Background

Property is often held in discretionary trusts for asset protection and family wealth planning. However, following the recent Federal Budget announcement of a proposed 30% minimum tax on discretionary trust income from 1 July 2028, some trustees of property held in discretionary trusts may now be reconsidering whether continuing to hold property in a discretionary trust remains appropriate for their circumstances. Additionally, if a residential property is held in a discretionary trust, the principal place of residence exemption from land tax is generally unavailable and vacant residential land tax may also apply. These factors make upfront duty and tax planning increasingly important.

In Victoria, a duty exemption is available under section 36A of the Duties Act 2000 (Vic) where a trustee wants to transfer property from a discretionary trust to a beneficiary. A separate duty exemption may apply to commercial or industrial property that has entered the commercial and industrial property tax (CIPT) reform following a qualifying transaction on or after 1 July 2024.

Section 36A can provide genuine duty relief, but it does not apply automatically. There are strict eligibility requirements and each limb of section 36A needs to be carefully considered before making an application to the State Revenue Office (SRO) for the duty exemption.

Eligibility Requirements

Section 36A can exempt a transfer of property from a discretionary trust to a beneficiary from duty provided all of the relevant requirements are met.

Timing

Firstly, duty must have been paid when the property first became subject to the trust. Secondly, the transferee must be an eligible beneficiary. Generally, this means the transferee was a beneficiary when the property first became subject to the trust, referred to as the 'relevant time'.

Section 36A also recognises some beneficiaries who became beneficiaries after the relevant time. For example, the exemption can extend to certain spouses or domestic partners, adopted children, stepchildren and lineal descendants who became beneficiaries because of those family relationships.

Companies and trusts can also qualify, but the rules are narrower. If the transferee is a company receiving the property absolutely, the company must have been a beneficiary of the principal trust at the relevant time, and all shareholders must be natural persons who were beneficiaries of the principal trust at the relevant time. A beneficiary can also receive the property as trustee of another trust, provided all beneficiaries of that second trust are 'relevant beneficiaries' for section 36A purposes. This makes the trust deed and the ownership or beneficiary structure of the proposed transferee important to review before proceeding.

The decision in Chiang v Commissioner of State Revenue (Review and Regulation) [2016] VCAT 304 (Chiang) illustrates why timing matters. In Chiang, the taxpayer sought to transfer property between trusts with identical beneficiaries. VCAT refused the exemption because the receiving trust did not exist when the property first became subject to the principal trust and the receiving trust’s beneficiaries therefore could not have been beneficiaries of the receiving trust at the relevant time. The fact that two trusts otherwise had identical beneficiaries did not overcome this timing requirement.

Consideration

The next condition is that the Commissioner must be satisfied that the transfer is not part of a sale or other arrangement involving consideration.

The issue is not simply whether the land transfer form states that no price is paid. The term 'consideration' essentially means anything that 'moves' the transfer, and can include non-monetary consideration (for example, the assumption of loan liabilities, forgiveness of unpaid present entitlements, and even leaving that trust with insufficient ability to pay its liabilities). In practice, the SRO will look beyond the transfer form to the underlying transaction and supporting documents, including the trust deed, financial statements, loan account records and mortgage information.

Advisers should therefore be cautious where a proposed transfer involves beneficiary loan accounts, trust debts, mortgage assumptions, debt forgiveness or reductions in unpaid present entitlements, which may render a transfer ineligible for the duty exemption under section 36A. While it may be possible to assume liabilities secured by a mortgage over the property under section 36C, that exception does not extend to unsecured liabilities.

Section 36C provides that a transfer provides for an exception to the where a beneficiary assumes liabilities under an existing mortgage over the property. This condition is deemed satisfied where the original mortgage was created at or before the property became subject to the trust, genuinely refinanced such a mortgage, or secured borrowings applied to improving the property.

In Astakhov v Commissioner of State Revenue (Review and Regulation) [2018] VCAT 1363 (Astakhov), the trustee transferred a property held in the trust to the beneficiary. In Astakhov, as part of the transfer of the property to the beneficiary, the beneficiary waived (by conduct) loans owed to them by the trust. VCAT determined that the waiver of these loans constituted consideration and the transfer was therefore ineligible for the duty exemption under section 36A. VCAT also found in the alternative that their failure to provide the financial statements or other information about the winding up of the trust, the taxpayer failed to establish that the transfer involved no consideration.

The decision in Baullo v Commissioner of State Revenue (Review and Regulation) [2023] VCAT 1164 (Baullo) further highlights this risk. In Baullo, VCAT treated the forgiveness of a loan owing to the beneficiaries as fatal to the section 36A position, as the forgiveness of the loan was deemed to be consideration.

Key Takeaways

• Family trusts holding property should review capital distribution options early, especially where a future transfer to a beneficiary is contemplated.
• Whilst the duty exemption under section 36A can provide valuable relief, it is critical that trustees and beneficiaries properly review and assess the relevant requirements beforehand.
• The financial position of the trust will be critical in determining eligibility for section 36A and must be reviewed before any transfer is implemented.

To discuss duty risk and structuring options for discretionary trust property transfers, please contact Velocity Legal’s property team.

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.