Baullo v Commissioner of State Revenue [2023] VCAT 1164: Beneficiary Loans, Land Transfer Duty, and Discretionary Trusts

The VCAT ruling of Baullo v Commissioner of State Revenue [2023] VCAT 1164 (Baullo), has reaffirmed the position of the State Revenue Office (SRO) that forgiving beneficiary loans in relation to a distribution of property from a discretionary trust to a beneficiary will prohibit utilisation of the exemption to land transfer (stamp) duty afforded by section 36A of the Duties Act 2000 (Act).

On the 2nd of October we published an article on the mechanics of section 36A of the Act (LINK). 

Background

Section 36A of the Act provides an exemption to land transfer (stamp) duty, where real property is distributed in specie from a discretionary trust to a beneficiary for nil consideration, i.e. the trust cannot sell the property to a beneficiary and expect the exemption to apply.

If beneficiary loans or unpaid present entitlements (UPEs) need to be forgiven as part of the transfer, the SRO will deem this to be consideration, and accordingly the exemption will not apply. Baullo is the most recent example of this principle being tested.

Facts

Father (Tony) and son (Jordan) purchased a property together for $905,000 with the intention to develop the site into two separate units. The deposit and contract were signed personally, and after receiving advice from their accountant, the contract was nominated to a newly established discretionary trust (Trust).

As the Trust did not have a separate bank account, Tony and Jordan personally contributed $156,846 (Contribution) with the balance of the purchase price being financed by a bank. The Contribution was entered into the Trust’s financial statements as ‘beneficiary loans’.

Shortly after settlement, the property was distributed out of the Trust, the Trust was wound up and the corporate trustee was deregistered on the understanding that it had no assets or liabilities in its name.

On the distribution of the property the SRO assessed land transfer (stamp) duty on the basis that the forgiveness of the beneficiary loans excluded the application of the exemption available pursuant to section 36A of the Act.

Issue

The ultimate issue was whether the forgiveness of the loan, upon transfer of the land, amounted to consideration.

The applicants/beneficiaries argued that not only was there no loan provided to the Trust, but if there was, then there was no evidence to suggest that the loan (being the Contribution) was forgiven.

The Commissioner submitted, and Senior Member Tang AM agreed, that the method of payment by way of advancements, represented a loan that was subsequently extinguished upon the transfer of the property. Additionally, that the advance that was labelled as ‘beneficiary loans’, was a factor which VCAT found to be adverse to the applicant’s case.

Findings

VCAT determined that the arrangement reflected a loan between the parties, whereby the ‘extinguishment of the beneficiary loans’ amounted to consideration, and therefore the eligibility for section 36A was not met. Accordingly, land transfer (stamp) duty was issued on the transfer.

Implications

Although consideration can take multiple forms, this case reaffirmed that forgiveness of a loan is treated as consideration for the purpose of the Act. 

The ruling in this case confirms the status quo. Expert advice is required before applying for any duty exemption, and clients and advisors should first consider the following:

• Whether there are any beneficiary loans or UPEs owing to beneficiaries at the time of the proposed distribution.

• If money has been paid by the beneficiaries to the trust, do they need to be forgiven or can those debts be paid with other assets or income of the trust?

• whether the payments are considered a loan or a gift of capital.

• If the SRO seek further information before completing their assessment, tread carefully as the answers will be important.

• Seek expert advice in relation to duty applications.

It is important to confirm the duty position prior to actioning any distribution of property to beneficiaries. If you require assistance or wish to obtain further information in relation to exemptions to land transfer (stamp) duty, please contact Alasdair, Joseph or Ben.

Alasdair Woodford
Principal Lawyer
T: 03 5225 5217| M: 0436 456 144
E: awoodford@ha.legal

Joseph Flanagan
Associate
T: 03 5226 8504
E: jflanagan@ha.legal

Ben Smith
Graduate Lawyer
T: 03 5225 5262
E: bsmith@ha.legal