Mr Henshaw's Life Death and Taxes
Can a transfer to a ‘bare trust’ be subject to transfer duty? The devil is in the detail!
The recent Victorian Supreme Court case of MD Commercial Pty Ltd and AJ Commercial Pty Ltd vs Commissioner of State Revenue  VSC 560 highlights that duty legislation is highly technical, and that the application of duty or an exemption can turn on key property law terms (such as ‘beneficial ownership’).
Issues considered in the MD Commercial case
The MD Commercial case concerned whether certain transfers of property to two ‘bare trusts’ were exempt from transfer duty pursuant to paragraph 35(1)(a) of the Duties Act2000 (Duties Act), as a transfer to a trustee or nominee of the transferor, without any change in the beneficial ownership of the property.
On 2 October 2011, Christine Fox died. Her Estate included a property situated in Pakenham (Pakenham Property). The Pakenham Property was bequeathed to her sons, Anthony Fox and Matthew Fox in equal shares.
On 3 May 2012, MD Commercial Pty Ltd and Matthew Fox executed a Deed of Trust to create the ‘M David Trust’ (of which Matthew was the sole beneficiary). Similarly, AJ Commercial Pty Ltd and Anthony Fox executed a Deed of Trust to create the ‘A James Trust’ (of which Anthony was the sole beneficiary).
On 10 August 2012, the Pakenham Property was transferred from the Estate of Christine Fox to MD Commercial Pty Ltd (as trustee of the M David Trust) at the direction of Matthew, and AJ Commercial Pty Ltd (as trustee of the A James Trust) at the direction of Anthony. The transfers were stamped as exempt under paragraph 35(1)(a) of the Duties Act.
Following the development, subdivision and sale of some of the Pakenham Property in 2016, the Commissioner commenced an investigation regarding whether the transfers on 10 August 2012 were correctly granted exemptions under paragraph 35(1)(a).
On 7 November 2016 (over four years after the duty exemption was granted), the Commissioner concluded that the transfers did not qualify for the exemption under paragraph 35(1)(a), and a notice of assessment was issued.
The taxpayers unsuccessfully objected to the assessment, and then appealed the Commissioner’s decision to the Victorian Civil and Administrative Tribunal (which was unsuccessful). Unfortunately for the taxpayers, the Court also found in favour of the Commissioner.
The Transfer Duty Exemption
Section 35 of the Duties Act contains a series of transfer duty exemptions in respect of transfers to and from a ‘trustee or nominee’. The present case concerned paragraph 35(1)(a), which provides that:
(1) No duty is chargeable under this Chapter in respect of—
(a) a transfer of dutiable property that is made by the transferor to a trustee or nominee to be held solely as trustee or nominee of the transferor, without any change in the beneficial ownership of the property; …
The transfers in question resulted in a transfer of the Pakenham Property from the Estate (at the direction of Anthony and Matthew, respectively) to MD Commercial Pty Ltd (to hold on trust from Matthew) and AJ Commercial Pty Ltd (to hold on trust for Anthony).
Given that MD Commercial Pty Ltd held its interest in the Pakenham Property as trustee for Anthony, and AJ Commercial Pty Ltd held its interest in the Pakenham Property as trustee for Matthew, then why did the duty exemption in section 35 not apply?
Without any Change in Beneficial Ownership?
The Court held that the decisions in three prior cases (Comptroller of Stamps v Yellowco Five Pty Ltd, Commissioner of State Revenue v Victoria Gardens Developments Ptd Ltd, and White Rock Properties Pty Ltd v Commissioner of State Revenue) meant that the scope of the section 35 exemption is extremely narrow. In particular, that the exemption requires:
- no immediate change in beneficial ownership (i.e. that the beneficial ownership of the property is the same immediately before and immediately after the transfer); and
- that the property must be transferred ‘to be held solely as trustee or nominee for the transferor’. This second requirement involves an element of futurity.
The Trust Deeds to the M David Trust and the A James Trust contained various provisions which went beyond the provisions often contained in many Trust Deeds that create a ‘Bare Trust’. In particular:
- the Trust Deed empowered the Trustee (at the direction or with the written consent of the relevant Beneficiary), to borrow money and to secure the repayment of any borrowing by mortgage over all of the assets of the Trust Fund;
- the Trust Deed empowered the Trustee (at the direction or with the written consent of the relevant Beneficiary), to deal with any real or personal property (i.e. sell, lease, transfer, use, etc.); and
- the Trust Deed empowered the Trustee (at the direction or with the written consent of the relevant Beneficiary), to partition or subdivide any land that may become part of the Trust Fund.
The taxpayers argued that any ‘beneficial interest held by the trustee’ that was created due to the above clauses of the Trust Deed was immaterial to the section 35 exemption.
The Court had doubts over whether there was any immediate change in beneficial ownership. However, because the beneficiary had a discretion to produce a change in the beneficial ownership by directing a sale, it could only be said that the property was to be held without any change in beneficial ownership for so long as the transferor did not exercise that discretion. Thus, the ‘futurity’ element was not satisfied.
The Court re-iterated that the scope of the section 35 exemption was extremely narrow. Namely, the exemption requires that the terms of the trust:
- do not permit the persons for whom the trustee holds the land to be altered or expanded;
- do not authorise any change in beneficial ownership whilst the trustee holds the property; and
- do not impose on the trustee any active duties or powers to develop or to sell the land.
Summary of the Case
Unfortunately for the taxpayers, the Court’s decision meant that the Commissioner’s assessments stood, and the section 35 duty exemption did not apply. The trust that was created was not strictly a ‘bare trust’ in which the trustee had no active duties or obligations to perform.
Take Away Points
The taxpayers attempted to argue that the section 35 exemption should be interpreted on the basis that the ‘fundamental basis for duty is a change in beneficial ownership’. The Court said that while this may generally be the case, it stressed legislation such as the Duties Act cannot be approached other than by paying close attention to the language and structure the legislature has actually employed in its provisions. This is consistent with other key transfer duty cases (e.g. the decision in Danvest Pty Ltd & anor v Commissioner of State Revenue  VSCA 382, where the change of partnership interests did not result in a change of beneficial ownership of the land held by the partnership).
The decision highlights three things:
- the importance of drafting documents. For instance, if the Trust Deeds did not contain the offending cases, the exemption in section 35 may very have applied;
- the importance of paying extremely close attention to the legislative requirements of any duties legislation. In the author’s experience, this is particularly the case with duties exemptions and landholder provisions; and
- even if your client has been granted a duty exemption, subsequent events (e.g. property development) may result in audits and the Commissioner changing his position!
Finally, taxpayers who are contemplating transactions that they believe ‘should’ be duty exempt should obtain specialist duty advice before undertaking those transactions. The devil is invariably in the detail!