ around the globe. Parties intending to implement or utilise a blockchain system should therefore give advanced thought to which laws should apply and what type of forum is most appropriate to resolve disputes. It might be beneficial to have an arbitration dispute resolution cluses rather than relying on the enforcement of a court award from a local court system.

    The governance position of public blockchain systems also poses an interesting challenge from a litigation perspective. While terms of use can be communicated to users of a public blockchain, such terms may be difficult to enforce as no single entity controls the system. The question also remains as to who will bear the liability for any faults in the technical code and who has the right to enforce against them.

    Interestingly, there have been several suggestions applications such as “JUR” and “Jury.Online” which offer a ‘decentralised’ dispute resolution mechanism. In such systems, members can open a dispute and the blockchain community effectively vote on the issues in question. While these dispute resolution mechanisms sit outside the current legal framework, it will be interesting to see whether such mechanisms gain traction amongst blockchain users or whether users will rely upon traditional legal dispute resolution mechanisms.

    It is clear that the explosive uptake of blockchain technology has the potential to disrupt centuries of settled legal principles. While this may create a headache for lawyers, it is an exciting opportunity to rethink the way we transact in an increasingly globalised and digitised economy. “It will be an ill-wind that blows no lawyer no good”; so watch this space.

    If you’d like to discuss how distributive ledger technologies might impact your business, feel free to get in contact with Shaneel Parikh in our Business team.

    Written by Shaneel Parikh with thanks to Bryce Robinson.

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  • Residential Tenancies Amendment Bill 2018 No 2 A-CATastrophe

    Residential Tenancies Amendment Bill 2018 (No 2) - A-CATastrophe?

    We certainly hope not, but residential investors are likely to consider that it is, with tenants perhaps ultimately wearing the cost.

    Introduced in the Legislative Assembly on 1 November 2018, the Residential Tenancies Amendment Bill 2018 (No 2) seeks to amend the Residential Tenancies Act 1997 to improve protections for tenants while enabling lessors to be consulted on issues that will affect the properties they own.[1] In summary, the changes:

    1. Restrict a lessors right to decline an application for the keeping of pets on the premises. If a lessor wishes to refuse consent or impose conditions on that consent (that do not relate to the number of animals or the cleaning/maintenance of the premises), the lessor must apply to the ACAT for its prior approval.

      The proposed changes do not allow for the lessor to hold additional security for damage caused to the premises, even where it is predicated that a pet will cause deterioration.
    1. Restrict a lessors right to decline an application to modify the premises. Where a tenant makes an application to renovate/alter the premises for the purpose of assisting the tenant in relation to:

      1. the tenants disability (on written advice of a health practitioner);
      2. the safety of the tenant;
      3. improving the energy efficiency of the premises; or
      4. the security of the tenant, to be known as special modifications, the lessor will only be able to decline the application if the lessor obtains the ACATs prior approval. For any other modification, the lessor must not unreasonably decline the application.

        It is important to note that the (currently proposed) grounds on which the ACAT may make orders in favour of the refusal are non-prescriptive, the obvious being that:
      1. the lessor would suffer significant hardship; or
      2. the special modification would result in additional maintenance cost for the lessor.

        Such grounds, without further clarification, do not provide either tenant or lessor with any certainty and may lead to inconsistent decisions by the ACAT and could prove significant barriers to obtaining consent.

        The proposed changes do not allow for the lessor to hold additional security for damage caused to the premises or to return the premises to its original condition (subject to fair wear and tear) in the event the tenant fails to comply with the lessors conditions of consent (which presumably will require the premises to be restored).
    1. Introduce capped rental increases. If a lessor wishes to increase the rent by a rental rate above that specified by regulations (10% greater than the rents component of the housing group of the CPI for Canberra), the lessor will need to obtain either the tenants consent or the ACATs prior approval.
    1. Cap the break fee payable by a tenant under a break lease clause. Where a tenancy agreement is entered into with a new tenant before the expiry of the 4 week period (if more than half of the fixed term period has expired) or 6 week period (if less than half of the fixed term period has expired) following the tenant vacating the premises, the break fee will be reduced by the amount of rent payable by the new tenant during that period.

