Revenue NSW has issued its guidance on charging duty on acknowledgements of trusts in NSW. This comes in the form of updates to Revenue Ruling DUT031v2 - Declaration of trust in agreement for sale (Ruling).
In our previous article Revenue NSW Bill passed - Extending Duty on Trusts, Foreign Surcharges & Tax Integrity we indicated that the new duty on acknowledgment of trusts was introduced in response to the NSW Supreme Court of Appeal decision in Chief Commissioner of State Revenue v Benidorm Pty Ltd  NSWCA 285 (Benidorm SCA Decision).
We highlight below NSW duty traps for trustees and custodians to consider before making statements that could expose the trust to ad valorem duty up to 5.5% on the dutiable value of the trust.
1. Legislative change from 19 May 2022
Section 8AA of the Act was introduced on 19 May 2022 to clarify that an 'acknowledgement of trust' is subject to duty in NSW. This reversed the effect of the Benidorm SCA Decision.
A reminder, the facts in Benidorm SCA Decision are as follows. In May 2007, Benidorm Pty Ltd (Benidrom) was incorporated to buy an apartment in Sydney. The purchase money was provided by Mr Robinson who lived in Guernsey. A resulting trust was documented over shares in Benidorm held by his solicitor and Benidorm's ownership of the apartment for the benefit of Mr Robinson. Duty was paid on the value of the apartment under the contract, and nominal duty was paid on the trust documents.
Mr Robinson died in September 2013 with his will appointing his executor as sole beneficiary. The estate included the shares in Benidorm and the beneficial interest in the apartment. In January 2015, the estate's solicitor prepared a further deed recording the terms of the first trust and the fact that the executor now succeeded to the apartment as sole executor and sole beneficiary.
The Chief Commissioner assessed the second deed to ad valorem duty. The Benidorm SCA Decision held:
- that a document which does not effect a transaction but merely acknowledges an existing trust is not liable to duty under the Act;
- the second deed had no legal effect because Benidorm held the legal title of the apartment for the executor in his capacity as his sole executor of the estate and not as a beneficiary; and
- the second deed was not liable to ad valorem duty because it did not effect a transaction for duty purposes.
From 19 May 2022, the making of a statement that purports to be a declaration or acknowledgment of a trust will be liable to duty as a declaration of trust. Duty is calculated on the dutiable value of the property of the trust as at the date of the acknowledgement of trust.
2. What is an 'acknowledgement of trust'?
A statement is liable to duty under section 8AA(1) of the Act as an 'acknowledgement of trust' if:
- it purports to be a declaration of trust over NSW dutiable property
- merely has the effect of acknowledging that identified NSW property vested, or to be vested, in the person making the statement is already held, or to be held, in trust for a person or purpose mentioned in the statement.
The Ruling confirms that to be an acknowledgment of trust there must be a statement that the dutiable property is held (or to be held) on trust for identified beneficiaries. The statement may be made orally or in writing.
A statement will be liable to duty as an acknowledgement of trust where the purchaser is described as:
- trustee for a named person or persons
- trustee for a named class of persons (e.g. 'the children of X', or 'the beneficiaries of the XYZ Trust')
- trustee for a named corporate body
- trustee for a named unincorporated body
- custodian for the trustee for a named person or persons
- custodian for the trustee for a named class of persons
- custodian for XYZ as trustee for a named corporate body
- XYZ as custodian for ABC Pty Ltd as trustee for a named unincorporated body.
The Ruling also includes 3 new examples which give rise to duty in addition to any duty charged on the contract for sale of a property:
(a) Where there is no prior declaration of trust before entering the contract - The contract describes the purchaser as 'A Pty Ltd as trustee for B Pty Ltd'.
(b) Where there is no declaration of trust at the date of contract - The contract describes the purchaser as 'A Pty Ltd.' After the purchase, A Pty Ltd & B Pty Ltd make a statement acknowledging that 'A Pty Ltd acquired the property as trustee for B Pty Ltd'.
(c) Where there is a declaration of trust after the contract but before the transfer - The same facts as example 2 above, but the statement occurs pre-transfer.
As you can see from the above 3 examples, there is a liability for double duty unless there is a declaration of trust in existence prior to the acquisition of dutiable property.
3. What is not a declaration trust?
The Ruling confirms the position in Benidorm SCA Decision that "Words merely referring to an existing trust or to an existing trust deed will not amount to a declaration of trust or acknowledgement of trust": paragraph 16.
The Ruling prescribes that a statement will not be liable to duty as an acknowledgement of trust where the trust is pre-existing and a person is described as:
- trustee for the estate of a named person
- trustee for a named trust
- trustee for a named superannuation fund
- trustee for a company to be formed or incorporated
- custodian for the trustee for the estate of a named person
- custodian for the trustee for a named trust
- custodian for the trustee for a named superannuation fund
- custodian for the trustee for a company to be formed or incorporated.
The above statements merely describe the person's capacity as trustee or custodian and do not mention the beneficiaries of the trust: paragraph 14 of the Ruling.
Statements and statutory declarations requested by Revenue NSW or other government bodies may not be liable as an acknowledgement of trust: paragraph 16 of the Ruling. However, care should still be taken in the drafting of these documents to ensure they do not inadvertently trigger duty.
Specifically, when confirming existing trust arrangements there may be consequences if you identify the property and the person or persons for whom or the purpose or purposes for which it is held, regardless of if the trust is already in existence. This is distinct from the Benidorm SCA Decision.
It is likely that there will be an increase in duty assessments for failure to satisfy the apparent purchaser duty concession under section 55 of the Act (see Revenue Ruling DUT 030). The concession requires strict evidence to prove payment of the deposit and purchase moneys made by the beneficiary. Where this is not satisfied (such as the parties no longer have access to bank records, no deed was documented despite an oral arrangement or the deed was lost) there is likely to be duty on the transfer and potentially the deed as of the date of its execution (if it is lodged for stamping without satisfying the concession).
Additional care needs to be taken by advisers, trustees and custodians in confirming or documenting trust arrangements which may now give rise to ad valorem duty under the acknowledgement of trust head.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.