Snap shot:
- Take care when preparing change of trustee documents.
- Consider the landholder duty provisions whenever shares in a company or units in a unit trust are being transferred in landholding entities.
You are sitting in your office tucking into a quick lunch before your next client meeting, when your phone starts buzzing AGAIN – it is 4 o’clock and you have not stopped – 30 June is approaching and you have quite a few succession matters that need to be exchanged prior to then. You are starving and skipped lunch yesterday so ignore your phone, but it keeps buzzing away so you reluctantly put down your lunch down and answer it.
Your receptionist, Molly, tells you your client Tom is on the line and needs to speak with you urgently about the most recent matter you completed for him.
Tom has been a good client and is pretty easy-going most of the time, so you know he must be worried about something to be demanding an urgent conversation.
Sighing you pick up the line, resigning yourself to the fact that another hungry afternoon awaits.
You acted for Tom not long ago in relation to preparing change of trustee documents for his family trust. Tom and his wife, Suzie were the trustees but had decided to change to a corporate trustee on the advice of their accountant.
The only asset of the trust were shares in a private company that owned commercial properties. You prepared everything required to change the trustee and transfer the shares to the new trustee and finalised the matter with no dramas.
Tom tells you that he has received a letter from Revenue NSW about the transfer of the shares in the company from the old trustee to new trustee.
“That’s weird,” you say to Tom, “duty generally isn’t payable on the transfer of shares, and even if it was the transfer was done because of a change of trustee and duty is only about $100 in that case.”
Tom says he’ll email the letter for you to review.
It arrives quickly in your inbox and you open it straight away. The first point Revenue NSW makes is, that when the change of trustee deed was prepared there were no irrevocable clauses included in relation to the new trustee:
- being prohibited from becoming a beneficiary of the Trust;
- irrevocably renouncing any present interest in the Trust, or
- covenanting to renounce any further interest which may arise.
Further, in the deed establishing the trust, any company that Tom and Suzie are the majority shareholders in can be a beneficiary of the trust. They are the majority shareholders in the new corporate trustee.
Therefore the requirements of section 54 (3) of the Duties Act 1997 that imposes nominal duty of $100 when there is a transfer of dutiable property as a consequence of the change of a trustee, have not been satisfied.
But, you think to yourself, the only thing the trust owned were shares in a company, which isn’t dutiable property, so what’s the problem?
The Sting
Your stomach drops as you read through the rest of the letter and it dawns on you that you hadn’t considered the landholder duty provisions.
Whilst generally, the transfer of shares in a company are not liable to duty (as shares are not considered dutiable property) where you have a private company that has landholdings in NSW worth more than $2million, an acquisition of a significant interest in such a private company is liable for landholder duty under Chapter 4 of the Duties Act.
The company owns commercial land in NSW worth more than $5m, so under Chapter 4 of the Duties Act, the company is considered a landholder (section 146 (1) and (2)).
Duty is chargeable when there is a ‘relevant acquisition.’ A ‘relevant acquisition’ arises when a ‘significant interest’ is acquired in a landholder.
A ‘significant interest’ means, in the case of a private company landholder, if all the property of the company is distributed, the person is entitled to 50% or more of the property in the company.
As the retiring trustees Tom and Suzie transferred 100% of the shares in the company to the new corporate trustee, therefore the new trustee acquired a ‘significant interest’ in a landholder.
Under section 163A(1)(f) of the Duties Act, duty of $100 is payable on a transfer as a consequence of a change is trustee if:
“the acquisition of an interest in a landholder would be chargeable with duty of $100 under section 54 if the property being acquired were land in New South Wales and the Chief Commissioner is satisfied that the acquisition is not part of a scheme to avoid duty under this Chapter”
Section 54 (3) of the Duties Act provides that (extracting the relevant parts):
“Duty of $100 is chargeable in respect of a transfer of dutiable trust property to a person 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—
- none of the trustees of the trust after the appointment of a new trustee is or can become a beneficiary under the trust…..
If the Chief Commissioner is not so satisfied, the transfer is chargeable with the same duty as a transfer to a beneficiary under and in conformity with the trusts subject to which the property is held, unless subsection (3A) applies.”
Where the requirements of this section are satisfied, a transfer of any dutiable trust property from a retiring trustee to a new trustee is liable to duty of $100.
If the property (i.e. the shares) being acquired by the new trustee were land, because the change of trustee deed failed to include the clauses required to satisfy s54 (3), the section does not apply to the transfer of the shares from the old to new trustee.
So it seems the transfer of shares from Tom and Suzie to the new corporate trustee is liable for landholder duty……
You prepare yourself to deliver the news to Tom.
Author: Amanda Tully – Lawyer/Director