lexis nexis 7th annual wills, succession and estate ...robertgordontax.com/documents/lexis nexis 7th...

Lexis Nexis 7th Annual Wills, Succession and Estate Planning Conference (4 - 6 March 2009, Melbourne)

Cross border Estate Planning: Juggling overseas assets and other international issues – a question of jurisdiction?

By Robert Gordon (Victorian Bar)

INTRODUCTION

As a country of immigrants, in Australia, it is to be expected that there will be relatives left in the country of emigration.

Accordingly, those Australians who have immigrated here, might be entitled to assets from foreign estates, and foreign relatives may be entitled to assets from Australian estates.

With the globalisaton of business, it is to be expected that foreigners will be more likely than before to have assets in Australia, and for Australians to have assets overseas.

The wealthier a person, the more likely it will be that the holding of assets will be more complicated, and in more than one jurisdiction. This may be driven by a number of factors, such as taxation (direct and inheritance), forced heirship or testators family maintenance legislation, asset protection concerns, including liability under family law and bankruptcy legislation, as well as the need to spread wealth between more than one country, to avoid having “all eggs in one basket”, thereby assisting with sovereign risk and currency risk.

This paper seeks to deal more with issues of planning by wealthier individuals, rather than simply the technical rules that apply to particular asset classes, which are invariably covered in standard texts in this area1.

By way of example of the issues that can arise, I return repeatedly to a UK individual who may find it attractive to do their “estate planning” by moving to Australia.

For Australian individuals, or a migrant to Australia, “estate planning” is becoming more complex due to changes to the family and bankruptcy law, and their interpretation. The conclusion is that the use of inter vivos trusts with independent trustees will become more widespread, and the use of such trustees in suitable offshore jurisdictions, an expected response.

A QUESTION OF JURISDICTION

1 Dicey Morris, and Collins “The Conflict of Laws” 14th ed Sweet & Maxwell, London (2006) Ch 22Nygh and Davies, “Conflict of Laws in Australia”, 7th ed. Lexis Nexis Butterworths (2002) Ch 31

© Robert Gordon 2009

In most common law countries, such as Australia, it is the domicile2 of a deceased that determines the testamentary law to apply to that deceased estate.

Most civil law countries have since Napoleonic times, adopted nationality as a test to determine the testamentary law to apply to a deceased estate of a national of a civil law country. States of the USA, have adopted a form of domicile which is said to more akin to “habitual abode”3.

The test applied in succession law, is described as that which is the “personal law” of the deceased. That is, the law of the country with which the deceased has the closest affiliation.

In addition, where within a country, there is a religious law to which the deceased subscribed, then it may be that “personal law” which is to be applied. For example, Islamic law4.

If the deceased was domiciled in an Australia jurisdiction5, then Australian testamentary law will apply, generally, to both all movable, and Australian immovable assets.

If the deceased is domiciled elsewhere, then the Australian law will generally only apply to the deceased’s Australian immovable assets6.

As there may be a mismatch of the tests to be applied as to formal validity of a will between countries where the deceased has assets, many countries are parties to the Hague Convention on the Conflicts of Laws relating to the Form of Testamentary Dispositions (1961), which has been effected in Australian State and Territory wills and succession legislation7.

For example, the NSW Succession Act 2006 s48 and the Vic Wills Act 1987 s17 adopt the Convention and provide:

(1) A will is taken to be properly executed if its execution conforms to the internal law in force in the place: (a) where it is executed, or (b) that was the testator’s domicile or habitual residence, either at the time the will was executed or at the time of the testator’s death, or (c) of which the testator was a national, either at the time the will was executed or at the time of the testator’s death. (underlining added)

Whilst “habitual residence” and “nationality” will found the formal validity of a will, it is whether there is Australian domicile which will govern the testamentary law to be applied to the will8.

2 Dicey Morris and Collins op cit Ch 63 Dicey Morris, and Collins op cit ¶ 6-1334 For the only Australian High Court decision which discusses the issues, see Haque v Haque (1962) 108 CLR 230 ¶ 105 One of 6 States or 2 Territories6 see generally, Dicey Morris and Collins op cit Ch 277 The Convention has entered into force in 39 countries8 The words “habitual residence” do not seem to have been interpreted in Australia in that context. However, in Kilah & Director-General, Department of Community Services [2008] FamCAFC 81 (24 June 2008) the Full Family Court in the child abduction context, applied the decision of Lord Scarman in R v Barnet London


2

Domicile

The concept of domicile is still largely governed by the common law (e,g. Udny v Udny (1869) LR 1), although in both Australia, and the UK (Domicile and Matrimonial Proceedings Act 1973), there are statutory amendments dealing with the domicile of married women and the domicile of dependent children. Section 10 of the Australian Domicile Act 1982 codifies the common law to a certain extent, in that it provides:

“The intention that a person must have in order to acquire a domicile of choice in a country is the intention to make his home indefinitely in that country.”

Of course, in order to change one’s domicile of choice to Australia, it would be generally necessary to have the legal capacity through visa status to “make his home indefinitely” or “ends one’s days”9 in Australia (although see most recently Mark v Mark [2005] 3 All ER 912, which casts some doubt on the status of Solomon v Solomon (1912) WNNSW 68, and Puttick v A-G [1979] 3 All ER 463). This would require the taxpayer to convert to permanent resident status, in the case of a UK domicile, at least 3 years before the date of death in order to avoid UK Inheritance Tax (IHT) on world-wide assets: s267(1)(a) Inheritance Tax Act 1984.

That a British person may find it easier to have evidence accepted of his acquisition of a domicile of choice in Australia rather than a country which is more alien in terms of language, culture, religion etc, although it is always a question of fact, can be seen in Casdagli v Casdagli [1919] AC 145 at 156-157 and Qureshi v Qureshi [1971] 1 All ER 325 at 339-340.

In the UK there has been since 1964, various law reform reports in relation to the concept of domicile, but they have largely only been implemented to deal with the most inappropriate of outcomes from the use of the test.

If the country of domicile of the deceased has an inheritance tax, and/or lifetime gift duties, the determination of domicile will have significant tax implications, as most countries which have an inheritance tax, tax persons domiciled (or deemed domiciled) in their jurisdiction, to inheritance tax on their world-wide assets, but only tax non-domiciled person on their assets within the jurisdiction. Australia abolished State and Federal Death and Gift Duties in the around 1980. Australia is now one of only six or so OECD countries without an inheritance tax.

Whilst a person may be a resident of two (or even more) countries at the same time, a person can only have one domicile10.

Borough Council ex parte Shah [1983] 2 AC 309, 342 and 343, which dealt with eligibility for student grants, that “habitual residence” is the same thing as “ordinarily resident” for UK tax purposes, as to which see Levene v IRC [1928] AC 217 at 225: “connotes residence in a place with some degree of continuity and apart from accidental or temporary absences”. A similar result has been found in the context of the Bankrupcy Act, which refers to “ordinarily resident”: Re Taylor; Ex parte National Australia Bank Limited (1992) 37 FCR 194.9 Or “until the end of his days unless and until something happens to make him change his mind: IRC v Bullock [1976] STC 409 at 415.10 Udny v Udny


3

There are essentially three types of domicile which an individual can have - the domicile of origin, the domicile of choice and the domicile of dependency.

Basically, the domicile of origin of an individual is the domicile of the father at the date of birth (or the mother if the child is illegitimate). Once the individual turns 18, he or she is able to change his domicile to a domicile of choice, but the cases indicate that this is much more difficult that merely changing tax residence: most recently, Gains-Cooper v HMRC [2006] UKSPC 00568 (31 October 2006) before the Special Commissioners in the UK.

In order for an individual to acquire a domicile of choice there must be both the act and the intention to select a new jurisdiction as that individual's permanent home.

HMRC has shown continual resistance to claims of loss of UK domicile of origin: see IRC v Bullock; Re Clore (deceased)(No2), Official Solicitor v Clore & Ors [1984] STC 609; Anderson v IRC [1998] STC (SCD) 43; F v IRC [2000] STC (SCD) 1; Civil Engineer v IRC [2002] STC (SCD) 72; Moore’s exec v IRC [2002] STC (SCD) 463; Surveyor v IRC [2002] STC 501.

For a case where there was a dispute between Australian and UK resident potential beneficiaries of the estate of the English born playwright, Anthony Shaffer, as to whether he had a domicile of choice in Queensland, see Morgan & Anor v Cilento & Ors [2004] EWHC 188 (Ch).

The Hague Convention on the Law applicable to Succession to the Estates of Deceased Persons (1989), to which Australia is not a party, seeks to overcome the mismatch as the law to apply to succession between common law and civil law, and other regimes, by relying on “habitual residence”. Only four out of the 69 countries which are a party to the Hague Convention, signed this particular Convention11. Apparently it has not entered into force in any country. The Australian Law Reform Committee Report ALRC 58 Ch 9, recommended against adoption of the Convention on the basis that it could prejudice the rights of a spouse, and others under family provision legislation (¶ 9.33).

Civil law forced heirship12

From Orca Worldwide13 “Buying property in France”:

French Succession law focuses on the concept of Bloodline, thus protecting the rights of protected heirs, which include children, grandchildren and in some case, parents before the rights of the surviving spouse (a surviving spouse is a protected heir if there are no living descendants or ascendants.)

Protected heirs are entitled to a reserved portion (Reserve Legale) of the deceased’s estate. For example, where there is one child of a marriage either through blood or adoption that child will be entitled to half of the deceased’s estate, where there are two children two-thirds, and where there are three or more children, three quarters.

11 Argentina, Luxembourg, Netherlands & Switzerland12 See generally, Alain Verbeke & Yves-Henri Leleu, “Harminisation of the Law of Succession in Europe”, being Ch 11 of “Towards a European Civil Code”, Kluwer 2nd ed. (1998)13 www.orca.com


4

In the case of a son or daughter pre-deceasing the testator the share otherwise attributed to the deceased child will be distributed equally among the children of that deceased child. If there are no such children the share is distributed between the surviving children of the testator as if the predeceased child had not existed.

