It has been a long held view of the State Revenue Office (SRO) that if beneficiary loans are forgiven in connection with a distribution of real estate from a discretionary trust to a beneficiary, then the duty exemption in section 36A of the Duties Act 2000 (Vic) will not apply and the transfer will trigger land transfer (stamp) duty.

Unfortunately, this SRO view is not as widely known as it should be and, as such, there have been many duty assessments on such distributions over the years. We can now add the distribution in the case of Baullo v Commissioner of State Revenue [2023] VCAT 1164 (13 October 2023) to that list.

Facts

The facts are not an uncommon situation. Here, the beneficiaries decided to buy land for future development. They signed the contract and paid the deposit personally. They then sought advice from their accountant; who recommended that a discretionary trust acquire the property. Such a trust was set up, was nominated as the purchaser and completed the contract.

The purchase price was partly funded by a bank loan and partly from amounts contributed by the beneficiaries. While there was no loan agreement, the accountant recorded the amounts contributed by the beneficiaries as beneficiary loans in the financial statements of the trust.

Sometime after the property settled, the beneficiaries decided to take the property out of the discretionary trust. As such, they distributed the property from the trust to themselves. While there was no evidence that the beneficiary loans were formally forgiven, they were removed from the trust’s financial statements. The trust was wound up and the trustee company was deregistered on the basis that it had no liabilities.

The SRO assessed the transfer as dutiable on the basis that the section 36A exemption did not apply as the forgiveness of the beneficiary loans was consideration for the transfer (ie section 36A does not apply if there is consideration for the transfer).

Why the Tribunal found there was consideration
The Tribunal agreed with the SRO that the forgiveness of the beneficiary loans was consideration for the transfer of the property from the discretionary trust to the beneficiaries, that the section 36A exemption did not apply and that duty was triggered.

In coming to this decision, the Tribunal noted:

• The payment of the deposit before the trust was established could still be a loan to the trust as it was intended that the trust acquire the property

• It did not matter that there was no written loan agreement (and this was not surprising given the beneficiaries were the controlling mind of the trustee)

• The recording of the amounts as beneficiary loans in the trust financial statements was evidence that they were in fact loans

• Likewise, the removal of the loans from the trust’s financial statements indicated “there must have been an ‘extinguishment of the loan balance’, whether by way of payment, set off, forgiveness or otherwise” of the beneficiary loans

• Statements from the beneficiaries and their advisers to the SRO supported that the amounts were loans and they were forgiven

Lessons from this case

As noted above, this case supports the SRO’s long held, but not widely (enough) known, view that the forgiveness of beneficiary loans is consideration for a transfer, causes the section 36A exemption not to apply and can trigger duty on transfers from discretionary trusts to beneficiaries.

Therefore, where it is proposed to distribute a property from a discretionary trust to a beneficiary and apply for the section 36A duty exemption, the following should be considered:

• Does the trust have any beneficiary loans or unpaid present entitlements recorded in its financial statements?

• If it does, are such contributions into the trust accurately characterised as loans – for example, were they actually intended to be capital contributions (gifts) to the trust

• If they are loans, do those loans have to be forgiven as part of the transfer – for example, can they not be forgiven and paid back in the future from other assets or income of the trust

• Be very careful how you answer questions from the SRO in support of the duty exemption

• Think about these issues in advance of the transaction, not after the event

• Use expects for these types of duty applications

For further information please contact:

Phil Broderick
Principal
T +61 3 9611 0163  l M +61 419 512 801  
E pbroderick@sladen.com.au