THE SK NEWSLETTER - FEBRUARY 2025

Welcome to the SK Newsletter where we share our insights relating to tax, estates, and commercial transactions. To read our regular insights as they happen, you can follow our firm LinkedIn page HERE, including our recent update on the key Full Federal Court decision in Bendel.

SUCCESSION PLANNING - A TOP FOCUS AREA FOR ATO’s DEPUTY COMMISSIONER

Andrew Giorgi – Senior Associate

Smailes Krawitz has broad expertise in dealing with the high wealth individual and family group issues highlighted by the ATO.

The ATO’s Private Wealth Deputy Commissioner Louise Clarke has published her priorities for 2025. These include reviewing the affairs of wealthy family groups who are engaged in planning, structuring, and disposal activity in the market. The ATO is observing that mature family-controlled businesses are being sold or passed onto the next generation, either as on-going businesses or the accumulated wealth from those businesses, which is a matter of scrutiny.

Specifically, the ATO reviews wealthy groups through one of its tailored assurance programs, such as the Next 5000. Quoting from Ms Clarke:

“We’re also looking at groups where full tax assurance has been achieved but they haven't invested in tax governance…. For example, there are some groups with net wealth in the billions of dollars and some with net wealth of between $5 million and $10 million. We’re considering whether expectations of these groups in areas like tax governance should be the same or whether a more tailored approach is better.”

It is not entirely clear what a ‘more tailored approach’ would involve but the ATO may be concerned that wealthy family groups do not haveadequate tax processes and controls giving rise to, for example, potential disclosure of income or capital gains.

So practically, what might the ATO be looking at? Ms Clarke gives us some hints:

“Individual risks we’re seeing in these arrangements include Division 7A loans being settled, assets moving around the group, family member interests being restructured, and trust deeds being amended. A significant concern is where the restructure is cited as a reason for late lodgement.

Trusts will also continue to be a key focus area for us. In 2025, we’ll be continuing to raise awareness about family trust distributions tax (FTDT) and how it applies to distributions made outside the family group.”

Amendments to trust deeds, late lodgments and the dreaded FTDT may strike fear into the hearts of many tax professionals who are engaged in technically complex, and often emotionally arduous, endeavours in restructuring family businesses and groups as the patriarchs and matriarchs transition to retirement.

Smailes Krawitz can assist across the spectrum of tax advice and dealing with tax reviews, where we have broad expertise in the issues highlighted by the ATO.

DID YOU KNOW THAT WE CAN ASSIST YOU WITH YOUR TRUST DEED NEEDS?

At Smailes Krawitz, we take pride in our commitment to keeping our trust deed precedents up to date and in line with the latest legal requirements. Below is a list of some of the trust deeds that we regularly supply clients and referrers:

Establishing self-managed superannuation funds

Updating self-managed superannuation funds
Establishing Bare Trusts
Deeds of Vesting
And much more

Establishing discretionary trusts
Establishing unit trusts trust – fixed and non-fixed
Deeds of Amendment for all types of trusts
Deeds of Change of Trustee
Deeds of Appointment of Successor Appointors and Guardians

SELECT TRUST DECISIONS FROM 2024

Thomas King - Private Clients Lawyer

We are highlighting some key trust decisions which were of relevance to our clients in 2024 and provide a short outlook on trust litigation in Western Australia.

Dryandra Trust v Hardie [2024] WASC 248

The Supreme Court of WA has held that it has the power to replace the guardian of a trust.

Some trusts, particularly older trusts, do not provide for what happens when a guardian loses capacity. If the trust deed does not specify otherwise, a guardian that has lost capacity will continue to hold their office, but that guardian will not be able to exercise any of the guardian’s powers. If the guardian is critical to the function of the trust, as it was in this case, then an application to the Court may be the only solution.

I understand that this is the first Australian decision to deal with the Court’s inherent jurisdiction to replace a guardian. It is a good sign that solutions can be found regarding appointment and replacement of guardians (and appointors).

Re Pickering Family Trusts [2024] VSC 5

If the amendment power in a trust deed is insufficient to make required amendments (or there is no amendment power), one option is to vary the terms of the trust by application to the Court. This case in the Victorian Supreme Court concerned two trust deeds without an amendment power.

Amendments to the trust deed were proposed, for the Court’s approval. One complicating issue in these matters is that a ‘Contradictor’ is required: a person appointed to represent the interests of minor and unborn beneficiaries. A key takeaway was that the proposed amendments were to the benefit of unborn or minor beneficiaries because (among other reasons), the amendments provided:

• an increase to the commercial viability of the trust in relation to any business that it conducts; and

• tax savings,

which was likely to result in increased assets for distributions amongst the beneficiaries.

This case concerned the Victorian equivalent of s 90 of the Trustees Act 1962 (WA). Luckily, here in WA our legislation concerning the Court’s power to amend the Trust Deed is in some key respects easier to navigate than the Victorian equivalent.