If there are no children or grandchildren, but there are surviving or ascendants i.e. living parents or grandparents in both the paternal and maternal lines, the reserved portion equates to half of the estate. If there are ascendants in only one line, it is a quarter of the estate.

From Wikipedia14:

In Brazil, the descendants (alternatively, the parents or grandparents) and the spouse must receive at least 50 % of it among themselves.

In the Czech Republic, the nearest descendants can require a half of their intestacy portion if they are of age or the whole intestacy portion if they are under age. (If a child of the deceased died before him, his children can claim forced share instead of him etc.)

[Previously,] in Louisiana, if there was one child, that child must receive at least 25% of the decedent's estate. If there were two or more children, they must receive at least 50% of it among themselves. Similar provisions prevented a decedent with living parents from disinheriting them.

Current Louisiana law provides for a forced share if the decedent's children are under 24 years of age, or are permanently unable to take care of themselves.

Persons who will be the subject of forced heirship, may wish to avoid that result by making an inter vivos settlement in a country which has common law trusts. There is even forced heirship within the UK, in Scotland, in Canada in Quebec, and in the US, in Louisianna. There is also forced heirship in Japan. The case of Abdel Rahman v. Chase Bank (CI) Trust Company Limited, a decision of the Jersey Royal Court reported at [1991] JLR 103 (headnote partly extracted below), involved the challenge to a Jersey trust by the wife of a Lebanonese husband settlor. Civil law countries that are parties to the Hague Convention on the recognition of trusts will then need to recognize such a trust, but there may be issues as to whether the distribution by the deceased during his or her life, can be “clawed back”. Often the forced heirship laws will attempt to do so if the deceased has gifted the property within a specified period before death.

From Skandia Life15:

It may be possible to make lifetime transfers and for these not to be taken into account for forced heirship purposes. For example, in Germany gifts to third parties are not generally taken into consideration on death, if 10 years have elapsed since the gift was made.

14 www.wikipedia.org15 www.royalskandia.com


5

However, in other jurisdictions such as France, the law allows lifetime gifts to be challenged by the forced heirs.

Islamic forced heirship

Islam law requires two-thirds of the deceased’s estate to be distributed to heirs under Islamic law. The testator is free to leave one-third of the estate pursuant to a will, including to non-Muslims16.

However, there is no stipulation as to whom property may be gifted inter vivos, save that the gift must be outright, as gifts with reservation of rights to the donor may be treated as remaining within the deceased’s estate. Subject to the donor’s view, the donor may settle property on an inter vivos common law trust, with the only proviso from an Islamic perspective, that the donor has made the gift outright.

Ghafoor & Ors v Cliff & Ors [2006] EWHC 825 (Ch) (11 April 2006) is an English case on touched on Islamic forced heirship in Pakistan.

Murakami v Wryadi (2006) NSWSC 1354 (7 December 2006) is an Australian case which touched upon Islamic forced heirship in Indonesia.

From “Islam: its law and society”, Jamila Hussain, 2nd ed. Federation Press, Sydney (2004) Ch 9:

Males and females are each entitled to a share of inheritance, regardless of the size of the estate:

A daughter’s share is to be half that of a son’s; If there are only daughters, two or more are to share two-thirds of the estate,;

if there is only one daughter, she receives one-half; Parents, both mother and father, are each entitled to one-sixth, if there are

children, but if there are no children, and the parents are the only heirs, the mother receives one-third. If the deceased left brothers and sisters, the mother receives one-sixth;

A husband is entitled to a half share of his wife’s estate, if there are no children; if there are children, the husband’s share is one-quarter;

A wife is entitled to a one-quarter share of her husband’s estate if there are no children; if there are children, she receives one-eighth;

If the deceased has left neither ascendants or descendants, but has a brother and/or a sister who survive him, each gets one-sixth, but if there are more than two, they share in a third of the estate;

In every case, debts and legacies must be paid before the estate is distributed among the heirs;

No Muslim can inherit from a non-Muslim. No non-Muslim may inherit from a Muslim. This is the orthodox Sunni view, but this kind of inheritance is permitted by the Shia. However a legacy under a will may be left to a non-Muslim relative or friend.

Migration to Australia

One long standing positive about Australian tax was the absence since 1980 of any State or Federal death or gift duty, so that retirees or other wealthy migrants from

16 See generally, “Shari’a succession”, Gary Envis, STEP Journal, September 2008 p20


6

countries with inheritance tax may have sought to adopt an Australian domicile of choice, to escape the clutches of their country of origin inheritance tax17.

The previously frosty income and capital gains tax climate in Australia has now changed significantly:

1. since 1999, capital gains made by individuals from holding assets for more than 12 months, was halved, as was a gain made by a trustee for a “presently entitled” individual beneficiary, without any reduction in the ability to “negatively gear” income producing assets and get a full tax deduction for interest expense;

2. the 2006 Budget resetting of the tax scales making the top marginal rate of tax for individuals “kick in” at a much more reasonable A$150,000;

3. the 2006 Budget reforming the taxation of Australia superannuation (retirement funds), especially the ability to take out benefits tax free from complying superannuation funds once the member reaches the age of 60, even though they may still be working;

4. the abolition of Australian tax on the foreign investment income of “temporary residents” with effect from 6 April, 2006 (Div 768 of the 1997 Act).

However, it is perhaps the abolition of Australian taxation on the foreign source investment income of “temporary residents” that is going to excite the imagination of many prospective potential wealthy migrants.

The disposal of a permanent house in the UK and the acquisition of one in Australia would be one of the steps that could be taken firstly, to ensure that dual residence is resolved in favor of Australia under the ‘tie breaker” in the UK / Australia double tax agreement (DTA), and secondly, as an assistance on the path to acquiring an Australian domicile of choice for UK IHT purposes.

Ironically, non-domiciles of the United Kingdom, find it an attractive to reside but not adopt a domicile of choice in the UK, in order to make use of the remittance basis of taxation applicable to non-UK domiciles. The Finance Act 2008 makes reliance on the remittance basis of taxation less attractive, after seven years of residence in any nine year period, by requiring the payment of £30,000 tax just for the privilege.

Globalisation of Business

There are a number of reasons that foreigners might now find Australia a more attractive place to invest, and therefore have assets in Australia, which may need “estate planning”.

Receding application of CGT to non-residents

The new Australian CGT regime, which has moved to the OECD model treaty position, of only taxing gains of non-residents on the realisation of an Australian business permanent establishment, or direct or indirect interests in Australian realty.

17 This topic was explored by the author in some detail for a paper “Protecting Family Wealth: Retiring In Australia” presented at Legal Week “Private Client Legal Forum” Villa d’Este, Lake Como, Italy 9-11 November, 2006 ", which can be found at http://www.robertgordontax.com/documents/articles/Protecting-Family-Wealth4-Retirement-Aus.doc. Also see in relation to income tax: Rijkele Betten, “Income Tax Aspects of Emigration and Immigration of Individuals”, IBFD (1998)


7

The new Div 855 of the 1997 Act, removes from the Australian CGT net as applies to non-residents, shares in Australian private companies, more than 10% interests in Australian listed companies, interests in Australian resident private trusts, more than 10% interests in listed unit trusts, as well as options over those assets.

Australian Conduit Company Regime

Australia has also introduced in 2005, an effective conduit regime for Australian resident companies. For many years there was a “foreign dividend account” conduit regime, but no exemption for capital gains tax on disposal of the shares producing the foreign dividends. The new provisions allow Australian resident companies owned by non-residents to flow through dividends and capital gains from foreign sources. These provisions clearly have some attraction for investment in third countries by an Australian resident conduit company, for the benefit of family members resident outside Australia. As Australian resident companies are less likely to be denied the benefit of Australian’s DTAs, than trusts, the Australian conduit company regime may be attractive: see Div 802 of the 1997 Act.

Mutual Assistance in Tax Recovery

Unlike the position in Europe, Australia has so far only entered into a few treaties allowing Australia to collect tax on behalf of other countries revenue authorities i.e. USA, France and New Zealand. Australia has also signed an exchange of information agreements with Bermuda, the Netherlands Antilles, and the British Virgin Islands, among others, and is seeking further agreements with tax havens, outside the framework of comprehensive double tax agreements.

Alongside the EU pressure, the OECD’s so-called “Harmful Tax Competition” Project18

has resulted in tax havens being forced to become more transparent by agreeing to record information on who is using their regimes, and to share that information with the Revenues of the countries where those investors are resident19.

Generally this has only been successful against the small island countries20, whereas economically relatively powerful non-OECD countries, such as China (including Hong Kong), Malaysia and Singapore, are unaffected. Tax preferred arrangements for foreigners only, within OECD members, have been largely removed, but the tax competition between countries tax systems as a whole, has probably increased, rather than harmonised21.

18 OECD Report on Harmful Tax Competition - An Emerging Global Issue (1998); OECD Report: Towards global tax co-operation: Progress in identifying and eliminating Harmful Tax Practices (2000);OECD Harmful Tax Project: 2001 Progress Report; OECD Harmful Tax Project: 2004 Progress Report; Progress Towards a Level Playing Field: Outcomes of the OECD Global Forum on Taxation (2005);J C Sharman, “Havens in a Storm”, Cornell University Press (2008)19 “Harmful tax competition: Defeat or victory” Jogarajam & Stewart (2007) 22 Australian Tax Forum20 Land-locked Liechtenstein is not in the OECD, and is one of the last countries attacked, to be holding out against the Project. The others are Andorra, Liberia, Monaco & the Marshall Islands21 Refer for instance, to “The OECD and the Offshore World”, R Hay, ITPA Journal Vol VII No 3 (2007)


8

RESIDENCE

Residence at the time of death, or for a period before death, and citizenship (or dual citizenship), may be relevant to the question of the deceased’s domicile at the time of death, but only domicile in an Australian jurisdiction, determines the proper law to be applied to the estate.

