The keys to the “care, custody and control” exclusion

By Patrick Henry, from our Insurance Law Practice Group.

December 19, 2016 — “Park’n Fly” services have become ubiquitous. A hotel, generally located close to an airport, provides one night’s accommodation, breakfast, car parking during the stay abroad and shuttle services to and from the airport, all for a flat fee. The service is especially popular in the wintertime, as the lure of warmer climates suddenly becomes irresistible to many.

In 2005 and 2006, Econolodge, close to the Pierre-Elliott-Trudeau airport, was offering such a package. For $99, the customer got all four services. Of course, for winter travel, customers who purchased this package had to deposit their car keys with the hotel reception, and provide their car’s license plate number. This was meant to allow hotel staff to move the car if necessary: to allow for snow removal operations, for instance.

In late January 2005, a vacationer who had purchased this package was quite upset when he realized that the vehicle he had left at the hotel had disappeared. He filed a claim with AXA, his insurer, and received compensation for the theft; AXA, subrogated in his rights, filed a claim against the hotel which, in turn, called its insurer, Lombard, in warranty. By a stroke of bad luck, in mid-March 2006, another suntanned customer had a similar surprise, with the same hotel. The same legal scenario was repeated albeit with Promutuel as the customer’s insurer, and a new hotel owner: but Lombard was once again the liability insurer.

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Directors’ duty to act with care, skill and diligence in the context of the general anti-avoidance rules

The recent Federal Court decision in BCI Finances Pty Ltd (In Liq) v Binetter (No 4) [2016] FCA 1351 (Binetter) is a timely reminder of company directors’ common law duties to act with care, skill and diligence in the discharge of their responsibilities (in addition to the statutory duties imposed under the Corporations Act 2001) – not least in the context of tax risk management.

The Binetter decision

The liquidators of four companies succeeded in a Federal Court action claiming that among other things, several directors of those companies breached their duty to act with care, skill and diligence as a result of certain arrangements involving offshore banking deposits, and as a result of their conduct in the context of an Australian Taxation Office (ATO) audit into the arrangements.

The impugned arrangement comprised of ‘back to back’ arrangements involving the use of funds held by directors and associated entities (in Switzerland and Israel) as security for advances from the Israeli banks to the four companies. The advances were equivalent to the offshore deposits.

The liabilities in the revised assessment arose as a result of the disallowance of deductions for the interest expenses claimed to be paid to the Israeli banks and the inclusion of other related amounts in the companies’ assessable income.

The Court held that the four directors breached their duties by agreeing to participate in a scheme between the companies and the Israeli banks. The Court found that:

  • the directors intentionally concealed the existence of the offshore deposits and any income earned from the deposits
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Week of December 12, 2016 on ILNToday – A Roundup!

roundupSomehow, we have reached the point where there are only two weeks left in the year (which, let’s be honest, after the way 2016 has treated most of us, I think we’ll be glad to see the back of it). But with only 15 days left, it’s a good time to reflect and review, as well as plan for the next 12 months – don’t forget to build some flexibility into those plans though!

As you’re reviewing and planning, give some thought to your content as well, and take a look at what the ILN members have provided us over the last week on ILNToday. Make sure to also check out our newly released international guide on “Buying & Selling Real Estate.”

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Talking Tax – Issue 62

ATO guidance

ATO guidance on foreign resident capital gains withholding tax

The ATO amended its instructions to taxpayers seeking a reduced withholding tax rate on the sale of property on 6 December 2016.

The amended instructions include examples of the supporting information that should be included in an application, which is dependent on the reasons for variation of rate.

Non-portfolio dividend exemption participation test

The ATO has released two draft taxation determinations regarding the application of Subdivision 768-A of the Income Tax Assessment Act 1997 (Cth) (ITAA97) to Australian corporate tax entities which are either a partner of a partnership (TD 2016/D6) or a beneficiary of a trust (TD 2016/D7). The determinations consider the same issue, being whether these partners or beneficiaries can hold a direct control interest within the meaning of section 350 of the ITAA97.

The draft determinations state that partnerships and trusts can be taken to ‘hold’ a direct control interest in a foreign company for the purpose of satisfying the 10% participation test in s 768-15.

Accordingly, depending on their own participation in the partnership or trust, if a partner or beneficiary Australian corporate tax entity receives a distribution from a foreign company, section 768-5 may deem the distribution is non-assessable non-exempt income.


