You knew it was professionally unwise, but you just couldn’t say no to your old mate Peter when he asked you to help fix up his family succession plan.
You tried to explain, but when he said “Maaate, come on, school mates and footie mates and you can’t help? Come on…what are mates for?”.

Transfer of the business

So you said yes. Peter’s parents Michael and Mary had for years run a successful printing business which, with Peter’s help, had adapted to the digital
disruption facing printing businesses. Their daughter Pat was not involved and very much on the outer of the family.

Peter tells you that his parents want to retire and hand over the business to him.

The building in which the business operates was initially leased but purchased in 1984 in a unit trust in which Michael and Mary owned all the units. The
business is run through a family discretionary trust set up on the advice of their accountant in 1999 when profits were high and tax planning important.

You duly meet with Michael and Mary who confirm what Peter said about the business. They also ask you to prepare their wills to leave everything else –
their house and super – to Pat.

Discretionary trading trust

Michael and Mary are the default beneficiaries of the discretionary trading trust with both Peter and Pat listed as discretionary objects. You suggest
the deed be amended to make it so the only potential beneficiaries are Peter and his immediate family.

Peter is happy with this so you prepare transfers of the units in the unit trust and shares in the trustee companies with suitable releases and indemnities.

Michael and Mary are happy to formally renounce their rights as default beneficiaries but no one is game to ask Pat, who actually hasn’t been told what
is happening.

Sometime later Mary happens to mention to Pat that they have transferred the business to Peter because “he has worked so hard for all of us”. Pat rather
icily replies “that’s nice mum but where does that leave me?”.

Mary, rather offended at her daughter’s attitude, responds “don’t worry … you’ll get the house and whatever is left of the super fund when we’ve
both gone”.

Pat, not being especially impressed by “whatever is left”, asks her parents what it all means. To keep the peace they agree to let Pat speak to you and
to their accountant Martha to find out “everything about everything”.

When Pat finds out about everything she complains about the unfairness. Not only does Michael get the business now, while she has to wait, but also there
may not be much in the super fund when she does inherit. Pat points out that effectively this means that she alone bears the cost of maintaining Michael
and Mary in their retirement.

Peter in despair asks for your help and agrees it would be fair enough if he paid a lifetime annuity to cover half his parents’ likely living expenses.
You duly prepare a deed reciting that, in consideration of payment of $100, Peter committed to cover half the parents’ likely living expenses.

An uneasy peace returns, but not for long.

The stings

In reviewing the transactions at the end of the financial year, Martha (the accountant) says she has some comments and asks for a meeting with Peter and
his parents to discuss. 

Firstly, says Martha, the good news. Because ownership of the trust units and the trust building was unchanged since before CGT was introduced in 1985
the transfer of the units is CGT free – and Peter’s future cost base will be present market value.

Peter looks at you approvingly and says “good one mate”.

But it’s not all good news says Martha.

Firstly, because the trust has always distributed business profits to Michael and Mary, their renunciation as beneficiaries will, according to Taxation
Determination 2001/26, have a value and therefore trigger CGT event C2, which could mean a fair bit of tax, given the profitability of the business.

It would have been better, says Martha frowningly, to leave the parents in. Peter looks at you doubtfully.

Secondly, says Martha, that annuity. There’s no tax to pay if a pre CGT asset is sold for the price of an annuity.

However, granting an annuity triggers CGT event DI (Income Tax Assessment Act 1997, ss 104-35) and ITAA 1997, ss 116-30 deems market value
to have been paid unless it was a gift. So Peter will be liable to CGT on the annuity’s present value.

Martha says she will work out the actual tax amounts and get back to Peter and his parents. Peter leaves without speaking.

The next time you see Peter at the footie he walks by as if he didn’t see you. Then you get a letter from another lawyer pointing out your failings in
clear legal terms.

Takeaway points

  • Every succession plan has tax implications
  • Ensure your client gets good tax advice elsewhere if you can’t give it
  • Never act for a mate just because he’s a mate

By Jim Main

This article is general information only and should not be relied on without obtaining further specific information.