Australian Tax Residence

Section 6(1) of the 1936 Act defines Australian residents as it relates to individuals as follows:

‘"resident" or "resident of Australia" means -

(a) a person ... who resides in Australia and includes a person -

(i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;

(ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or

(iii) who is:

(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or

(B) an eligible employee for the purposes of the Superannuation Act 1976; or

(C) the spouse, or a child under 16, of a person covered by subsubparagraph (A) or (B)’ (underlining added)

As the specific tests widen the concept of “residence” beyond whether a person “resides” in Australia in a particular year of income, it only become necessary to consider the specific tests if the individual does not “reside” in Australia in the ordinary meaning of that word, in a particular year of income.

It will be observed that whether a person’s residence will be taken into account in deciding their domicile, the reverse is also true. That is, a person’s domicile is taken into account in the first specific test of tax residency.

General Test – “resides”

Relatively recently, the issue of common law residence22 was considered in Gains-Cooper v HMRC [2006] UKSPC 00568 (31 October 2006) before the Special Commissioners in the UK, where the law was analyzed23.

22 For a discussion of the relevant matters that the Commissioner will take into account in determining whether a person is resident according to ordinary concepts see Taxation Ruling TR98/17.23 Also see Shepard v HMRC [2005] UKSPC 00484.


9

Mr Gains-Cooper was found by the Special Commissioners to have remained a resident of the UK, and his appeals to the High Court [2007] EWHC 2617 (Ch), and the Court of Appeal were dismissed [2008] EWCA Civ 1502.

First Specific Test - domiciled but permanent place of abode outside Australia

Domicile

The first of the three specific tests refers to the domicile of the individual24.

Permanent Place of Abode

The most relevant expression of opinion by the Commissioner of Taxation is contained in Income Taxation Ruling IT 2650, which is headed “Residency – Permanent Place of Abode Outside Australia” (underlining added). That ruling is essentially directed at the question of whether persons absent from Australia for particular periods may become non residents of Australia during the period of absence.

Second Specific Test – in more than 183 - days but usual place of abode outside Australia

After the issue of IT 2650 and TR98/17, a further case was decided: FC of T v Executors of The Estate of Subrahmanyam 2002 ATC 4001 (Full Federal Court), and on remission to the AAT, 2002 ATC 2303. This case didn’t deal with domicile, and as it was fought on the basis of the second test. It appears that the evidence was always the taxpayer had intended to return to Singapore, and so it appears to have been conceded by the ATO that she was domiciled in Singapore.

In this case, the deceased, who was a citizen of Singapore, had been in Australia for almost 4 years, essentially for medical treatment, and her lifestyle had been severely restricted by the health problems. She had closed her medical practice in Singapore, sold he house and transferred the proceeds of sale to Australia. However, she had left valued possessions in Singapore and maintained her Singapore medical registration and travelled back there on a few occasions. Ultimately on remission to the AAT, she was found not to have a usual place of abode outside Australia.

Resident nowhere

From press reports, it appears that the actor Paul Hogan, has an argument with the ATO, where he has asserted that in the relevant years, he was not a tax resident of any country25. Clearly the ATO prefer the argument that he was an Australian tax resident26.

It has been suggested that the cruise liner, “The World” reputedly promotes the possibility of ceasing to be a tax resident anywhere, by selling up in the home

24 As to the question of domicile, see the discussion at ¶ 8-10 and ¶ 21 of IT 2650.25 e.g. “Crime body suspects Hogan of travel sham”, The Age, 22 August, 200826 Due to largely ineffective suppression orders, the first reported decision that refers to Hogan by name is Hogan v ACC (No.4) [2008] FCA 1971 (22 Dec 2008)


10

jurisdiction, and buying a suite on the liner, which will then cruise the world endlessly!

From Wikipedia entry: “The World” (cruise ship)

“The World” is a floating residential community owned by its residents. The residents, currently from 40 different countries, live on board as the ship slowly circumnavigates the globe — staying in most ports from 2 to 5 days. Some residents live onboard full time while others visit their floating home periodically throughout the year.

From “The World” website27:

…The World opens a vast amount of opportunity to travel the world in an exclusive community as either a Resident or vacationing Guest. With 165 private residences located aboard, many Residents call The World home on a consistent basis while others open their doors temporarily for short term rentals that allows others a unique vacation experience unlike any other.

This idea might not be far fetched. On remission to the AAT in FC of T v Executors of The Estate of Subrahmanyam, the AAT referred (at p445) to the Commonwealth Taxation Board of Review in Case No. 56, (1946) 15 CTBR 443:

The taxpayer took up an appointment on board a ship and placed all of his personal belongings on board with the intention of living on it and without any definite intention of ever returning to Australia to live. The ship was in Australia for short periods during each of the tax years under consideration. The taxpayer had not abandoned his domicile in Australia. Therefore, in view of paragraph (a)(i) of the definition, he was a resident and so subject to taxation unless his permanent place of abode was outside Australia.

28. Mr Gibson considered the dictionary meanings given to ``abode'' and ``place'' and formed the view that, in one of its senses, a ``place of abode'' was a place of habitation or home. The ship was the taxpayer's place of abode because it was the place where he slept, ate, worked and had his recreation. It was immaterial where the ship was moored. It was his permanent place of abode because he was residing on it for an indefinite time and his presence was not merely fleeting. Mr Gibson also considered that the expression ``place of abode'' might be given a broader interpretation and that:

``... meaning may be a `person's home or dwelling-house or other habitation or the village, town, city, district, county, country, or other part of the world in which a person has his home or dwelling-house or other habitation or in which he habitually resides'. In the broader of these senses the taxpayer's `abode' at the material times was his ship or on his ship, and his place of abode was the particular part of the world where the ship happened to be at any given time. Even applying that sense it could, I think, be held that the tax-payer's permanent place of abode was outside Australia.''

Dual residence is resolved in Article 4 “tie-breaker” of the UK/Australia DTA:

27 www.aboardtheworld.com


11

“…3 The status of an individual who, by reason of the preceding provisions of this Article is a resident of both Contracting States, shall be determined as follows:

(a) that individual shall be deemed to be a resident only of the Contracting State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national;

(c) if the individual is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.” (underlining added)

It will be observed that whilst nationality (and indeed dual citizenship) is relevant to the “tie breaker”, it is not directly relevant to the domestic definition of Australian tax residence.

OVERSEAS ASSETS AND FOREIGN INHERITANCE TAXES

As is dealt with under its own heading below, UK world-wide IHT is based on UK domicile or deemed domicile.

Other countries use various combinations, or one of, residence, ordinary residence, nationality28 or domicile, as the test for their world-wide IHT. Due to the potential for double taxation, the OECD has a Model Double Taxation Convention on Estates and Inheritances and on Gifts (1982). It contains a tie breaker to resolve different national rules relating to “fiscal domicile”. For instance, the UK has entered into 10 estate tax treaties29.

US citizenship creates a world-wide US IHT liability as will permanent residence (“green card” or resident alien status)30.

Generally speaking, as only individuals die, foreign inheritance taxes are usually overcome by holding assets in entities, such as companies and trusts, which may have either exist in perpetuity as with companies, or for trusts, subject to a rule against perpetuities where the perpetuity period may span several or more generations. Several offshore jurisdictions have abolished the rule against perpetuities e.g. Jersey and Cayman.

28 Austria, Germany, The Netherlands & Sweden. 29 See generally, “Inheritance and Wealth Tax Aspects of Emigration and Immigration of Individuals”, 56th IFA Congress, Oslo (2002) Vol 27a.30 As to new exit rules for losing that status to avoid income and inheritance tax, see: “Winners and losers”, G Warren Whitaker, STEP Journal Sept 2008; “Expatriation: time to go”, Paul A Sczudlo, STEP USA, Oct 2008.


12

RECURRENT QUESTIONS: DRAFTING FOREIGN WILLS OR SEPARATE WILLS FOR EACH JURISDICTION?

This topic was dealt with extensively at the 6th Annual Wills, Succession and Estate Planning Conference (Vic), by Barry Fry, in his paper: “Looking Beyond Jurisdictional Boundaries in Will Drafting and Estate Planning”, particularly at ¶ 13.1-13.10. The competiting considerations usually involve, a foreign trust having the benefit of having local executors & trustees; the hastened administration in uncomplicated jurisdictions not being restrained by complilcated situations in other jurisdictions, and the isolation of insolvent estates (usually due to local taxes) from solvent estates in other jurisdictions. However, for my part, I think it very hard to generalize, and much depends on the types of assets and the jurisdictions they are in31.

ONSHORE ASSET PROTECTION TRUSTS

During a person’s life, they may have caused to be formed entities onshore or offshore, in which they do not have an ownership interest e.g. a discretionary trust, over which they have a degree of influence (usually by retaining the power of appointment over the trustee, and/or a memorandum of wishes), but which is not property, and so not able to be bequeathed by will or transmitted on intestacy.

Australian Discretionary Trusts

As an Australian discretionary trust can last for 80 years (except SA, where the rule against perpetuities was effectively abolished32), it is inherently more flexible than holding assets personally, as the party to benefit from the holding of the asset can be changed from time to time, as circumstances change, through a number of generations. Generally speaking, the beneficiaries who are mere discretionary objects of such trusts have no “interest” in the trust assets which can become devisable property on the bankruptcy of the individual, and so such trusts are valuable asset protection vehicles, which may also protect the particular structure from the application of the general tax anti-avoidance provision (Part IVA) as the dominant purpose of the structure may be seen to be asset protection: FC of T v Mochkin [2002] FCAFC 15.

Nor should the client who is in the position of an appointor of an Australian discretionary trust going to find the trustee in bankruptcy stepping into his shoes. In the only decision directly on the point in Australia, Davies J in the Federal Court in Re Burton; Wily v Burton (1994) 126 ALR 557, found on the basis that the power of appointment was a personal right, and therefore not “property”, it was therefore not capable of being “devisable property” for bankruptcy purposes, and so the trustee in bankruptcy could not obtain the power of appointment so as to change the trustee to a party controlled by the trustee in bankruptcy, who might vest assets of a discretionary trust in favour of the bankrupt, and therefore for the bankrupt’s creditors33.

