Firstly, what is a ‘Bare’ Trust?
Before we look at how an ‘Acknowledged of Trust – After the trustee buys‘ works, let us look at the nature of bare trusts in general.
Here is an example of a ‘bare trust’. When your son is born, you open a bank account in trust for him:
- You are the trustee. (Only the legal owner. Not the beneficiary owner)
- The trust’s beneficiary is your son. (Beneficiary, true owner, ‘object of the trust, holder of the equitable interest.)
- The trust asset is the money in the bank account.
You hold the bank account in trust for your son. Your name appears on the bank account. But merely as the ‘legal owner’.
The ‘true’ or ‘beneficial’ owner is your son. Your son is the ‘equitable’ owner. He owns the asset in equity.
Who pays tax in a bare trust arrangement?
It is your son who pays tax on the bank account interest. When your son is 18 years of age he can remove you as trustee. And instead, replace you with:
- another trustee; or
- himself as the ‘legal owner’ (at which point the trust no longer exists because the ‘legal’ and ‘beneficial’ owners are one and the same)
Beneficiaries are protected by the Trustee
Beneficiaries of trusts are protected.
For example, if you, as the trustee, go bankrupt or get a divorce then the trust asset, being the bank account, is not lost. The bank account is preserved for your son, who, as beneficiary, is the ‘true’ owner of the asset. The courts and the ATO ‘look through’ the trust. They see who the ‘true’ owners of the assets are. In this case, the ‘true’ owner is your son. Not you.
To be a ‘trust’ the asset must be held by two different groups: the trustee and the beneficiary
Most people holding an asset hold both the ‘legal’ and ‘beneficial’ interest in the asset.
There is no trust structure if you hold both legal and beneficial ownership. (The trust is gone. It vested in the beneficiaries.) For a trust relationship to exist the ‘legal’ and ‘beneficial’ interests must be held by different people:
- One person is the legal owner: the trustee.
- The other person is the beneficial owner: the beneficiary.
A trust automatically exists when you separate the ‘legal’ and ‘beneficial’ ownership. Conversely, the trust automatically ends when the ‘legal’ and ‘beneficial’ ownership is held by the same person(s).
For example, if your son, at 18, removes you as trustee and puts himself in as the legal owner, then the trust is finished. It is extinguished. This is because your son now holds both the ‘legal’ title and ‘beneficial’ interest. The split of the ownership has gone. Therefore, the trust relationship no longer exists.
What ‘assets’ can you put in a trust?
The trust asset can be anything. It can be real estate, shares, artwork, cars, bank accounts and cash. It can be a right like a debt someone owes. It can be a right to purchase something.
One great strength of Trusts is that they are mostly unregulated and private. You need to disclose trusts to the family court, bankruptcy court and government regulators such as the Australian Taxation Office.
These are two main types of ‘bare’ trusts you can build on our website:
1. Acknowledgement of Trust (‘AFTER the Trustee buys’)
Sometimes, in the heat of the moment, you forget to sign a Declaration of Trust BEFORE You Buy. While your trustee proceeds to buy the asset for you, there is no deed yet to document that trust relationship. Trust relationships exist whether they are in writing or not. They are just a lot easier to prove if everything is in writing.
Whether there is a deed or not the trustee still ‘owns’ the asset merely as a trustee for another person being the beneficiary.
The Acknowledgement of Trust is drafted after the above purchase by the trustee. The Acknowledgement of Trust does nothing other than document what has happened in the past. It is not trying to rectify or change anything, it is merely recording what actually happened in the past.
It would have been better to have documented this trust relationship BEFORE the trustee acquired the asset. Before the trustee acquired the asset you should have built and signed a Declaration of Trust BEFORE You Buy. But you did not. So you are now documenting what you did in the past with an Acknowledgement of Trust. It is better late than never.