Application by Gainer Associates Pty Ltd [2024] NSWSC 1437

This case concerned a trust with a lost trust deed, where none of the details of the trust could be found. A husband and wife were the beneficiaries of the trust and directors of the corporate trustee. Both husband and wife were deceased. The New South Wales Supreme Court held that trust had failed because the beneficiaries (the ‘objects’ of the trust) could not be ascertained. On this application by the trustee, the Court made the practical orders that the trust property should vest in the estate of the deceased husband (notwithstanding uncertainty as to some key facts, including the identity of the settlor).

If a trust deed is lost, but the terms of the trust can be identified, a trust may not fail for uncertainty. In such a situation, an application may be required to be made to the Court to confirm the terms of the trust. This is an area where the Court has, including in this case, shown a willingness to grant practical or commonsense relief.

What is in store in 2025

At Smailes Krawitz we routinely assist in succession planning for trusts with complex and sometimes less than perfect terms in their trust deeds (We have found this to particularly be the case in older trusts). As the Great Wealth Transfer begins, determining succession to the next generation of trustee, appointor and guardian will be vital, and it would be unsurprising if judgments of the Court regarding these issues become more frequent.

Assisting private groups with succession planning for trusts, and related or other issues with the terms of trust deeds will continue to be a key part of both the estate planning and general trusts practice at Smailes Krawitz.

DUTY EXEMPTIONS - THE COURT’S HARDLINE APPROACH ON ADMINISTRATIVE ERRORS

Rick Way - Adviser

A recent WA case has highlighted the sobering consequences that can be caused by administrative errors resulting in a taxpayer’s failure to meet the requirements for an exemption to landholder or transfer duty in the Duties Act 2008 (the Act).

Armada Holdings (WA) Pty Ltd (Armada Holdings) and Senior Revenue Consultant as Delegate of the Commissioner of State Revenue [2024] WASAT 139 was handed down in December 2024 and highlights the importance of receiving comprehensive advice for transactions involving dutiable property and landholders.

In this decision, the Court considered the availability of a landholder duty exemption under the Duties Act 2008 (WA) (the Act) on the grounds that a share swap agreement (the Arrangement) entered into was a ‘relevant consolidation transaction’. The key requirement for the Arrangement to qualify as a ‘relevant consolidation transaction’ was that each person who held securities in Abbott & Associates Pty Ltd (Abbott) immediately before the Arrangement, were the same persons holding securities in the same proportions in Armada Holdings immediately after the Arrangement (the Requirements).

The Arrangement itself was implemented following the purchase of a building (the Property) by Armada Property Holdings Pty Ltd as trustee for the Armada Property Trust (AP Trust). Armada Holdings was then incorporated with a single share issued. Abbott held 50.55% of the units in the AP Trust, and the Arrangement was to transfer all the shares in Abbott to Armada Holdings in exchange for the issue of an equivalent number of shares in Armada Holdings to the previous holders of the shares in Abbott.

In the execution of the Arrangement, and despite efforts to correct the Arrangement after the fact, two key mistakes were made which meant the Requirements were not met and the exemption would not apply:

1. The single share in Armada Holdings was not cancelled in the transaction. This resulted in the total number of shares in Abbott prior to execution of the Arrangement being less than the total number of shares in Armada Holdings immediately after the acquisition; and

2. Some of the sellers did not have the same number of shares in Armada Holdings immediately after the Arrangement as they had held in Abbott immediately before it.

The key takeaways from this case for taxpayers include:

• The Court is unlikely to provide practical relief for administrative mistakes regardless of magnitude; in this case, the additional share represented a 0.004752% interest in Armada Holding’s shares, which amounted to a substantive change.

• Corrective action after the fact may not sufficiently remedy a mistake.

• As the exemptions will be strictly applied, getting things right in the first instance is the only way to ensure the desired outcome.

Smailes Krawitz has extensive experience in obtaining favourable outcomes regarding transfer duty and landholder duty exemptions. Please reach out if you require any assistance in these areas.

DEBT DEDUCTION CREATION RULES

Eli Bursky - Senior Associate

The Australian Government has introduced a new set of debt deduction creation rules. How can Smailes Krawitz assist?

When the Government recently amended the thin capitalisation rules, it took the opportunity to introduce a new set of debt deduction creation rules (DDCR).

The DDCR can apply to entities that are subject to the thin capitalisation rules, as well as groups that are excluded from the thin capitalisation rules because they satisfy the 90% Australian assets threshold.

Subject to certain exceptions, the DDCR broadly disallow debt deductions (e.g., interest) on related party debt in two instances:

• related party debt used to fund the acquisition of a CGT asset or a legal or equitable obligation from an associate; and

• related party debt used to fund certain payments and distributions to associates, such as dividends, distributions, returns of capital and royalties.

The DDCR can apply to both domestic and cross-border related party arrangements, including Division 7A complying loans.

The DDCR apply to income years commencing on or after 1 July 2024, including arrangements entered into before that date (i.e., there is no grandfathering of pre-existing arrangements).