31 Also see Bernie O’Sullivan, “Estate & Business Succession Planning”, TIA (2008) Ch 6; and James Kessler & Michael Flynn, “Drafting Trusts & Will Trusts in Australia”, Thomson (2008) ¶ 15.75.32 See “Tax issues with Modern Trusts: Avoiding the Vesting Day, Trusts domiciled in South Australia”, Michael Butler, TIA SA Div 25 Sept 200833 See Kessler & Flynn op cit ¶ 6.175. In “Defending the Trust Ramparts” by Graeme Halperin, TIA Vic State Conv, Oct 2007 p9, it is suggested that Re Burton was not the only authority, and reference was made to Dwyer v Ross [1992] 34 FCR 463. However, the later case, discussed the issue, but in fact, did not have to decide (at


13

A District Court in Florida has found the exact opposite in relation to the power of appointment of an American over trustees of tax haven trusts in Bermuda and Jersey: United States of America v Raymond Grant and Arline Grant (S.D.Fla. 06/17/2005). The order in that case was that Arline Grant (the survivor of the defendants) use her power of appointment to substitute the tax haven trustees, with US trustees, or in the alternative to otherwise repatriate the assets held in the trusts. As Arline Grant was more than a mere discretionary object, indeed, she had the right to call on the trustees to provide her maintenance in the sum she said she required, the alternative order is more clearly understood. In that case the IRS was owed over US$36M by the defendants.

In Australia, an added safeguard when drafting a trust deed, is to have successor appointors, in the case of bankruptcy of an appointor.

The use of a memorandum of wishes by the principal of an Australian discretionary trust, is often overlooked, probably as the private company trustee is usually controlled by the principal while he is alive (unlike in an offshore trust). However, on the demise of the principal, the beneficiaries may not see things in the same way, and trouble can then exist if they inherit the shares in the trustee. It would be best often, if the shares in the trustee are not left to the beneficiaries, but to a professional adviser, who armed with a memorandum of wishes may be better able to fulfill the wishes of the principal34. For some recent authority on whether a discretionary object is entitled to access a letter of wishes, see Breakspear v Ackland [2008] EWHC 220 (Ch).

The memorandum of wishes for an Australian discretionary trust, will most likely become much more common in conjunction with the use of trustees independent of the family concerned, due to the non-tax decision in Australian Securities and Investments Commission In the Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) [2006] FCA 814 (29 June 2006), a decision of French J (as he then was, having now been elevated to Chief Justice of the High Court).

In that case a receiver was appointed over various trust assets on the basis that the defaulting debtor as a beneficiary and as in effective control of the trustee, had an interest in the assets, entitling the appointment of a receiver over them under the Corporations Act. This has caused considerable consternation35, as the case didn’t even refer to Re Burton; Wily v Burton. For a display of some restraint after Richstar, see ASIC v Burnard [2007] NSWSC 1217, particularly at ¶ 69-71 and 76-78. Also see Public Trustees v Smith [2008] NSWSC 397. However, the uneasiness is still there, as high profile insolvencies darken the public and judicial mood, when the blameworthy individuals seem to have salted away assets for themselves36. 468), and in any event was also decided by the same judge, two years earlier than Re Burton.34 See generally, Kessler & Flynn op cit ¶ 6.85-6.95.35 See “Trust Practices under threat- Discretionary trust interests: the Westpoint Litigation” Ron Jorgensen & Renuk Somers, TIA Vic Div 13 Sept, 2006 and Halperin op cit. But apparently no consternation to Justice Branson “The Bankrupt, His or Her Spouse ant the Family Trust- A Consideration of Part VI Div 4A of the Bankruptcy Act”, ITSA 2006 Bi-Annual Conv.36 Also see “Trust me –I don’t own anything!”, Michael Lhuede, TIA Vic State Conv, Oct 2008. “Claims against the Estate (Warnings for Executors)”, Craig McKie, TIA Estate & Succession Planning Intensive, WA Div 24 Sept, 2008 pp14-15. Also see other cases referred to in “Modern Day Trust Structures”, Daniel Smedley, TIA Vic State Conv, Oct 2008 pp19-20 including Kawaski (Australia) Pty Ltd v Arc Strang Pty


14

Whilst sitting with French CJ recently in Kennon v Spry [2008] HCA 56 (3 December, 2008), Gummow & Hayne JJ observed (at ¶ 89):

“the term ‘property’ is not a term of art with one specific an precise meaning. It is always necessary to pay close attention to any statutory context in which the term is used [and referred by way of footnote to Richstar]. In particular it is, of course, necessary to have regard to the subject matter, scope and purpose of the relevant statute”.

Family Law Act

It should be noted that for Australian Federal family law purposes, an Australian resident spouse may be in contempt of court37 for not disclosing38 the existence of onshore or offshore trust assets, even though they may be safe from other creditors. The penalty for an individual may involve imprisonment, and for a corporation may involve sequestration39. It should also be noted that there is legislation in most States providing protection to persons in de facto relationships.

As to whether a family discretionary trust will be able to be attacked by a party to an Australian family law dispute, the position still depends on the circumstances, and is no less easier to decide following the recent High Court of Australia decision in Kennon v Spry.

In that case, the husband was personally one of the trustees of a family discretionary trust, originally created in 1968, in which he held a power of appointment, and in which he and his former wife were discretionary objects, as were their children and other family. The husband excluded himself as a beneficiary in 1983. By a majority of 4:1 the Court held that orders could be made directly affecting the trust property under the Family Law Act 1975. It appears that the issue of whether the trust was a “financial resource” of the husband (or of the wife), was not a subject of the appeal, but will normally be an additional issue, allowing the existence of the value of the trust to be taken into account in the overall divide of marital property i.e. potentially indirectly affecting the assets of the trust. Of course, if most of the wealth of the parties to a marriage is in trust, an order against only a party to the marriage that the trust is a “financial resource” of one or other of them, won’t allow recovery for the claimant40.

The problem in Kennon v Spry, is that the majority differed as to how they reached their conclusion. It should first be observed that the dissenter, Heydon J reached the conclusion that neither the husband nor the wife had an “property” in the trust as a matter of general law (referring to Gartside v IRC [1968] AC 553) at ¶ 56), and that the position was no different for family law purposes under s79 (at ¶ 187). His

Ltd [2008] FCA 461 at ¶ 75, reference to Lygon Nominees Pty Ltd v Commissioner of State Revenue (2005) 60 ATR 135 at [58]. Also see “Wealth Preservation in a Sub-Prime World”, Ken Schurgott, TIA WA State Conv. 2008 pp4-5.37 Family Law Rules 2004 – 13.14 Consequence of non-disclosure 38 Family Law Rules - 13.04: Full and frank disclosure

39 Family Law Act 1975 - s 112AP Contempt40 For a discussion of “financial resources” see Schurgott, op cit pp22-24, and Kessler & Flynn op cit ¶ 4.40-4.50.


15

Honour interpreted s85A as only potentially applying to trusts in “made in relation to the marriage” and the subject trust was created years before the marriage (at ¶ 186).

Of the majority, none mentioned Gartside v IRC directly, although French CJ noted that the husband’s power as trustee to appoint assets or income to the wife “may not be property according to the general law” (at ¶ 79).

French CJ relied on the purpose of the Family Law Act, husband being a trustee, the wife being a discretionary object, the assets of the trust accumulating during the period of the marriage, and the wording that the orders under s79 can be made in relation to “property of the parties to the marriage” (at ¶ 64-65 & 70).

Gummow & Hayne JJ reached the same conclusion under s79, but were more specific (at ¶ 126):

“And in considering what is the property of the parties to the marriage (as distinct from what might be identified as the property of the husband) it is important to recognise not only that the right of the wife was accompanied at least by the fiduciary duty of the husband to consider whether and in what way the power should be exercised, but also that, during the marriage, the power could have been exercised by appointing the whole of the Trust assets to the wife. Observing that the husband could not have conferred the same benefit on himself as he could on his wife denies only that he had property in the assets of the Trust, it does not deny that part of the property of the parties to the marriage, within the meaning of the Act, was his power to appoint the whole of the property to his wife and her right to a due administration of the Trust.”

French CJ, Gummow & Hayne JJ reaching their conclusions based on s79, did not need to deal with s85A, which argument had not be raised below. Keifel J relied entirely on s85A.

It should be noted that s90AE (which was introduced in 2006), and allows orders to be made against third parties, was not available to the wife, as in the proceedings at first instance, she did not lead evidence as required by s90AE(4).

It is very clear from Kennon v Spry, that the trustee of a family trust should never be a individual who is party to a marriage, if the outcome in that case is to be avoided. However, further steps would also need to be taken, and it would be expected that use of an offshore trustee holding assets outside Australia is likely to be become more popular.

If a party to a marriage in Australia has settled or gifted property on an inter vivos trust outside Australia, even if the Family Law Court made s90AE against the foreign trustee (without assets in Australia), and that jurisdiction does not have Reciprocal Enforcement of Judgment legislation which covers Australian judgments, if it is a common law country, then it will it be extremely difficult to enforce especially, an Australian non-money order judgment in that jurisdiction. At common law, one issue will be whether Australia had jurisdiction over the foreign trustee or assets in Australia, and absent the foreign trustee recording an appearance in the Australian court, or having assets in Australia, this less likely.

Bankruptcy Act


16

Nor is superannuation the safe haven for asset protection that it once was. Amendments to the Bankruptcy Act 1966 in 2006, particularly s128B, have allowed for claw-back of large late contribution before bankruptcy41.

The 2006 amendments to Part 4A also limit the effectiveness of a strategy of allowing a spouse to have title to an asset such as a family home, which the at-risk spouse then funds by paying the mortgage42.