The Acknowledgement of Trust merely sets out the facts that took place in the past. As an example, you may say:
‘Yes, as a trustee, I acquired the asset, but it was, at all times, for the benefit of the beneficiaries. I have no interest in the asset other than as the trustee. The money to pay for the asset came from the beneficiary, not from me. And I have plenty of evidence like bank account records, statutory declarations and emails to prove this.
All the Acknowledgment of Trust is doing is recording, by way of a Deed, the trust relationship that already exists.
However, there is a real risk that the:
- State stamp duty office
- ATO for Capital Gains Tax
- Bankruptcy Court
- Family Court
may not believe your story. They may inflict stamp duty and CGT on the Acknowledgement of Trust Deed. Be careful. Make sure you have plenty of evidence that at all times the beneficial owner was and remains the beneficiary (bank transfers, bank statements, emails etc…)
You need to prove that this Acknowledgement of Trust changes nothing. You were always the trustee of the asset for the beneficiary. You need evidence it has always been the case.
Why did the beneficiary want you, as trustee, to acquire the asset as trustee in the first place? There are many reasons – both personal and private. For example, the beneficiary may have wanted you to buy the asset as trustee because the beneficiary didn’t want the vendor, the public or a spouse to know what the beneficiary was up to.
Legal Consolidated gives no tax, CGT, stamp duty or any other advice on this document. You must speak with your accountant and adviser.
SMSF acquires property in the wrong name or without full disclosure of the SMSF
Sometimes, because of urgency, a person may purchase an asset for their Self-Managed Superannuation Fund. But the asset is purchased incorrectly, such as:
- the person buying the property is not a trustee of the SMSF;
- the person buying the asset is only one of the trustees of the SMSF; and
- most commonly, the person buying the asset is the trustee of the SMSF but there is nothing on any documents to clearly show that the super fund is the true beneficial owner.
Now the SMSF rules state that the trustee of the SMSF must hold the SMSF assets (there are some minor exemptions). So it is best practice to transfer the property into the correct names with disclosure of the SMSF.
Good luck with getting that through the stamp office. You will need to show evidence as to who the true beneficial owner was and still is). You and your accountant will also need to fight the good fight with the SMSF auditor as to how serious the breach of the Superannuation Laws has been in this instance.
Legal Consolidated is not giving you advice on stamp duty or Superannuation compliance rules.
Drafting an Acknowledgement of Trust for an SMSF
This Acknowledgement of Trust may help the process of the transfer. This is how your accountant may advise you on how to draft the Acknowledgement of Trust for an SMSF:
1. Where the purchaser was not a trustee of the SMSF
E.g. Fred Smith purchased the property with the Green Skies Super Fund ABN 2383838383 money. But Fred is not the trustee of that SMSF. The Trustee of the SMSF is actually Smith Nominees Pty Ltd:
Trustee: Fred Smith
Beneficiary: Smith Nominee Pty Ltd (select ‘Yes‘ to the question about whether the beneficiary also holds it in trust and puts in the SMSF’s name and ABN being Green Skies Super Fund ABN 2383838383)
2. Where the purchaser was one of the trustees of the SMSF
E.g. Colin Edwards purchased the property with Blue Super Fund ABN 3838383838 money. Colin is one of the trustees. The other trustee is his loving wife Mary Edwards:
Trustee: Colin Edwards
1st Beneficiary: Colin Edwards (select yes to the trust question and put in Blue Super Fund ABN 3838383838)
2nd Beneficiary: Select a second Trust and put in Mary Edwards (and again select yes to the trust questions and put in Blue Super Fund ABN 3838383838
3. Where the purchasers were the trustees of the SMSF but there is nothing in writing to confirm this
E.g. Stickles Nominees Pty Ltd is the Trustee of the Jenny and Peter Super Fund ABN 383838383. But the trustee company carelessly forgot to record that the beneficial owner was the SMSF:
Trustee: Stickles Nominees Pty Ltd
Beneficiary: Stickles Nominees Pty Ltd (and press yes to the trust question and put in the super fund details being Jenny and Peter Super Fund ABN 383838383
Legal Consolidated does not give advice on SMSFs. You must speak with your accountants and adviser.
