Changes to the Victorian Duties Act

The law on 'duty exempt' distributions of trust property to beneficiaries has been clarified - with effect from 11 October 2006.
 

Until the new law, there had been debate about whether a distribution to a beneficiary was exempt from duty if the beneficiary took a transfer of trust property subject to a mortgage. If such transfers are treated as a dutiable transfer of land, the duty can vary from 1.4% to 5.5% of the land's value.

The new provisions clarify the situations in which transfers to beneficiaries will now be exempt from duty. Although the beneficiary will now need to satisfy the Commissioner that the transfer is not part of a 'sale or other arrangement' for consideration, merely taking a transfer subject to a mortgage will not attract the duty as 'a transfer for consideration'.

The old law is in section 36 of the Duties Act 2000. The new law is in sections 36, 36A and 36B.

The old law and the debate - section 36

Since 2001, section 36 has provided an exemption from duty on a transfer of dutiable property from a trust to a beneficiary if:

  • the beneficiary was a beneficiary of the trust when the property was first vested in the trustee; and
  • the transfer is to the beneficiary absolutely; and
  • duty (if any) charged in respect of the first vesting of the property in the trustee has been paid.

One aspect of this old section had been the subject of some debate. The Victorian State Revenue Office:

  • asserted that section 36 did not exempt a distribution to a beneficiary from duty if the beneficiary took a transfer of trust property subject to a mortgage; and
  • argued that in these circumstances the beneficiary provided some consideration for the transfer and therefore did not receive the property in its capacity as a beneficiary.

The SRO's position was that this situation more correctly reflected a sale and purchase for consideration - for which no exemption from duty was available.

Amendments to section 36

Thankfully, section 36 has been amended (and supplemented by new sections 36A and 36B) to end that debate and to provide some additional certainty.

To benefit from the exemption under the new law, the beneficiary will need to satisfy the Commissioner that the transfer is not part of a 'sale or other arrangement' for consideration. The relating good news is that merely taking a transfer subject to a mortgage will not constitute a transfer for consideration.

The new law is summarised below in relation to each of a fixed trust, a discretionary trust, and a unit trust.

Fixed Trusts

The transfer of dutiable property from a fixed trust (that is, if beneficiaries have a fixed entitlement under the trust) to a beneficiary will be exempt from duty [1] if:

  • the trust paid duty when it acquired the dutiable property (Acquisition);
  • the beneficiary was a beneficiary of the trust at the time of the Acquisition;
  • the transfer is:
    • to the beneficiary absolutely, or
    • to the beneficiary as trustee of another trust, of which the beneficiaries are natural persons, each of whom were beneficiaries of the fixed trust at the time of the Acquisition;
  • the dutiable value of the property transferred does not exceed the value of the beneficiary's interest in the trust; and
  • the Commissioner is satisfied that the transfer is not part of a sale or other arrangement for consideration.

Discretionary trusts

A transfer of dutiable property from a discretionary trust to a beneficiary will be exempt from duty [2] if:

  • the trust paid duty when it acquired the dutiable property (Acquisition);
  • the beneficiary was a beneficiary of the trust at the time of the Acquisition (or became a beneficiary after the Acquisition by becoming a spouse of a beneficiary);
  • the transfer is:
    • to the beneficiary absolutely - if that beneficiary is a company, then its shareholders must be natural persons who are beneficiaries of the trust at the time of the Acquisition, or
    • to the beneficiary as trustee of another trust, all the beneficiaries of which are beneficiaries of the discretionary trust at the time of the Acquisition; and
  • the Commissioner is satisfied that the transfer is not part of a sale or other arrangement for consideration.

Unit trusts

A transfer of dutiable property from a unit trust to a unit holder is exempt from duty [3] if:

  • the trust paid duty when it acquired the dutiable property (Acquisition);
  • the unit holder was a unit holder at the time of the Acquisition;
  • the dutiable value of the property transferred does not exceed the value of the units held by the unit holder;
  • as a result of the transfer, the value of the unit holder's units is reduced by the same amount as the dutiable value of the property transferred; and
  • the Commissioner is satisfied that the transfer is not part of a sale or other arrangement for consideration.

Sale or arrangement for consideration

For the exemption to apply, the distributions to beneficiaries must be genuine distributions to beneficiaries in their capacity as beneficiaries - the distributions must not constitute a sale and purchase between the trustee and the beneficiary.

f the property transferred is subject to a mortgage and the beneficiary provides a new mortgage or assumes the liabilities under the existing mortgage, then the new section 36C makes it clear that the granting of the mortgage or the assumption of the liabilities is not to be treated as a sale or arrangement - unless the Commissioner is of the view that there is an arrangement designed to take advantage of the concessions.

Other jurisdictions

Exemptions or concessions for transfers from a trust to beneficiary are also available in other jurisdictions - see table below. However, the criteria for eligibility differ from State to State.

Jurisdiction Amount of duty payable Authority
Queensland Nil Section 123 Duties Act 2001 (Qld)
New South Wales $10 Section 57 Duties Act 1997 (NSW)
Australian Capital Territory $20 Section 58 Duties Act 1999 (ACT)
Tasmania $20 Section 41 Duties Act 2001 (Tas)
Western Australia $20 Section 73AA Stamp Act 1921 (WA)
Northern Territory Nil Item 9A Stamp Duty Act 1978 (NT)

More information

For more information, contact Maddocks on (03) 9288 0555 and ask for Anna Tang.


[1] New Section 36.
[2] New Section 36A.
[3] New Section 36B.