The number of self managed superannuation funds (SMSFs) is increasing exponentially. This growth has been particularly prompted by changed laws allowing SMSFs to borrow to purchase investments such as real estate.
The primary rule of self managed superannuation is a requirement that all the members (a maximum of 4) must either be trustees of the fund or directors of the trustee company if the fund has a corporate trustee.
Normally, trustees must act unanimously. Unless the prospect for dispute or deadlock between trustees is considered and dealt with upfront, disputes will ultimately find their way to the Supreme Court which is all of, very expensive, uncertain and time-consuming.
This means that it necessary in every case to consider how disputes or deadlocks between trustees will be resolved.
The most common type of SMSF is still the “mum and dad” version in which a married or de facto couple are the only persons involved in decision-making. Increasingly however we are also seeing more complicated relationships that present a greater degree of risk that disputes will arise e.g. SMSFs that include children, in-laws, other relatives or business associates.
A properly drafted SMSF deed can provide a process to resolve disputes relatively quickly and inexpensively. For instance, the rules of the SMSF may provide for decisions to be made on the basis of member account balances or by a certain majority of trustees in the event of deadlocks or disputes. Similarly, the Constitution of a corporate trustee might require that decisions of the board of directors of the company can be made on a pre-agreed basis.
The eventual result of a need to resort to a formalised dispute settlement process is generally that one or both of the disputing parties will leave the SMSF and make other ongoing arrangements. Whilst that can be inconvenient in some cases, it is certainly preferable to reaching the same position after a lengthy court battle.
The key points for planning are: –
Always consider at the outset who you share an SMSF with. Even in the best of families, parents and children don’t always see eye to eye particularly as children grow up and form their own relationships and families;
Anticipate and plan for the possibility of disputes. This means that you need to ensure that your SMSF documentation is properly drafted at the outset or, if that opportunity has passed by, have your current structure reviewed by an expert and where necessary restructure.
The laws relating self managed superannuation and trusts generally are complex. At Everingham Solomons we have the experience and expertise to assist you in all your superannuation and trust issues because Helping You is Our Business.
It is very common to find restraint on competition clauses in commercial agreements such as employment contracts and business purchase agreements.
There is a very developed body of law in relation to restraint clauses in employment contracts. Essentially they are very difficult to enforce as they are scrutinised very carefully by Courts with the onus being on the employer to prove that they are reasonable and necessary to protect the employer’s legitimate interests. For that reason, employee restraints need to be very carefully and conservatively drafted. Broad probations on the employee trading in competition with the ex-employer are most unlikely to be successful.
In a purchase of business situation however anti-competitive restraints have traditionally been viewed more favourably by the Courts. If a purchaser has paid a large amount of money for the good will of a business, it is often reasonable that the purchaser be protected from future competition by the vendor which might diminish the value of what the purchaser has paid for.
A recent decision of the NSW Supreme Court in the case of “Then There Were Three Pty Ltd v Douglas” is a reminder that even in a purchase of business situation, restraints will be carefully considered with the onus still being upon the party seeking the protection of the restraint to prove that it is reasonable and necessary.
In that case, the vendor and purchaser to a share sale transaction had agreed to a restraint which even contained an express acknowledgement by the vendor that it was reasonable in all the circumstances. The purchase price was payable by instalments over a four year period with those instalments being subject to adjustment depending upon the financial performance of the business after completion and also the retention of a key employee. Ultimately the Court held that these other grounds for adjusting the purchase price made the restraint clause less important to the protection of what the purchaser had paid for and declined to enforce the restraint.
Proper drafting of restraint provisions and enforcement of them when necessary is a matter requiring expert advice.
At Everingham Solomons, we have the expertise to assist you in all issues relating to the drafting and enforcement of commercial contracts becauseHelping You is Our Business.
The form of power of attorney (‘POA”) now used in NSW is a very simple but often misunderstood form.
Whilst the standard form is simple, it will often be appropriate to make significant changes to it to reflect the individual circumstances of the person giving the POA.
The issues that may need to be covered by a POA are constantly evolving. A good example of this is the treatment of so-called “digital assets” which are becoming more and more important to all of us.
Research in the USA indicates –
More than half of individuals over 65 use the Internet;
95% of people have an online presence from the age of 2; and
A representative sample of Internet users had, on average, 25 passwords.
