Stamp Duty: Declaration of Trust in an Agreement for Sale by Paul Anderson | February 2007 Area of Expertise | Business & Property
The Chief Commissioner has recently released Ruling Number DUT31 dealing with the circumstances in which a contract for the sale of property may be liable for stamp duty both as an agreement for the sale or transfer of dutiable property and as a declaration of trust over the same property. This ruling replaces similar statements in Revenue Rulings SD109 and SD120.
Background Chapter 2 of the Duties Act 1997 imposes duty on “dutiable transactions”, including an agreement for the sale or transfer of dutiable property (Section 8(1)(b)(i)), and a declaration of trust over dutiable property (section 8(1)(b)(ii)). A declaration of trust is defined in section 8(3) to mean: “Any declaration (other than by a will or testamentary instrument) that any identified property vested or to be vested in the person making the declaration is or is to be held in trust for the person or persons, or the purpose or purposes, mentioned in the declaration although the beneficial owner of the property, or the person entitled to appoint the property, may not have joined in or assented to the declaration”. Section 294 of the Act provides: “An instrument that contains or relates to several distinct matters for which different duties are chargeable under this Act is to be separately and distinctly charged with duty in respect of each such matter, as if each matter were expressed in a separate instrument.”
LPI NSW One of the functions of Land and Property Information NSW (“LPI”) is to register land titles and transfers. It is common knowledge that LPI does not recognise trusts. For example, John Smith is Trustee of the Smith Family Trust. If the Trust purchases a property, LPI will not register the owner as “The Smith Family Trust” or “John Smith as Trustee of the Smith Family Trust”. The only registration LPI will recognise is “John Smith”. By extension, if a Transfer is presented to LPI showing the Transferee as “John Smith as Trustee for the Smith Family Trust”, the LPI will only register the title in the name of “John Smith”.
Decisions In Farrar v Commissioner of Stamp Duties (1975) 5 ATR 364, Sheppard J held that the description of the purchaser “as trustee for John Joseph Farrar” amounted to a declaration of trust on the basis that without those words, there was nothing binding the purchaser to hold the land purchased on trust. Accordingly, duty was payable in respect of the document as both a contract for sale and a declaration of trust. The sting for the purchaser was that he was effectively liable to pay stamp duty twice.
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A provision of a document is more likely to be held to be a “distinct” matter within section 294 of the Duties Act if it does more than record obligations imposed by law (see Commissioner of Stamp Duties (NSW) v Pendal Nominees Pty Ltd & Anor (1989) 167 CLR 1 on Section 17 of the Stamp Duties Act 1920, which was the equivalent of section 294 of the Duties Act). Provisions in the form of a covenant, the use of mandatory language and the creation of enforceable rights in parties other than the beneficial owner are instances in which the provisions of a document will go beyond the general law. Another indication is where the agreement for sale and the declaration of trust would have been assessed separately had they been expressed in different documents.
Ruling Consistent with the decisions referred to above, a contract for sale will be considered to be liable to duty as a declaration of trust, in addition to the duty payable as an agreement for sale or transfer, where the purchaser is described: a)
as trustee for a named person or persons,
b)
as trustee for a named class of persons (for example, “the children of X”, or “the beneficiaries of the XYZ Trust”),
c)
as trustee for a named corporate body,
d)
as trustee for a named unincorporated body.
A declaration in a contract that does not identify the person for whom, or the purpose or purposes for which, the property is to be held will not constitute a declaration of trust for stamp duty purposes. Further, words in a contract that are merely descriptive of the purchaser’s capacity as trustee of an existing trust would not amount to a declaration of trust for stamp duty purposes. A contract will not be considered to be liable to duty as a declaration of trust where the purchaser is described: a)
as trustee,
b)
as trustee for the estate of a named person,
c)
as trustee for a named trust,
d)
as trustee for a named superannuation fund,
e)
as trustee for a company to be formed or incorporated.
Alternative In the light of some of the subtle distinctions involved in the Ruling, one alternative is to not make any mention at all of the Trust in the contract, i.e. to simply purchase in the name of “John Smith”. This approach is clearly acceptable to LPI NSW. However, it is possible that at some point John Smith will be obliged, e.g. by the Australian Taxation Office, to prove that the property is a trust asset held on behalf of named beneficiaries rather than a personal asset of John Smith. Such obligation can be discharged by:
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•
producing a contemporaneous trust minute indicating that the Trust has acquired the asset; and
•
producing bank statements showing the price for the asset and all associated expenses were paid from the Trust’s bank account.
In these circumstances, courts of equity will recognise that the asset is held in trust and, if necessary, impose such an obligation upon the trustee.
Conclusion The Ruling does not break new ground but is a timely reminder of the need to be careful in describing a purchaser of dutiable property who is acting in a trustee capacity. Some of the distinctions drawn in the Ruling are fairly subtle and the consequences of a mistake can be expensive. The alternative suggested in this paper is to avoid the issue completely wherever possible but still put in place procedures to protect the Trust and its beneficiaries.
For more information, please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au
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