Further, in Trustees of the Property of John Daniel Cummins v Cummins [2006] HCA 6; (2006) 224 ALR 280; (2006) 80 ALJR 589, in dealing with the question of whether there had been a fraudulent disposition in 1987, to which s121 of the Bankruptcy Act refers, the High Court were happy to infer, without evidence before the Court, that a senior counsel who had not lodged a tax return since 1955, must have been insolvent due to unpaid tax in 1987, even when there was no evidence of his income or expenses up to 1987. The law was changed in 2006 so that absence of books of account, creates a rebuttable presumption of insolvency43.

OFFSHORE STRUCTURES INCLUDING OFFSHORE ASSET PROTECTION TRUSTS

Some of these problems are likely to see the emergence of the use of trustee companies independent of the beneficiaries, and the greater use of such trustees out of Australian jurisdictions.

Offshore structures may also have come into existence for commercial reasons, e.g. an offshore trading company, or for tax and asset protection reasons e.g. an offshore trust.

Often the purposes are mixed, e.g. where the offshore trading company is wholly or partly owned by an offshore trust.

Some tax havens have special legislation designed to make it difficult to attack the assets of an offshore trust in their jurisdiction.

An offshore trust may have nothing to do with tax planning, with the principal happy to pay the tax attributable to them as “settlor”44, as long as the assets in the trust are not to be distributed according to forced heirship rules in their “home” country. Abdel Rahman v. Chase Bank (CI) Trust Company Limited, was a notable example of failure to implement correctly.

Offshore Trusts for Australian (Permanent) Residents

Continuing with the theme of our wealthy UK migrant to Australia, on loss of “temporary resident” tax status, to attempt to achieve an Australian domicile of choice, the taxpayer is then confronted with all the complexity of the Australian tax system.

Prior to the introduction of anti-deferral legislation in 1990, Australian residents could be the beneficiaries of offshore discretionary trusts with foreign source income, and provided that they were not made presently entitled to the offshore trust’s income,

41 see Schurgott op cit p14.42 see Schurgott op cit p11.43 see Schurgott op cit pp8-9.44 s102AAZD of the 1936 Act.


17

they had no Australian tax liability on it. As can be imagined, there were likely to have been a great many of such offshore trust in existence for Australian beneficiaries. The so called Transferor Trust (TT) rules (contained in Div 6AAA of the 1936 Act) sought to prevent such deferral by attributing the offshore discretionary trust’s income and gains to the party who had transferred property or services to the trust, unless the trust had borne tax at normal rates in one of seven (7) nominated high tax countries, or the transfer was to a trust under an arm’s length dealing, and the transferor did not control the trust.

Creation or transfer to a non-resident trust pre-immigration (a simple “drop off” trust) doesn’t work, as on becoming an Australian (permanent) resident, the trust will still become a TT with respect to the transferor. Previously, there was an exemption for a “drop off” trust that the transferor didn’t control when he became an Australian resident, but that is likely to be abolished. Indeed, the former Treasurer announced that it would be, but this was not acted upon as on 10 October, 2006, the then Treasurer announced a complete review of all anti-deferral legislation, to alleviate unnecessary complexity and uncertainty. The BOT has reported to the new government, but the contents of the report have not yet been made pubic, at the date of writing. As can be seen below, the position may be different if a relative who is not to become an Australian (permanent) resident establishes and funds the trust for the future Australian (permanent) resident.

In 1993 further anti-deferral legislation45 was introduced which dealt with Foreign Investment Funds (FIFs). The most common form of FIFs which those measures caught were “roll up” offshore unit trusts, where the income of the trust was accumulated, allowing the investor to defer tax on the accumulated income until he realised his investment. Under the FIF measures, the Australian resident needed to have an “interest” in the trust, such as by being a unit holder. A mere discretionary object in a discretionary trust should not have an FIF interest (Gartside v IRC) and so there is not usually an overlap between the two measures, at least in relation to the common offshore discretionary trust with an independent trustee, where there is no beneficiary who has an interest as a taker-in-default of appointment, except a charity. However, where by some planned means or the happening of some designated event specified in the trust instrument, a mere discretionary object was to become entitled, s96B of the 1936 Act could deem the entitlement to have happened from the beginning, and there was also a similar provision in the FIF regime . These provisions created considerable uncertainty in a self assessing environment where the mere discretionary object may not have known even about being a potential beneficiary, let alone the details which could cause a deemed present entitlement. The BOT is likely to have recommend that s96B will be repealed.

The TT rules were drafted with the view to catching most offshore discretionary trusts with an Australian transferor. The notable intentional exception is the testamentary trust: s102AAL of the 1936 Act. Accordingly, an Australian resident individual can provide for the creation of a testamentary trust with a non resident trustee, and on his demise, the offshore trust which then comes into existence is outside the TT rules.

It is worth noting that the testamentary trust, even onshore, may have significant asset protection advantages, because assets left by a deceased to children or grandchildren who are professional persons, or directors of particularly public companies, or any companies that may be at risk of trading while insolvent, may be “gobbled up” by the beneficiaries’ creditors after the death of the deceased. That is, the deceased whole life’s accumulation of wealth may be wasted e.g. by professional 45 Part X1 of the 1936 Act


18

negligence of one’s professional partners, if the liability is uninsured, as many professionals found themselves after the collapse of HIH Insurance in early 2000s, at the time Australia’s largest general insurer.

However, there are at least a few other types of offshore discretionary trusts which may be outside the scope of the TT rules. The first is the trust which is settled inter vivos by a non resident without the involvement of an Australian resident party, and to which no Australian resident party makes a transfer. For example, if an Australian resident’s non resident relative created an offshore trust using their own money, naming the Australian resident relative as a mere discretionary object. While the trust is not controlled by the Australian resident relative, it cannot be a TT with respect to him. If the trustee of the trust is exercising their duties properly, they will be in control of the trust even if they communicate with the beneficiary as to his preferences as to investment alternatives: Cf Abdel Rahman v. Chase Bank (CI) Trust Company Limited. Obviously, such a case is very fact specific.

At this stage it should be observed that if the trust in question is indeed a TT, and the Australian resident transferor is attributable with income or gains from the TT but fails to disclose that income or gain, then the taxpayer will have been involved in tax evasion (unless the taxpayer had a “reasonably arguable position” that the trust was not a TT), which may result in a criminal prosecution.

However, there are some cases where an offshore trust which is clearly a TT can have some use for Australian residents. It is not having an interest in a TT which is proscribed, it is the failure to declare the existence of the TT, and the income and gains from the TT. If the taxpayer’s concern is asset protection and they are happy to pay Australian tax on the earning of the trust, but want to protect its capital from potential creditors, a trust formed under the Labuan Offshore Trusts Act (Malaysia), or similar regime, would fit the bill. Based on Re Burton; Wily v Burton, an Australian court should not allow the substitution of the Australian resident controller’s trustee in bankruptcy to vest the trust in favour of the bankrupt’s creditors.

Also, for family planning purposes, assets which may not produce income but potentially large capital gains, can be held in a TT without any attribution, as it is only realised gains which are attributable. It may be that when the gain is to be realised, that one or more of the mere discretionary objects is living in one of the seven (7) high tax countries which are excluded from the TT regime, but whose tax rate may be substantially lower than Australia. Indeed, the TT may produce some income, but as long as it is declared as attributable, the fact that it flows from a significantly appreciating asset does not cause any issue in relation to that appreciation unless and until the gain is realised.

Hague Convention on the Law Applicable to Trusts and on Their Recognition (1989)

Australia was a signatory to this Hague Convention, and gave it force of law by the Trusts (Hague Convention) Act 1991. This is important even for Australia, as a common law country, as the Convention specifies that the law chosen for the trust doesn’t have to have a direct connection with the trust46, contrary to the position at common law: Augustus v Permanent Trust Co (Canberra) Ltd (1971) 124 CLR 245.

It was signed by 12 member countries of the Hague Convention, but its scope is wider as it was ratified by the UK on behalf of: the Isle of Man, Bermuda, British Virgin Islands, & Gibraltar, amongst others Crown dependencies.

46 Dicey Morris and Collins op cit ¶ 29-016


19

It is particularly important for the civil law countries for which the Convention has entered into force: Italy, Luxembourg, Monaco, Netherlands & Switzerland.

There is one Australian case in which the Convention has been raised: Singh v Singh [2006] WASC 182 (24 August 2006) concerned an Australian declaration of trust re Malaysian land.

There are two UK cases in which the Convention has been raised:

Barton (Deceased), Re [2002] EWHC 264 (Ch) (20th March, 2002) in which the deceased had a Texas domicile, but had left an English will with respect to English movables over which there was declared a testamentary trust, and the beneficiaries sought a deed of variation to the testamentary trust.

Charalambous v Charalambous [2004] EWCA Civ 1030 (30 July 2004) concerned a husband who had set up a trust in Jersey, and the effect on the trust in English divorce proceedings.

Example of Offshore Enabling Trust Legislation

The island of Labuan is a Federal Territory of Malaysia, located close to Brunei. The Labuan Offshore Trusts Act, 1996 (“LOTA”)47 provides for the regulation of Labuan offshore trusts and confers statutory benefits on Labuan offshore trusts48. The benefits of LOTA are obtained by registration with the Labuan authority. A Labuan Offshore Trust is taxed as an Offshore Company i.e. no tax on investment income, and on trading income, tax of 3% of audited profit, or a flat RM 20,000, by election.

As noted above, Australia having enacted provisions from Hague Convention on the Law Applicable to Trusts and on Their Recognition (1989), the specification in the trust deed, that the law of the trust will be that of Labuan, Malaysia, must be recognised by Australia: Article 6. Sections 10 & 11 of LOTA contains some of the most important benefits provided to Labuan offshore trusts–

10.(1) Where an offshore trust is validly created in accordance with or as provided by this Act, the Court shall not vary it or set it aside or recognise the validity of any claim against the trust property pursuant to the law of another jurisdiction or the order of a court of another jurisdiction in respect of –

(a) the personal and proprietary consequences of marriage or the termination of marriage;

(b) succession rights, whether testate or intestate, including the fixed shares of spouses or relatives;

47 The legislation is available at http://www.ectrustco.com/documents/legislation/LabuanOffshoreTrustAct1990.htm48 For commentary see http://www.ectrustco.com/documents/contents/whitepapers/offshoretrusts.htm


20

(c) any claims or orders of court with regard to matters referred to in paragraph (a) or (b) in reference to the personal laws of the settlor or the beneficiaries; or

(d) the claims of creditors in an insolvency subject to the provisions of section 11.”

