When not to tell a beneficiary?

In a recently released judgment, In the matter of C Settlement [2017] JRC 035A, the Jersey Royal Court confirmed that, in principle, a trustee can withhold information from a beneficiary with capacity about his rights under a trust. However the trustee will need to have sufficient reasons justifying withholding this information. The decision also confirmed that such non-disclosure could be maintained even if the trustee applied to the court for a ‘Beddoe order’ – a process which would normally involve the court seeking representations from all of the trust’s beneficiaries.

We consider this decision further below.

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Filed under Private wealth and trusts, Trust disputes

Richard Norridge has been named as a leading lawyer in the Citywealth Leaders List

We are delighted to announce that Richard Norridge, our Head of Trust & Estates Disputes and Head of Private Wealth – Asia, has been named as a leading lawyer in the Citywealth Leaders List. Continue reading

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Filed under China, Hong Kong and Singapore, Private wealth and trusts, South East Asia

Privy Council considers proper approach to establishing the beneficial ownership of jointly-held assets

In Marr v Collie [2017] UKPC 17, a dispute arose between a separated same-sex couple about the beneficial ownership of property purchased during the relationship for investment purposes in their joint names. The Privy Council clarified that the principle in Stack v Dowden1, that beneficial ownership follows legal ownership unless the contrary is proven, is not limited to a domestic context and can apply where the parties’ personal relationship has a commercial aspect. However, the Court made clear that in addition context is key and is informed by the parties’ common intentions.

Even though the dispute in Marr v Collie related to the Bahamas, the Privy Council’s decision is likely to be followed in England, and other common law jurisdictions which apply similar rules. We consider this decision further below. Continue reading

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China Has Released Guidelines on Outbound Investment

Four key Chinese authorities, i.e. the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), the People’s Bank of China (PBOC) and the Ministry of Foreign Affairs (MFA), jointly issued the Notice on Further Guiding and Regulating the Directions of Outbound Investment (Guidelines) on 4 August 2017. The Guidelines clarify the regulatory approach to governing Chinese outbound investment.

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Labor’s Family Trust Distribution Tax

In an audacious move to target income splitting, if elected, the Australian Labor Party (ALP) has announced that it will introduce a minimum standard 30 per cent tax rate on all discretionary trust distributions made to beneficiaries over the age of 18 from 1 July 2019. Touted to tackle income inequality and enforce “fair taxation”, the proposed changes have been described as meddling with “off-limits tax territory”.

How will a discretionary trust distribution tax work?

The policy proposal of the ALP is scant in detail and leaves a number of questions unanswered. What we do know is that the new tax builds on the existing regime which taxes minor beneficiaries on certain income at the highest marginal tax rate. If the new tax is to follow that model, this would mean that the beneficiary will be assessed at a minimum of 30 per cent, with no tax credits provided.

This approach is confirmed in the policy document. To the extent that the income is distributed to a tax payer with a higher marginal tax rate (>30 per cent), the income would be taxed at that higher rate.

There are, of course, carve outs. The proposed changes will only apply to discretionary trusts. This means other non-discretionary trusts will not be impacted by the change. Further, farm trusts (undefined) and charitable institutions will not be subject to the proposed changes. Similarly, exemptions will be provided for distributions to certain mature beneficiaries, including people with disabilities.

Conceptual issues

At this stage, it is difficult to assess how effective the new policy will be. It is estimated that the policy will only impact 2 per cent of taxpayers and 318,000 discretionary trusts. Yet, the independent Parliamentary Budget Office estimates the policy will raise $4.1 billion over the forward estimates period to 2021-22. Quantitative analysis aside, a number of unanswered policy questions remain, including:

  • how will non-cash distributions made from a discretionary trust be treated? Non-cash distributions can occur through the transfer of property, shares, or units. Presumably, the trustee will need to fund the 30 per cent tax on the distributions from other sources.
  • how will the policy apply to distributions made to non-resident beneficiaries? Non-resident beneficiaries already face a higher marginal tax rate, and are initially taxed at the trustee level. It is not clear whether a credit for the 30 per cent tax will be available to non-residents as is generally the case at the moment.
  • what if adults receive the discretionary trust distributions indirectly via a company? Will a mechanism be introduced to ensure that the franking credits generated at the company level are not refundable in these circumstances?

