The Victorian Supreme Court in the decision of MD Commercial Pty Ltd & AJ Commercial Pty Ltd v Commissioner of State Revenue  VSC 560 confirmed that certain transfers of land to trustees were not exempt from duty under section 35 of the Duties Act 2000.
In 2011, the mother of Anthony and Matthew Fox passed away, and as part of her estate, devised and bequeathed the subject land to her sons.
On 10 August 2012, the subject land was transferred as follows:
50% interest to MD Commercial Pty Ltd as trustee of the M David Trust, with Matthew as the beneficiary; and
50% interest to AJ Commercial Pty Ltd as trustee of the A James Trust, with Anthony as the beneficiary.
The Deeds of the Trusts, which contained similar wording, contained a variety of provisions such as;
Clause 1: the Trustee acknowledged that “it is registered or entitled to become registered as the proprietor of a one half interest in the property” and that, pursuant to the will of Christine Fox, the beneficiary is the beneficial owner of the interest held by the Trustee in the Property (subject land).
Clause 2(a): the Trustee covenanted that it “holds its interest in the Property in trust for the Beneficiary and will transfer and deal with its interest in the Property and any income and all other rights which may accrue by virtue thereof (collectively referred to herein as ‘the Trust Fund’) in such manner as the Beneficiary may from time to time direct”.
Clause 3: the Trustee irrevocably appointed the Beneficiary as its Attorney “for the purpose of doing everything which the Beneficiary may deem desirable in order to effect a transfer of the Trustee’s interest in the Property to the Beneficiary or to a purchaser from the Beneficiary and for carrying out any of the provisions of this Deed”.
Clause 6(g): the Trustee was empowered, at the direction or with the written consent of the Beneficiary, “to hold, use, purchase, construct, demolish, maintain, repair, renovate, reconstruct, develop, improve, sell, transfer, convey, surrender, let, lease, exchange, take and grant options or rights in, alienate, mortgage, charge, pledge, reconvey, release or discharge or otherwise deal with any real or personal property”.
Clause 6(h): the Trustee was empowered, at the direction or with the written consent of the Beneficiary, “to partition or agree to the partition of, or to subdivide or agree to the subdivision of any land or other property which may for the time being be subject to the trusts hereof”.
Section 35 exemption
The taxpayer contended that an exemption should apply under section 35 of the Duties Act 2000 as the land was transferred to the trustees to be held solely as trustee or nominee of the transferor without any change in the beneficial ownership of property. Hence, it was submitted that the taxpayers took the property as ‘bare trustees’.
Justice Croft found in favour of the Commissioner, concluding that it cannot be said that the subject property was transferred to be held solely as trustee or nominee of the transferor, without any change in the beneficial ownership of the property.
The Court found that the Deeds of Trusts in question, and the powers contained within the deeds (such as to develop, subdivide and sell), meant that the trustee could not aptly be described as a ‘bare’ trustee under the modern definition of a ‘bare’ trust (which a trustee should have no active duties to perform: Herdegen v Federal Commissioner of Taxation (1988) 20 ATR 24).
Notwithstanding this, Justice Croft observed in light of preceding cases such as Comptroller of Stamps v Yellowco Five Pty Ltd  2 VR 529; Commissioner of State Revenue v Victoria Gardens Development Pty Ltd (2000) 46 ATR 61 and White Rock Properties Pty Ltd v Commissioner of State Revenue  VSCA 77 that:
“[I]t is not necessarily appropriate to approach the construction or application of section 35(1)(a) of the Duties Act, or its predecessor legislative provisions, by reference to concepts of “bare trusts” (notwithstanding any such reference in some extrinsic materials). This is not a term employed by the statutory text.”
Rather the provisions, in particular the words “to be held”, introduce an element of futurity necessitating an enquiry whether, the trustee-transferee is seen to hold the land for the future in the capacity only as trustee for the transferor.
Consequently, the application of the exemption under section 35 of the Duties Act must be assessed with an enquiry about the governing trust deed and powers of the trustee to potentially alter the beneficial ownership of the underlying property. Any contemplation in the trust deed of a change in the beneficial ownership of some or all of the property in subsistence of the trust would disqualify the exemption from applying.
Importance of the case
This is an important case for taxpayers looking to transfer land to bare trustees, custodians or nominees under the duty exemption contained in section 35. This case demonstrates that it is vital that the trustees have no, or at the very least very few, independent powers and that the trust deed be drafted accordingly. This can create tensions if banks are involved as such banks often require the “bare” trustee to have express powers to deal with the property and to be indemnified.
This case also reinforces the difficulty of creating bare trust relationships which can be relevant for the tax laws (for example, whether a trust can be “looked through” for the purposes of income tax, capital gains tax and GST) and superannuation laws (for example, under limited recourse borrowing arrangements).
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Level 5, 707 Collins Street, Melbourne, 3008 Victoria, Australia