Hold on to your trustee duties – Court of Appeal clarifies dutiable transfer exemption requirements

A recent Court of Appeal (Court) decision has clarified the application of section 35(1)(a) of the Duties Act 2000 (Vic). This section provides an exemption from transfer duty that applies when property is transferred to a trustee to be held solely as trustee of the transferor without any change in the beneficial ownership of the property.

In MD Commercial Pty Ltd v Commissioner of State Revenue [2019] VSCA 295, the Applicants were two brothers who inherited interests in a property. Each brother transferred his interest into a trust of which he was the sole beneficiary.

The transfers were initially deemed exempt from transfer duty under section 35(1)(a), and the property was subsequently subdivided, developed and sold. The Commissioner of State Revenue (Commissioner) then retrospectively determined that the exemption did not apply, arguing that the exemption requires the property to be ‘held solely’ for the transferor and that in this case, the trust deeds permitted the trustees to do more than merely ‘hold’ the property for the transferors by allowing for the subdivision and sale of the property.

The Court clarified the requirement that the property be ‘held solely’ for the transferor, specifying that the property must be held for the transferor as beneficial owner, and for no-one else, for as long as the trust exists. The trustee cannot create further beneficiaries to the trust; but is not precluded from subdividing and selling the property.

Additionally, the Court stated that while trust deeds that create an immediate and binding obligation to develop and sell the property are not the type of trust the exemption is designed to encompass, trust deeds that merely facilitate future possibilities of sale or development can qualify for the exemption under section 35(1)(a).

Accordingly, a trust deed that provides the beneficiary a broad discretion to require the trustee to act in accordance with its future directions and contains broad trustee powers, including deriving income from the property to form part of the trust fund, is likely to comply with section 35(1)(a) so long as trust property is held solely for the benefit of the transferor.

However, a trust deed that shifts the beneficial entitlement to the property, or alters the nature of the interest (for example, by creating a right to money instead of a right to land), or allows for the beneficiary’s interest to be dispersed or diluted among other entities, is unlikely to satisfy the test in section 35(1)(a).

For more information on seeking the exemption set out above or for general tax and trust advice, please contact:

Rod Payne
Principal
T: 03 5226 8541
E: rpayne@ha.legal

Alasdair Woodford
Senior Associate
T: 03 5225 5217
E: awoodford@ha.legal

Alexander Gulli
Lawyer
T: 03 5226 8573
E: agulli@ha.legal