      If the tenant vacates the premises more than 4 weeks before the end of the fixed term, the break fee will be increased to include the lessors reasonable costs of advertising the premises for lease and providing vacant possession but limited to:

      1. If more than half of the fixed term has expires an amount equal to 2/3 of 1 weeks rent; or
      2. If less than half of the fixed term has expires an amount equal to 1 weeks rent.

    The conscious push to move the ACT to a more tenant friendly jurisdiction, perhaps which to a degree may be necessary, without incentive, a more amicable resolution process or the substitution of additional security (at least for the lessor) brings about an obvious risk of an increase to the already overburdened number of applications before the ACAT, which obviously increases the cost and risk of owning and renting land.

    The question then is who is ultimately going to bear these costs? Based on the proposed reforms this clearly lays cost and risk at the feet of the lessor, but does it? One observation is that lessors will demand higher rent to cover their risk and mitigate their potential losses and if these changes are too burdensome, to invest elsewhere, reducing available rental supply.

    [1] Residential Tenancies Amendment Bill 2018 (No 2), Explanatory Statement

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  • Business Breakfast Club November Summary - Business Succession Planning

    Business Breakfast Club November Summary - Business Succession Planning, Buy-Sell Agreements And Personal Insurances

    This month at Business Breakfast Club, Golnar Nekoee of BAL Lawyers and Sam Elliot of Macquarie Wealth Management discussed the importance of business succession planning and how to finance the plan. An effective succession plan will ensure that the time and effort invested in building up a business is not jeopardised when a business owner leaves.

    What is a business succession plan?

    A succession plan outlines who will take over a business when a business owner leaves. An owner might leave for a number of reasons and might be voluntary or involuntary. This might be due to retirement, death, disability, a sale of the business, or a falling out between business partners. Creating a plan ensures that you have a strategy in place for the orderly and smooth transfer of business, aiding to maintain economic stability and preserve family and business relationships. The business succession plan can be built into your establishment and ownership documents or can come later separately but it does need to be discussed with the intended beneficiaries and documented so that it can be implemented in a practical and meaningful way.

    Types of succession plans

    A succession plan can come in many forms and will depend on the legal model of business ownership you have chosen. Strategies can include Enduring Powers of Attorney, Wills and Statements of Intent for sole traders, Partnership Agreements, Shareholders Agreements and Buy-Sell Agreements where there are multiple owners. It is important to ensure that the succession plan is funded, whether through a loan or an insurance payout, otherwise the plan cannot be implemented.

    Q&A Corner

    How can Enduring Powers of Attorney and Corporate Powers of Attorney be used?

    An Enduring Power of Attorney (EPA) is a legal document under which an individual (the principal) appoints another to make decisions on their behalf (the attorney). Decisions can include managing an individuals property, financial and health affairs. An EPA is a simple but powerful document as it continues to operate after the principal loses the ability or capacity to make decisions. This can be a useful tool in the case of a sole trader, allowing the attorney to make not only personal decisions but business decisions to either manage the business until the principal regains capacity, or to sell the business or conduct an orderly winding down in the event the principal no longer has capacity.

    Directors however cannot give an EPA in respect of their role as a director; hence a company power of attorney might be appropriate for sole director / shareholder entities.

    If a sole director and shareholder of a company is incapacitated or has passed away, there is a period of time in which no one can exercise the rights attached to the shares (to appoint an interim director) and the company will be without appropriate management and oversight. The company will be unable to operate effectively (or perhaps at all). In order to allow the company to continue to operate (for instance use bank accounts to pay wages or debts, enter into contracts to preserve the business) a sole director might consider, as part of their succession plan, implement a company power of attorney. The company power of attorney can grant a third party the right to exercise the powers of the company allowing that third party to step in and manage the business at a critical time.

