|Ruling number||DUT 017|
|Date issued||14 December 1999|
|Issued by||Peter Achterstraat|
Chief Commissioner of State Revenue
|Effective from||14 December 1999|
From 1 July 1998, the Duties Act 1997 imposes duty on ‘dutiable transactions’ over ‘dutiable property’. A ‘dutiable transaction’ is defined in section 8 to include, amongst other things, a transfer of dutiable property and a declaration of trust over dutiable property. "Dutiable property" is defined in section 11, and includes land in New South Wales, shares in NSW companies, units in a unit trust scheme registered on a register kept in NSW, various business assets connected with NSW (including goodwill), and an interest (including an estate or proprietary right) in any dutiable property. A chose in action is not dutiable property unless specified in section 11.
Prior to the decision of the High Court in Chief Commissioner of Stamp Duties v Buckle (1998) 37 ATR 393, some variations to trusts were assessed under the Stamp Duties Act 1920 to ad valorem duty as conveyances of property (revenue rulings SD 024 and SD 045). In the Buckle decision, the High Court found that a deed that varied the terms of a discretionary trust was not a resettlement of the trust fund as a whole.
The term ‘discretionary trust’ is used to describe certain express trusts. In Buckle, the trust was described as a discretionary trust because of the following features: (at 395-6, paragraph 9).
In the case of the deed of settlement, the identity of those who might receive income or capital, the amounts they might receive, the period or duration of the trusts, the content from time to time of the fund impressed with those trusts, and the very terms of the trusts themselves all depended wholly or significantly upon the exercise of, or the failure to exercise, powers bestowed by the deed of settlement upon the trustee.
There are two types of beneficiary under a discretionary trust: takers in default, and discretionary objects. A taker in default has a vested interest in the trust fund subject to any exercise of a power of appointment by the trustee. However, a discretionary object, as such, has neither a vested nor contingent interest in the fund, but has a chose in action involving a right to call for the due administration of the discretionary trust.
A fixed trust is a trust under which identified beneficiaries have specified interests. A unit trust is one form of fixed trust.
This ruling considers the liability to duty under the Duties Act of variations to discretionary trusts and fixed trusts.
A variation to a trust will be subject to duty under the Duties Act if it is a transfer of dutiable property or a declaration of trust over dutiable property. While it is immaterial whether or not the dutiable transaction is effected by a written instrument (section 10), most variations to the terms of a trust would be effected by a written instrument, or would at least be evidenced in writing.
Under section 8 and the Dictionary of the Duties Act, a ‘transfer’ includes an assignment or exchange of dutiable property. The word ‘transfer’ has a wide meaning but, unlike the definition of ‘conveyance’ in section 65 of the Stamp Duties Act 1920, it does not cover cases where dutiable property is vested in a person without being divested from some person who previously owned it. In Coles Myer Limited v Commissioner of State Revenue (1998) 98 ATC 4537, the Victorian Court of Appeal held (at 4546-7) that a ‘transfer’ is essentially bilateral in nature. A transfer requires at least that the transferee should, at the end of the transaction, have substantially the same right or interest in the subject matter as did the transferor before the transfer took place.
In Buckle, although it could be said that prior to the variation, the trustee was the ‘owner’ of the assets then comprised in the trust fund, the variation by the trustee did not transfer those assets. The beneficiaries acquired vested interests in the trust fund as takers in default, but these interests were not vested in the trustee prior to the variation. Consequently, there was a vesting rather than a transfer of the property, and such a vesting is not a dutiable transaction under section 8.
For the same reasons, where the trustee by an amending deed adds to the class of existing takers in default, the deed does not effect any transfer of property from the trustee to the new taker in default. Furthermore, there is no transfer of property from the existing takers in default to the new taker in default, because the purported transferors (the existing takers in default) are not parties to the transaction whereby the interest is vested in the purported transferee (the new taker in default).
In some instances, a variation to a trust will constitute a declaration of trust. For example, an instrument that varies the terms of the trust may also contain a declaration that the trustee holds the trust property subject to the trusts as varied. Such a declaration would be a dutiable transaction to the extent that it relates to dutiable property.
Clearly, the interest of a discretionary object under a discretionary trust is not dutiable property under paragraph (l) of section 11. Such a beneficiary has the right to compel the due administration of the trust (an equitable chose in action), but has no vested or contingent proprietary interest in the trust fund or in the assets (including any dutiable property) which from time to time comprise the trust fund. Accordingly, an amending variation or supplemental deed that merely adds to or subtracts from the class of discretionary objects (whether or not the trust also has takers in default) does not affect dutiable property, and is not liable to duty under the Duties Act 1997.
