A pricey change of trustees

You acted for your brother, Kel, a few years ago in relation to purchasing a residential investment property in Sydney through his discretionary family trust, known as the KK Investments Family Trust (‘KK Trust’). At the time, Kel and his wife, Kath, were the trustees and primary beneficiaries of the trust.

You were concerned about Kel purchasing through a family trust structure and advised him so at the time, but he told you not to worry because his accountant had it all ‘under control’.

The matter ended up going a bit pear-shaped because, when you submitted the contract to Revenue NSW for stamping, Kel received an assessment for an extra eight per cent land transfer duty. Based on the information submitted to Revenue NSW, the KK Trust was regarded as a foreign trust because it failed to include a clause excluding foreign beneficiaries – which meant Kel was going to have to come up with another $70,000. In addition to this, he was also going to be required to pay extra land tax.

Naturally, Kel was not happy. As it turned out though, lady luck smiled on you. Due to a change in the vendor’s circumstances, the vendor wanted out of the contract and so did Kel – not just because of the extra duty and land tax but because he had found another investment property he wanted to buy instead. So, the parties agreed to rescind the contract and move on.

Kel advised he wanted to buy the other investment property through the KK Trust.

‘But get it right this time’, Kel said when he asked you to act for him again.

This time you triple check everything to do with surcharge purchaser duty and surcharge land tax so you don’t get caught out again.

After checking everything, you are satisfied Kel won’t get caught because this time he is buying a warehouse, being a commercial investment property, and surcharge purchaser duty and land tax only applies to acquisitions of residential land.

Although you know this time it is ok, you suggest to Kel that he should still consider amending his trust deed to exclude foreign persons as beneficiaries – just in case and for the purpose of any future acquisitions. Kel agrees so you order the required document to amend the deed.

Since the debacle with the surcharges Kel has also separated from Kath. They finalised a property settlement which included Kel taking over the KK Trust however nothing was done about removing Kath as a trustee.

You advise Kel that he should appoint a company trustee in which he should be the sole director and shareholder and arrange for Kath to resign. Kel and Kath remain friends after the separation, so Kel is confident Kath will sign whatever documents are necessary to fix the KK Trust.

You tell Kel you will order a change of trustee document online which might take a day or two and cost around $750.

‘Surely you can do the document for me for free?’, Kel asks when you tell him the procedure and costs.

‘After all, you buggered up the last thing you did, surely you can give me for something for free – plus we are family!’

You haven’t been doing much with trusts lately – you are still a bit scarred from your last trust experience with Kel. However, the process to change the trustee looks reasonably straightforward and you still have some precedents you could use that look like they tick all the boxes, so you agree to prepare the document.

You prepare a deed by which Kel and Kath appoint a company trustee and they then retire and have them execute it.

By the time you prepare the document, the purchase of the commercial investment property has settled. The trust doesn’t own anything else that is considered dutiable property, so you prepare the documents to transfer the commercial property from Kel and Kath to the company trustee and arrange to have it all stamped under section 54 (3) of the Duties Act 1997 (NSW).

The sting 

A few weeks after submitting the transfer for stamping, a letter arrives from Revenue NSW.

Revenue NSW advise they believe ad valorem duty is payable because the potential beneficiaries listed in the trust deed include companies in which shares are held by other potential beneficiaries.

‘But’, you think to yourself, ‘the company trustee isn’t a beneficiary, it’s just the trustee – why does Revenue NSW keep picking on me?’

You look at the terms of the trust deed which say the beneficiaries include any proprietary company in which a beneficiary is a shareholder.

You then go to s 54 (3) which says:

‘(3) Duty of $100 is chargeable in respect of a transfer of dutiable trust property to a person (other than to a licensed trustee company, a special trustee, a trustee of a self-managed superannuation fund or a trustee of a special disability trust) as a consequence of the retirement of a trustee or the appointment of a new trustee if the Chief Commissioner is satisfied that, as the case may be–

(a) none of the continuing trustees remaining after the retirement of a trustee is or can become a beneficiary under the trust, and

(b) none of the trustees of the trust after the appointment of a new trustee is or can become a beneficiary under the trust, and

(c) the transfer is not part of a scheme to avoid duty that involves conferring an interest, in relation to the dutiable trust property, on a new trustee or any other person (whether or not as a beneficiary) so as to cause any person to cease holding the whole or any part of a beneficial interest (or potential beneficial interest) in that property.’

Because the terms of the trust deed states ‘any proprietary company in which a beneficiary is a shareholder’ can become a beneficiary, the new company trustee you have appointed ‘is or can become a beneficiary under the trust’ as Kel is a primary beneficiary of the KK Trust and a shareholder in the company trustee.

‘But that doesn’t make sense’, you think, ‘people change to corporate trustees all the time relying on that provision – what have I done wrong?’

You have worked with another lawyer in the past who you know is spot on when it comes to trusts and taxes, so you decide to give her a call.

You explain what has happened and she asks whether you included any irrevocable clauses making the company trustee unable to become a beneficiary in the deed changing the trustee. Your heart drops as you realise you didn’t and, by the sounds of things, probably should have…

The failure to include this clause means the transfer does not qualify for the concession in s 54 (3) so duty on the transfer is chargeable with the same duty as would be payable on a transfer from the trust to a beneficiary.

You comb through the Duties Act hoping, praying for a get out of jail card but cannot find one…

With your heart in your throat, you call Kel to deliver the bad news.

Amanda Tully is a director and business lawyer at JMA Legal.