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Beware to declare – NSW stamp duty traps on acknowledgments of trust – Trusts

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Revenue NSW has issued its guidance on charging duty on
acknowledgements of trusts in NSW. This comes in the form of
updates to Revenue Ruling DUT031v2 – Declaration of trust
in agreement for sale
(Ruling).

In our previous article Revenue NSW Bill passed – Extending Duty on
Trusts, Foreign Surcharges & Tax Integrity
we
indicated that the new duty on acknowledgment of trusts was
introduced in response to the NSW Supreme Court of Appeal decision
in Chief Commissioner of State Revenue v Benidorm
Pty Ltd
[2020]
NSWCA 285 (Benidorm
SCA Decision
).

We highlight below NSW duty traps for trustees and custodians to
consider before making statements that could expose the trust to ad
valorem duty up to 5.5% on the dutiable value of the trust.

1. Legislative change from 19 May 2022

Section 8AA of the Act was introduced on 19 May 2022 to clarify
that an ‘acknowledgement of trust’ is subject to duty in
NSW. This reversed the effect of the Benidorm SCA
Decision.

A reminder, the facts in Benidorm SCA Decision are as
follows. In May 2007, Benidorm Pty Ltd (Benidrom)
was incorporated to buy an apartment in Sydney. The purchase money
was provided by Mr Robinson who lived in Guernsey. A resulting
trust was documented over shares in Benidorm held by his solicitor
and Benidorm’s ownership of the apartment for the benefit of Mr
Robinson. Duty was paid on the value of the apartment under the
contract, and nominal duty was paid on the trust documents.

Mr Robinson died in September 2013 with his will appointing his
executor as sole beneficiary. The estate included the shares in
Benidorm and the beneficial interest in the apartment. In January
2015, the estate’s solicitor prepared a further deed recording
the terms of the first trust and the fact that the executor now
succeeded to the apartment as sole executor and sole
beneficiary.

The Chief Commissioner assessed the second deed to ad valorem
duty. The Benidorm SCA Decision held:

  1. that a document which does not effect a transaction but merely
    acknowledges an existing trust is not liable to duty under the
    Act;

  2. the second deed had no legal effect because Benidorm held the
    legal title of the apartment for the executor in his capacity as
    his sole executor of the estate and not as a beneficiary; and

  3. the second deed was not liable to ad valorem duty because it
    did not effect a transaction for duty purposes.

From 19 May 2022, the making of a statement that purports to be
a declaration or acknowledgment of a trust will be liable to duty
as a declaration of trust. Duty is calculated on the dutiable value
of the property of the trust as at the date of the acknowledgement
of trust.

2. What is an ‘acknowledgement of trust’?

A statement is liable to duty under section 8AA(1) of the Act as
an ‘acknowledgement of trust’ if:

  • it purports to be a declaration of trust over NSW dutiable
    property

  • merely has the effect of acknowledging that identified NSW
    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.

The Ruling confirms that to be an acknowledgment of trust there
must be a statement that the dutiable property is held (or to be
held) on trust for identified beneficiaries. The statement may be
made orally or in writing.

A statement will be liable to duty as an acknowledgement of
trust where the purchaser is described as:

  • trustee for a named person or persons

  • trustee for a named class of persons (e.g. ‘the
    children of X’
    , or ‘the beneficiaries of the XYZ
    Trust
    ‘)

  • trustee for a named corporate body

  • trustee for a named unincorporated body

  • custodian for the trustee for a named person or persons

  • custodian for the trustee for a named class of persons

  • custodian for XYZ as trustee for a named corporate body

  • XYZ as custodian for ABC Pty Ltd as trustee for a named
    unincorporated body.

The Ruling also includes 3 new examples which give rise to duty
in addition to any duty charged on the contract for sale of a
property:

(a) Where there is no prior declaration of trust before entering
the contract – The contract describes the purchaser as ‘A
Pty Ltd as trustee for B Pty Ltd’
.

(b) Where there is no declaration of trust at the date of
contract – The contract describes the purchaser as ‘A Pty
Ltd
.’ After the purchase, A Pty Ltd & B Pty Ltd make a
statement acknowledging that ‘A Pty Ltd acquired the
property as trustee for B Pty Ltd’
.

(c) Where there is a declaration of trust after the contract but
before the transfer – The same facts as example 2 above, but the
statement occurs pre-transfer.

As you can see from the above 3 examples, there is a liability
for double duty unless there is a declaration of trust in existence
prior to the acquisition of dutiable property.

3. What is not a declaration trust?

The Ruling confirms the position in Benidorm SCA
Decision
that “Words merely referring to an existing
trust or to an existing trust deed will not amount to a declaration
of trust or acknowledgement of trust”:
paragraph 16.

The Ruling prescribes that a statement will not be liable to
duty as an acknowledgement of trust where the trust is pre-existing
and a person is described as:

  • trustee

  • trustee for the estate of a named person

  • trustee for a named trust

  • trustee for a named superannuation fund

  • trustee for a company to be formed or incorporated

  • custodian for the trustee for the estate of a named person

  • custodian for the trustee for a named trust

  • custodian for the trustee for a named superannuation fund

  • custodian for the trustee for a company to be formed or
    incorporated.

The above statements merely describe the person’s capacity
as trustee or custodian and do not mention the beneficiaries of the
trust: paragraph 14 of the Ruling.

Statements and statutory declarations requested by Revenue NSW
or other government bodies may not be liable as an acknowledgement
of trust: paragraph 16 of the Ruling. However, care should still be
taken in the drafting of these documents to ensure they do not
inadvertently trigger duty.

Specifically, when confirming existing trust arrangements there
may be consequences if you identify the property and the person or
persons for whom or the purpose or purposes for which it is held,
regardless of if the trust is already in existence. This is
distinct from the Benidorm SCA Decision.

It is likely that there will be an increase in duty assessments
for failure to satisfy the apparent purchaser duty concession under
section 55 of the Act (see Revenue Ruling DUT 030). The concession
requires strict evidence to prove payment of the deposit and
purchase moneys made by the beneficiary. Where this is not
satisfied (such as the parties no longer have access to bank
records, no deed was documented despite an oral arrangement or the
deed was lost) there is likely to be duty on the transfer and
potentially the deed as of the date of its execution (if it is
lodged for stamping without satisfying the concession).

Additional care needs to be taken by advisers, trustees and
custodians in confirming or documenting trust arrangements which
may now give rise to ad valorem duty under the acknowledgement of
trust head.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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