Tax exemptions: hidden duty stings

George and Genevieve’s accountant has made an appointment for them to see you mainly in relation to their daughter, Helen. Following family unhappiness, George and Genevieve have agreed to transfer the family business company to Helen with their other child, Harry, receiving nothing until after their deaths. They don’t want Helen to take a second bite at the cherry when the time comes. They are to fix up their wills at the same time.

The accountant gives you details of the share transfer, including a copy, and sends you relevant documents including prior wills and a copy of George and Genevieve’s family discretionary trust deed. The accountant says the discretionary trust has a property portfolio, which will eventually to go to Harry.

You discuss the issues with George and Genevieve generally. You observe that the share transfer – signed very recently – does not appear to have been stamped. Genevieve says that is correct because, according to their accountant, stamp duty on share transfers was abolished from 1 July 2016.

You say this is true, but that landholder duty has not been abolished. You explain that landholder duty in NSW applies when shares in a private company holding land valued at more than $2 million can attract ad valorem duty on transferring the shares on the same basis as a transfer of the underlying land ownership.

George says the business premises are valued at well under $1 million. However, the family trust does own other real estate valued at about $3 million.

All good, you say, and proceed to fix up the documents to everyone’s satisfaction.

A few weeks later, the accountant telephones again asking that you have a look at the deed because she is concerned about the vesting date. The first thing you see is that the trust was created in 1976 with the vesting date being the earlier of three potential dates: 21 years after the death of the last survivor of Queen Elizabeth II alive when the trust was created; 40 years from the date of the trust deed; or whatever earlier date the trustee resolves.

A quick calculation shows that the deed will vest in just two months – in favour of George as the default beneficiary.

You tell the accountant this, who says that it must be fixed very quickly because there is a significant accrued capital gain which will be triggered if the trust vests.

She tells you that under ATO ruling TD 2012/21 the vesting date for a discretionary trust can be extended without triggering CGT, provided certain rules are followed and quotes an example in the ruling involving a 1980 trust where the vesting date was extended for a further 30 years.

You point out that the deed has a wide enough amendment clause to extend the date, provided the rule against perpetuities is not breached. So the accountant says: go ahead and fix it for a further 30 years. Which you do by deleting the reference to Queen Elizabeth II and extending the 40 years to 70 years.