Acknowledgement of Trust after you buy vs before you buy – Benidorm Pty Ltd v Commissioner of State Revenue
While Legal Consolidated provides no advice on these issues, your accountant may wish to use an Acknowledgement of Trust after you buy together with the supporting evidence to try and reduce:
- paying stamp duty again
- triggering Capital Gains Tax
- the bankruptcy court taking the asset from the Trustee (bankrupt person)
- the family court claiming the asset beneficially belongs to the trustee (divorcing person)
Benidorm Pty Ltd v Chief Comr of State Revenue
You will enjoy the case Benidorm Pty Ltd v Chief Comr of State Revenue  NSWSC 471.
It shows how an Acknowledgement of Trust after you buy is hard to prove. While a Declaration of Trust before you buy is generally less problematic.
In Benidorm v State Revenue, an executor of a Will declares he holds a penthouse on trust for a new beneficiary. This is following the death of the original beneficiary. Basically, it was an Acknowledgement of Trust after the asset comes into your hands.
- It was not a “Declaration of Trust BEFORE you buy”. This is where you sign the bare trust BEFORE you get the asset.)
- Instead, an Acknowledgement of Trust after you get the asset merely acknowledges that which had already come to exist.
The facts of the case Benidorm v State Revenue
- The company is a vehicle formed with one purpose. This is to purchase a Sydney penthouse for $12.5m.
- The sole director and shareholder of Benidorm is a lawyer.
- The lawyer is acting for his client Rolf.
- Rolf is a resident of a very beautiful tax haven called Guernsey. (Sorry, Guernsey no longer likes the expression ‘tax haven’. Guernsey prefers the expression ‘low tax’ jurisdiction. So let us go with that.)
- Rolf, the client, gives the funds to the company to purchase the penthouse.
2. Declaration of Trust BEFORE you buy
The facts of the above case are: immediately before the purchase contract is signed, the lawyer and Benidorm sign a Declaration of Trust before you buy. The lawyer declares that he holds his shares in Benidorm as a mere nominee for Rolf absolutely. If you build this document on our website then:
Bare Trustee: lawyer
Asset: shares in Benidorm Pty Ltd
Second, Declaration of Trust BEFORE you buy
Then Benidorm and Rolf sign another Declaration of Trust BEFORE you buy. The bare trust deed declares that Benidorm holds the title to the penthouse as a bare trustee for Rolf. To build that document on our website:
Bare Trustee: Benidorm Pty Ltd
Third, Acknowledgement of Trust AFTER you have the assets
Rolf dies in 2013. Sam (Rolf’s friend) is the executor and sole beneficiary of Rolf’s estate. In January 2015, the lawyer signed a document declaring that he now holds the shares in Benidorm in trust for Sam absolutely.
The lawyer’s support for Acknowledge of Trust is that Sam is the sole beneficiary and the executor of Rolf’s estate. This is the First Acknowledgement of Trust.
On the same day, Benidorm and Sam sign the Second Acknowledgement of Trust. The company Benidorm acknowledges that it “will hold” the penthouse on trust as a nominee for the “New Beneficiary” (Sam). This is on the same terms as the First Declaration of Trust.
The NSW State Revenue Office is not happy with the Second Declaration of Trust after you have the asset
- State Revenue has no issue regarding the two Declaration of Trusts BEFORE you buy.
- State Revenue does not care about the First Acknowledgement of Trust regarding the shares. (Why would it anyway. At that point the shares had no value.)
- But State Revenue does not like the Second Acknowledgement of Trust after you buy regarding the penthouse ownership. State Revenue charges Benidorm full stamp duty. It charges full ad valorem duty of $710k on the Second Declaration of Trust AFTER you have the asset.
- In effect, as is often the case, where the regulator does not believe your story it treats the Declaration of Trust AFTER you have the asset as a transfer. The lawyer argued that ‘it was always the case that the asset belonged beneficially to the beneficiary’. The regulator disagrees. And the regulator treats the Declaration of Trust AFTER you have the asset as a beneficial transfer from one person to another person.