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ILN Announces Release of “Buying & Selling Real Estate: An International Guide”

2016We’re excited to announce today the release of the first edition of our real estate guide, “Buying & Selling Real Estate: An International Guide.” The collaborative electronic guide provides an overview of the legal aspects of buying and selling real estate in eleven jurisdictions internationally. It is designed to serve as a quick and practical reference for those buying or selling real estate in these jurisdictions.

As the facilitator of the guide, I can say that we’re delighted to publish this collaborative work and showcase the strength and depth of the combined expertise of our real estate lawyers. We already have plans to add additional jurisdictions to the publication, which will be regularly revised, to make this a comprehensive and up-to-date source of information. Like our corporate guide on establishing business entities, this is a real labor of love.

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HOMS News Issue 2 2016

During our recent ‘Leadership’ Summit, it was refreshing to hear Paul O’Connell and Hugh O’Donnell discuss their diverse experiences of acting as effective leaders in the sporting and business fields. Leadership is a quality that fascinates us all, whether in business terms, within our communities or acting as good role models. We can only learn from the example set by leaders such as Paul O’Connell and Hugh O’Donnell.

We have embraced the art of leadership through our exciting ‘HOMS 2020: Getting Ahead of the Curve’ client-focussed project. By partnering with our clients, we are ensuring that HOMS is a great place to work, generating sustainable profits with meaningful succession plans. HOMS will grow in conjunction with our clients, responsive to our clients’ diverse requirements.

Our clients’ success is the bedrock for our own success. Through the quality of our advice and the solutions we deliver, we act as leaders in the legal field. It is a constant, rewarding challenge which we embrace – to quote Barack Obama,

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Davis Malm Adds Kimberley C. Maruncic to its Business Law and Litigation Practices

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UK residential property in offshore structures: more surprises from the Government

The Government has confirmed its intention to make UK residential property held indirectly by non-doms through an offshore structure chargeable to UK Inheritance Tax (IHT).  As planned, this will begin on 6 April 2017.

Although the proposal was first announced as far back as July 2015, draft legislation effecting this change was only published on 5 December 2016 – and it contains some surprises.
Main features of the draft legislation

Affected structures clarified

Owners of interests in partnerships and closely held companies whose value is derived, directly or indirectly, from UK residential property, are the key targets. 

A close company broadly means one owned by five or fewer participators (essentially anyone who has an interest in the company, not just shareholders), or owned only by directors, who together control the company.

Debt in the structure

The Government’s 18 August Consultation envisaged that debt funding provided by connected parties would be ignored when valuing an interest for the purposes of these changes.

This proposal has been shelved. 
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Seventh Circuit Holds That Student Athletes Are Not Employees

Berger v. National Collegiate Athletic Association,
No. 14-cv-1710 (7th Cir. Dec. 5, 2016)

Colleges and universities, at least in the jurisdiction of the Seventh Circuit Court of Appeals, surely breathed a collective sigh of relief earlier this month when the Court held that student athletes were not employees under the Fair Labor Standards Act (“FLSA”) and thus were not entitled to minimum wage.

Former student athletes at the University of Pennsylvania sued Penn, the National Collegiate Athletic Association (“NCAA”) and over 120 other colleges and universities that have Division I (the division that covers the largest schools) athletic programs, arguing that student athletes were employees entitled to the minimum wage. Interestingly, the court declined to use any of the multi-factor tests to resolve the issue because those tests would not capture the true nature of the relationship.

Instead, the court relied on the U.S. Department of Labor’s Field Operations Handbook, which indicates that students who participate in extracurricular activities are not employees of the school. In addition, the court took a common sense approach and recognized that college athletes participate in these programs for reasons wholly unrelated to immediate compensation and without any expectation of earning an income. Viewing student athletes as employees also would undermine what the court recognized as a “revered tradition of amateurism in college sports.”

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Change: What’s Holding Us Back?

Speedometer with needle racing through the words Revolution, Change, Shake it Up, Status Quo and Stagnation

“Change or die.”

How many times have you heard that over the last eight years?

A friend of mine in the legal industry pointed that out to me yesterday, along with commenting that it always sounds so dire. And it does sound dire.

But after the statistics that we covered in last week’s post (1/3 of clients are openly dissatisfied with their outside counsel, chief legal officers rank firms at a 3 on a 1 to 10 scale for commitment to change, and clients are moving their legal work to other firms or to nonfirm vendors), it would seem that we should be properly incentivized to speed up the pace of change. From the Peer Monitor/Georgetown 2016 Report on the State of the Legal Market, which cautioned BigLaw against a “Kodak moment”

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