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. Continue reading

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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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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