Legal Tip 315: Estate Planning Consequences of Recording Beneficial Ownership Wrongly 2

Continuing on from the previous tip Legal Tip 313: Estate Planning Consequences of Recording Beneficial Ownership Wrongly



Example

Homer sets up the Simpson family trust with himself as trustee. He then sets up a company with himself as the sold director and secretary and the shares he wants the Simpson Family trust as the shareholder. Homer indicates that he is the shareholder, which is correct, but he indicates that he holds the shares beneficially – he thinks that means he is acting as trustee, but it actually means he is not acting as trustee.

The Company pays out a dividend - but who to?

Imagine the tax consequences that flow onto this if it goes to the wrong person.

If Homer owns the shares he will be the only one that can receive a dividend.

If the trustee of the Simpson Family Trust held the shares the dividend could be streamed out to a wide class of potential beneficiaries and loads of tax could be paid.

Imagine if the dividend had already been paid out and now it was found to be wrong. It would be too late for the trustee to make someone presently entitled to the income and it might be taxed at 45% in the hands of the trustee with Beneficiaries liable to reimburse the trust for the money they received.

All over one tick in the wrong box.

 

But if the accountant for the trust has maintained proper trust accounting records it could be detected later. I see this at times. I see shares owned by a trust but the ASIC records are wrong. ie shares are not shown as non-beneficial. The other fix occurs far earlier. Its another reason why never to have human trustees. A human trustee can result in confusion over legal title. If the trustee of the trust was Homer Pty Ltd and Homer Pty Ltd only acts as a trustee its very easy to note the defective beneficial interest.

It is a simple fix. Just amend ASIC records to show a non-beneficial interest. No change of owner occurs. Just a correction. We are ASIC agents and have the software to maintain these records.

That said the inverse may be quite damaging. eg Shares are evidently owned by Homer and are NOT indicated in the trust accounts. The new accountant suggests changing the shares to non-beneficial. This may be a CGT event that goes unreported and also potentially be a fraud.