    For more information, please contact Golnar Nekoee. The next Business Breakfast Club will take place on 14 December 2018. For more details click here. If you would like to attend, please contact us.

     

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  • Dying with Multiple Partners

    Dying with Multiple Partners: “Playing the Field” or Poor Estate Planning?

    To die with multiple partners– what does that mean?  In a social context, the meaning is quite obvious.  The deceased person was “playing the field”, so to speak.  He or she was in an active relationship with at least two individuals at the date of their death.  In a legal context, the phrase “dying with multiple partners” has a more obscure meaning.

    When people ask us “why do I need a Will?”, we often find the best way to respond is to highlight what happens if they die without a Will.  A person who dies without a Will is said to have died intestate.  In each Australian State and Territory, there is intestacy legislation which determines to whom assets are distributed on death.

    The statutory framework is rigid and wholly dependent on the circumstances of the deceased person at death.  These “circumstances” are whether the deceased had a spouse or partner at death, and what is the composition of the deceased’s family (both immediate family members and more distant relatives).

    The intestacy legislation varies across jurisdictions, but generally speaking, the order of entitlement is (1) Partner, (2) Children, (3) Parents, (4) Siblings, followed by Nieces and Nephews, Grandparents, Uncles and Aunts, and Cousins.  If there are no members of any of those classes, then the deceased person’s estate reverts to the Territory or State Government.[1]

    In relation to the deceased’s family, the categories of eligible beneficiaries are relatively easy to establish.  But what is the definition of a “partner” for the purposes of intestacy?  In the Australian Capital Territory, a partner is any of the following: the deceased’s spouse (wife or husband), civil union partner, civil partner or “eligible partner”.

    An eligible partner is someone who was in a domestic relationship with the deceased at their death and fulfils one of the following two criteria:

    1. He or she had been the domestic partner of the deceased for a continuous two year period immediately prior to the deceased’s death; or
    2. Is the other parent of the deceased’s child (provided the child was a minor when the deceased died).[2]

    A person is a “spouse” as long as they remain married.  Separation, without actual divorce (decree nisi), will not change how the intestacy legislation is applied.  The (unfortunate) fact is that a deceased person is unlikely to want someone who they have separated from to benefit from their assets.  It is easy to see how the application of the framework can result in inheritances that are unjust.

    Let’s look at an example.  Say Bridget and John were married in 1990.  They did not have children and separated in 1998.  Neither of them thought that the formal process of getting a divorce was worth the time and expense.  Bridget and John have not spoken since 1998.  Bridget was jaded by the relationship and never re-partnered.  Bridget dies in 2018 with an estate valued at $4,000,000.00.  Who gets it?  John.  John is entitled to the whole of Bridget’s estate.  It does not matter that they have not spoken in over twenty years.  They were legally still married when Bridget died, and John is therefore Bridget’s spouse for the purposes of the intestacy legislation.

    Now let’s retain that example, but change one fact.  Say Bridget re-partnered with Luke in 2014.  They have been in a continuous (and exclusive) domestic relationship since that date.  In 2017, they got engaged.  Bridget was not “playing the field”, but the law says she died with multiple partners. She was survived by her husband, John, and her eligible partner, Luke.  What happens to Bridget’s assets in these circumstances?  John receives $2,000,000.00 and her fiancé, Luke, receives $2,000,000.00.[3]

    Remember that mere separation without divorce has no impact on the intestacy legislation, despite the fact that the person’s testamentary intentions are likely to have changed.  What can you do to avoid these arbitrary and unintended results?  You should ensure that you obtain proper estate planning advice and have a Will that reflects your current circumstances and testamentary intentions.

    If you require assistance in relation to your estate planning arrangements, please contact the Estates Team at BAL Lawyers.

     

    [1] Administration and Probate Act 1929 (ACT) s 49 and Schedule 6.

    [2] Administration and Probate Act 1929 (ACT) s 44.

    [3] Administration and Probate Act 1929 (ACT) s 45A.

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