NSW Stamp duty to change a Trustee

Change a trust’s trustee to a corporate trustee in New South Wales?

At times, you may wish to change the trustee of your New South Wales trust. Perhaps the trustee dies, leaves the country or loses mental capacity. Or you want to move from a human to a company as a trustee. The three most common trusts in New South Wales are:

  1. Self-Managed Super Fund Deed:
  2. Family Trust Deed:
  3. Unit Trust Deed:

Why swap a human trustee for a company trustee in NSW?

changing the trustee of a family trust where the family trust holds NSW land nominal stamp duty

The new trustee cannot be a beneficiary of your Family Trust – otherwise you pay extra NSW transfer duty

Apart from the trustee’s death, the most common reason to change a trustee is to replace a human trustee with a company trustee. A trustee company trustee is called a ‘corporate trustee’. Because of asset protection and perpetual succession, this has become popular in Australia.

How to build an NSW corporate trustee:
  1. a special purpose company for your NSW SMSF
  2. convert a company to a special purpose company to be trustee of your NSW SMSF
  3. a company to be  corporate trustee of a family trust
  4. a company to be corporate trustee of your unit trust
  5. a company to be trustee of a bare trust

1. Does a beneficiary in a Will escape NSW (stamp) duty?

The Will maker dies. The assets are often transferred into the executor’s name. Then the assets are transferred into the beneficiaries’ name. Such transfers do not suffer NSW transfer (stamp) duty. There are 4 defacto death duties in Australia. However, in New South Wales beneficial interests transfer without incurring duties. This is provided the transfers are pursuant to the Will.

2. What happens when a trustee changes outside of a Will?

When you just change a trustee, the beneficiary does not change. The same beneficial owners are still there, and the equitable owners remain the same. But, strangely, in NSW, you may have to pay ad valorem stamp duty on the market value of an asset such as real estate. (About 4.5%.)

Consider Section 54(3) Duties Act 1997 (NSW). If you change the trustee and have “dutiable property” you pay full stamp Duty. Under section 11 ‘dutiable property’ includes land and shares.

What is the NSW Government’s Concern with Family Trusts Changing Trustees?

Most Family Trusts allow for the trustee to also be a beneficiary. This arrangement provides flexibility, as having more beneficiaries gives the trustee greater discretion in distributions. Additionally, Family Trust deeds often include open classes of beneficiaries, which means new members (like a newborn child or a newly formed company) automatically become beneficiaries.

However, the NSW government is concerned about scenarios where a Family Trust changes its trustee in such a way that the new trustee could also become a beneficiary. This concern arises because such a change could effectively alter the ownership of the trust’s assets without appropriate oversight or tax implications.

An example of a change of trustee where the family trust owns NSW land
  • John and Jenny are the trustees and beneficiaries of their Family Trust, which owns land in NSW.
  • The Family Trust sells this land to Keith, who is unrelated to John and Jenny.
  • Subsequently, John and Jenny resign as trustees, and Keith assumes the role of trustee.

This type of transaction might have enabled Keith to avoid paying stamp duty had it not been for Section 54(3) of the Duties Act 1997 (NSW) as outlined in Ruling DUT 037. This ruling allows for the movement of NSW trust properties between trustees under nominal duty conditions, provided that the transaction does not alter the equitable interests within the trust for personal gain.

Section 54(3) seeks to maintain the continuity and purpose of the existing family trust while preventing misuse through the re-assignment of the trustee position.

To prevent misuse, such as in the scenario with Keith, the Family Trust deed must explicitly state that the new trustee (Keith, in this case) is excluded from becoming a beneficiary. While he can serve as a trustee, he must not have any beneficiary rights under the trust.

Under Section 11, NSW ‘dutiable property’ includes:
  1. NSW real estate (e.g. a home, block of flats, vacant block, factory)
  2. NSW shares in a company (but not shares quoted on the ASX)
  3. units in a unit trust scheme
  4. a business asset such as the goodwill of a business or intellectual property and a partnership interest

Nominal stamp duty provided the new trustee is not a beneficiary

The good news is that under section 54(3) you only pay a nominal sum of stamp duty when you transfer the family trust’s assets from one trustee to another. But this is only if the NSW Chief Commissioner is satisfied that:

(a) none of the continuing trustees remaining after the retirement of a trustee are beneficiaries under the trust, and

(b) none of the trustees of the trust after the appointment of a new trustee is or can become a beneficiary under the trust, and

(c) the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest of any person.

What if the Commissioner is not so satisfied? The change of trustee is chargeable with the same duty as a transfer to a beneficiary.

You must pass all three of the above tests. Otherwise, full ad valorem duty applies.

This is a common problem because:

  1. to save money you have humans as trustees of your family trust (Companies cost money.) However, corporate trustees are better for asset protection.
  2. your trustees (humans and companies) are usually also beneficiaries of the trust

Examples of how to change an NSW trustee for no transfer (stamp) duty

Mum and Dad are trustees of their trust. They, together with their children, and many others, are also beneficiaries. The trust owns a block of flats in Double Bay, NSW:

New South Wales Mum dies.

