The recent stamp duty case of White Rock Properties Pty Ltd v Commissioner of State Revenue [2014] VSC 312 is a timely reminder of what is not a bare trust and the importance of obtaining reliable stamp duty advice when effecting a change of ownership – legal or equitable – in land.
Bare facts
In this case, the trustees of five testamentary trusts entered into a partnership in relation to the development and sale of three parcels of land. The key facts are:
- under the will of a deceased person, five discretionary testamentary trusts were created;
- each trustee held a one-fifth interest in three parcels of land;
- to develop and subsequently sell the land, the trustees and White Rock Properties Pty Ltd entered into a Partnership Agreement;
- under the Partnership Agreement, the trustees (as “Partners”) appointed White Rock as an “agent” to manage the business of the partnership; and
- the Partners transferred their title in the land to the agent.
The State Revenue Office assessed the transfer to the agent as dutiable.
White Rock disputed the assessment primarily on the basis that the transfer should be exempt from stamp duty under section 35(1)(a) of the Duties Act 2000.
That section provides:
“No duty is chargeable…in respect of…a transfer of dutiable property that is made by the transferor to a trustee or nominee to be held solely as trustee or nominee of the transferor, without any change in beneficial ownership.” (emphasis added)
Crux of the decision
White Rock argued that it held the land as trustee for the Partners under a trust established by the Partnership Agreement and that the transfers did not give rise to a change in beneficial ownership. The Commissioner argued that section 35(1)(a) applies to transfers to what is commonly referred to as a “bare trust” and the trust created under the Partnership Agreement was not such a trust.
In the single Judge decision of the Victorian Supreme Court, Robson J agreed with the Commissioner. In this case, the agent had “active” duties to develop and sell the land and so the exemption under section 35(1)(a) could not apply – the beneficial ownership in the land had changed. From the decision, it can be drawn that the exemption would, as commonly thought, be limited to transfers to bare trusts.
Wider implications
The term “bare trust” is a shorthand term for a trust in which the trustee has no active duties. The trustee has only a “bare” duty to transfer the land upon demand to the beneficiary or as directed by the beneficiary (for example, to a third party).
Bare trusts are commonly used in private and business structures. The importance of properly effecting and evidencing a bare trust is important
- for stamp duty purposes, in obtaining the exemption for the transfer to a bare trust and distribution from one;
- for land tax purposes, in relation to obtaining the principal place of residence exemption;
- for CGT purposes, in relation to demonstrating that a beneficiary has an “absolute entitlement” to the underlying land;
- for GST purposes, in relation to land held on bare trust for an entity conducting an enterprise; and
- for superannuation purposes, in relation to land held on a “holding trust” (another name for a bare trust) for the purposes of the limited recourse borrowing rules.
For CGT purposes, the concept of absolute entitlement arises from tax law and the Australian Taxation Office has its own views in relation to the particular circumstances in which a beneficiary is taken to be absolutely entitled to property. The Australian Taxation Office view is that the existence of a bare trust is not by itself sufficient to demonstrate that a beneficiary has an absolute entitlement to the underlying land (TR 2004/D25). In relation to what constitutes “absolute entitlement”, the recent Federal Court decision of Oswal v FCT [2013] FCA 745 on the issue is on appeal.
Key point
Whilst a bare trust is (for trust law purposes) the simplest form of trust, ill-considered dealings with it can give rise to not so simple stamp duty, CGT and GST implications.
White Rock is a timely reminder of what not to do.
If you require any further information, please do not hesitate to contact us.