Generally, the transfer of assets held in a person's name is exempt from stamp duty if they are transferred by Will or on intestacy (where no Will disposes of the assets). However, these exemptions do not apply where an asset is held in a discretionary trust or self-managed superannuation fund. In these situations, different stamp duty laws apply.
We recently sought clarification from Revenue SA about stamp duty in certain estate and succession planning scenarios, as we felt that the legislation concerning them was unclear in some respects. Revenue SA has now clarified the position for us, and we thought you might find this information useful.
Distributions in specie from discretionary trusts
Section 71(5)(f) of the Stamp Duties Act 1936 (SA) provides an exemption from stamp duty where property is transferred from the trustee of a discretionary trust to a natural person who is a beneficiary of the trust. The beneficiary must be a member of the family group for whom the trust is created, pursuant to an instrument (the trust deed) that has been duly stamped.
This exemption is typically used when parties wish to transfer assets out of a discretionary trust to a natural person. It can also be used as an intermediate step in transferring assets pursuant to a subsequent stamp duty exemption. For example, it can be used in a two-step process to transfer farmland from a discretionary trust to a beneficiary, and then from the beneficiary to his or her self-managed superannuation fund under the "family farm" stamp duty exemption in Section 71CC of the Act. This is useful where the scope of beneficiaries of the discretionary trust is too wide to qualify for the family farm exemption.
In the past, the commonly held view amongst stamp duty practitioners was that the exemption in Section 71(5)(f) did not apply where the property is subject to a mortgage and the beneficiary to whom the property is transferred assumes the debt secured by the mortgage. The rationale was that the assumption of the debt by the beneficiary constituted "consideration" payable to the trustee in exchange for the transfer of property. This limited the usefulness of the exemption to situations where there was no debt secured against the property, or any debt could be paid out and discharged.
We recently asked Revenue SA whether this view was correct. As it turns out, it is not. Revenue SA has indicated that it now treats a transfer of property from a discretionary trust to a natural person who is a beneficiary as exempt, as long as the person is a member of a family group pursuant to an instrument (the trust deed) which was duly stamped. The fact that the beneficiary assumes liability for a debt secured against the property is irrelevant to the stamp duty treatment.
This can be a useful estate and succession planning tool, such as in situations where clients wish to restructure the ownership of an asset but the asset remains subject to debt. It is particularly useful in the context of residential and primary production land, which will remain subject to full ad valorem stamp duty rates. Stamp duty on other types of real property will be abolished on 1 July 2018.
Transfers in specie from self-managed superannuation funds
Section 71(5)(e) of the Act provides an exemption from stamp duty where real property is transferred from the trustees of a trust to a person who already has defined beneficial interest in the property. However, the exemption only applies where the beneficial interest arose pursuant to an instrument that was duly stamped. This generally does not include discretionary trusts, as the beneficiaries only have a potential beneficial interest subject to the trustee’s discretion.
Revenue SA has long treated this exemption as applying to distributions from a self-managed superannuation fund (“SMSF”) to a member of the SMSF. The exemption applies up to the value of the member’s account balance. If the property transferred is worth more than the member’s balance, stamp duty is payable on the difference.
However, it has been uncertain whether Section 71(5)(e) also applies after the death of a SMSF member. That is, where real property is transferred in specie to a dependant of the member or to the member' s legal personal representative ("LPR"). In the case of the LPR, the property would form part of the deceased's estate to be dealt with according to their Will or the laws of intestacy.
The uncertainty arose because, strictly, the dependent or LPR did not have a beneficial interest in the property pursuant to an instrument that was "duly stamped". Only the member had such an interest. The member’s interest arose when the property was transferred to the SMSF trustees pursuant to a stamped Memorandum of Transfer.
We recently asked Revenue SA whether it treats Section 71(5)(e) as extending to distributions made to a dependant or LPR of a deceased SMSF member. Fortunately, the answer is “yes”. There is no stamp duty payable on the transfer of the property up to the value of the deceased's member balance. Stamp duty would only be payable on any excess value transferred to the dependant or LPR.
This confirms that a SMSF can be a stamp duty effective structure for holding income-generating real property and passing it in specie to the next generation. However, if the property is residential or primary production land, stamp duty will apply where the value of the property transferred exceeds the value of the deceased member’s account balance. In that sense, a SMSF is not as advantageous a structure as other alternatives, such as individual ownership or holding property in a discretionary trust.
There are many other things to consider when dealing with trusts and SMSF's in a succession planning context. While these structures have many benefits, care should be taken in choosing an appropriate asset-holding structure for clients.
Estate planning is not just about Wills. It also requires careful consideration of non-estate structures such as discretionary trusts and superannuation funds, as well as the tax treatment that applies to those structures.
Clients should take advice from their accountants, financial planners and lawyers when considering their estate plan. In our experience, the best results usually arise from a “team effort” involving the clients and their professional advisers.