Sam disagrees. So off to the NSW Supreme Court, they go.
What did the court in Benidorm v State Revenue consider?
The Court is asked: is the “acknowledgement of trust AFTER you acquire” subject to stamp duty?
Rolf wins. There is no stamp duty on the Acknowledgement of Trust AFTER you purchase:
- The NSW Supreme Court states that the definition in s 8(3) Duties Act 1997 (NSW) of:
- “declaration of trust” does not include mere acknowledgements of existing trusts. Instead, to come within the definition, “the impugned declaration must do something more than, in the sense of having a legal effect beyond, merely acknowledging the position subsisting at the time of the impugned declaration”.
- The Court states that the Second Acknowledgement of Trust had no effect beyond merely acknowledging that which had already come to exist.
- On the death of Rolf (under section 44 Probate and Administration Act) the beneficial interest in the penthouse vests in Sam as executor. In the words of the Court, that
- “had the consequence of effecting a change in the beneficiary and, in effect, created a new and different trust”. The Second Acknowledgement of Trust did no more than acknowledge that fact. The Second Acknowledgement of Trust, therefore, did not constitute a “declaration of trust” within the meaning of the definition of that term in s 8(3) Duties Act. As a result, the Court set aside the ad valorem stamp duty assessment.
- The Court states that the Second Acknowledgement of Trust after the acquisition was not subject to stamp duty.
This case highlights the fact that an Acknowledgement of Trust after you acquire the asset:
- is only part of the process. You also need supporting documentation.
- if you have, the important, supporting documents then there is unlikely to be stamp duty.
- is not as good as signing a Declaration of Trust BEFORE your trustee acquires the asset.
Legal Consolidated provides no advice on this document. We do not provide advice on tax and stamp duty issues. You need to speak with your accountant.
Can I purchase a property in a Legal Consolidated Bare trust, the beneficiary being a child under 18?
Yes, both the Legal Consolidated Declaration of Trust before you buy and the Acknowledgement of Trust after you acquire the asset allow for the beneficiary to be a human under 18 years of age. (A minor.) Both documents are often used for that purpose.
- But speak with your accountant about land tax.
- Also, speak to your accountant about a minor paying 66% tax on unearned income. This is under Division 6AA. (If your child is disabled consider a Special Purpose Trust instead.) This is because it is the minor who pays income tax and Captial Gains Tax on the asset. This is the case whether they are under or over 18 years of age.
- And do not forget, when the child turns 18 they can direct the trustee to transfer the asset to themselves. (This is generally for no CGT or stamp duty.)
- So the asset protection is not great, as the younger the person the more chance they are to go bankrupt, get divorced or stop loving you. Or, to put it another way, you are more likely to go bankrupt or divorce when compared to your parents. I am not sure why this is the case. Some say you get smarter as you get older. Or it could be because you get tired!
Can the trustee of these bare trusts borrow money to purchase the property?
Yes, both the Legal Consolidated Declaration of Trust before you buy and the Acknowledgement of Trust after you acquire the asset allow the gearing of the asset. This is at any time. For example, you could borrow to buy the property. Or in 20 years, you can use the property in the bare trust as security for a loan. But remember, at all times, the trustee must act in the best interests of the beneficiary. While the beneficiary is over 18 and of sound mind that is easy to do. You just get the beneficiary to agree to your strategy. Or, rather, the beneficiary will tell the trustee what to do. The trustee is a servant of the beneficiary. The trustee must do the bidding of the beneficiary.
However, when the beneficiary is under 18 years of age or lacks mental capacity the test is much harder to satisfy. In that situation get your accountant and financial planner to sign off to say what you, as the trustee, are about to do is in the best interest of the beneficiary.
Other types of bare trusts:
- Declaration of Trust BEFORE You Buy – ‘secretly buy‘
Please telephone us if you need more legal advice in answering the questions.