By Michaela Schmidt
Snapshot
- Always confirm the purchase entity with your clients and, if in individual names, confirm whether they are acting as a trustee.
- Best practice is to always run the purchase entity by your client’s accountant.
- Don’t rush transactions through: despite what some people think, the world doesn’t end at Christmas.
Jack and Jill are new clients who were referred to you by an accountant, Fred, who you have several mutual clients with.
It’s three days before the Christmas break and, although it’s always good to get new clients, you wish you had the last couple of days to finalise the urgent things, wind down and do a bit of an office tidy-up.
Jack and Jill come in first thing and are very excited to inform you they have finally secured their dream holiday home. You feel a twang of jealousy as you recognise the address; it is a beautiful house, up on a hill and overlooking the Murrumbidgee River.
‘That’s great, congratulations,’ you say, ‘we’ll just need to wait for the contract.’ But just as you say that Jack reaches into his bag and pulls it out. ‘The seller thought it would be quicker if he just gave the contract straight to us, we all want to settle before Christmas,’ Jack says.
You do a review on the spot and provide your usual advice as it all looks very straightforward. You note Jack and Jill are the named purchasers, and you have them sign the contract and send them on their merry way.
As they walk out, they tell you they will see you in the new year to discuss their estate planning and that Fred will send through some documents for review soon, including a copy of their trust deed to ensure it covers off on the foreign beneficiary clause. You wonder for a second why they mentioned this but then move on.
You send the contract off for exchange immediately and, not long afterwards, receive an email from the vendor’s solicitor with the exchanged contract and a request for an early settlement date.
Another email comes in at the same time, this time from Fred, with several documents attached and with the subject line: ‘JJ Family Trust purchase of property’.
With confusion, you read the email and come to the realisation that the purchaser is supposed to be the JJ Family Trust. You note there was a change of trustee last year—from Jack and Jill to a corporate trustee—and now also realise why the foreign beneficiary clause was mentioned.
‘Oh well,’ you think to yourself. Section 18(3) of the Duties Act 1997 (NSW) will come to the rescue, and they will avoid any double duty issues; they are all related parties. You give the exchanged contract to your conveyancer and ask very nicely if it can be settled before Christmas.
The Sting
Firstly, the conveyancer is not happy with your request to settle before Christmas, there are 13 others in the queue! Nevertheless, the conveyancer proceeds.
Secondly, you haven’t interpreted s 18(3) very well, particularly subsection (d)(ii), as the purchaser is a trust. Revenue Ruling DUT010v2 then needs to be looked at to show how ‘related persons’ is defined.
At this stage you’re still feeling confident as you know Jack and Jill are the directors and shareholders of the trustee company, and beneficiaries of the trust. How can they not be ‘related persons’?
You begin to read the ruling which states:
‘If a transfer is not in conformity with an agreement, $10 duty will still be payable if the transfer would have been in conformity but for the transferee not being the purchaser under the agreement, provided the purchaser under the agreement and the transferee under the transfer were related person at the time the agreement was entered into’ (at [12]).
But then you read on and the problem becomes apparent at paragraph 14(d) which states that, according to the Duties Act, the definition of ‘related persons’ includes a natural person and a trustee if the natural person is a beneficiary of the trust (not being a public unit trust scheme or discretionary trust) of which the trustee is a trustee.
The trust here is of course a discretionary trust and so you have a problem. Your immediate supervisor is a grinch, but you have no choice but to approach him for help.
At least it’s not all bad news because you find the foreign beneficiary exclusion clause in the deed. At the same time, you wonder why Jack and Jill don’t want to purchase the property in their own names because they would save up to $17,200 in land tax per year—maybe that is your out?