The ALP has proposed to provide $55 million per year to the ATO to ensure that the intent of the policy is achieved, and also to bolster the ATO’s current trust anti-avoidance activities. The ATO may need to allocate a significant proportion of these funds to managing the administrative complexity that will come with the introduction of this new tax.

What’s next

It is clear that policy makers are starting to turn their attention to tax minimisation created through trust structures. With high-net wealth individuals being a reoccurring feature in the “fair taxation” debate, we can expect more initiatives that will “make the tax system fairer and improve the budget bottom line”.

Andrew White
Andrew White
Director
Email
+61 2 9225 5984

Narelle McBride
Narelle McBride
Director
Email
+61 3 9288 1715

Chris Aboud
Chris Aboud
Senior Associate
Email | Profile
+61 2 9225 5954

Stefania Maccarrone
Stefania Maccarrone
Associate
Email
+61 2 9225 5955

 

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Filed under Australia, Tax

IN THE MATTER OF THE A LIMITED FURBS AND THE B EBT [2017] 21/2017

Summary

The recent case of A Limited FURBS decided in the Guernsey Royal Court provides helpful clarification on the question often faced by offshore trustees about whether to submit to the jurisdiction of a foreign court in overseas legal proceedings. This was the first Guernsey case to consider this issue, prior to which it was thought the Guernsey court would take a similar approach to that of the Jersey court.

The decision confirms that Guernsey court will usually take the same approach as the Jersey court, namely that trustees of a discretionary trust should normally resist submission to the jurisdiction of a foreign court. The case clarified, however, that in certain circumstances (for example where the trustee has limited discretion) submission may be appropriate to assist the foreign court. The facts of A Limited FURBS fell into this latter category and so the judge sanctioned the trustee’s submission to the jurisdiction of the English court in the underlying matrimonial proceedings.

The case also confirmed that trustees should be encouraged to apply to their “home” court for directions before deciding whether to submit to the jurisdiction of an overseas court.

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Filed under Offshore, Private wealth and trusts, Trust disputes

IFC Awards 2018 – shortlist now released

The IFC Awards 2018 has announced the finalists.  We are thrilled to have been shortlisted in Law firm of the Year – Asia.  There are many other trustees and firms who have been shortlisted across different categories.

If you wish to vote for any of the finalists, click here: https://www.citywealthmag.com/awards/ifc-awards/voting

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Filed under Hong Kong and Singapore, Private wealth and trusts, South East Asia

Cayman courts emphasise the importance of Beddoe relief and its availability in situations where a third party claim is for an amount greater than the Trust assets.

In the case of X (as Trustee of the A Trust) v Y (beneficiary of the A Trust)[1], the court reiterated the importance for Trustees of seeking Beddoe relief before commencing or defending an action. Obtaining Beddoe relief ensures that Trustees are more likely to be indemnified against any adverse costs consequences than without such relief. The court also found that interested non-beneficiary third parties should be provided with informal notice of a Beddoe application but that the interests of the beneficiaries of a Trust outweigh the interest (actual or potential) of any third party in the trust assets in assessing the Trustees’ application.

Background Facts

The Claimant in these proceedings was the Trustee of the A Trust. The Trustee was involved in English proceedings in respect of a Sale and Purchase Agreement (“SPA“) which involved a claim against a consortium of sellers (including the Trustee) in relation to (a) breach of warranty, and (b) the tort of deceit.

The breach of warranty claim related to, amongst others, failure to disclose a dispute between the Trustee and another defendant (in the English proceedings) which was ongoing at the time of the execution of the SPA. The claim for deceit arose on the basis that the defendants (in the English proceedings) allegedly made material misrepresentations to the claimant (in the English proceedings) (“Z“) that no funds had been invested in the ill-fated Madoff Funds. Z avers that such investments were made before the SPA was signed and came to its attention after the SPA was executed.

The Trustee had sought directions from the Court to defend the English proceedings.  It also sought orders permitting it to borrow funds from the C Trust (i.e. another Trust), to discharge the costs of defending the English proceedings and, pre-emptively, for an indemnity for any costs and expenses properly incurred for those purposes, which would have been ultimately reimbursed from the A Trust assets.

