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Financial planning, Investment and Self Managed Super Fund Article
Cross-Juristictional Impacts on Estate Planning
By Tony Crilly
1st August 2006
This article may be out of date.
As I look toward the row of text books on my shelf, including the Law of Trusts, Master Superannuation Guide and Trust Structures Guide, I am reminded of the increasing complexity of business and personal life.
This is especially evident in the context of estate and succession planning. Recently, I became a member of the Society of Trust & Estate Practitioners (STEP). This is an international organisation which provides for the promotion of cooperation between trust and estate practitioners throughout different jurisdictions. This is becoming increasingly vital in light of the ease with which individuals can relocate internationally, in regards to their personal residence as well as the location of their investments.
It is no longer uncommon for people to have second marriages and children by those partners and to have moved residence to a new international destination. This poses some serious difficulties and practical considerations for administration of estates and future management of investments derived.
There is an interesting article by an English practitioner in the latest STEP Journal (July 2006) that has a focus on English migrants to Australia and what considerations they should give to the process. Clearly, when relocating, there are tax and other issues, and some trips and traps for the unwary. Of course, there are specialist accountants in Australia and in the United Kingdom who can assist clients in that relocation process, but essentially, what not to bring includes the following:
- foreign trust estates to which they have transferred assets or services
- foreign companies which are controlled by the Australian resident and from which are derived predominately passive investment income such as interest and royalties
- foreign life policies or other portfolio investments.
An Australian resident…will generally be required to include any actual or deemed increases in the value of the interest in their Australian assessable income. There are lots of exemptions, but due to the complexity of the rules it makes for high compliance costs.
You might wonder whether it is worthwhile then for the Australian tax resident to continue these entities.
Offshore trusts are obviously subject to specific anti avoidance provisions in Division 6 Part III of the ITAA 1936 which sets out the transfer trust rules. This operates to assess income tax to trustees and beneficiaries of domestic and foreign trusts. The focus is on the residency status of the trustee and the beneficiaries of the trust, rather than the residency status of the settlor of the trust. There is a distinct need to obtain specialist tax advice in the process of moving residence when there is control of these structures.
In addition, the article discusses income derived by controlled foreign companies, meaning the controlling shareholding is held overseas. Essentially, Australian interest holders will be given a share of the attributable income of such an entity calculated on the basis that it is a resident Australian company.
Where an Australian resident owns non-Australian portfolio investments, the Foreign Investment Fund rules under ITAA 1936 may apply to attribute income to an Australian resident person where at the end of the relevant income year that person:
- has an interest in a foreign trust
- has an interest in a foreign company
- owns a foreign life policy.
There is no intended double up with the transferal trust rules or CFC rules, and so it will generally be applied in relation to small parcels of shares or interests in trusts. An Australian resident who holds such an interest will generally be required to include any actual or deemed increases in the value of the interest in their Australian assessable income. There are lots of exemptions, but due to the complexity of the rules it makes for high compliance costs.
You might wonder whether it is worthwhile then for the Australian tax resident to continue these entities.
The article recommends foreign super funds, complying super funds and domestic trusts. Also recommended is that the extent of duties to be undertaken by the Australian resident employee working offshore is clearly stated on employment contracts. If it is clear that none of the services are to be performed in Australia, and they will be spending most of their time offshore, an exemption from Australian income tax may be available.
It is very interesting to note that the author espouses the benefits of resident discretionary trusts for holding assets. The main advantages are stated to be that they provide asset protection and flexibility for distribution of income and capital gains. This is something I have always advocated to my clients and I provide information to our new Australian resident clients to the same effect.
So it seems that between super funds and domestic discretionary trusts, the estate planner will continue to be faced with these cross-jurisdictional issues.
This is highlighted by a recent case in the United Kingdom. There are still some rare and colorful cases that involve the common law regarding the “domicile” of a person.
