UK Supreme Court considers test for dishonesty in criminal cases

The Supreme Court of England and Wales in its recent decision in Ivey v Genting Casinos [2017] UKSC 67 (“Ivey“) took the opportunity to reassess the approach in criminal cases to determining whether a defendant has acted dishonestly. The Supreme Court held that the “Ghosh test”, which excused a defendant who did not know that ordinary and honest people would regard his behaviour as dishonest, should no longer be used. Instead the Court held that the test for dishonesty in criminal cases should be brought in line with the test already used in civil cases. We consider the decision further below.

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Citywealth Magic Circle Awards 2018 – Herbert Smith Freehills shortlisted in two categories

Citywealth has just announced its finalists for its Magic Circle Awards 2018.  We are thrilled to have been shortlisted twice. Herbert Smith Freehills has been shortlisted in International Law Firm of the Year – non UK and Richard Norridge has been shortlisted for Lawyer of the Year. There are many other trustees, advisers 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/magic-circle-awards/voting

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AUSTRALIAN COURT HOLDS THAT UNSENT TEXT MESSAGE CAN ACT AS VALID WILL

The Queensland Supreme Court has held that an unsent text message written on a man’s mobile phone shortly before he died adequately captured his testamentary intention.  In doing so, the Court dispensed with the normal execution requirements of a will, and allowed the text message to be admitted to probate: Re Nichol; Nichol v Nichol [2017] QSC 220.

The Court had been asked to determine two competing applications.  The first was brought by the deceased’s widow, and supported by his son, asking that the rules of intestacy be applied.  The second (and ultimately successful) application was brought by the deceased’s brother and nephew, who stood to gain under the terms of the unsent text message.

This case highlights the powers given to courts in other parts of the world when considering the validity of documents that purport to set out testamentary intentions.  This can be contrasted from the position of the courts in England and Wales, where the requirements for creating a will continue to be strict. We consider the decision further below.

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HIGH COURT RULES: HOMEMADE, UNCLEAR WILL IS VALID AND CREATES TRUST RATHER THAN ABSOLUTE GIFT

In the recent case of Vucicevic v Aleksic [2017] EWHC 2335 the High Court (Bristol District Registry) considered the rules relating to gifts in the context of homemade wills. The court concluded that instead of being an absolute gift, the homemade handwritten (or holographic) will of the testator gifting his properties to the Serbian Orthodox Church (the “Church“) created a gift to the Church on trust for the benefit of the people in need in Kosovo, especially children. The case highlights that the courts are often willing to adapt a flexible approach to seek to give effect to the provisions of a homemade will as long as the testator’s intentions are discernible, even if certain aspects of the will lack clarity. Continue reading

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Filed under Private wealth and trusts, Wills

ENGLISH HIGH COURT FINDS SETTLOR RETAINED BENEFICIAL OWNERSHIP

In the latest decision in the long running Pugachev dispute, the High Court considered the effect of five trusts set up by Mr Pugachev, and whether the trusts were shams. Birss J held that he would have been prepared to declare the five trusts shams, but on the true interpretation of the trust documents and considering the powers reserved to Mr Pugachev as protector, all five trusts were, in effect, bare trusts for the benefit of Mr Pugachev.

The first part of the decision has potentially wide effects in relation to assets held in trust subject to freezing orders. Paragraph 6 of the standard form freezing order in the annex to PD25A refers to “any asset which [the Respondent] has the power, directly or indirectly, to dispose of or deal with as if it were his own”. Following Birss J’s decision, this may include discretionary beneficial interests where the settlor has retained sufficient powers so as to be able to exercise effective control.

While the decision does not alter the test applied to whether a trust will be a sham, it is a rare example of the courts being prepared to find that a trust arrangement constituted a sham, and shows that the courts will look critically at the intentions on the part of the establishing trustees. We consider the decision further below.

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Filed under Private wealth and trusts, Trust disputes

Transfer into Guernsey trusts set aside on grounds of mistake despite the fact the transfer was made solely to reduce tax

The Guernsey Royal Court recently ordered, under s. 69(1)(a)(iv) of the Trusts (Guernsey) Law 2007 (the “Act“), that a transfer of shares into Guernsey trusts be set aside on grounds of mistake. This was despite the fact that the transfer had been made for the sole reason of reducing tax liability. We consider the case, Whittaker v Concept Fiduciaries Ltd, further below. Continue reading

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Filed under Offshore, Trust disputes

Private Groups and Trusts under ATO scrutiny

The ATO in Australia continues to target privately owned and wealthy groups, with specific focus on groups with risky trust structures that exhibit characteristics of tax avoidance or evasion.

