This article was published in this month’s edition of the Law Society Journal of NSW.
George and Genevieve’s accountant has made an appointment for them see you mainly in relation to their daughter Helen. Following family unhappiness, George and Genevieve have agreed to transfer the family business company to Helen with their other child, Harry, receiving nothing until after their deaths. They don’t want Helen to take a second bite at the cherry when the time comes. They are to fix up their wills at the same time.

The accountant gives you details of the share transfer, including a copy, and sends you relevant documents including prior wills and a copy of George and Genevieve’s family discretionary trust deed. The accountant says the discretionary trust has a property portfolio eventually to go to Harry.

You discuss the issues with George and Genevieve generally. You observe that the share transfer – signed very recently – does not appear to have been stamped. Genevieve says that is correct because, according to their accountant, stamp duty on share transfers was abolished from 1 July 2016.

You say this is true, but that landholder duty has not been abolished. You explain that landholder duty in NSW applies when shares in a private company holding land valued at more than $2 million can attract ad valorem duty on transferring the shares on the same basis as a transfer of the underlying land ownership.

George says that the business premises are valued at well under $1 million. However the family trust does own other real estate valued at about $3 million.

All good, you say, and proceed to fix up the documents to everyone’s satisfaction.

A few weeks later, the accountant telephones again asking that you have a look at the deed because she is concerned about the vesting date. The first thing you see is that the Trust was created in 1976 with the vesting date being the earlier of 3 potential dates: 21 years after the death of the last survivor of Queen Elizabeth II alive when the trust was created; 40 years from the date of the trust deed; or whatever earlier date the trustee resolves.

A quick calculation shows that the deed will vest in just two months – in favour of George as the default beneficiary.

You tell the accountant this, who says that it must be fixed very quickly because there is a significant accrued capital gain which will be triggered if the trust vests.

She tells you that under ATO ruling TD 2012/21 the vesting date for a discretionary trust can be extended without triggering CGT provided certain rules are followed and quotes an example in the ruling involving a 1980 trust where the vesting date was extended for a further 30 years.

You point out that the deed has a wide enough amendment clause to extend the date, provided the rule against perpetuities is not breached. So the accountant says: go ahead and fix it for a further 30 years. Which you do by deleting the reference to Queen Elizabeth II and extending the 40 years to 70 years.

The stings

First problem – the transfer of shares to Helen.

It is true that section 146 of the Duties Act 1997 (NSW) defines a landholder as including a private company with NSW landholdings valued at $2 million or more, and that the family business company has land valued at less than this.

However section 159(2) provides that “A beneficiary of a discretionary trust is taken to own or to be otherwise entitled to the property the subject of the trust.” Futhermore, like many other discretionary trust deeds, all companies in which any other beneficiary is a shareholder are included as a class of potential beneficiaries.

George and Genevieve being potential beneficiaries of the trust as well as the shareholders in the company means the company is, for landholder duty purposes, a potential beneficiary of the discretionary trust.

This brings the land value above the $2 million limit and, because all the shares were transferred to Helen, stamp duty is calculated on the full land value, unless the Commissioner can be persuaded, as provided by section 163H, it would be unjust and unreasonable to do so.

Second problem: amending the discretionary trust deed.

It is true that section 7 of the Perpetuity Act 1984 (NSW) provides for a perpetuity period of 80 years, however section 4(1) specifies that ‘[e]xcerpt as provided by sections 11, 12 and 13, this Act does not apply in relation to a settlement taking effect before the appointed day’. The appointed day was 31 October 1984 and unfortunately neither section 11, 12 nor 13 has anything to do with the problem.

The old rule against perpetuities, applicable to pre-1984 trusts, requiring a trust to vest within 21 years of the death of a life in being therefore still applies and your attempted extension of the vesting date didn’t work because it did breach the rule against perpetuities. If the original 40-year period is gone by, the trust has vested and capital gains tax triggered as if the real estate was sold at market value.

Takeaway points

1. Always be careful when dealing with trusts.

2. Tax law is federal but trust law is state.

3. CGT exempt doesn’t necessarily mean NSW duty exempt.

By Jim Main

This article is general information only and should not be relied on without obtaining further specific information.