Most accountants and lawyers are aware of the duty implications of changing a trustee of a trust that holds dutiable property in New South Wales – as long as any new trustee or continuing trustee cannot benefit under the trust, the duty payable on a transfer of dutiable property to the new trustee or continuing trustee will only be $50. Where the trust deed does not already prevent new or continuing trustees from benefiting under the trust, and the trust holds dutiable properly, it is always recommended that trust deed be amended prior to appointing a new trustee.
However, you could cause a real duty problem if you were to issue or transfer shares in a corporate trustee that can benefit from a trust that owns land. From 1 July 2016 there is no transfer duty on the transfer of shares in a New South Wales company, and so it might be assumed that you would not cause a problem by issuing or transferring shares in a corporate trustee. However, the landholder duty provisions deem a corporate trustee to own any land it might benefit from as a beneficiary of a trust. If the value of land that the corporate trustee might benefit from has a land tax value of at least $2,000,000, then the issue or transfer of shares might be dutiable as if a portion of the land had been acquired.
As noted, from 1 July 2016 a transfer of shares in a New South Wales company is no longer subject to transfer duty in New South Wales. However, landholder duty may be payable upon a transfer or issue of shares, where the transfer or issue is a ’relevant acquisition’ in a ‘landholder’. A relevant acquisition is where a person acquires a ‘significant interest’ in a landholder. In the case of a private company, a 'significant interest' is an interest with an entitlement to 50% of the property of the entity in the event of a distribution. A landholder is a unit trust scheme, a private company or a listed company that has land holdings in New South Wales with a threshold value of $2,000,000 or more.
The Duties Act 1997 (NSW) (Duties Act) provides that a corporate trustee that is the trustee of a trust is not treated as owning the land held in the trust for the purpose of landholder duty, unless the company is also a beneficiary of the trust.
Beneficiaries of discretionary trust deemed to own land of trust
Section 159 of the Duties Act provides that:
- a person who is a member of a class of persons in whose favour the capital of the trust may be applied, either in default or by exercise of a power by the trustee, is regarded as a beneficiary of the trust; and
- a beneficiary of a discretionary trust is taken to own or to be otherwise entitled to the property of the trust.
This means, for example, that a company that falls within the class of beneficiaries of the trust would be regarded as owning any land of the trust and, to extent that the total value of the land held in the trust is at least $2,000,000, the company would be treated as a landholder for the purposes of landholder duty.
Accordingly, if a corporate trustee is entitled to benefit under a discretionary trust that holds land in New South Wales the total value of which is at least $2,000,000 at the time that at least 50% of the shares in the corporate trustee are transferred to another person, the transfer of the shares will be a 'relevant acquisition' and subject to landholder duty. To determine whether a person has acquired at least 50% of the shares in a company, you include the interests of any associates. A similar outcome will follow if the change in ownership of shares is achieved by an issue of new shares rather than a transfer of existing shares.
Often a trust deed for a discretionary trust will exclude a trustee that is remaining or appointed following the removal of an original trustee from benefiting under the trust. This exclusion is to meet the conditions of the duty concession referred to above. However, ordinarily an original trustee is not precluded from benefiting under the trust and some discretionary trust deeds simply do not have any clause preventing a trustee from benefiting under the trust.
The solution, where the corporate trustee can benefit under the trust, is to amend the trust deed before the transfer or issue of shares, to exclude the corporate trustee as a beneficiary of the trust.
Where such an amendment is not made, all is not lost. The Chief Commissioner of State Revenue (Commissioner) has discretion under section 163H of the Duties Act to grant a full or partial exemption of landholder duty where it is not just and reasonable to impose landholder duty in the circumstances. In Milstern Nominees Pty Ltd v Chief Commissioner of State Revenue  NSWSC 68 (Milstern), the Supreme Court of New South Wales held that the Commissioner should have granted an exemption on a transfer of shares in a company which was the beneficiary of a discretionary trust that held land, because the company as a matter of fact did not own or control the land held by the discretionary trust, nor did the company have any expectation of receiving the land, any proceeds of sale of any part of the land or any income from it.
The Milstern decision provides assistance to overcome landholder duty on the transfer or issue of shares in a company where company is a beneficiary of a discretionary trust but does not own or control the land held for the discretionary trust. However, it may not extend to the corporate trustee of the trust, as the corporate trustee does own and control the land. It can be expected that the Office of State Revenue would likely seek to distinguish the Milstern decision in such circumstances.
The key takeaways from the above are as follows:
- an acquisition (transfer or issue) of 50% or more of the shares in a company which only holds assets as the trustee of a discretionary trust may have duty implications if the discretionary trust, or another trust under which the corporate trustee can benefit, owns land in New South Wales the total value of which is at least $2,000,000 (based on land tax values);
- before transferring or issuing shares in a corporate trustee of a discretionary trust, consider whether the corporate trustee can benefit under a trust;
- if a corporate trustee can benefit under a trust, before transferring or issuing the shares, the trust deed should be amended so that the corporate trustee is excluded from benefiting under the trust; and
- where the Office of State Revenue imposes landholder duty on a transfer of shares in the corporate trustee of a discretionary trust, on the basis that the corporate trustee can benefit under the trust, an application can be made to the Commissioner for a full or partial exemption under section 163H of the Duties Act. However, note that the Commissioner may be reluctant to grant such an exemption where the company is the trustee of the relevant discretionary trust.