11.(1) Where it is proved beyond reasonable doubt, the onus of which is on the claiming creditor, that an offshore trust created or registered in Labuan, or property disposed of to such an offshore trust –

(a) was so created or registered or disposed of by or on behalf of the settlor with principal intent to defraud that creditor of the settlor; and

(b) did, at the time such creation or registration or disposition took place, render the settlor, insolvent or without property by which that creditor's claim, if successful, could have been satisfied,

then such creation, registration or disposition shall not be void or voidable and the offshore trust shall be liable to satisfy the creditor's claim out of the property which but for the creation, registration or disposition would have been available to satisfy the creditor's claim and such liability shall only be to the extent of the interest that the settlor had in the property prior to the creation, registration or disposition, and any accumulation to the property, if any, subsequent thereto.” (underlining added)

The existence of s11(1) makes it clear that the “fraudulent disposition” to which it refers is of the type in s121 of the Bankruptcy Act49. The position would be different in relation to dispositions to which the criminal provisions of s263 & 266 of the Bankruptcy Act apply. Professional advisers obviously need to avoid aiding and abetting the commission of such offences50.

Thus, aside from being required to discharge a criminal burden of proof, the creditor’s claim will not put the other assets of the Labuan offshore trust at risk and no such claim could void the creation or resettlement of the Labuan offshore trust. This stands in stark contrast to the usual range of equitable remedies in such cases, which would, save for sub-section 11(1), include a declaration that the trust is void, orders to the trustee to account, and equitable damages.

Subsections 11(3) to (5) place further statutory barriers in the way of creditors who may seek to attack a Labuan offshore trust -

(3) An offshore trust created or registered in Labuan and a disposition of property to such trust shall not be fraudulent as against a creditor of a settlor -

49 For a discussion of cases under s121, see “Asset Protection; So you think your assets are yours?”, Lee Christensen, TIA WA Div 3 July, 2008 pp4-7.50 For instance, s266(3) provides: A person who has become a bankrupt, and within 12 months before the presentation of the petition on which, or by virtue of the presentation of which, he or she became a bankrupt, disposed of, or created a charge on, any property with intent to defraud his or her creditors is guilty of an offence and is punishable, upon conviction, by imprisonment for a period not exceeding 3 years.


21

(a) if its creation or registration, or the disposition, takes place after the expiration of two years from the date that creditor's cause of action accrued; or

(b) if its creation or registration, or the disposition, takes place before the expiration of two years from the date that creditor's cause of action accrued and that creditor fails to commence such action before the expiration of one year from the date of such creation or registration, or disposition.

(4) An offshore trust created or registered in Labuan and a disposition of

property to such trust shall not be fraudulent as against a creditor of a settlor if the creation or registration, or the disposition of property, took place before that creditor's cause of action against the settlor accrued or had arisen.

(5) A settlor shall not have imputed to him an intent to defraud a creditor

solely by reason that the settlor -

(a) has created or registered an offshore trust or has disposed of property to such trust within two years from the date of that creditor's cause of action accruing; or

(b) is a beneficiary.“ (underlining added).

It should also be observed that the Malaysian Reciprocal Enforcement of Judgements Act 1958 does not name Australia as a jurisdiction from which judgments will be able to be registered under that Act. Accordingly, a party to for instance, a family law dispute will need to claim enforcement of the Australian judgement under common law principles in Malaysia. One ground for refusal will be Malaysian public policy51, and the provisions of LOTA will prevail52.

Offshore Companies for Australian (Permanent) Residents

A non-resident company controlled directly or indirectly by five (5) or fewer Australian residents will be a “controlled foreign company” (CFC) for Australian anti-deferral tax purposes53. However, provided it has only business (trading) income which is not “tainted”, none of the income is attributable to the Australian controllers, even if the foreign income has not been subject to tax (from 1 July, 2004).

This outcome does not change if all the shares in the offshore company are held by a transferor trust (TT), for asset protection reasons or otherwise.

The use of an offshore company owned by a TT will often be administratively simpler, as the Australian resident principal can be a director of the company54. If the company only has passive or “tainted” income, this will be attributed through the TT

51 See Dicey Morris and Collins op cit Rule 44, and the reference at ¶ 14-143 to Mayo-Perrot v Mayo-Perrot [1958] I.R. 336.52 See generally, Jupiters Ltd (trading as Conrad International Treasury Casino) v Gan Kok Beng & Anor [2007] 7 MLJ 228. Also see generally, “Enforcement of Non-Monetary Foreign Judgments in Australia”, Kim Pham, Sydney Law Review, Vol 30 (2008) at 663 and Dicey Morris and Collins op cit Ch 14.53 Section 340 of Part X of the 1936 Act


22

to the Australian resident transferor, but the capital of the company should be protected.

If the migrant (returning to the theme) might cease to be an Australian tax resident for instance, if a sufficiently large capital gain was to be made on a tax haven trading company, it might have two (2) classes of shares. To enable tax free dividends to come back to Australia in the years before the sale, one class of share (with 10% of the voting rights) with discretionary dividend entitlement, would be owned by an Australian company in its own right (and entitled to s23AJ tax free dividends), while a TT might hold another class of shares which would also have discretionary dividend entitlement, which would only be used if the Australian (permanent) resident, ceased to be so, in an Australian tax year before the offshore company made the sale.

Whilst this is an oversimplification of the concept, it is a workable plan if implemented carefully. It will be observed that the use of the TT will also protect value in the non-resident trading company from potential creditors of the Australian resident principal. The Australian company that would hold the shares paying s23AJ dividends, would itself be owned by an Australian discretionary trust, also for asset protection and flexibility reasons.

Labuan, Malaysia is an attractive tax haven for Australian purposes, as it has a common law system, with English as the business language, is in a more convenient time zone for Australia, and is also geographically much closer than European and Caribbean havens, and is also outside the EU Savings Directive.

CIVIL LAW ENTITIES, ISLAMIC TRUSTS ETC

Civil law entities e.g. foundations, anstalts, stiftungs

These entities have characteristics of both companies and trusts. Generally they will have legal personality, and exist in perpetuity, but do not have shareholders or members, and may exist for a purpose, or for persons, or both55. Generally, the founder will not have a property interest in such entities, and so their succession will not be governed by the testator’s will, but will be dealt with in the documentation of the civil law entity itself.

From www.assetprotectionbook.com:

“While there are a number of civil law entities that could be utilized for asset protection purposes, the most popular structures for U.S. planners are two trust-like entities, the stiftung and the anstalt56, created under the law of Lichtenstein…and foundations created in Panama. We will examine these entities, and how they might fit into an overall asset protection plan.

Stiftung [Foundation]

54 The majority of directors will need to be resident where the company is to be resident.55 See generally, Andreas Schurti, Chapter on Liechtenstein in “Offshore Trusts”, Centre for International Legal Studies, Salzburg, Kluwer (1995) at pp228-230.56 Also see CCH “International Offshore Financial Centres”, (looseleaf) ¶ LIE1-035 & 1-036.


23

A civil law arrangement that is basically a charitable fund that is created for a particular purpose. It is similar in many respects to a Purpose Trust57…

The stiftung, is basically a fund for a particular purpose that has by statute been given the status as a legal entity. The Stiftung is created by a “Founder” and has a separate legal identity from the Founder. The assets of the Stiftung must be segregated from any personal assets, and are typically not available to creditors of the Founder.

The Stiftung can have some commercial activities, but it cannot be utilized solely for commercial purposes. Instead, the Stiftung is designed to act basically as a private foundation, and it may be formed purely as a family foundation. For asset protection purposes, however, it is better if the Stiftung is formed for the promotion of some important interest (such as to further education or medical research)….

A Stiftung has no shareholders. However, a Stiftung may be drafted to have beneficiaries, including the Founder as a beneficiary. Neither of these features is suggested as the Stiftung then starts looking like a foreign asset protection trust. Instead, the Stiftung should be limited by its terms to supporting the purpose for which it was created and used in that fashion. This does not mean, however, that there are not methods to utilize assets of the Stiftung to endow private scholarships, etc.

The Stiftung is managed by a Council of Members, which most often is originally appointed by the Founder. At least one person on the Council must be resident in Liechtenstein. Assuming that none of the persons on the Council are named as beneficiaries of the Stiftung, it likely will be very difficult for a creditor to pierce the Stiftung. Similarly, since the Stiftung has no “owner,” neither the Stiftung itself nor its assets should be available to any creditors of the persons sitting on the Council.

Where…the Stiftung probably have their greatest use is not in holding significant assets, but rather as acting as the holder of stock in traditional domestic or offshore entities that are used as management companies.

Anstalt [Establishment]

The Liechtenstein Anstalt is an entity, which has no members, participants or shareholders, and is a sort of hybrid between a corporation and a Stiftung. An Anstalt can have beneficiaries. The principal practical difference between an Anstalt and a Stiftung is that an Anstalt can conduct all kinds of business activities58.

Panamanian Foundation

The Panamanian Foundation59 is modeled after the Stiftung, with some important differences, however. The Foundation is formed by the filing of a Charter, and is treated as a separate legal entity. As an entity, it can hold title

57 HMRC TDSI mailshot 6- 17 May 2004 says for UK tax purposes, they will be treated as trusts.58 HMRC TDSI mailshot 6- 17 May 2004 says for UK tax purposes, they will be treated as companies.59 Introduced in 1995.


24

to assets in its own name like a corporation. However, it can also make discretionary payments to the Founder or beneficiaries, like a trust. When used for this latter function, the entity is sometimes referred to as a “Family Foundation”.