Private groups should consider whether the DDCR will apply to disallow any debt deductions under their Division 7A complying and any other related party loans.

PAYROLL GROUPING - AN UNINTENDED, UNWELCOME DUTY AFFECTING GROWING BUSINESSES

Rick Way - Adviser

Many business owners are aware of the need to self-assess the payroll tax their businesses need to pay in relation to the wages paid. Payroll tax does not affect all businesses, rather, only those with wages that exceed the payroll tax threshold. This threshold applies where wages paid by an employer exceed $1,000,000 annually, generally speaking.

RevenueWA has the ability to ‘group’ businesses together for payroll tax purposes. What many business owners may be unfamiliar with is the often-tenuous links that can be grounds for this grouping to occur, which can include certain circumstances where two or more businesses have little to do with each-other. Something as subtle as a common employee can be enough for a group to form under the relevant statute.

This can produce extreme outcomes due to two quirks in the way payroll tax liability is calculated;

1. payroll tax does not apply a flat rate tax; and

2. the higher the total of the wages paid of the businesses in the group, the more tax is assessed on the sliding scale under a tapering value formula applied.

It is therefore imperative that business owners apply to exclude the grouping of two or more businesses where appropriate. Unfortunately, the laws and RevenueWA’s practice statement on the Commissioner’s discretion to exclude businesses from the group are subject to interpretation.

Reasonable minds can differ as to the scale and extent to which two or more businesses are linked to each other. Comprehensive, robust submissions ought to be put to RevenueWA prior to the issue of pay-roll tax assessments (or as soon as practicably thereafter).

Smailes Krawitz has considerable experience in managing pay-roll tax risks and obtaining favourable outcomes on grouping exclusion applications.

ATO IS CONTINUING ITS TAX DEBT RECOVERY DRIVE IN 2025

Andrew Giorgi - Senior Associate

Did you know that Smailes Krawitz acts in tax debt recovery matters, including court and tribunal litigation?

In 2025, the ATO are currently undertaking an expansive tax debt recovery drive.

Taxpayer debts owing to the ATO have skyrocketed in recent years, with small to medium sized businesses facing the brunt of ATO collection action.

We have seen the ATO take firm action against company directors and their businesses in the forms of director penalty notices, statutory garnishees and insolvency-related processes. Flexibility and accommodation provided by the regulators during the COVID-19 pandemic has considerably reduced and debtors are finding themselves with less time and options to resolve their issues. This is causing companies to be wound up and directors to go bankrupt. Those that resist those outcomes are often left having to make large payments to the tax office in short periods, often in relation to disputed interest charges, penalties and primary tax amounts (including the onerous SGC).

Smailes Krawitz has experience obtaining successful outcomes for its clients in this space, including:

(a) Resolution of litigation processes instituted against tax debtors;

(b) Significant reduction in the SGC and Part 7 Penalty;

(d) Reduction in director penalty notice amounts; and

(e) Favourable court sentences for tax-related prosecutions, including lodgment obligations.

Smailes Krawitz advises both at the ‘front-end’, such as tax advisory, trust law and private client structuring matters, and the ‘back-end’, including litigated tax disputes. Our clients benefit from our comprehensive experience and holistic approach to matters.

FEATURED PRACTITIONER: THOMAS KING

Tom is a private client lawyer with expertise in tax, trusts, estates, and commercial law. He provides technical tax advice to high-net-worth individuals, family groups, and corporate entities. Tom acts for taxpayers at all stages and has experience in tax disputes in the Administrative Appeals Tribunal and Supreme Court of Western Australia.

Tell us about your experience and background:

I am a tax, trusts and estates lawyer. I joined Smailes Krawitz (SK) just over 12 months ago. Prior to joining SK, I worked at another boutique tax and commercial law firm.

What does a day at SK look like for you?

My day can be as wide as the practice areas of SK. I might start a day working on niche tax technical questions for an accounting client, before switching to a tax dispute matter, or problem-solving intergenerational succession issues for a private group. Using technical knowledge to build practical solutions draws me to these practice areas, and to working at SK.

Working at SK also provides me the ability to work with smart and astute clients, such as leading accounting firms, other law firms, or working with the family offices for private client groups.

Fun fact about Tom?

You can find me at Smailes Krawitz discussing the latest trusts and tax cases with Adrian, or the premier league with Andrew. I enjoy tutoring at the University of Western Australia (UWA) law school, which helps me to keep me up to date with the latest cases on tax and trust matters.

What are your qualifications?

I hold a Bachelor of Commerce (Economics) and a Juris Doctor, both from UWA.

Would you rather visit the Tax Museum in Japan, Korea, or China?

I would choose Japan (for reasons other than visiting a tax museum!). I would bring back a souvenir for Adrian (who posed this question).

For further information about any of the matters contained in The SK Newsletter or for any assistance with any other tax, trust, estate or commercial law matters, please contact one of our Directors.