Transferring Property from a Discretionary Trust to a Beneficiary – is it really exempt from transfer duty? Lessons from Baullo v Commissioner of State Revenue [2023] VCAT 1164

Introduction

For a discretionary (family) trust that owns property, it may be desired for that property to be distributed to a beneficiary of that trust. The rationale for such a transfer is often land tax (in the case of a principal place of residence) or succession planning.

In Victoria, a transfer (stamp) duty exemption exists for transfers of property from a discretionary family trust to a beneficiary, subject to strict compliance with section 36A of the Duties Act 2000 (Vic).

In order for section 36A to apply, the following requirements must be satisfied:

• the beneficiary must have been a beneficiary of the trust when the property was acquired (other than beneficiaries included through births and marriages);
• the transfer is to the beneficiary absolutely; and
• the transfer is not part of a sale or arrangement under which there was any consideration for the transfer.  

In our experience, it is often the third requirement which causes issues. It is also noted that a limited exception to the consideration requirement exists where the beneficiary is assuming a mortgaged backed liability of the trust.

Baullo v Commissioner of State Revenue [VCAT] 1164

The recent case of Baullo v Commissioner of State Revenue [VCAT] 1164 has once again brought to light a rather delicate but lesser known issue that the section 36A exemption is not available where the transfer of the property involves an offsetting of beneficiary loan accounts.

Briefly, JT Development Nominees Pty Ltd as trustee for the JT Family Trust (Trust) acquired a property in Pascoe Vale South (Property). Part of the purchase price was funded by the beneficiaries of the trust, which were recorded as loans in the books of the Trust (Loan), rather than as gifts to the Trust. Sometime after, the trustee sought to distribute the Property to one of the beneficiaries of the trust pursuant to the section 36A exemption (Transfer). Following the Transfer, the Loan was removed from the balance sheets of the Trust.

The SRO assessed duty on the Transfer on the basis that the Loan balance was effectively reduced to nil following the Transfer and therefore section 36A did not apply as the reduction (or forgiveness) of the Loan was consideration for the Transfer.

VCAT’s decision

VCAT ultimately agreed with the SRO that the forgiveness of the Loan was consideration for the Transfer. Accordingly, the transfer duty exemption under section 36A was not applicable and the Transfer was dutiable.

Key takeaways

• Where a discretionary (family) trust has liabilities and seeks to distribute a property to a beneficiary, a key aspect of the SRO Evidentiary Requirements Manual is to provide an explanation as to how the liabilities of the trust will be satisfied in light of the proposed transfer. This aspect can be particularly problematic where the property in question is the primary asset of the trust.
• Baullo has re-emphasised that the liabilities of a trust must be considered in detail when deciding whether to make a transfer of property out of a trust to a beneficiary, and how that transaction should occur. Baullo is a timely reminder for family trust groups and their advisors to carefully consider the requirements of any proposed duty exemption prior to making any transfer(s) of property.
• The loss of a transfer duty exemption has significant consequences. Based on a property with a market value of $2 million, the transfer duty payable would be $110,000 (as opposed to $nil if an exemption applies).

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‍This article in no way constitutes legal advice. It is general in nature and is the opinion of the authors only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.‍