Panamanian law permits the appointment of one or more protectors to oversee the three or more members of the Foundation Council. The members of the Council are required to apply the Foundation’s assets for the benefit of its beneficiaries or some beneficial purpose as set out in the Charter.” (re-arranged for readability and footnoting added)

Other Foundations

Foundations of the civil law type have also existed for some time in Austria, Cyprus, Italy, Finland, Germany, the Netherlands (Stichting), Netherlands Antilles, Spain, Sweden (Stiftelse), Switzerland, and more recently in St Kitts (2003), Nevis (2004), Bahamas (2005), Anguilla (2006), Antigua and Barbuda (2006), Malta (2006), Jersey (legislated in 2008, and expected to be operative in 2009), with others proposed e.g. Labuan, Malaysia.

Memec Plc v IRC [1998] STC 754 dealt with the UK tax characterisation of a German silent partnership. The approach taken was to analyze the characteristics of the civil law entity, and to equate it as closely as possible to the common law entity that it most closely resembles60.

Dreyfus v CIR [1929] 14 TC 560 held a French “Societe en Nom Collectif” (SNC), to be a company for UK tax purposes61.

Ryall (Inspector of Taxes) v Du Bois Co Ltd [1933] 18 TC 431 held a German “Gesellschaft mit beschraenkter Haftung” (GmbH) to be a company for UK tax purposes62.

The ATO has shown a marked reluctance to tackle this issue. As far as I can find they have not sought to deal in detail63 with foreign civil law Foundations64. In relation to Dutch Stichtings, ATO ID 2007/42 reaches the conclusion they are trusts, based on Harmer v FC of T 89 ATC 5180. In relation to Anstalts, there is no ruling available but PS LA 2007/7 says at example 2, that an Anstalt “limited by shares”, will be a company65.

“Foreign Entities- Characterisation and Treatment for Australian Tax Purposes”, Watkins & Rodi, TIA NSW Div, International Tax Masterclass, 18 Sept 2008, notes that in Private Ruling 77367 the ATO conclude that a Dutch Co-OP is a corporate entity from which s23AJ dividends may be available. They also note that a German

60 As observed by Prof. Burns “Harmonization of Australian’s Anti-Deferral Regimes”, presented to IFA Melbourne, 12 June, 2007. Also see Dicey Morris and Collins op cit ¶ 30-010.61 See particularly, pp 576-7. Tax Bulletin, Dec 2000 now treats an SNC as transparent for UK tax purposes.62 Which status it is also treated under Tax Bulletin, Dec 2000.63 By the issue of a public ruling i.e. Taxation Ruling or Determination.64 refer generally “The Private Foundations Handbook” M Grundy ed., ITPA, 2007.65 Whilst the conclusion is the same as HMRC, these days, most anstalts are not “limited by shares”. The BOT identified the characterization of anstalts as an “urgent issue” in 2004.


25

Kommanditgesellschaft (German AG) referred to in ATO ID 2007/47, and a Delaware Revised Uniform Limited Partnership66 referred to in ATO ID 2008/80, are “foreign hybrid limited partnerships” under Div 830 of the 1997 Act.

The ATO reluctance to deal with Foundations must be in the process of changing due to the US Senate investigation: “Tax Haven Banks and US Tax Compliance”, which refers at page 49 to the Liechtenstein foundation alleged to be formed at the request of the Lowy family67. The ATO made a submission to the US Senate investigation68. Also see “Revealed: How the ATO got lucky with Frank Lowy”, Financial Review, 25 July, 2008, and the reference to “unknown international sources” in Case 25/92, 92 ATC 263.

Islamic trusts

For the third of a Muslim’s estate, which can be the subject of a will, the Islamic law recognizes that that part of the estate can be settled on an “Islamic trust”.

Islamic law recognizes two types of quasi-trusts, the waqf al Ahli (family waqf), and the waqf al-Khayri (welfare waqf).

From “Sharia’a charitable ‘trusts’”, Gary Envis, STEP Journal, Nov 2008:

“In Islamic legal terminology, waqf means the ‘tying up of the property in perpetuity’ so as to prevent it from becoming the property of a third person (effectively the giving of the property for a good purpose). The waqf property thus belongs to Allah and no human being can alienate it for his own purpose. The establishment of the waqf extinguishes the rights of the waqif (dedicator) and transfers its ownership to Allah. Consequently, once the waqf is created, the property will always remain waqf property and cannot change its character…

“When a waqf is created, a pious person or group of people are appointed as the managers of the waqf (known as the mutawillis, a concept similar to the Anglo-Saxon trustee)…

“The [family waqf] is created for the security and welfare of near relatives of the waqif (dedicator) and his family to ensure that they get their needs from it for all their life, and then reverts to the welfare of poor people after the death of those near relatives (that is, it reverts to a [welfare waqf] once the private family objective cease to exits)…

“The [welfare waqf] is that which serves an objective of interest to the whole society or part of it, such as the needs of orphans, destitutes, blind people and the handicapped. Such waqfs can also be created for maintaining mosques, schools, hospitals, graveyards, and other places of public welfare…69

66 Even though the Delaware Limited Partnership is a body corporate.67 http://hsgac.senate.gov/public/_files/REPORTTaxHavenBanksJuly1708FINALwPatEliseChgs92608.pdf68 http://www.ato.gov.au/corporate/content.asp?doc=/content/00155700.htm69 For comment on drafting an Islamic Trust, see “Care and Consideration”, Gary Envis, STEP Journal, Jan 2009 p 58


26

The only UK case I have found dealing in any way with a trust for Islamic purposes, is Shariff & Anor, Re Application For Exercise Of The Nobile Officium [1999] ScotCS 157 (23 June 1999), which makes the observation:

“The trust property is held for the objects provided and subject to the powers conferred on the trustees by the deed of trust. In terms of that deed the property can be put to a whole range of uses within the general scope of the objects and there is no requirement simply to use the premises as a mosque. In any event, the deed of trust enables the trustees to sell any existing property and to purchase new property. This is incompatible with the concept of a waqf which precludes alienation of property subject to it.”

In that case the court was petitioned to remove trustees of what was drafted as a Scottish trust for public purposes. The court declined to do so, but proceeded on the basis that “the Institution” was a trust to be considered according to Scottish law.

I have not been able to find an Australian case on “Islamic trusts”.

SPECIAL CONSIDERATIONS FOR FOREIGN NATIONALS, NON-RESIDENTS

Foreign nationals and non-residents may be prohibited from owning certain Australian assets. If such a person in fact owns assets illegally, on their demise, the illegality of their ownership may “come to a head”.

Further, if certain Australian assets are left to a person who is not entitled to own the asset under Australian law, as they are not an Australian citizen or resident, there will arise the question of what is to happen to those assets.

Foreign nationals buying Australian residential realty (and limited other assets), need Foreign Investment Review Board approval, which will be granted in relation to existing housing stock to temporary residents with at least 12 months remaining on their visas, and on condition that the house is to be their main residence, and is sold if they do not continue to hold a temporary (or permanent) visa. For new housing stock, such as purchase of apartments “off the plan”, approval is required for foreign nationals, but there is no requirement to be a resident (of any type) and the realty can simply be an investment.

CASE LAW

Jersey case on “sham” trust

The headnote to Abdel Rahman V. Chase Bank (C.I.) Trust Company Limited [1991] JLR 103 provides, in as much as is relevant:

The plaintiff brought an action challenging the validity of a settlement made by her late husband.

In 1977 the deceased, Kamel Abdel Rahman (“KAR”) constituted a settlement under Jersey law which contained, inter alia, trusts and powers directing the first defendant trust corporation to hold the trust fund and income therefrom upon such trusts as he should appoint in his lifetime with its consent, subject to the proviso that he could in any 12-month period appoint one-third of the capital of the trust fund without that consent. Provision was also made for the distribution of trust capital and income in default of such appointment and on KAR’s death. The plaintiff and the second, third, fourth, fifth and sixth


27

defendants were potentially interested under the settlement and/or in the intestacy of KAR.

Notwithstanding these provisions, the trustee was empowered to pay or apply the capital or income to or for the benefit of KAR and was directed to have regard exclusively to his interests in determining whether or not to exercise such power. Many of the administrative powers contained in the settlement required his prior written consent for their exercise in his lifetime. KAR referred to the fund as “my assets” and to the trustee as his “trust manager.” The trustee made no independent investment decisions and invariably complied with KAR’s instructions. Moreover, KAR obtained moneys and made distributions from the fund of which the trustee was only later informed and often gave direct instructions to banks holding trust property concerning its investment. Following KAR’s death, the plaintiff brought the present proceedings challenging the validity of the settlement under Jersey law.

The Court held, giving judgment for the plaintiff, that from the date on which KAR purported to constitute the settlement and throughout his lifetime, he exercised dominion and control over the trust fund and treated the assets comprised therein as his own and the first defendant as if it had been his mere agent or nominee.

In any event, it was clear on the facts that if no appointment were made in KAR’s lifetime, he had a life interest in the trust fund and since he had no genuine intention of making such an appointment, the purported settlement inter vivos was in fact a vehicle for testamentary dispositions through which KAR could defeat the rights of his widow and heirs to their légitime (forced heirship rights under the customary law of Jersey). As the courts would not readily uphold documents which were a fiction, in the sense that they bore no relation to the facts of a transaction the terms of which they purported to embody, a sham such as that in the instant case would not be upheld under Jersey law.

Trusts (Jersey) Law 1984

Section 9 of the Trusts (Jersey) Law 1984 was amended in 2006 so as to read:(1) Subject to paragraph (3), any question concerning –

(a) the validity or interpretation of a trust;(b) the validity or effect of any transfer or other disposition of property

to a trust;(c) the capacity of a settlor;(d) the administration of the trust, whether the administration be

conducted in Jersey or elsewhere, including questions as to the powers, obligations, liabilities and rights of trustees and their appointment or removal; or

(e) the existence and extent of powers, conferred or retained, including powers of variation or revocation of the trust and powers of appointment and the validity of any exercise of such powers,

shall be determined in accordance with the law of Jersey and no rule of foreign law shall affect such question.