It is not clear from the decision in Buckle whether the interest of a taker in default can be regarded as dutiable property under paragraph (l) of section 11 (an interest in any dutiable property listed in section 11). While takers in default have a vested or contingent interest in the trust fund, the High Court in Buckle emphasised that this interest was distinct from the assets (including any dutiable property) which may comprise the trust fund from time to time. The Office of State Revenue takes the view that the interest of a taker in default is dutiable property to the extent that the trust fund comprises dutiable property.
However, the High Court in Buckle indicated that the present value of such interests ‘had to reflect the vicissitudes which were an essential element of the structure’ of the discretionary trust. Therefore, the unencumbered value of the interest of a taker in default is to be determined after taking into account:
the extent to which the trustee (or any other person) can, by exercising powers conferred under the trust deed, affect or defeat the interests of the takers in default; and
whether the interest is contingent on the taker in default being alive on the distribution date.
Where a variation to a discretionary trust includes a declaration of trust, the dutiable property is not referable to the interests of the beneficiaries, but is the actual property in the trust fund to the extent that the property is ‘dutiable property’ as defined in section 11. Therefore, in any case where the trust property is or includes dutiable property, a variation that includes a declaration of trust will be subject to duty in relation to all of that dutiable property. In such a case, the unencumbered value of the dutiable property will be the unencumbered value of all of the dutiable property that is vested under the declaration - not the (increased) fractional interest of any beneficiary, and not the net value after deducting the liabilities of the trust.
The following variations to discretionary trusts are not dutiable transactions over dutiable property, and will not be liable to duty:
a variation that adds a beneficiary to, or deletes a beneficiary from, the class of persons who are takers in default;
a variation that adds a beneficiary to, or deletes a beneficiary from, the class of persons who are discretionary objects;
a variation that varies the interests inter se of beneficiaries without altering the identity of beneficiaries; and
a variation that merely inserts or amends administrative powers without affecting the interests (if any) of the beneficiaries in the trust property.
If the variation is or includes a declaration of trust, the variation will be liable to duty on the unencumbered value of the dutiable property in the trust fund at the date of the declaration, without any deduction for liabilities of the trust.
In the case of a discretionary trust over dutiable property, an assignment of the interest of a taker in default will be a dutiable transaction over dutiable property, and will be liable to duty on the greater of the consideration for the transfer and the unencumbered value of the ‘dutiable property’. In most cases, the unencumbered value of that interest will be minimal, and duty of $10 will be assessed on a notional value of $800.
A variation of a unit trust would rarely affect the relative interests of unitholders in the trust property, and is therefore unlikely to constitute a transfer. Any change in the relative interests of unitholders is more likely to be achieved by way of transfer, allotment or redemption of units. Further, an interest in dutiable property under the trust will in most instances arise as a consequence of the ownership of a unit or units in the scheme. Such an interest is specifically excluded (paragraph (l)(i) of section 11) from the list of dutiable property. Consequently, in most cases a variation of a unit trust will not be liable to duty.
Section 59 of the Duties Act provides that nominal duty is payable on certain instruments relating to a managed investment scheme. In the Dictionary to the Act, a ‘managed investment scheme’ includes a ‘public unit trust scheme’. Duty of $101 is chargeable in respect of an instrument that:
amends, varies or replaces an instrument that establishes or governs a managed investment scheme, and
does not transfer, or have the effect of transferring, any dutiable property to a person who does not hold units in the scheme, and
does not have the effect of reducing the number of persons who hold units in the scheme.
Duty of $102 is also chargeable in respect of a declaration of trust:
made by a trustee in respect of dutiable property that, immediately before the trust is declared, is held by the trustee as trustee of the prescribed interest scheme within the meaning of the Corporations Law as in force immediately before 1 July 1998, and
to hold the dutiable property on trust for the responsible entity of the managed investment scheme.
In the case of fixed trusts other than unit trusts, a variation that affects the interests of the beneficiaries would constitute a transfer where the specified interests of the beneficiaries are varied by agreement between the beneficiaries and the trustee. Such a variation would be a dutiable transaction to the extent that the trust property is dutiable property. The dutiable value will be the greater of the consideration for the transfer and the unencumbered value of the dutiable property transferred. The nature and value of the dutiable property will depend on the entitlement of the beneficiaries under the trust. For example, a transfer of the beneficiary’s interest under a bare trust would be assessed on the unencumbered value of the dutiable property in the trust, and not the net value after deducting the liabilities of the trust.
If the trust property under a fixed trust is or includes dutiable property, any variation to the trust that includes a declaration of trust will be subject to duty in relation to all of that dutiable property. The dutiable value will be the unencumbered value of the dutiable property in the trust fund at the date of the declaration, without any deduction for liabilities of the trust.