Beddoe Relief

The case of Re Beddoe[2] established the principle that Trustees are able to apply to the court to seek permission to commence or defend proceedings using the trust assets while also obtaining an indemnity from the Trust for any adverse cost consequences. (That indemnity can be lost if the Trustees have failed to make full disclosure of all material facts when making the application for relief.)

It is important to note Trustees who do not seek Beddoe relief are not automatically barred from recovering the costs of litigation from the Trust funds.  However, such Trustees do not have the same certainty of protection as they would if they had obtained Beddoe relief.

The importance of seeking Beddoe relief

The Cayman courts have general jurisdiction to provide relief to a trustee in relation to the management or administration of trust money under section 48 of the Trusts Law (2011 revision). The case of Re Beddoe allows for the applicability of such directions specifically on the question of engagement in litigation.

Smellie CJ re-iterated Lindley LJ’s position in Re Beddoe where he stated that “…a trustee who, without the sanction of the Court, commences an action or defends an action, unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel’s opinion” especially given the “ease and comparatively small expense with which trustees can obtain the opinion of the Chancery Division on the question whether an action should be brought or defended at the expense of the trust estate“.

Therefore, the Court found the Trustee had adopted the correct approach in this case by seeking Beddoe relief from the court before proceeding with the litigation.

Rights of non-beneficiary third parties in a Beddoe application

The Trustee had provided Z with informal notice of the Beddoe application. However, Z contested that it should have been provided with formal notice so that it could have made appropriate formal representations to the court.

Smellie CJ found that in circumstances where Z is not a beneficiary in the A Trust, it is merely a third party asserting a disputed personal claim in contract or tort against the Trustee. Therefore, Z’s claim is one which is a dispute between a third party and a Trustee in relation to liabilities assumed by the Trustee in administration of the Trust. In such circumstances there is no need for Z to be provided with formal notice of the Beddoe application. However, Smellie CJ also found that Z would be adversely affected if its claim was successful and the Trustee had defended the claim at the expense of the Trust because the costs of the defence would reduce the value of the assets against which Z would have been able to enforce its judgment. The Trustee had therefore been correct to provide Z with informal notice of the Beddoe application. The court also took into account the representations made by Z in its response letter.

Decision

Given that Z’s claim exceeded the value of A Trust, if that claim were to be undefended the A Trust would certainly be exhausted to the detriment of the beneficiaries. However, in deciding how much weight should be given to Z’s interests, Smellie CJ decided that a contingent or putative creditor in Z’s position is not capable of asserting a proprietary claim to the Trust assets, and takes the Trust Assets as it finds them at the time of the judgement. The Trustee obtained Beddoe relief in these proceedings and was allowed to defend the English proceedings and would have had an indemnity from the Trust assets for the costs reasonably incurred in defending the claim.

Conclusion

As this case illustrates, it is important for trustees to ensure that:

  1. they seek the court’s permission before bringing or defending claims in relation to the trust assets (i.e. seek Beddoe relief); and
  2. to the extent that there are third parties interested in the trust assets who would be adversely affected by the outcome of any litigation, they should be provided with informal notice of any application for Beddoe relief.

 

[1] in the Grand Court of the Cayman Islands, Financial Services Division (unreported) 15 March 2017, Smellie CJ

[2] [1893] 1 CH 547

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A severe case of the penalties

The Administrative Appeals Tribunal (AAT) has handed down its decision in Peter Sleiman Investments Pty Limited as Trustee for The Sleiman Family Trust and Commissioner of Taxation (Taxation) [2017] AATA 999 (Sleiman). The decision is a timely reminder of the various powers that the Commissioner has to impose penalties on taxpayers.

The case involved the lodgement of returns not necessary by a family trust which was undertaking a property renting business. The taxpayer submitted that it had lodged returns not necessary for numerous income years on the basis that its expenses exceeded the assessable income in each of these income years.

The Commissioner subsequently issued default assessments to the taxpayer resulting in combined taxable income of $8.04 million and a tax liability of $3.739 million for the income years in which returns not necessary were lodged. As a result, the onus of proof was on the taxpayer to substantiate its deductions or that certain amounts were non-assessable in the default assessment income years.

Unsurprisingly, the AAT found in favour of the Commissioner given that the taxpayer was unable to demonstrate the nexus of its outgoings and its passive property renting business. These deductions included 65 cars (including two cars located in a State which the family trust held no property), fitness equipment and firearms. The taxpayer was also unable to support its treatment of certain amounts as non-assessable.