28

(2) Without prejudice to the generality of paragraph (1), any question mentioned in that paragraph shall be determined without consideration of whether or not –(a) any foreign law prohibits or does not recognise the concept of a

trust; or(b) the trust or disposition avoids or defeats rights, claims, or interests

conferred by any foreign law upon any person by reason of a personal relationship to the settlor or by way of heirship rights, or contravenes any rule of foreign law or any foreign judicial or administrative order or action intended to recognize, protect, enforce or give effect to any such rights, claims or interests.

(3) The law of Jersey relating to –(a) légitime; and(b) conflicts of law,shall not apply to the determination of any question mentioned in paragraph (1) unless the settlor is domiciled in Jersey.

(4) No foreign judgement with respect to a trust shall be enforceable to the extent that it is inconsistent with this Article irrespective of any applicable law relating to conflicts of law…

Jersey Cases On English Divorce Court Orders

Mubarik v Mubarik [2007] EWHC 220 (Fam) was the English case giving rise to recent Jersey case of In the Matter of the The IMK Family Trust (Mubarak v Mubarik and others) [2008] JRC 136 (15 Aug 2008), of which I do not yet have a copy.

It should be noted that Jersey has a Reciprocal Enforcement of Judgments Act which allow registration of English High Court judgments.

However, in an article in STEP Journal Nov 2008 p 29 by Alex Carruthers, he says:

“Mr Mubarik and his wife are Indian citizens she had been in London for only a few months when Mr Mubarak issued divorce proceedings. Mr Mubarik is an international jeweler who had, for tax purposes, transferred various companies that own the jewellery business into a Jersey trust. The divorce litigation became bitterly contested. During the final hearing in 1999, Mr Mubarik left the court saying that he would rely on the English court to make an order that would be fair. The English divorce court promptly ordered that he pay his wife over GBP 4 million and, if the money was not received within three hours, then jewellery held in a Bond Street store owned by the trust would be delivered to the wife.

“Mr Mubarik changed lawyers and successfully appealed against the delivery of the jewellery but not against the rest of the order. The order was made in 1999. Since that date Mrs Mubarak has sought to enforce it with little or no success. Finally in 2006, she sought to vary the Jersey trust…

“In 2006, the Jersey court [sic] enacted the Forth Amendment of the Trusts (Jersey) Law with the intention that it would provide Jersey trusts more protection from these orders. However, in the case of Re B Trust [2006] JRC 185, it was held that the new law did not exclude English judgments from being given effect by the Jersey court in accordance with the doctrine of


29

comity. As a result, the Jersey court continued to make orders reflecting all or part of English divorce orders.

“The judges in Mubarik severely criticized some previous decision saying that they had been incorrect and that the English court could not re-write a Jersey trust. The judgment states that if an English court make an order varying a trust the Jersey court would direct the trustees only to action this if (inter alia) the trustees would be using powers given to them in the trust deed. They would not allow the deed to be subject to wholesale amendment.

“…they still managed to vary the trust under the principle in Saunder v Vautier because of a letter of ‘consent’ written to the trustees by Mr Mubarik at the behest of the English court. Mr Mubarik unsuccessfully appealed against this section of the order but has obtained leave to appeal to the Privy Council.”

In a newsletter of Jersey firm of Carey Olsen in September 2008 it was said in relation to the Mubarik case:

In two recent reported cases in Jersey (In the matter of the B Trust [2006] JRC 185 and In the matter of the H Trust [2006] JRC 057, [2007] JRC 186 & [2007] JRC 213) the Royal Court made orders which gave substantial effect to orders made against Jersey resident trustees by English divorce courts. Some concern was raised among practitioners and others that the Jersey court would be unwilling to stand in the way of parties seeking to “enforce” against Jersey trustees orders made in non Jersey matrimonial courts. In the B Trust case the Jersey court was exercising its jurisdiction under what is now Article 51 of the Trusts (Jersey) Law 1984 (the “Law”), in the interest of comity, to give directions to a trustee the result of which could be to give substantial effect to the order of the English matrimonial court. In the H Trust case the English court had not make an order purporting to vary the trust, but had made orders against the husband directing him to procure the transfer by the trustee of certain trust assts to the wife. The Jersey court directed the trustee to exercise its powers to give substantial (but not complete) effect to the English court’s order.

Furthermore, in both Re B and Re H the “foreign” court had ordered the trustee to take actions which fell within the powers conferred on the trustee in the relevant trust instrument.

In Mubarik, the trust deed did not empower the trustees to make the amendment ordered by the English divorce court. Carey Olsen continue:

The couple separated in March 1998 and a few weeks thereafter the Husband exercised his power [under the trust deed] to exclude the Wife as a Beneficiary of the Trust….In May 2006 the High Court barred the Husband from further participation in the English proceedings (on the grounds that he was already in breach of an earlier order) unless he complied with certain conditions one of which was to write a letter to the trustee asking it go give effect to any order which the English courts may make in favour of the Wife. The Husband wrote and sent that letter to the Trustee in August 2006. A few months later, in March 2007, the High Court made an order under the Matrimonial Causes Act 1973 varying the terms of the Trust so as to require the trustee (which, as indicated, had not submitted to the jurisdiction of the court) to pay the Wife an amount equal to the balance owing under the lump


30

sum order of Bodey J, and arrears of periodical payments under that order and the balance of any cost still due from the Husband to the Wife (a total amount in the region of £7,600,000).

The Wife sued the trustees in Jersey on two alternative grounds. According to Carey Olsen the Court held on the First Ground – enforcement of the English Order on grounds of comity:

(a) There were two sorts of “variation”, the first category being where the court is doing something which the trustee itself has no power to do (a departure from the terms of the trust deed)(the Royal Court defined this sort of variation as an “alteration”) and the second where the court is doing something which the trustee had the power to do itself (a variation in the strict sense).

(b) By reason of Article 9, the Jersey courts cannot enforce a judgment of a foreign court applying foreign (non Jersey ) law order the variation or alternation of a Jersey trust even where the trustee has submitted to the jurisdiction of that foreign court.

(c) The giving of directions by the Jersey court under Article 51 (the provision of the Law which permits beneficiaries to apply to the court for directions) did not amount to the enforcement of a foreign judgment for the purposes of Articles 9.

(d) Where the variation ordered by the foreign court does not amount to an alteration, the Royal court may give directions under Article 51 which have the effect of achieving the objectives of the foreign order. Whether the Royal Court will do so in a particular case is a matter for its discretion having regard to the interests of the beneficiaries.

(e) Where the variation ordered by the foreign court does amount to an alteration , the Royal Court has no jurisdiction under Article 51 to give directions which authorize or direct the trustees to act in a manner which is outside the powers conferred on them by the trust deed.

(f) On the facts of the present case, the English order amounted to an alteration of the trust (the Trustee did not have the power to revoke the Husband’s exclusion of the wife as a beneficiary) and therefore the Royal Court could neither enforce the English order nor direct the trustee under Article 51 to comply with it.

UK INHERITANCE TAX GENERALLY

Non-domiciles of the UK, who reside in the UK for 17 out of 20 years before their demise, are deemed domiciles, subject to UK inheritance tax (IHT) on their world-wide property70. The concept of deemed domicile is only relevant to IHT, and not to income or capital gains tax.

Main residences are not exempt from IHT, even though they are for UK CGT. Business assets are excluded.

Non-domiciles of the UK, who reside in the UK for less than 17 out of 20 years before their demise, are subject to UK inheritance tax (IHT) only on their UK situs property.

The threshold value of estate to become liable to IHT for 2008 is £300,000 (the so-called “nil rate band”). For estates over the threshold, the IHT is at a flat 40% rate! Transfer from domiciled or deemed domiciled, spouse to spouse, or civil law partner

70 s 267(1)(b) IHTA


31

to civil law partner is exempt from IHT71. However on the demise of the later spouse or civil law partner, the second estate is subject to IHT. The pre-budget announcement for 2008 is that the threshold for IHT on the second estate would be £600,000.

I understand to be “civil law partners” requires some formality, such a registration as such, rather than simply living together as “man and wife”, which is often referred to as “common law” marriage, but which in fact, does not exist as such in the UK.

An Australian tax resident non-UK-domicile, who has UK situs property (with certain exemptions mainly for government bonds) will pay IHT on that property.

To prevent avoidance of IHT by emigrating near death, there is a provision deeming domicile if the deceased dies within 3 years of being domiciled in the UK72.

To back up the IHT regime on death, the IHTA also deals with gifts while alive, to non-spouse or non-civil law partners. Gifts to non-spouse or non-civil law partners who are individuals totaling up the “nil rate band” can be made while alive, in any 7 year period, without being added back into the value of the deceased estate. Such gifts over the “nil rate band” may still fall outside the IHT net, as long as the donor lives for 7 years after making the gift (a so called “potentially exempt transfers” -PETs)73. If the donor dies between 3 and 7 years after making the PET, the IHT liability shades out. Gift over the “nil rate band” to trusts in the UK or outside the UK, are usually not PETs, and will make the gift liable to an immediate 20% IHT liability.

DISCLAIMER

This paper does not constitute advice. It should not be relied on as such

Robert Gordon BA LLB LLM FCPA was first admitted to legal practice in 1979, and initially worked as an accountant with Big Four firms in Sydney and Melbourne, then as a solicitor in Sydney and Melbourne, becoming a tax partner at Corrs Chambers Westgarth. From 1992 he was a member of the NSW Bar specializing in tax, with a special interest in international tax, including offshore trusts and estates. In 1994 he obtained an LLM from Monash University. In 2006 he had a one year sabbatical in London where he studied UK and international tax. In 2007 he moved to Melbourne and is now a full member of the Victorian Bar.

4 February, 2009

71 s 18 IHTA72 s267(1)(a) IHTA73 s 3A IHTA


32

lexis nexis 7th annual wills, succession and estate ...robertgordontax.com/documents/lexis nexis 7th...

Documents