The ‘Tax Avoidance Taskforce – Trust’ (Taskforce) has been established to take compliance action against taxpayers who use trust vehicles in ways other than ordinary trust arrangements or tax planning associated with genuine business or family dealings. The Taskforce continues the work of the ‘Trusts Taskforce’.

The objectives of the Taskforce are to:

  • “undertake focused compliance activity on private groups involved in tax avoidance and evasion arrangements using trust structures;
  • target tax scheme designers, promoters, individuals and businesses who participate in such arrangements;
  • lead cross-agency action to pursue the most egregious cases of tax abuse using trusts; and
  • undertake projects to gather intelligence on and deal with specific risks.”

There is no doubt that the experience and issues identified by the preceding taskforce has moulded the Taskforce’s objectives and areas of identified risks.

Whilst the areas reviewed by the Taskforce could be much wider than projected, the ATO has released the following non-exhaustive list of arrangements that attract the Taskforce’s attention:

  • trusts and beneficiaries who are not registered, or fail to lodge tax returns or activity statements, despite receiving substantial income;
  • offshore dealings with secrecy or in low tax jurisdictions;
  • income entitlements being distributed to low-tax beneficiaries without apparent commercial justification, while benefits are enjoyed by others;
  • artificial adjustments made to trust income so that tax outcomes do not reflect the economic reality – TA 2013/1 identifies these arrangements as involving a deliberate mismatch between trust and taxable income. For example, the trustee of a family discretionary trust resolves to exclude a capital gain from its trust income and distributes all of the trust income to a specific beneficiary (usually a newly incorporated related company). The capital gain is distributed to another beneficiary (i.e. a family member) as a tax free capital distribution. The company is unable to repay the tax debt and is wound up;
  • revenue activities which are purposefully mischaracterised as capital items in order to access the concessional capital gains tax (CGT) discount – for example, the trustee mistreats sale proceeds received by a property developer on capital account instead of revenue account and claims the CGT discount (refer TA 2014/1);
  • deliberate changes are made to trust deeds to achieve tax planning benefits –
    TA 2016/12 identifies these arrangements as being aimed at exploiting the proportionate approach to trust taxation. For example, the trustee determines trust income to be less than taxable income, creating an artificial difference which is distributed to an individual as a tax free capital distribution;
  • transactions which have excessively complex features or sham characteristics such as round robin circulation of income; and
  • new trust arrangements by taxpayers linked to previous non-compliance.

Whilst the Taskforce is stated to be targeting tax avoidance and tax evasion, elements of the broadly described arrangements above would be evident in a range of circumstances. Therefore, it will be interesting to see the breadth of the Taskforce’s activities.

The objectives of the Taskforce continue the ATO’s focus on private groups. Private groups using trust vehicles should be wary of significant penalties, civil or criminal offences which may arise in cases of non-compliance and should consider self-amending or making a voluntary disclosure if necessary.

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
Tina Huang
Tina Huang
Associate
Email
+61 3 9225 5943

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Filed under Australia, Private wealth and trusts, Tax

Regulators around the world become more vocal regarding the potential risks associated with ICOS

On 4 September 2017, seven major regulators governing the finance and technology sectors in China (collectively, the Chinese Regulators), jointly published an announcement prohibiting initial coin offerings (ICOs) in China.

The following day, the Hong Kong Securities and Futures Commission (SFC) also made a statement on existing regulations which could be applicable to ICOs and explained that digital tokens may be “securities” as defined in the Securities and Futures Ordinance (SFO), and accordingly subject to the securities laws of Hong Kong. The SFC also warned investors of the potential risks of ICOs.

The announcement by the Chinese Regulators and the statement by the SFC follow similar clarifications and announcements by regulators in the US, Canada, Singapore, Malaysia, Thailand and Dubai, among other jurisdictions, about their respective positions on ICOs. To date, the Chinese Regulators have been the only ones to issue an outright ban. You can read our e-bulletin on the Monetary Authority of Singapore’s position here.

The UK Financial Conduct Authority also issued a consumer warning on 12 September 2017 stating that “ICOs are very high-risk speculative investments” and investors “should only invest in an ICO project if [they] are an experienced investor, confident in the quality of the ICO project itself (eg, business plan, technology, people involved) and prepared to lose [their] entire stake”.

In this e-bulletin we highlight the key points in the announcement by the Chinese Regulators and the statement by the SFC and set out our observations on the future of ICOs.

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Filed under Hong Kong and Singapore, South East Asia

Corporate tax rate cut – passive income exclusion

As part of the Australian Government’s Enterprise Tax Plan, the corporate tax rate has been reduced to 27.5 per cent for entities that satisfy the annual turnover threshold requirement, which applies progressively from $10 million in the 2016-17 income year to $50 million in the 2018-19 income year.

