Jane and James have been clients of yours for the last ten years. You enjoy working with them because they seem quite an adventurous couple, so you are thrilled when James calls you to say he would like to meet up with you to discuss his new business idea.James tells you that he and some of his mates are going to set up a brewery in their local town and that he will become the director of the new company which is going to run the operation. James and Jane are concerned about James’ personal liability and think it’s wise for James to retire as trustee of their family trust. You are familiar with their trust; it owns several units at the coast and Jane and James, along with Jane’s father, are the trustees, and the beneficiaries are Jane, James, their children and Jane’s father.
Jane and James considered appointing a corporate trustee but didn’t want to pay further set up and ASIC fees, plus they are in a rush to get things done. You prepare a deed of change of trustee and transfers of the properties from James as retiring trustee to Jane and her father as continuing trustees. James tells you that he has already discussed CGT with his accountant, and as there is no change in beneficial ownership you tell James that there is $50 nominal duty payable on the transfers.
The documents are signed after which James remembers the document that the accountant gave to him. James shows you the document dated 12 years ago, which states that the trustees of the family trust declare that the property in Orange registered in the name of Jane’s father is held in trust by him for the family trust. You don’t know anything about the property in Orange and James tells you that their previous solicitor had made an error when the property was initially purchased, which the accountant picked up years later and then prepared the document to note the true ownership. You warn James that this document could be construed as a declaration of trust, and if so, will be liable for duty as it is unstamped. After a lengthy discussion of the potential liability and risk of non-disclosure, James agrees it should be disclosed to the OSR and you also lodge the change of trustee for stamping.
You receive a letter from the OSR a week later requesting a valuation for the Orange property as at 2005 (the date of the declaration) and the interest payable between then and now, however no penalty interest is imposed due to the disclosure. You are glad that you had warned James about the liability and you tell him that the OSR confirmed the document is a declaration of trust, as you had suspected. Jane and James are fine with this.
You receive a second letter from the OSR requesting valuations of the units at the coast and payment of ad valorem duty, referring to section 54 of the Duties Act 1997. You are aware that this section contains the provisions for change in trustees and in a mad panic bring it up on your screen. Your heart skips a beat as you read the part most relevant to family discretionary trusts being subsection (3) which imposes a duty of $50 on a transfer of dutiable property on, amongst other things, the retirement of a trustee if the Chief Commissioner is satisfied that “(a) none of the continuing trustees remaining after the retirement of a trustee is or can become a beneficiary under the trust..”
You know all too well that if the Chief Commissioner is not satisfied that is the case duty is payable as if it was a transfer to a beneficiary. You look at section 57 of the Duties Act which imposes a duty of $50 on such a transfer, but you quickly realise that is only if all the property was in the trust when it was first declared and of course you know that the only property in the trust when it was declared was the initial $10. You shudder at the thought of what those units at the coast are worth now.
Jane and James will not be fine with this.
Author: Michaela Schmidt
This article is general information only and should not be relied on without obtaining further specific information.