28/04/2015

A case where double duty was payable because the terms of the trust deed were incorrectly drafted.

Generally, a trust is established with a small sum of money so that only nominal stamp duty is payable on the trust deed.  Once the trust is established and duty is paid, assets such as property are purchased in the name of the trustee without additional stamp duty being payable on the trust deed.

But, and it is a big but, this only works if the trust deed is properly drafted. If your trust deed happens to contain “a declaration of trust” over dutiable property (e.g. real property) then the trustee may have to pay ad valorem (i.e. full) duty twice: once on the trust deed itself, and again on the contract of sale for the purchase of that property. Cash is not considered dutiable property, which is why most trusts are initially set up with cash.

The risks associated with poor drafting were illustrated last year in a case involving the trustee of a charitable trust. While the trust was established with a settlement sum of $100, the trust deed stated at clause 1:

“The Settlor and the Trustee declare that the Trustee shall hold the settlement sum and all monies and property both real and personal… upon trust… in accordance with the terms of this Deed for promoting the study of education and for the welfare of the general public…”

while Recital C provided that:

“The trustee wishes to acquire a property on behalf of the Trust located at 1492 Camden Valley Way, Leppington NSW Auto Consol 10781/149 ("the property”).”

The day after signing the trust deed, the trustee signed a contract of sale to acquire the property and the trust deed was lodged with the NSW Duties Office as an exempt document (as it was intended for the property to be held on trust for a charitable body).

To the unfortunate trustee’s surprise, the NSW Office of State Revenue did not grant the exemption and instead found the trust deed to be a declaration of trust over dutiable property as defined in s.8 of the NSW Duties Act 1997 (“the Act”), which meant it was liable to ad valorem duty.

The trustee’s challenge of the assessment was unsuccessful. The NSW Civil and Administrative Tribunal concluded that the trust deed did fall within the definition of a declaration of trust under s.8(3) of the Act.  

Interestingly, one of the trustee’s arguments was that the declaration of trust was only contained in Clause 1 of the trust deed and should not be extended to include Recital C.  It argued that the purpose of recitals is to give some background information, they are not included in the operative part of the trust deed. Consequently, Clause 1, looked at in isolation, was a declaration of trust over unidentified property and the trust deed was assessable under s.58, not s.8.

The Tribunal rejected this argument and concluded that the whole of the trust deed, including the recitals, is to be looked at to find identified property.  

The trustee appealed to the Appeal Panel of the Tribunal on three grounds, namely:

-    the Tribunal should not have looked at the trust deed as whole; rather it should have looked only at the declaration contained in Clause 1 to ascertain whether the declaration of trust was over identified property or not.  
-    Even if the Tribunal could have included Recital C in its analysis, the identified property fell outside the scope of the declaration as the declaration referred to property ‘given’ to the Trustee while the property identified in Recital C was to be ‘purchased’ by the trustee.

The third ground related to the payment of interest on the initial notice assessment.  

The Panel held that:
-    the whole document can be looked at to determine whether s.8 is satisfied; and
-    the fact that the property was acquired by way of purchase and not as a gift did not mean that the property, once acquired, would not satisfy the definition of trust fund.  Accordingly the property was subject to the declaration.

The appeal was dismissed and the trustee was left to pay two lots of full stamp duty.
    
Lesson to be learnt?

When it comes to drafting, sometimes less is more. We recommend seeking the assistance of an experienced professional to draft your trust deed in order to prevent the inclusion of an inadvertent declaration of trust over dutiable property.

As the declaration already stated that the trustee would hold on trust property both real and personal, and the contract named the purchaser in its capacity as trustee, the inclusion of the recital appeared unnecessary. Had the recital not been included, the trust deed would not have referred to any specific property and stamp duty on the trust deed would have been $500 under s.58(1). A costly mistake!

You can order a Discretionary Trust from Townsends Business & Corporate Lawyers or for more information, call (02) 8296 6222.