Commissioner's practice note: Grouping of discretionary trusts - removal of a potential benefit under a discretionary trust - Payroll Tax Act 2007, ss.72(2)(g) & 72(6)

Aim

This Commissioner’s Practice Note will assist trustees of discretionary trusts and customers who may benefit under a discretionary trust to determine whether the payroll tax grouping provisions apply to their circumstances. It also explains the documentation that must be provided to the Chief Commissioner to allow the degrouping effect to be determined.

Note: Failure by customers to advise the Chief Commissioner that they are members of a group by virtue of them being a beneficiary of a discretionary trust may result in a tax default by all members of the group, and could result in interest and penalty tax being incurred.

SUMMARY

For the purposes of grouping commonly controlled businesses, a person who may benefit under a discretionary trust is taken to be a beneficiary in respect of more than 50% of the value of the interests in the trust if:

• the person may benefit as a result of the trustee or another person exercising a power or discretion under the trust deed; or
• the person may benefit if a power or discretion is not exercised by the trustee or by any other person named in the trust deed.(see s.72(2)(g) and s.72(6) of the Payroll Tax Act 2007 (NSW)).

A trustee of a discretionary trust may be grouped with another entity if a person who may benefit under the trust has a controlling interest in a business conducted by that other entity.

Note: “A person who may benefit from a discretionary trust” is called a “discretionary beneficiary” in this practice note.

A discretionary beneficiary will avoid the application of the grouping provisions of s. 72(2)(g) and s. 72(6) if:

• the trust deed is amended to remove the discretionary beneficiary from the list or description of persons who may benefit under the trust; or
• other steps which are binding on the trustee and the discretionary beneficiary, and irrevocable according to the terms of the relevant trust deed, are taken to remove the discretionary beneficiary (such as by disclaimer); or
• the Chief Commissioner makes an order under s.79 excluding the trustee from a group (Commissioner’s Practice Note CPN 009 explains the grouping and exclusion provisions).

Commissioner’s Practice Note

Grouping of a trustee of a discretionary trust with another entity

For grouping purposes, a “discretionary beneficiary” has a controlling interest in the business conducted by a trustee on behalf of the trust.  If a person who has such a controlling interest also has a controlling interest in another business, the trustee who is carrying on the business of the discretionary trust is grouped with the entity that conducts that other business.

Example

ABC Pty Ltd conducts a business of managing rental properties.  Angela Roberts has a controlling interest in the business under s.72(2)(e) because she is the sole shareholder of ABC Pty Ltd.

DEF Pty Ltd carries on a real estate business as trustee of the Roberts Family Trust.  Angela is one of the discretionary beneficiaries of the Roberts Family Trust and therefore is taken to have a controlling interest in the real estate business under ss.72(2)(g) and 72(6).  Note that a “discretionary beneficiary” may be a person who is either named or described (eg “…the issue of…” a named person).

ABC Pty Ltd and DEF Pty Ltd as trustee who is carrying on the real estate business are therefore grouped under s.72(1) because Angela is taken to have a controlling interest in both businesses.

Rescinding a controlling interest in a trust business

Amending the trust deed to remove a discretionary beneficiary

The Chief Commissioner will accept that a discretionary beneficiary will cease to have a controlling interest in a trust business conducted by the trustee if the trust deed is amended to remove the person as a discretionary beneficiary.

The amendment of the trust deed must be made in accordance with the provisions of the trust deed.  For example, the terms of the discretionary trust may provide that the trust deed can only be amended in writing by a deed signed by the trustee and the appointer.

An amending deed that removes a discretionary beneficiary will not affect grouping prior to the date on which it is executed.

Generally, the amendment of a deed to remove a discretionary beneficiary does not trigger liability for duty in NSW (see Revenue Ruling DUT 017 Variations to Trusts).  However, if an amending deed triggers a duty liability for other reasons, the deed must be stamped under the Duties Act 1997 (NSW) (“Duties Act”) before it can be relied upon in a degrouping application.

Once the amending deed becomes effective, the Trustee should provide the following documentation to Revenue NSW to consider whether degrouping has occurred:

• a copy of the original trust deed (stamped if required);
• a copy of the amending deed (stamped if required);
• relevant resolutions of the trustee; and
• evidence that the appointer, or any other person whose consent is required, has consented to the amending deed (eg, a statement in the amending deed that the appointer and other person has given consent).

Removal of discretionary beneficiaries as permitted under the trust deed

The Chief Commissioner will accept that a person who may benefit under a trust as a discretionary beneficiary will cease to have a controlling interest in the trust business if all of the following conditions are met:

• by a deed of disclaimer, the discretionary beneficiary, not being under a legal disability, unconditionally declares that he or she is to be removed as a person who may benefit from the trust. The deed must provide that the disclaimer is irrevocable;
• the trustee must be a party to that deed and must irrevocably accept that the discretionary beneficiary is to be removed;
• the terms of the trust deed do not prevent the discretionary beneficiary from disclaiming in such a manner;
• any other person required under the trust deed to be a party to such an amending deed (eg the settlor or another person) is also named as a party in the deed; and
• resolutions are made for the removal of the beneficiary (if required by the trust deed); and
• upon execution by the parties, the person ceases to be a potential beneficiary under the terms of the trust and is excluded from the possibility of receiving a benefit.

These requirements apply to a discretionary beneficiary, whether identified by name or by some other description, eg a person’s issue or other relatives.

Unless these requirements are expressed to be irrevocable, it may be possible for the amending deed to be revoked by agreement of the parties, thereby reinstating the rights of a potential beneficiary.

Once an amending deed becomes effective, the Trustee should provide the following documentation to Revenue NSW to consider whether the degrouping is effective:

• the original trust deed (stamped if required);
• the executed deed (stamped if required) effecting removal of the discretionary beneficiary as a person who may benefit under the trust; and
• minutes of resolutions of the trustee.

Date of effect of removal of a potential beneficiary for grouping purposes

A liability to payroll tax is determined having regard to the facts and circumstances at the time the employer becomes liable to pay payroll tax: Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184 at [143] to [150].

The extinguishment of the rights of a discretionary beneficiary, whether by way of amendment of a trust deed or by irrevocable deed of disclaimer, cannot effect a change in the make-up of a group prior to the date on which they become binding on both the trustee and the beneficiary.  This is the case even if a disclaimer purports to have effect prior to the date the disclaimer was executed. The Chief Commissioner only applies a degrouping order from the date on which the facts and circumstances which justified the order took effect.

The only circumstance in which the payroll tax liability of a group member may be altered retrospectively is if the Chief Commissioner determines pursuant to s 79 of the Payroll Tax Act that a person should be excluded from a group from a date before the exclusion is granted: Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184 at [142].

Degrouping applications

Commissioner’s Practice Note CPN 009: Payroll Tax Grouping provides guidance on the Chief Commissioner’s administration of the grouping provisions and the discretion to exclude a member from a group.

Cullen Smythe

Commissioner of State Revenue