Variations of Trust v2
Ruling number | DUT 017v2 |
Date issued | November 2022 |
Issued by | Scott Johnson Chief Commissioner of State Revenue |
Effective from | 19 May 2022 |
Effective to | - |
Status | Current |
Preamble
The Duties Act 1997 (“Act”) 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, a declaration of trust over dutiable property and any other transaction that results in a change in beneficial ownership of dutiable property. Section 8AA imposes duty on an acknowledgement of trust.
An ‘acknowledgment of trust’ is a document or statement that appears to be a declaration of trust over dutiable property but has the effect of acknowledging that identified property vested or to be vested, in the person making the statement is already held, or to be held, in trust for a person or purpose mentioned in the statement.
"Dutiable property" is defined in section 11, and includes land in New South Wales, and an interest (including an estate or proprietary right) in any dutiable property.
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. 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 defined in the Dictionary to the Act as follows:
"discretionary trust" means a trust under which the vesting of the whole or any part of the capital of the trust estate, or the whole or any part of the income from that capital, or both- - is required to be determined by a person either in respect of the identity of the beneficiaries, or the quantum of interest to be taken, or both, or
- will occur if a discretion conferred under the trust is not exercised, or
- has occurred but under which the whole or any part of that capital or the whole or any part of that income, or both, will be divested from the person(s)in whom it is vested if a discretion conferred under the trust is exercised.
- There are generally two types of beneficiaries 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 theAct of variations to discretionary trusts and fixed trusts.
Ruling
A variation to a trust will be subject to duty under the Act if it is a transfer of dutiable property, change in beneficial ownership of dutiable property, a declaration of trust over identified dutiable property or an acknowledgement of trust over identified dutiable property. While it is largely immaterial whether or not the dutiable transaction is effected by a written instrument most variations to the terms of a trust would be effected by a written instrument or would at least be evidenced in writing.
Is the variation of a discretionary trust a ‘dutiable transaction’?
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 then section 8 of the Act. Since 19 May 2022, a variation of trust which vests an interest in dutiable property can be a dutiable transaction under section 8(1)(b)(ix) of the Act as a “change in beneficial ownership” (as defined in section 8(3)).
- 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 or an acknowledgement of trust. For example, an instrument that varies the terms of the trust may also contain a declaration or acknowledgement that the trustee holds the identified trust property subject to the trusts as varied on trust for the person(s) or purpose(s) mentioned in the instrument. Such a declaration or acknowledgement would be a dutiable transaction to the extent that it relates to dutiable property.
Is the property in a variation of a discretionary trust ‘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 Act.
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. Revenue NSW 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.
Consequently, the unencumbered value of the interest of a taker in default will, in most cases, be minimal. This will be so even before taking into account whether the trust has any liabilities for which the trustee is indemnified and that would have the effect of depleting or exhausting the funds available for distribution.
- Where a variation to a discretionary trust includes a declaration of trust or an acknowledgement 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 identified ‘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 or an acknowledgement of trust and mentions the person(s) or purpose(s) in the instrument will be subject to duty in relation to all of that identified dutiable property. In such a case, the unencumbered value of the dutiable property will be the unencumbered value of all of the identified dutiable property that is vested under the declaration or the acknowledgement - not the (increased) fractional interest of any beneficiary, and not the net value after deducting the liabilities of the trust.
Summary - discretionary trusts
The following variations to discretionary trusts are not dutiable transactions over dutiable property, or not treated as a dutiable transaction 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 vesting any interest of the beneficiaries in the trust property.
- If the variation is or includes a declaration of trust or an acknowledgement of trust,
and mentions the person(s) or purpose(s), the variation will be liable to duty on the unencumbered value of the identified dutiable property in the trust fund at the date of the declaration or acknowledgement, 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 will be liable to duty of $101.
Variations to unit trusts
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 dutiable transaction. 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. Section 8(3) of the Act excludes certain transactions that result in the change in beneficial ownership, these include:
- the purchase, gift, allotment, or issue of a unit in a unit trust scheme,
- the cancellation, redemption or surrender of a unit in a unit trust scheme,
- the abrogation or alteration of a right relating to a unit in a unit trust scheme
- the payment of an account owing for a unit in a unit trust scheme.
Consequently, in most cases a variation of a unit trust will not be liable to duty under Chapter 2 unless it contains a declaration or acknowledgement of trust and mentions the person(s) or purpose(s) in the instrument. It would be necessary to consider whether there is a liability under the landholder provisions of Chapter 4.
Note: An “excluded transaction” can still attract duty if it is part of an avoidance scheme or made with a collateral purpose of reducing the duty otherwise payable (s.8(2A)).
- 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 $50 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 $50 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.
Variations to other fixed trusts
- In the case of fixed trusts other than unit trusts, a variation that affects the interests of the beneficiaries would constitute a dutiable transaction 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.
Example: A and B are beneficiaries of a fixed trust with interests of 50% in the trust property. The Deed is varied to reflect the change in the interest held. A now holds 70% and B 30%. The 20% change in beneficial interest is liable to duty. The person liable to duty is A. - If the trust property under a fixed trust is or includes dutiable property, any variation to the trust that includes a declaration of trust, or an acknowledgement of trust and mentions the person(s) or purpose(s) in the instrument will be subject to duty in relation to all of that identified dutiable property. The dutiable value will be the unencumbered value of the dutiable property in the trust fund at the date of the declaration or acknowledgement, without any deduction for liabilities of the trust.
- Under section 8(1)(b)(ix) of the Act, any other transaction that results in a change in beneficial ownership of dutiable property, other than excluded transactions, are liable to duty. These new provisions could affect certain arrangements including creating new interests and extinguishing interests in fixed trusts
Example: XYZ Family Trust is a discretionary trust. The trust owns a piece of land in NSW worth $5,000,000. The trustee has the power to vary the trust. The trustee, by a deed of amendment, varies the terms of the trust deed to convert the discretionary trust to a fixed unit trust so that each beneficiary had a fixed entitlement in the trust. Duty is payable on the variation would be on the whole of the unencumbered value of the underlying dutiable property. The persons liable are the beneficiaries.
1From 1 February 2024 the fixed duty amount of $10 is increased to $50 and the fixed duty amount of $50 is increased to $100.