It is common for trusts to own real estate as a means of asset protection. As circumstances change, the trustees may decide to transfer the real estate to one or more beneficiaries of the trust. Typically, any transfers of real estate are subject to land transfer duty unless an exemption applies. Section 36A(1) of the Duties Act 2000 (VIC) (“the Act”) provides that no duty is chargeable in respect of a transfer of a dutiable property that is subject to a discretionary trust to a beneficiary if certain statutory requirements are met.[1]
Perhaps the most litigated issue in relation to this stamp duty exemption is s 36A(1)(e); ‘the Commissioner is satisfied that the transfer is not part of a sale or other arrangement under which there exists any consideration for the transfer’. Consideration being the key word here. However, what is constituted to be consideration? Unfortunately, the Act fails to provide a comprehensive definition of consideration; it merely states that consideration may be monetary or non-monetary. Over the years, case law has widened the scope of what constitutes ‘deemed consideration’. However, what remains consistent, is that the State Revenue Office generally takes a wide view of what is ‘consideration’.
What is Consideration?
Broadly speaking, consideration is any amount provided, whether monetary or non-monetary, for the purposes of facilitating a contractual transaction.
There is a common misconception that where a transfer from a discretionary trust to a beneficiary is concerned, only instances where the beneficiary is providing something in exchange (such as money) for the property will be noted as consideration. However, several transactions between the trust and beneficiaries are held to be ‘deemed consideration’ and will not satisfy the s36A(1)(e) requirement.
Deemed forms of consideration
It has been widely accepted that the following examples may be captured as deemed consideration:
1. Beneficiary Loans
There has been extensive case law on the forgiveness of beneficiary loans as deemed consideration under s 36A(1)(e). This is relevant where the trustees of the trust have borrowed money from the beneficiaries, and this is listed as a liability of the trust. Subsequently, upon the distribution of property to the beneficiaries, the loan is forgiven, and the trust no longer carries this liability. A recent case that discussed this issue was Baullo v Commissioner of State Revenue [2023] VCAT 1164 (“Baullo”).
The Baullos were the trustees and beneficiaries of the J.T. Family Trust (“the Trust”). The Baullos purchased a property in Pascoe Vale South in their personal capacities, and subsequently transferred the property into the Trust. The purchase price was partially funded by a loan from the beneficiaries. Upon the Baullos, in their capacities as trustees under the Trust, deciding to transfer the property to themselves in their capacities as beneficiaries, the loan was extinguished.
There was no express evidence or documentation that stated the debt was forgiven, however VCAT looked to the financial statements of the Trust to determine that the beneficiary loan was no longer listed as a liability following the transfer. This forgiveness of the loan was deemed to be consideration and the Baullos were unable to receive the s36A(1) duty exemption.
2. Mortgage Liabilities and deficit of trust
Property that is subject to a registered mortgage may also be an issue when applying for this exemption. This is because the repayment of such mortgage liability immediately prior to, or in connection with, the transfer of real estate from the trust to the beneficiary may be construed as consideration. It is important to note however, that the refinance of a mortgage by the beneficiary whom is to receive the property, for the same or a greater amount than what was secured against the property prior to the transfer, is not necessarily fatal. The primary issues to be considered with the discharge of a mortgage liability are as follows:
a) if the mortgage is not refinanced and instead discharged by the trust prior to and in connection with the transfer, will the trust be placed into a technical deficit in which the trust does not have sufficient equity to discharge its obligations?
b) if the mortgage is to be refinanced by the beneficiary, will it be for an amount that is less than the amount secured prior to the transfer.
If the answers to the above questions are yes, then this will likely be problematic in securing the duty exemption. The State Revenue Office will review the last three financial statements for the trust to ensure that the trust has sufficient equity once the property is transferred out to the beneficiary, to discharge the remaining liabilities of the trust. Transfers of property that put the trust into a technical deficit, are typically denied by the State Revenue Office.
3. Unpaid Present Entitlements
The forgiveness or wavier of Unpaid Present Entitlements (“UPEs”) can also be problematic when applying for this exemption, as the State Revenue Office may constitute the forgiveness of such UPE as consideration. Caution must be had to the forgiveness of UPE’s and the timing of such forgiveness, to not preclude the transfer from being assessed as non-dutiable. If the forgiveness of UPE occurs in connection with the transfer and to avoid the trust being in a technical deficit on the rollout of the property to the beneficiary, this can be fatal to the success of the duty exemption application.
4. Proceed with Caution
It should never be assumed that a transfer from a trust to a beneficiary will result in a duty exemption. Considering the financial statements for the trust and its liabilities to determine whether the trust will consist of sufficient equity to meet its liabilities once the relevant property has been rolled out to the beneficiary of the trust, is an essential first step in the assessment of the applicability of the s36A duty exemption. It may be that a strategy needs to be formulated around the timing of the transfer and the management of any ‘deemed consideration roadblocks’ to avoid the imposition of a duty assessment. If you believe you are eligible for a s36A duty exemption, we encourage you to contact our team who can advise you further in this regard.
[1] S36A(1) Duties Act 2000 (VIC).