Trusts are unusual creatures, not being legal entities in their own right, but at the same time acting as a legal vehicle for income re-distribution, asset protection and tax minimisation.
In its own right, a trust cannot sue or be sued, own assets or accrue debts. This is based on longstanding common law and is reflected in legislative provisions such as subsection 960-100(2) of the Income Tax Assessment Act 1997 (the 1997 Act) which notes: ‘a right or obligation cannot be conferred or imposed on an entity that is not a legal person’.
Nevertheless, subsection 95(1) of the Income Tax Assessment Act 1936 deems the trustee of a trust to be a taxpayer for the purposes of calculating the trust’s assessable income and allowable deductions; effectively, the tax law deems the trust to be a taxpayer.
Historically, trust law emerged through the courts of equity, a branch of law which was designed to supplement the more literal application of rights and obligations found in common law and statute. The distinction between legal and beneficial interests in property is an example of the interaction of common law and equity.
Because trust deeds are conceived as private agreements between settlors, trustees and beneficiaries, the rights and obligations available are infinite in scope, allowing the parties to devise imaginative and complex arrangements which do not always lend themselves to straightforward application, both in practice and in relation to how the law might apply to them. Care must be taken therefore, to avoid making assumptions when dealing with trusts; detailed consideration should be given to the uniqueness of each trust arrangement.
Aside from trusts established for family or commercial reasons, trust arrangements also apply to superannuation funds and deceased estates.
Trusts, other than deceased estate trusts, are generally established through a legal ‘instrument’ know as a trust deed, in which the party who establishes the trust, the settlor, specifies the trustee, the appointor, the beneficiaries, and the use to which the funds contributed to the trust, including the ‘settled sum’, can be put. The trust deed also specifies the rules by which the capital and income of the trust can be distributed to the beneficiaries.
Among the functions commonly performed by a trust are the holding of assets or the operation of a business. A trust can only perform these functions through the agency of a third party, a third party with the legal capacity to trade, hold assets and carry out the wishes of the settlor. This third party, known as the trustee, usually takes the form of a natural person or company.
Under trust law, and usually pursuant to the trust’s deed, the trustee is liable for the trust’s debts. Because a trustee can be sued, limited liability companies are often used to perform the trustee role – such companies usually have no net assets of their own.
Trustees have what is known as a fiduciary duty towards beneficiaries, to apply the terms of the deed, under which the trustee was appointed, in good faith. Trustees are also bound by statutory obligations. Courts enforce these duties rigorously.
The trust deed may provide for multiple trustees and the replacement of a trustee. The appointor of a trust, usually nominated in the trust deed, has the power to change the trustee; for this reason, determining who should be the appointor when establishing a trust is a critical consideration.
A number of tax and administrative consequences arise when a trustee is replaced.
Who must be notified of a change of trustee?
For constitutional reasons, each State and Territory of Australia has its own legislation which provides basic powers and responsibilities of trustees. In the ACT, for instance, these are found in the Trustee Act 1925 (ACT) which was based on the NSW statute of the same name.
Subsection 6(1) of the Trustee Act 1925 (ACT) states:
A new trustee may by registered deed be appointed in place of a trustee, either original or substituted, and whether appointed by the Supreme Court or otherwise.
Subsection 12(1) of the Trustee Act 1925 (ACT) states:
Any instrument by which a new trustee is appointed, or by which a trustee retires or disclaims, or by which the executor declares that he or she holds as trustee or as beneficiary, as the case may be, shall be deemed not to be registered for this Act unless it has been registered under the Registration of Deeds Act 1957.
The Registration of Deeds Act 1957 (ACT) defines a deed as ‘any instrument or document’. The mechanism by which the trustee is formally changed, which must be in accordance with the terms of the trust deed, must therefore be formally recorded.
In the ACT, the deed must be lodged with the relevant Government agency in person, accompanied by a prescribed form and filing fee.
Do special rules apply where a trust ‘owns’ real property?
Throughout Australia, most real property is registered under what is known as the Torrens Title system. Under this system, legal ownership of real property is established with reference to the ‘title’ recorded by the relevant government authority. This allows buyers of real property to have confidence, when dealing with a property vendor, that the vendor is the lawful owner of the property and is therefore legally entitled to dispose of the property. When a change of ownership occurs, evidence of the transfer must be provided to the relevant authority in order for the title record to be updated.
A change of trustee involves a change in legal ownership of trust property. The title register must therefore be updated to reflect the new legal owner of the real property.
Each jurisdiction imposes its own formalities in this regard, prescribing the use of certain forms and the payment of fees. Other formal documents such as Buyer and Buyer Verification Declarations may also be required.
In addition, in the interests of the trust’s beneficiaries, a ‘caveat’ should be recorded on the title. A caveat is a warning to prospective buyers that title to the real property is not entirely unencumbered. In a trust situation, for instance, the trustee’s legal capacity to dispose of the land may be limited by the terms of the trust deed.
The ACT Registrar-General’s Land Titles Practice Manual outlines the consequences of lodging such a caveat (from Chapter 16):
Upon lodgement of a dealing, where the land is subject to a Registrar-General’s Caveat, the Registrar-General may inquire as to whether the dealing is contrary to the interests of the beneficiaries and may refuse to register if this is found to be the case eg conflict of interests situations. Supporting evidence in the form of a declaration may be required.
The purpose of entry of the Registrar-General’s Caveat is to afford protection to persons with beneficial or equitable interests in the land by warning persons dealing, and where appropriate preventing registration of dealings, contrary to the interests of those persons.
What are the capital gains tax (CGT) consequences of trust assets held in the name of one trustee being transferred to a new trustee?
Subsection 104-10(2) of the 1997 Act notes: ‘a change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust … this means that CGT event A1 will not happen merely because of a change in the trustee.’ Therefore, CGT should not be payable when a change of trustee occurs and where underlying beneficial ownership of the trust’s property has not changed.
Is stamp duty payable on the transfer of land from one trustee to another?
The transfer of trust property from one trustee to another is generally (some exceptions apply) exempt from stamp duty. (e.g. section 54 Duties Act 1999 (ACT)).
What if there is a change in the directors or shareholders of a corporate trustee?
A change in the directorships or shareholdings in a corporate trustee do not represent a change of trustee. The company must update its own records such as its share registry. ASIC must be notified of the change in directorship or shareholding.
For assistance with tax and duty obligations applicable to trusts, trustees and beneficiaries, contact Nexia Canberra on 02 6279 5400.