The Government released for consultation on 18 September 2017 exposure draft legislation aimed at excluding entities with predominantly passive income from access to the lower 27.5 per cent rate. That is, entities with ‘base rate entity passive income’ that is 80 per cent or more of their assessable income in an income year would continue to pay corporate tax at 30 per cent despite being under the annual turnover threshold. This proposal, once legislated, will apply retrospectively to restrict the application of the rate reduction from the 2016-17 income year.

The usual items such as dividends, interests, royalties, rent (including a flow through of these items through trusts and partnerships) will be included in the proposed definition of ‘base rate entity passive income’. The proposed definition will also take into account capital gains as defined by the Act. However, this fails to reflect that:

  • gains on the disposal of assets such as trading stock and other assets held on revenue account prima facie give rise to capital gains, as defined, but for CGT purposes are then subsequently disregarded to prevent double counting of the gain;
  • capital gains on the disposal of assets in an income year are reduced by capital losses made during that year, as well as carried forward capital losses; and
  • most importantly, capital gains are often realised on the disposal of active assets that are used to carry on a business (for example goodwill).

The current drafting would often result in genuine active business income being incorrectly classified as passive. We expect this is a drafting error, and not the intended policy behind this proposed amendment.  However, this will need to be confirmed through the consultation process.

It is surprising that the exposure draft did not mirror other provisions in the Act that identify net gains on passive assets, such as the controlled foreign company rules in Part X of the 1936 Act or the active foreign business asset rules in Subdivision 768-G of the 1997 Act.

This may not be all bad news. Where an entity has predominantly Australian resident shareholders and routinely distributes all of its profits to shareholders, consistently having passive income of 80 per cent or more may enable them to avoid complexities and simply continue to pay tax at 30 per cent and frank their distributions at 30 per cent. This could be a more favourable outcome when compared to an entity that from year to year is just under 80 per cent and then just over 80 per cent, resulting in different tax and franking rates from one year to the next.

These issues relating to the current exposure draft are in addition to the franking credit issues previously identified in relation to the corporate tax rate reduction measure in general, as listed below.

  • The reduction in corporate tax rate will increase cash flow to shareholders. However, the lower corporate tax rate also means that less franking credits will be available to shareholders. This may result in more tax being paid at the shareholder level where the shareholder is an Australian resident individual; and
  • The potential mismatch between an entity’s applicable ‘corporate tax rate’, which is determined based on the aggregated turnover and passive income amount for the current year, and ‘corporate tax rate for imputation purposes’, which is calculated by reference to an entity’s aggregated turnover and passive income for the previous income year. This can result in a discrepancy for imputation and corporate tax purposes and the potential for franking credits to be trapped in a corporate entity where the entity moves from 30% to a lower tax rate.

Our previous post explains these franking credit issues in greater detail.

We will be making a submission to the Treasury on the draft legislation, which is due on 29 September 2017.

Andrew White
Andrew White
Director
Email
+61 2 9225 5984
Narelle McBride
Narelle McBride
Director
Email
+61 3 9288 1715
Lica Shi
Lica Shi
Senior Associate
Email | Profile
+61 3 9288 1985

 

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Filed under Australia, Private wealth and trusts

HSF private wealth and tax disputes teams bolstered with a raft of new hires

Herbert Smith Freehills’ continued growth in the areas of tax disputes and private wealth has been reflected in a string of new lawyers joining the firm.

James Rickards has joined the firm’s London office after 15 years’ practice as a barrister at Outer Temple chambers. James has a wide range of experience across trusts and estates matters, as well as mental capacity issues. He also advises on pensions issues. James is a member of STEP.  He is praised in the directories for having “great in-depth knowledge.”

William Cheung will soon be joining the firm’s Hong Kong private wealth practice as a mid-level associate. William is a trilingual lawyer (Cantonese, English and Mandarin) with similarly wide experience in the areas of trusts, estates and mental capacity.

In addition to the above hires, the firm’s specialist tax disputes team in London has been joined by Dawen Gao. Not only does Dawen have considerable experience of tax disputes matters, she is also a native Mandarin speaker.

Heather Gething, Head of Herbert Smith Freehills’ tax disputes and investigations team, commented: “These new hires demonstrate both an increase in current activity in the areas of tax disputes and private wealth and the further growth we foresee in these areas – as well as the increasing collaboration between our teams specialising in those fields.”

To find out more the firm’s expertise in these areas, please follow these links: Tax Disputes and Private Wealth and Trusts.

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Filed under Private wealth and trusts