Defective clause in trust deed triggers duty surcharge

State and federal tax provisions often result in different tax outcomes for trustees depending on what type of trust is involved.

For example, the NSW land tax rules provides for a land tax surcharge on unit trusts that are “special trusts” rather than “fixed trusts”.

We often see what are otherwise ‘standard’ unit trusts, not meeting the requirements of a “fixed trust” under those specific rules – that is, unit holders do not have a present right of beneficial enjoyment of the land of the unit trust.   As a result, in order to avoid that surcharge, the trustee will have to amend their trust deeds to ensure that the trust is a “fixed trust” under those rules.

However care is needed to ensure that any ‘saving clause’ intended to create a fixed trust does indeed achieve that end. 

The decision of Marius Street Developments P/L ATF The Gerryjohn Unit Trust v CCSR [2020] NSWCATAD 291, considered whether the unit trust in question was a “special trust” or a “fixed trust”. The taxpayer had inserted the following “saving clause” in the unit trust’s trust deed to ensure that was the case:

 “Fixed Trust

Notwithstanding any other provisions of this Deed, the unit holders are presently entitled to all of the income from any land owned by the Trust after the payment of the expenses properly incurred by the trustee in the authorised administration of the trust. Further the unit holders may require the trustee to wind up the trust and distribute either the land or the net proceeds of the sale of the land…”

The Tribunal found that the saving clause did not in fact cause the unit trust to be a fixed trust because:

• The clause did not create a right of possession of the unit trust’s land to the unit holders;

• The “notwithstanding any other provisions of this Deed” phrase only applied to the first sentence of the clause and not the second sentence; and

• The clause did not effectively override other provisions in the trust deed that prevented the unit holders from having a present right of beneficial enjoyment of the land.

For assistance to draft trust deeds to meet specific legislative provisions and in particular when using “saving clauses”, contact:

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

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