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Interstate and Overseas Assets in a GlobalisingEconomy

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 area[1].

By way of example of the issues that can arise, I return repeatedly to:

(a) a UK individual who may find it attractive to do their “estate planning” by moving to Australia; and

(b) an Australian individual who may find it attractive to move to a low tax jurisdiction.

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 vivostrusts with independent trustees will become more widespread, and the use of such trustees in suitable offshore jurisdictions, an expected response. An offshore trust may be used whether the Australian individual intends to cease to be an Australian resident or not.

CITIZENSHIP, DOMICILE, RESIDENCE & ESTATES

In most common law countries, such as Australia, it is the domicile[2] 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 law[4].

If the deceased was domiciled in an Australia jurisdiction[5], 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 assets[6].

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 legislation[7].

For example, the NSW Succession Act 2006s48 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 will[8].

Domicile

The concept of domicile is still largely governed by the common law (e,g. Udny v Udny (1869) LR 1 HL 441), 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 domicile[10].

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 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 Convention[11]. Apparently it has only entered into force in the Netherlands. 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). Recent moves in the EU to harmonize succession law based on “habitual residence” as proposed in its 2005 Green Paper have recently been rebuffed by the UK.

Civil law forced heirship[12]

From Orca Worldwide[13] “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.

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 Wikipedia[14]:

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

In the CzechRepublic, 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 Life[15]:

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

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-Muslims[16].

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.

As described in“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 countries with inheritance tax may have sought to adopt an Australian domicile of choice, to escape the clutches of their country of origin inheritance tax[17].

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[18], 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” for the 2007 tax year at a much more reasonable A$150,000[19];
  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[20];
  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[21].

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.