Dad removes dead Mum as one of the trustees of the NSW family trust. She is a ‘continuing trustee’. Therefore, section 54(3)(a) applies. Dad suffers full ad valorem stamp duty on the Deed of Variation of his Family Trust to change the trustee. That is roughly 4.5% of the market value of the flats.

Instead, Dad should have:

    • incorporated a new Company
    • ensured that the Family Trust deed states that the new Company is not a beneficiary
    • make the company the sole trustee of the trust.
Both new and continuing trustee are never trust beneficiaries

Under section 54(3)(a) and (b), the NSW Chief Commissioner must be satisfied that:

a. none of the continuing trustees remaining after the retirement of the trustee is or can become a beneficiary under the trust, and

b. none of the new trustees after the appointment of a new (whether additional or substituted) trustee is or can become a beneficiary under the trust.

This means that the new or continuing trustees cannot be an existing trust beneficiaries and can never become a trust beneficiary.

This requirement applies irrespective of the nature of the trust. However, it typically is a discretionary trust (family Trust) or a unit trust. This requirement also applies to all types of beneficiaries under the trust.

All new trustees (whether additional or substitute trustees) and any continuing trustees must satisfy this test. However, the prohibition does not apply to former trustees. Therefore, the concession still applies even where the retiring trustee is or may become a beneficiary of the trust.

But the change of trustee cannot be part of a ‘scheme’. The status of the retiring trustee as a beneficiary (or potential beneficiary) of the trust is relevant to whether there is a scheme of the kind referred to in section 54(3)(c). The change of trustee must pass the ‘smell test’.

How to promise to never be a beneficiary in a trust-owning NSW real estate

There is no set wording to prevent either a continuing or new trustee from becoming a beneficiary under a trust in the future. The NSW Chief Commissioner is satisfied where the terms of the trust deed and any variation provide that the new or continuing trustee is prohibited from being or becoming a beneficiary under the trust. The prohibition must be irrevocable: Oates Properties Pty Ltd & Ors v Commissioner of State Revenue [2003] NSWSC 596 [35] and [38].

NSW Unit Trust changing trustees – transfer duty

For asset protection, it is common to replace a human trustee with a corporate trustee of the Unit Trust.

This article explains how to build an NSW company to be a trustee of a Unit Trust.

This is how NSW Unit Trust’s work:

For a unit trust, where there is no prohibition on the new trustee (or any continuing trustee) from also holding units in the trust (and therefore being or becoming a beneficiary of the trust). It is irrelevant in what capacity the units are or may be held by that trustee.

The Units in the Unit Trust may be held beneficially or in some other trustee capacity. Then, sections 54 (3)(a) or (b) is not satisfied. And the transfer of the trust property to the new trustee (or any continuing trustee) is liable to ad valorem duty.

How to lodge a Deed of Variation to change the NSW Trustee:

  1. A complete copy of the trust deed (stamped if applicable)
  2. Evidence as to when the trust properties were acquired (Agreement for Sale or Transfer)
  3. Build a Deed of Variation to change the trustee on our website
  4. Minutes supporting the Deed of Variation
  5. For Unit Trusts only a copy of the register of unit-holders

NSW ‘ad valorem’ stamp duty when you change a trustee

‘Ad valorem’ is Latin. It means ‘according to value’. It is used for duties and taxes levied by the State and Federal governments. This is on a transaction or property, that is payable based proportionally on the market value of the property. Ad valorem taxes are based on the assessed value of the item being taxed. The more the property is worth – the more you pay.

NSW ‘ad valorem’ duty vs NSW ‘nominal’ duty

The opposite of ‘ad valorem’ duty is ‘nominal’ duty. (As tax lawyers we also call ‘nominal duty’ a ‘nuisance tax’. This because the cost of the tax is less than the time to have the document submitted to the tax collector.) For example, the stamp duty on a new Family Trust Deed in NSW is a fixed ‘nominal’ amount of $200.

Common example of NSW ad valorem stamp duty

The most common example of calculating duty on an ad valorem basis is the transfer of land or business duty. We use to call this “stamp” duty in NSW. The duty on a sale or transfer of land is paid according to the rates published by Revenue NSW.

NSW Self-Managed Superannuation Fund

Paying NSW duty when you change a Trustee does not apply if you build an NSW Special Purpose Company for your NSW SMSF: State Revenue Legislation Further Amendment Act 2010 (NSW).

Under the State Revenue Legislation Further Amendment Act 2010 an SMSF is from 1 July 2010 (backdated) a special trustee for the purposes of s54(1) by virtue of s42A of the Superannuation Industry (Supervision) Act 1993.

“Declaration of trust” not dutible in New South Wales

There are four types of bare trusts popular in NSW:

NSW Chief Comr of State Revenue v Benidorm Pty Ltd

The NSW Court of Appeal dismissed the NSW Chief Commissioner’s appeal in holding that a document titled “Declaration of Trust by Nominee” was not liable to duty. This was because it merely acknowledged an existing state of affairs following the granting of probate. See NSW Chief Comr of NSW State Revenue v Benidorm Pty Ltd [2020] NSWCA 285 (Meagher, Lemming and Payne JA, 13 November 2020).

