Changing trustee of a discretionary trust – why isn’t it as easy as it seems

Changing the trustee of a discretionary trust, where the trust holds dutiable property, may give rise to a duty liability, unless an exemption or concession applies.

Whilst there are concessions and exemptions which apply across the states and territories, care needs to be taken to ensure that the requirements for the relevant exemption or concession are met to avoid any unintended duty consequences. Further, where the trust’s property is located in multiple states or territories, consideration needs to be given to the exemptions and concessions in each state where trust property is located.

Exemption or concession

Queensland, Victoria, South Australia, the Australian Capital Territory and the Northern Territory offer a full exemption to duty for vesting of dutiable property as a result of a change of trustee (i.e. no duty is charged) whereas the remaining states and territories impose a “concessional” amount for duty. The concessional rates of duty are currently a fixed amount (e.g. $100 in New South Wales for a transfer of dutiable property as a consequence of the change of trustee).

It is prudent to ensure that, even where an exemption applies, the documents for the change of trustee are stamped. Not only is this a legal requirement, but there are also third parties who require the document to be stamped for their purposes – this includes Land Titles Offices and financiers.

No detriment to beneficial interests

Generally speaking, the provisions dealing with the concessions and exemptions contain carve-outs which limit their application if, in addition to giving effect to the change of trustee, the beneficiaries’ interests change.

The law in New South Wales, Western Australia, South Australia and the Australian Capital Territory requires that the change of trustee is not part of a scheme which results in the “detriment” of the beneficial interest of any person.  A “detriment” occurs if there is loss or damage to a beneficiary’s interest in the trust property, for example, where the interest diminishes in value or where obstacles to the enjoyment of this interest in a timely manner are introduced. 

In Queensland and the Northern Territory, the beneficial interests of the beneficiaries must not change in order for the exemption to apply. 

Victoria and Tasmania do not expressly include limitations, but the transfers of dutiable property must be made solely “in order to vest the property in the trustees for the time being entitled to hold it”.

These requirements need to be carefully considered before undertaking any change of trustee as a failure to meet the specific requirements of each state where trust property is located could result in the imposition of duty.

Prohibition on a trustee being a beneficiary

To apply concessional duty for changes of trustee in New South Wales and the Australian Capital Territory, the existing trustees or new trustees must not be (and cannot become) beneficiaries of the trust.

The trust deed should be reviewed prior to signing any documents to ensure that such a prohibition is included. If the trust has been set up outside of New South Wales or the Australian Capital Territory but the trust holds property in New South Wales or the Australian Capital Territory, a prohibition may not have been included.

Where the trust deed does not specifically provide for the trustee being a beneficiary of the trust, the trust deed will need to be varied to include a prohibition on new or continuing trustees from being or becoming beneficiaries. Such a variation will need to be undertaken before the trustee is changed otherwise the duty concession will not apply.

Connection between the vesting or transfer and the change in trustee

In order for a concession or exemption to apply, the vesting or transfer of the dutiable property must occur as a consequence of the change of trustee. 

In New South Wales, Western Australia and the Australian Capital Territory the vesting or transfer must merely occur “as a consequence of the retirement of a trustee or the appointment of a new trustee”.  The vesting or transfer of dutiable property may, in some circumstances, be part of some wider commercial transaction in addition to being a consequence of the change of trustee and care should be taken to ensure that the wider transaction does not prohibit the application of the concession.

The position in Queensland, Victoria, South Australia and Tasmania is that the vesting or transfer of dutiable property must be for “the sole purpose” or “the purpose” of the retirement of a trustee or the appointment of a new trustee. If there are any additional purposes to the change of trustee, there is a risk that these additional purposes could result in an exemption or concession not applying to the vesting or transfer.

What are the traps with changing a trustee?

Although the differences in the legislation seem relatively minor, it is easy to fall into a trap where reliance is made on the provisions of the state or territory in which the client is located or where the trust was established (rather than the location of the trust property).

When advising a client on a change of trustee the following should be taken into consideration:

Registration of trust deeds and deeds changing the trustee