Following the discovery of the tax shortfall, the Commissioner sought to impose administrative penalties on the taxpayer for failing to lodge income tax returns. The Commissioner imposed a 75% base penalty rate on the shortfall and an additional base penalty rate increase of 20% on the shortfall in the default assessment income years following the initial default assessment. The imposition of these penalties result in the taxpayer paying almost $7 million in tax and penalties on $8 million of undeclared taxable income.

In considering the penalties, the AAT concluded that the 75% administrative penalty was appropriate given the “deliberate and inexplicable” actions taken by not lodging the relevant income tax returns. The taxpayer also contended the 20% uplift should be remitted as the non-lodgement was “one single course of conduct”. However, the AAT rejected this contention and stated that this line of argument was the equivalent of:

“asserting that an armed robber who holds up a bank once a year for each of three years is engaging in just one single course of conduct and should therefore be treated more leniently”.

This case is an important reminder of the various powers that the Commissioner has under Division 274 of the Tax Administration Act 1953 to impose substantial penalties on taxpayers. Generally, the quantum of the penalty imposed will be based on the Commissioner’s view as to whether there were inadvertent errors or purposeful actions. In certain circumstances, the Commissioner is also entitled to further increase the penalty for additional indiscretions (as was the case in Sleiman).

Once the Commissioner decides to impose a penalty, the onus is on the taxpayer to provide reasoning as to why the Commissioner should remit that penalty. Factors such as compliance history, the way in which the tax shortfall is discovered and the taxpayer’s co-cooperativeness are considered by the Commissioner in choosing whether to exercise this discretion.

Based on the broad powers given to the Commissioner under Division 274, generally the only avenue to challenge any denied request for remission is for the taxpayer to refer the matter to the AAT (as was the case in Sleiman) or the Courts.

Andrew White
Andrew White
Director
Email
+61 2 9225 5984
Chris Aboud
Chris Aboud
Senior Associate
Email | Profile
+61 2 9225 5954

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Filed under Australia, Private wealth and trusts, Tax

HKMA and PWMA in Hong Kong collaborate to develop a Treat Customers Fairly Charter for the PWM industry

On 8 June 2017, the Hong Kong Monetary Authority (HKMA) announced that it has been working together with the Private Wealth Management Association to develop a Treat Customers Fairly Charter (the Charter) to further promote a customer-centric culture in the private wealth management (PWM) industry.  The Charter is designed to complement, not change, current laws and regulations and the existing terms and conditions between banks and their customers.  It is stated to be a commitment by PWM institutions in Hong Kong to support and implement the principle of treating customers fairly.

The Charter draws reference from good practices locally and overseas and from the G20 High-Level Principles on Financial Consumer Protection.  For example, it bears resemblance to the UK FCA’s consumer outcomes, in particular principle 6 which requires a firm to pay “due regard to the interests of its customers and treat them fairly”.  It comprises five high-level principles (the TCF principles) which are supplemented by examples to illustrate how such principles may be implemented by PWM institutions. However, these examples are not comprehensive, but are stated to be illustrations to enhance understanding of the “spirit” of the TCF principles.

The HKMA expects all Authorised Institutions which operate as private banks, or which have dedicated private banking units, to follow the TCF principles.  It has stated that it expects senior management and boards of directors to ensure that their institutions and relevant staff abide by the TCF principles.  Our recent bulletin outlines further details on each principle.

If you would like to discuss the above further, please do not hesitate to contact Will Hallatt, Richard Norridge, Hannah Cassidy, Joanna Caen, or your usual Herbert Smith Freehills contact.

William Hallatt
William Hallatt
Partner, Financial services regulatory Hong Kong
Email | Profile
+852 2101 4036
Richard Norridge
Richard Norridge
Partner, Head of private wealth - Asia
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+44 (0)20 7466 2686
Hannah Cassidy
Hannah Cassidy
Partner, Financial services regulatory Hong Kong
Email | Profile
+852 2101 4133
Joanna Caen
Joanna Caen
Senior consultant, Private wealth Hong Kong
Email | Profile
+852 2101 4167

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Filed under Hong Kong and Singapore, Private wealth and trusts