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. The trust’s beneficiary is your son. You hold the bank account in trust for your son. Your name appears on the bank account merely as the ‘legal owner’. The ‘true’ or ‘beneficial’ owner is your son. It is your son that pays tax on the bank account interest. When your son is 18 years of age he can remove you as trustee – and instead place you with another trustee or himself as the ‘legal owner’.
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 to see who the ‘true’ owner of the assets are. In this case the ‘true’ owner is your son – not you.
Most people when they own an asset hold both the legal and beneficial interest in the asset. There is no trust if you hold both the legal and beneficial ownership. In contrast, in a trust the legal and beneficial interests are held by different people. One person is the legal owner – trustee. The other person is the beneficial owner – beneficiary. A trust automatically exists when you separate the ‘legal’ and ‘beneficial’ ownership.
If your son, at 18, removes you at 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 and the trust relationship no longer exists.
The trust asset can be anything, including real estate, shares, artwork, cars, bank accounts and cash.
One great strength of Trusts is that they are unregulated and private. These are four types of trusts you can build on our website:
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 isn’t 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 didn’t. 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 cheque butts and emails to prove this.
All the Acknowledgement of Trust is doing is recording, by way of Deed, the trust relationship that already exists.
There is a real risk that the:
may not believe you and seek to 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.
Sometimes, in the heat of the moment, a person may purchase an asset for their Self-Managed Superannuation Fund. But the asset is purchased incorrectly, such as:
1. the person buying the property is not a trustee of the SMSF
2. the person buying the asset is only one of the trustees of the SMSF
3. 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 trust (beneficial) owner is the SMSF
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 stamps office. You will need to show evidence as to who the true beneficial owner was and still is).
This Acknowledgement of Trust helps the process of the transfer. This is how you draft the Acknowledgement of Trust for an 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 put in the SMSF’s name and ABN being Green Skies Super Fund ABN 2383838383)
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
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 super fund
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
An Acknowledgement of Trust after you buy together with the supporting evidence seeks to stop:
I think you will enjoy the court case Benidorm Pty Ltd v Chief Comr of State Revenue  NSWSC 471 (NSW Supreme Court, Ward CJ in Equity, 30 April 2020). It demonstrates 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 this case, 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.
These are the facts of the case:
Benidorm Pty Ltd is formed in 2007. [This is how you build a new company.] It is a vehicle to purchase a Sydney penthouse for $12.5m. The sole director and shareholder of Benidorm is a lawyer acting for his client Rolf (a resident of Guernsey).
Rolf gave the funds to the company to purchase the penthouse.
Immediately before the purchase contract was signed, the lawyer and Benidorm signed 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 then:
Bare Trustee: lawyer
Asset: shares in Benidorm Pty Ltd
Then Benidorm and Rolf sign a another Declaration of Trust BEFORE you buy. The bare trust deed declares that Benidorm holds the title to the penthouse as bar trustee for Rolf. So if you were building that document on our website:
Bare Trustee: Benidorm Pty Ltd
Rolf dies in 2013. Sam (Rolf’s friend) is the executor and sole beneficiary of Rolf’s estate. In January 2015, the lawyer signs a document declaring that he now holds the shares in Benidorm on trust for Sam absolutely. His 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 nominee for the “New Beneficiary” (Sam) on the same terms as the First Declaration of Trust.
Sam disagrees. So off to the NSW Supreme Court we go.
The Court is asked: is the “acknowledgement of trust after you acquire” subject to stamp duty?
This case highlights the fact that an Acknowledgement of Trust after you acquire the asset:
Please telephone us if you need more legal advice in answering the questions.
Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
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