Be careful when varying a trust deed for a trust that holds property! A change in ‘beneficial ownership’ may result in transfer duty

Earlier this year, the NSW Civil and Administrative Tribunal (Tribunal) applied the ‘change in beneficial ownership’ provisions contained in the Duties Act [1] for the first time, determining that these provisions can, in certain circumstances, apply to trust property following a variation of the trust. Specifically, the case confirmed that varying a trust deed for a trust which holds ‘dutiable property’ can attract the imposition of ‘ad valorem’ transfer duty under the Duties Act where the variation has altered the nature of the beneficiaries’ interests.

The ruling in Baxter v Chief Commissioner of State Revenue [2] confirmed that the variation of the relevant trust deed, which resulted in one beneficiary becoming presently entitled to all income and capital of the trust, constituted a ‘change in equitable interests’ and accordingly, a change in beneficial ownership of the trust property (which included two properties). Duty was therefore imposed on the ‘transfer’ of the two properties to the now sole beneficiary of the trust.

This article outlines the facts established by the court that could result in duty being applied, and the relevant considerations which trustees will need to be aware of in light of the findings of the Tribunal.

Relevant facts

The Windsmere Family Trust (Trust) was established in 2021. The Trust was a discretionary trust under which the trustee had absolute discretion in determining how the Trust’s income and capital was to be distributed to the two ‘named beneficiaries’ and other ‘eligible beneficiaries.’ Following the establishment of the Trust, the trustee acquired two properties in Surry Hills, New South Wales.

On 21 November 2022, one of the properties was transferred to one of the named beneficiaries of the Trust, which resulted in Revenue NSW issuing a duties’ notice assessment imposing ad valorem transfer duty.

The next day, the terms of the trust deed of the Trust were varied under a Deed of Variation, so that it in essence became a ‘fixed trust’, under which the other named beneficiary (Applicant) became the sole beneficiary and accordingly, became presently entitled to all income and capital of the Trust. Importantly, the definitions clause of the trust deed was amended so that it solely referred to the Applicant as the sole named beneficiary.

On 31 March 2023,Revenue NSW issued duties notices imposing ad valorem transfer duty in relation to the two Surry Hills properties as separate ‘dutiable transactions,’ on the basis that the Applicant became entitled to both properties upon the creation of the fixed trust following the variation of the trust deed.

This decision was based on the proposition that the Deed of Variation resulted in a change in ‘beneficial ownership’ of both properties. The two duties notices imposed on the Applicant were in addition to the initial duty imposed on 21 November 2022.

The Applicant objected to the duty assessed by Revenue NSW.  After rejecting the Applicant’s objection to the notice issued on 31 March, Revenue NSW then reassessed the duty payable in respect of the trust property as a higher amount, on the basis that the two ‘separate’ transactions, under which the Applicant obtained the beneficial ownership in each property, constituted a single ‘dutiable transaction.’

The Tribunal’s decision in summary

The Applicant, sought administrative review of Revenue NSW’s duty assessments, and submitted to the Tribunal that the Deed of Variation did not result in a change in beneficial ownership of the trust property. The Applicant submitted that they did not obtain ‘ownership’ of the properties following the variation, given the Applicant’s interests in the Trust assets were not ‘absolute, vested or indefeasible’.

However, the Tribunal rejected these submissions. The Tribunal held that in determining whether a change in beneficial ownership has occurred, it is necessary to assess how the Applicant’s interests were affected by the variation, and the nature of interests held before and after the variation. Given the features of the Trust changed so that the discretionary trust essentially became a fixed trust under which the Applicant had a present entitlement to all income and capital of the Trust (subject to the indemnification of the Trustee), it was determined that there was a change in beneficial ownership in relation to the Trust property.

The Tribunal also found, in response to submissions made by the Applicant concerning the wording of the Deed of Variation, that the change in wording from ‘named beneficiaries’ (plural) to ‘named beneficiary’ (singular), and adoption of singular form through the document, illustrated the intention behind the variation. Ultimately, the Deed of Variation changed the Applicant’s equitable interests, ensuring that there was a ‘change in beneficial ownership’ in ‘dutiable property.’

However, the Tribunal determined that the property which was transferred to the previous beneficiary on 21 November 2022 did not remain subject to the Trust when the Deed of Variation was executed, ensuring the relevant imposition of transfer duty on this property did not apply.

What does the Tribunal’s decision mean for trust deed variations?

The Tribunal’s decision confirms the importance of considering how the interests of beneficiaries may be affected by a variation of a trust’s trust deed. In particular, when a discretionary trust that holds ‘dutiable property’ is varied, such that the nature of the beneficiaries’ interests are altered, such a variation could attract the imposition of transfer duty in relation to the properties held by the trust.

The Tribunal’s decision is not only relevant for trusts that hold property in New South Wales, but also for other jurisdictions. It is important to exercise caution when considering the implications of varying beneficial ownership under a trust deed. However, it is worth noting that the decision also suggests that tribunals will adopt a ‘substance over form’ approach when assessing any variations of trusts, thereby providing some relief in circumstances where a drafting error may have unintentionally caused a change in beneficial ownership. 

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

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[1] Duties Act 1997 (NSW)

[2]  [2024] NSWCATAD 153