So what happens to our online presence should we lose capacity? It would certainly be reasonable to expect that a POA given without qualifications should allow an attorney to access information and deal with assets online. Unfortunately, the practicality is not that easy, particularly when the relevant account can only be operated online.
At a conference I recently attended, the presenter recounted a case that he had recently been involved with where an elderly lady (let’s call her “Edna”) had placed a large amount of money into an online investment account. She had been “cyber safe” and kept her pass words and indeed the existence of the account to herself.
At the age of 78, Edna suffered a severe stroke and lost capacity. She had previously given a standard form POA but her attorney was not aware of the account until receiving a letter from the financial institution notifying Edna of changes to unclaimed monies legislation entitling the Commonwealth to take any money from a person’s bank account which had not been operated for 3 years. Ironically, that is what happened to Edna’s money and ultimately it took several years and much expense before it could be retrieved and accessed by the attorney. These difficulties could have been avoided had Edna –
specifically dealt with digital assets and information in her POA; and
left her password and account details in a form that could be accessed by her attorney readily if the need arose.
At Everingham Solomonswe can provide expert advice on POA issues because Helping You is Our Business.
Grandparents are often very generous in their support of their grandchildren. Sometimes that is a matter of choice. Sometimes, a matter of necessity. The issue of whether a grandchild is financially dependent upon a grandparent can be relevant in many areas of the law.
It is quite common theses days for grandparents to wish to pass their death benefit superannuation entitlements to their grandchildren . The ability to demonstrate the financial dependency of the grandchild is very relevant in this context.
In order to pay a superannuation death benefit to a grandchild, and for the grandchild to receive it tax-free, the grandchild needs to establish financial dependency upon the grandparent.
Financial dependency is a matter of fact and in each particular situation needs to be individually assessed. Case law suggests that financial dependency can arise even when the financial assistance provided was to enable the grandchild to maintain a standard of living higher than the necessities of life. Not surprisingly, the ATO takes a less generous approach.
The ATO position is that financial dependency occurs where the grandchild is wholly or substantially maintained financially by the grandparent. The following points are drawn from published rulings issued by the ATO –
If the financial support provided merely supplements the grandchild’s income and represents “quality of life” payments, it would not be considered substantial support;
issues of quality of life and enjoying a reasonable standard of living are irrelevant for the purposes of determining dependency;
paying for social outings, medication, pocket money, entertainment and sporting costs will not be sufficient;
amounts spent on luxury items such as entertainment rather than child’s day to day living expenses are not relevant;
payment of private school fees are not of themselves evidence of financial dependency but when coupled with other factors such as payment of necessary food, shelter and clothing expenses can be relevant to the issue of dependency; and
the financial support must be regular.
Often the biggest single issue to overcome to establish dependency is lack of proper records. Retaining evidence of expenditure on a grandchild will always be critical to proving financial dependency.
At Everingham Solomons we can assist you with all your estate planning including situations involving complex structures such as superannuation funds because Helping You is Our Business.
When GST was introduced in 2000, part of the then agreement between the Commonwealth and the States for the sharing of GST revenues proposed the abolition of various state taxes relevant to business.
As might have been anticipated, most State Governments including NSW have not been particularly prompt in doing that. Finally, there is good news the business on this front.
Effective 1 July 2013 NSW stamp duty on –
Purchase of shares in private companies;
Mortgages; and
Purchase of business assets other than land,
is to be abolished.
The abolition of these duties was originally proposed to take effect from 1 July last year however that was deferred in the 2012 State Budget to this year. Most experts are waiting on this year’s State Budget, scheduled to be released on 18 June, before relying upon the proposed changes taking effect.
Traditionally June is a peak activity month for business sales and purchases. This year however the “carrot” of reduced or eliminated stamp duty and the uncertainty until after the State Budget may recommend that some business transactions be deferred into the new financial year.
There are anti-avoidance provisions already in the stamp duty legislation to stop the exemption applying to transactions which finalise after 1 July but result from legally enforceable arrangements entered into before that time. This means that there is limited scope to put a legally binding deal in place before 30 June and then claim the benefit of the stamp duty exemption if settlement takes place after 1 July.
This will be one of the issues that vendors and purchasers will need to grapple with in the period leading up to the end of the financial year. Sellers will naturally wish to complete transactions whereas some purchasers may wish to defer until the new financial year.