NSW stamp duty on bare trusts

The taxpayer, Benidorm Pty Ltd, was incorporated in 2007 as a vehicle to purchase a $12 million penthouse apartment at Macquarie Street, Sydney. Benidorm’s sole director and shareholder was a solicitor who acted for a Guernsey resident (Mr R). Mr R provided all the funds to purchase the apartment. Ad valorem duty of $783,994 was paid on the contract of sale. Immediately before the contract was entered into, Benidorm and the solicitor executed a declaration of trust by which the solicitor acknowledged that he held his shares in Benidorm as a mere nominee for Mr R absolutely. Shortly thereafter, Benidorm and Mr R entered into a deed of trust (the “First Declaration of Trust”) whereby Benidorm declared that it would hold the title to the Macquarie Street apartment as trustee for Mr R. The First Declaration of Trust was liable to duty of $50, being a vesting of the apartment by the “apparent purchaser” (Benidorm) in favour of the “real purchaser” (Mr R).

Mr R died in September 2013. Under his Will, Mr R appointed his partner, Mr S, as the sole executor and beneficiary of his estate. In December 2013, the grant of probate of the will was issued in Guernsey, UK. In December 2014, the grant of probate was resealed in the NSW Supreme Court.

In January 2015, the solicitor signed a document. The document declared that he now held the Benidorm shares on trust for Mr S absolutely. This is as the sole beneficiary and executor of Mr R’s estate. On the same day, Benidorm and Mr S signed another document (“Second Declaration of Trust“). The Second Declaration of Trust declared that it “will hold” the apartment on trust as nominee for the “New Beneficiary” (Mr S) on the same terms as set out in the First Declaration of Trust.

The Chief Commissioner of NSW State Revenue assessed Benidorm to ad valorem duty. This is $710,490 plus interest. This is on the Second Declaration of Trust. In Benidorm Pty Ltd v Chief Commissioner of State Revenue (NSW) [2020] NSWSC 471 the primary judge set aside the assessment. The judge stated that the Second Declaration of Trust was not a declaration of trust for NSW duty purposes. This is because it did no more than acknowledge the existing position following the granting of probate and NSW resealing of Mr R’s Will.

NSW Stamp Duty office loses on Declaration of Trust

The NSW Court of Appeal dismissed the Commissioner’s appeal. The taxpayer wins. The NSW Court of Appeal agrees with the primary judge/ That is that the Second Declaration of Trust did not have any legal effect. It is, therefore, not a dutiable transaction under section 8 Duties Act 1997 (NSW).

The Second Declaration of Trust simply confirms an existing state of affairs. It merely follows the granting of probate and its resealing in NSW. The trustee holds the legal title to the Macquarie Street apartment for Mr S. This is in his capacity as executor of Mr R’s unadministered estate.

Interesting, the Court of Appeal correctly points out that the Duties Act 1997 (NSW) brought about a change in the approach to NSW duty. NSW duty now looks at the transaction. This is rather than a tax on ‘instruments’. You look at what is really happening. This is rather than what is written down on a piece of paper.

In fact, section 8 no longer refers to ‘instruments’ or what is written down.

See here Victorian Stamp Duty when you change a Trustee of a Family Trust or other types of trusts. This is usually for asset protection.

Land Tax in NSW

As a separate issue also consider NSW Land tax. Land tax is a yearly tax levied by NSW. Land tax may increase in NSW where the trustee changes. The more the same person or trustee owns the higher the rate of NSW land tax.

Duties (NSW): guidance on declarations of trust updated –
the destruction of the Benidorm case

Revenue NSW updated its ruling on declarations of trust in agreements for sale:

NSW DUT 031v2

DUT 031v2 provides guidance on when a declaration or acknowledgment of trust over dutiable property is
liable to duty. The ruling is updated to reflect s 8AA Duties Act 1997 (NSW).  This imposes a duty on certain
acknowledgments of trust from 19 May 2022. Section 8AA is introduced to overcome the Court of Appeal decision in Chief Commissioner of State Revenue (NSW) v Benidorm Pty Ltd 2020 ATC ¶20-771. This is where it was held a mere acknowledgement of a pre-existing trust that effected no transaction was not dutiable as a declaration of trust.

Before the decision in Benidorm, the Chief Commissioner considered an acknowledgement of trust to be a declaration
of trust liable to duty unless concessional duty applied. From 19 May 2022, the making of a statement that appears to
be a declaration or acknowledgement of trust in a contract or in the contractual arrangements and has the effect of
acknowledging that identified property vested, or to be vested, in the person making the statement is already held, or to be held, in trust for a person or purpose mentioned in the statement is liable to duty.

DUT 031v2 is effective from 19 May 2022 and replaces DUT 031.

Article authored by Professor Brett Davies and Juris Doctor candidate at Murdoch University Mr Umar Badat, BCompSc