This is becoming a greater issue in relation to succession planning and tax and no more so than in the case of Agulian vs. Cyganik (2006) EWCA CIV 129. This case was about Mr Nathanael who was born in Cyprus in 1939 and died in England in 2003. His domicile was of crucial importance, because if he was domiciled in England then his partner of about ten years would have a very large claim on his estate. The deceased left her only £50,000 pounds out of an estate worth in excess of £6 million pounds. Essentially the Court followed a previous case of Re Fould which confirmed “the domicile of origin adheres, unless displaced by satisfactory evidence of the acquisition and continuance of a domicile of choice”.
Mr Nathanael had a life full of twists and turns developed during his personal and business life. He was born in a small Greek village in Northern Cyprus and never really lost contact with his country of origin. He regularly visited his family there, although all that time building a business in London. He had a British passport, but he kept his Cypriot identity card. He had a very strong emotional attachment to the country of his birth and always maintained frequent connection to his homeland. At first instance, the judge determined that the deceased formed the intention to live permanently or indefinitely in England, thereby abandoning the domicile of origin. This was overturned by the Court of Appeal, which made a number of specific points.
The burden of proof falls on the party who asserts the domicile of origin has been lost.
The Court stated that it must make its decision after careful examination of the person’s life from start to finish. It was found that, as a matter of fact, the deceased failed to show that he had formed the intention to live permanently in England and that he overplayed the wedding plans with his de facto of ten years. It was held that the earlier parts of his life should be given a far greater deal of weight in all the circumstances.
With more frequent and much cheaper international travel maintained and increased adherence to cultural linguistic and religious traditions, domicile will continue to be an even greater issue for generations to come.
Fly your flag clearly
This case presents an added degree of complexity for estate and succession planners. It confronts the issue of a foreigner who lives and develops a business in a country, but who left his own home because of tumultuous circumstances.
As you know, Australia is a country of migrants and continues to be so. With more frequent and much cheaper international travel maintained and increased adherence to cultural linguistic and religious traditions, domicile will continue to be an even greater issue for generations to come.
It is of particular importance for those people moving from the United Kingdom because of the jurisdiction under the Inheritance (Provision for Family Dependants) Act 1975.
Some of you may recall the Diane Cilento case in which it was of critical importance that her husband was determined to have been a permanent resident of Australia, as the alternative would have resulted in most of the estate having to be sold to pay the inheritance taxes that would then apply.
If the clear intention is to be domiciled in Australia and it can be shown that most of the estate is held here, then there is no issue. This provision varies between jurisdictions and for instance in Spain, nationality is the connecting factor. In Pakistan, religion may be the determinant and in Zurich foreign ownership of land may not be allowed.
This gives rise to the ever emerging area of conflict of laws and more often than not also comes intertwined with family law rights and conflicts.
At a practical level, when assisting clients with their estate planning it is of vital importance to consider what is to be the future forum of the resident discretionary trust. Clients must consider what tax and legal implications arise and where it is likely the chosen successors to control the trust are going to be non resident. This might be the case whether it is an inter vivos trust (established whilst the person is alive) or a testamentary trust (commencing only after the person’s death). This is an issue that will be of increasing importance, especially where the parties involved choose to divide their time as residents between different jurisdictions as well as dividing their assets locally, interstate and overseas.
My firm has a great many clients immigrating from the United Kingdom and there are particular issues that pertain to their estate planning requirements. Pension funds situated in the United Kingdom have special significance and it is critical to get advice early as to the best solution regarding possible transfer of funds into an Australian resident super fund.
There are tax traps for the unwary and we urge clients to seek specialist advice. It is critical that residue that will form part of an estate arising from other jurisdictions be considered carefully in the overall estate plan. As always, expert advice and a sound practical approach sensitive to the views of the client will always be required.
I look forward to hearing your views on the matter and any case examples that you might have.
Tony Crilly is a solicitor of The Supreme Court Queensland and principal of Crilly Lawyers; Succession & Commercial Law. He lectures for Finsia and his team is located in Brisbane. Tony may be contacted at firstname.lastname@example.org
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