At Everingham Solomons the business law team has the experience and expertise to provide advice on all sale and purchase of business matters and associated stamp duty issues because Helping You is Our Business.
Good faith clauses are finding their way into more and more commercial contracts. Traditionalists amongst lawyers will tell you that they are meaningless and that the only provisions which belong in a contract are precise statements of what each party must do, at what price, when and what happens if they don’t do what they are supposed to. Warm and fuzzy motherhood statements, they say, do not belong in contract documents, which should be bullet proof.
But good faith clauses are fighting back. Late in 2010, the New South Wales Court of Appeal decided a case involving a heads of agreement between Macquarie International Health Clinic Pty Limited and Sydney South West Area Health Service, relating to the development by Macquarie of a private hospital and a car park on Royal Prince Alfred Hospital land, which required the parties to act with the utmost good faith to one another.
After the agreement was signed, Area Health created a strategic plan which did not propose any development consistent with the agreement with Macquarie. Area Health never mentioned this to Macquarie and was nailed under the good faith clause because disclosure would have made a substantial difference to Macquarie’s expectations under the heads of agreement.
The Court said that the good faith promise must be construed having regard to the terms of the contract and the circumstances known to the parties in which it was entered into. It said that a contractual obligation of good faith embraces an obligation on the parties to cooperate in achieving the contractual objects, compliance with honest standards of conduct, and compliance with standards of conduct that are reasonable having regard to the interests of the parties. It said that a contractual obligation of good faith does not require a party to act in the interest of the other party or to subordinate its own legitimate interest to the interest of the other party but it does require it to have due regard to the legitimate interests of both parties.
So, parties entering heads of agreement, letters of intent, memorandum of understanding or formal contractual documents should be careful about good faith clauses. If you require advice in relation to the negotiation or preparation of contract documents, the commercial team at Everingham Solomons can assist you because Helping You is Our Business.
Borrowing by Self Managed Superannuation Funds (“SMSFs”) has been allowed under strictly controlled circumstances for over five years. Over that time the “grey areas” have gradually become a little clearer both through legislative change and the issue of very detailed rulings by the ATO.
In May this year the ATO issued a new major ruling. It is a very useful document and contains many examples of what the ATO considers can and can’t be done. Some of those examples are particularly relevant to farming properties.
One of the key concepts of the legislation is the concept of borrowing to acquire a “single acquirable asset”. Most farming properties will be comprised in more than one land title. If those titles can be dealt with separately, in many cases the farm will not be regarded as a single acquirable asset even if from a practical viewpoint, it would be unlikely that any part of the farm would be dealt with separately from the other.
If a farm was not regarded as a single acquirable asset, it may still be possible to proceed with a borrowing by breaking up the transaction into separate loans over each title. There will be practical problems in doing that however particularly due to the likely requirements of financiers and the duplication of borrowing expenses.
The ATO ruling also includes some useful examples of the distinction between “repairing” and “maintaining” a farm, which is allowed, and improving the farm which is not . For instance, replacing a section of existing cattle yards or fencing is a permissible repair whereas adding a further set of cattle yards or additional fencing would be an improvement.
Involving your SMSF in a farming business requires expert financial and legal advice. Borrowing is only one of a number of alternatives and there are ongoing operational issues relating to the arrangements between the entity that conducts the farming business and the SMSF.
There are many pitfalls for the inexperienced or ill advised. At Everingham Solomons we have the experience and the expertise to work with you and your financial advisors to achieve the best outcome for you because Helping You is Our Business.
Many business owners involve their self managed superannuation funds (“SMSF”) in their business as owner of or part owner of their business premises.
There can be benefits in doing this but there are also costs associated particularly with –
transferring the asset into the SMSF; and
the complex ongoing compliance regime for SMSFs
In the past month I have come across good examples of both points.
A client had heard of the benefits of transferring his business premises into his SMSF and better still, that it could be done for only $50 stamp duty. As usual, the devil is in the detail. A short discussion revealed that-
For various reasons, the stamp duty concession would not apply taking the potential stamp duty cost from $50 to approximately $60,000.00;
The transfer would trigger a significant capital gains tax cost; and
He was unaware that if the business premises were transferred to the SMSF , they could no longer be used for financing his business.
