Snapshot
- Never assume that just because its farming land and your clients are related that s274 will apply
- Read the section carefully (and every time) especially if there are trusts, companies and superfunds involved
- Consider the ruling if an aspect of s274 is unclear
You had been acting for Bruce and Rhonda over the last twenty or so years and have been trying to push them to consider their succession planning. They were both in their early 80’s and still working on their farm operated by their family trust, although illness and age have slowed them down quite a bit.
They have one daughter, Sally, who is married with 5 children and lives on a property nearby with her husband. Sally works 5 days a week on the farm doing most of the physical work and the admin these days.
Bruce had always been concerned about his son in law, he never really trusted him. He did not want to risk losing the farm.
When Bruce died almost 12 months ago, Rhonda regretted not sorting things out sooner, it was now all left up to her to fix.
Rhonda comes into your office and tells you that she wants the farmland transferred to Sally but, in a trust, because that’s what Bruce would have wanted. Rhonda ultimately wanted the land to be for the benefit of her five grandchildren.
“That’s easy,” you tell Rhonda, “section 274 of the Duties Act has been amended since I last saw you and Bruce. It is now much more generous and allows farms to be transferred into trusts, so we can set up an asset protected trust controlled by Sally and transfer the farm into the trust for the benefit of your grandchildren”.
Rhonda and Bruce’s superfund also owned some of the land which had been a nuisance given the increase in land values and the cash payments required to meet the annual minimum pension requirements.
To simplify things, you suggest to Rhonda that she transfers that part of the land out of the superfund as an in-specie contribution to herself, and then she can deal with it in her will.
As you prepare all the relevant documents you also make Sally a director and shareholder of the corporate trustee of the operating entity, as you remembered that she needed to have control as required by s274.
Once everything is signed, you gather the evidentiary requirements and lodge the applications in the portal.
After a few weeks and incidentally the day Rhonda was coming back in to see you, you receive an email from the portal advising there is a letter from eDuties to be downloaded.
First Sting
S274(4) has not been satisfied. Although Sally became a director and shareholder of the trustee company of the operating trust, Rhonda was still in control of the operating entity as she was the appointor of the trust. Subsection 5AA states that:
(5AA) A reference in this section to a business carried on by a person includes a reference to a business carried on by a company, or under a trust, that is controlled by the person.
Revenue NSW Ruling DUT 050v2 at paragraph 49 makes it clear that in the case of a discretionary trust it is the appointor that is the controller:
Second Sting
S274(2) has not been satisfied. You don’t immediately realise why because Sally was in control of the new landholding trust you had prepared for her. But then suddenly it dawned on you, this subsection is about the person ‘directing the transferee’ and does not relate to control, but rather as to the takers in default eg. to satisfy being a member of the family:
(b) for a transferee acting in the capacity of trustee of a discretionary trust–a person or persons who are entitled, as takers in default of appointment, to not less than a 25% interest in the capital of the trust, being an entitlement–
(ii) for a transferee–that exists for at least 3 years after the date of the transfer
Third Sting
This one related to the transfer of the land owned by the superfund.
Rhonda is the sole member of the superfund so she is the person ‘directing the transferor’.
The person ‘directing the transferor’ and the transferee are the same person so s274 cannot apply.
These stings are in relation to stamp duty only, there are of course other issues to consider including CGT.
Snapshot
- Never assume that just because its farming land and your clients are related that s274 will apply
- Read the section carefully (and every time) especially if there are trusts, companies and superfunds involved
- Consider the ruling if an aspect of s274 is unclear
Author – Michaela Schmidt