The other example involved a lease of business premises already owned by a SMSF to the operating company of the business owner.
This client was aware in general terms of what are sometimes referred to as the “arms length” rules. These rules provide that a related party transaction (in this case the lease ) cannot be on less favourable terms to the SMSF than would be the case if the SMSF was dealing with an unassociated party.
He did not wish to pay less than a market rent . He had reached the stage in life when he was trying to maximize his retirement income and get every cent he could into his SMSF. He wanted to pay a rental that was vastly more than the market rental.
From a superannuation law viewpoint, the danger was that the excess rental component would be regarded by the ATO as a contribution to the SMSF on his behalf rather than a rental receipt . As the client was already contributing all he was able to into superannuation, excess contributions tax would have been payable at an effective tax rate of 46.5% on part of the excess rental and 93% on another part.
In summary, any proposal involving the transfer of assets into an SMSF or a dealing between a SMSF and a related party needs to be carefully considered before it takes place. Expert legal, tax and financial advice should be taken.
At Everingham Solomons we have the expertise in superannuation, tax and business laws to help you because Helping You is Our Business.
The Law Society of New South Wales operates the Specialist Accreditation Scheme to help the general public find Solicitors who have proven expertise in particular areas of the law.
Before gaining accreditation a Solicitor seeking Specialist Accreditation must pass rigorous assessments in communication, problem solving, client relations and the law in the relevant area.
A successful applicant for Specialist Accreditation is also required to commit to ongoing mandatory continuing legal education in the specialty area which means that the Specialist must undertake twice the mandatory continuing legal education of a non-accredited Solicitor.
In the end result, people dealing with Accredited Specialists can be confident that they are dealing with a person of proven expertise in the particular field who is also required to continually update and maintain their skills.
The Specialist Accreditation Scheme commenced in 1992 and has been actively supported by Everingham Solomons since that time. At one stage Everingham Solomons was the only firm in New South Wales of more than four Principals where all the Principals were Accredited Specialists in various areas of the law.
With that background, the Directors of Everingham Solomons are very pleased to announce that Jennifer Blissett has been awarded accreditation in the area of Family Law. Jennifer becomes the sixth of the current solicitors of Everingham Solomons to achieve Specialist Accreditation.
Jennifer joined Everingham Solomons in 1999 and is the Director in charge of the firm’s Family Law section. She practices extensively in the areas of-
Property division and settlements
Parenting issues
Care arrangements for children
Divorce
De facto relationships
Child support
Spousal maintenance
At Everingham Solomons we can offer a range of Accredited Specialists to meet your specific legal needs.
Modern attitudes to corporate responsibility have greatly increased the scope for directors to be personally liable for what would otherwise be corporate responsibilities.
We already have significant director liability provisions in Corporations, Occupational Health and Safety and Taxation legislation.
In October the Federal Government introduced legislation which will significantly extend the scope for liability of directors and their associates in the taxation and superannuation areas.
In releasing the legislation, the Government stressed the need to –
crack down on companies which ignore their tax and superannuation responsibilities to obtain a competitive advantage over other businesses and
protect workers entitlements
by “ensuring every Australian business plays by the rules”.
Under the current legislation, company directors receive a warning and a period of notice before becoming personally liable for company tax liabilities. That will no longer be the case. The ATO will be able to take action against directors without prior notice where a company’s pay as you go (“PAYG”) withholding tax or superannuation guarantee obligations are unpaid for three months.
It is very likely that this proposed legislation will become law. It will have significant implications for –
Companies with existing PAYG withholding liabilities. Ideally they will need to deal with those liabilities in one of the presently allowed ways before the new legislation takes effect;
People offered directorships will need to make due diligence enquiries before accepting appointment at the risk of otherwise becoming liable for unpaid tax or superannuation amounts due before they accepted appointment; and
Existing asset protection strategies. The proposed legislation extends to directors and their associates. This term includes relatives, partners, spouses and children. This will require all directors to review whatever asset protection strategies they might have in place before the legislation becomes effective.
At Everingham Solomons we have the expertise to assist you with these issues and all your other corporate and business legal issues because Helping You Is Our Business.
The number of self managed superannuation funds (SMSFs) is increasing exponentially. This growth has been particularly prompted by changed laws allowing SMSFs to borrow to purchase investments such as real estate.