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TAXES AND DUTIES - Surcharge land tax – Applicant holds residential land on trust – discretionary trust – whether, during the relevant land tax years, foreign persons were excluded as a beneficiary under the terms of the trust deed
Axiom88 ATF Axiom88 Trust v Chief Commissioner of State Revenue [2023] NSWCATAD 252 Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184 Commissioner of Taxation v Ryan (2000) 201CLR 109 Cornish Investments Pty Limited v Chief Commissioner of State Revenue (RD) [2013] NSWADTAP 25 Cymtow Pty Ltd as trustee for Stanavacs Trust; Lanlex No 127 Pty Ltd as trustee for TBH Family Trust; Cybir Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAD 314 Monisse v Chief Commissioner of State Revenue [2023] NSWCATAP 27 Volpatti v Chief Commissioner of State Revenue [2007] NSWADT 222
Background
The facts, briefly stated, were as follows:
On 17 August 2007, the Kaluarachchi Family Discretionary Trust (“the Trust”) was established. The beneficiaries of the Trust are the Nominated Beneficiaries and General Beneficiaries. The Nominated Beneficiaries are Mr Harsha Kaluarachchi, a director of the Applicant, and his wife and two daughters, who are Australian citizens.
The General Beneficiaries include various relatives of the Nominated Beneficiaries, amongst others, including relevantly:
"any Corporation wherever incorporated or resident any share in which is beneficially owned or held by any General Beneficiary or by the Trustee…” and
"any charity or charitable, educational, benevolent, sporting, religious institution, person or persons, corporation, corporations, association or associations howsoever constituted whom the Trustee in the Trustee’s absolute discretion considers worthy of receipt of funds.”
Other relevant provisions of the Trust Deed include:
“The Trustee may from time to time declare in writing, provided it has first obtained the consent of the Nominated Beneficiaries, that a person, corporation or institution not included in the definition of General Beneficiary, be a General Beneficiary from the date of any such declaration” and
“the Trustee may revoke, add to or vary all or any of the provisions of the Trust Deed and may declare new or other Trusts or Trust powers concerning the Trust.”
In 2013, the Applicant purchased residential land at St Mary’s as trustee for the Trust. In 2017, the Applicant purchased residential land at Colyton as trustee for the Trust (together the “Properties”).
On 16 July 2022, the Chief Commissioner wrote to the Applicant advising that it may be liable to land tax and surcharge land tax in respect of the Properties.
On 9 August 2022, the Applicant lodged a land tax registration return in respect of the Properties.
On 15 September 2023, the Chief Commissioner issued the Assessment.
On 15 September 2023, a Deed of Variation was executed which varied the Trust Deed to irrevocably exclude foreign beneficiaries, which the Chief Commissioner accepted meets the requirements of s. 5D of the Land Tax Act 1956 (“LT Act”) for the purposes of the 2024 and subsequent land tax year.
On 16 October 2023, the Applicant lodged an objection to the Assessment, which was disallowed on 30 November 2023.
The Statutory Framework
Section 5A of the LT Act 1956 provides that surcharge land tax is charged for the 2017 and subsequent land tax years on residential land owned by “foreign persons”.
Section 5D(1) further provides that a trustee of a discretionary trust is taken to be a foreign person for the purposes of s 5A if the trust does not prevent a foreign person from being a beneficiary of the trust. Section 5(3) of the LT Act provides that a discretionary trust is considered to prevent a foreign person from being a beneficiary only if both of the following requirements are satisfied:
No potential beneficiary of the trust is a foreign person,
The terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person.
Clause 66(2)(a) of sch 2 of the Land Tax Management Act 1956 (NSW) (“LTM Act”) required discretionary trusts to amend their trust deeds to comply with the requirements set out in s 5D of the LT Act prior to 31 December 2020 to be exempt from surcharge land tax for the 2017 to 2020 land tax years.
Section 2A of the LT Act defines “foreign person” as having the same meaning as Chapter 2A of the Duties Act 1997 (NSW) which, in turn, defines “foreign person” as having the same meaning as in the Foreign Acquisitions and Takeovers Act 1975 (“FATA”). This includes individuals not ordinarily resident in Australia as well as corporations in which an individual not ordinarily resident in Australia or a foreign corporation or a foreign government holds a substantial interest.
Submissions
The Applicant’s submissions:
The Applicant submitted that the Tribunal should “reverse” the surcharge land tax amounts assessed because:
There are no foreign beneficiaries of the Trust and no Trust distributions have been made in any relevant land tax year;
The Applicant was not aware of the requirement to amend the Trust Deed to preclude foreign beneficiaries, and had it been aware, it would have promptly amended the Trust Deed to preclude foreign beneficiaries;
As soon as the Applicant learned of the requirement to amend the Trust Deed, the Trust Deed was amended to preclude foreign beneficiaries;
In the circumstances it is not fair that the Applicant should be assessed as liable to surcharge land tax for the land tax years prior to the Trust Deed being amended.
Decision
Senior Member Dunn considered that prior to the Deed of Variation, the Trust Deed did not contain a provision preventing a foreign person from being a beneficiary of the Trust. The Trustee had discretion to distribute income and capital of the Trust to the General Beneficiaries, who are therefore potential beneficiaries within the meaning of s. 5D(4) of the LT Act regardless of whether distributions were in fact made to them.
While the Nominated Beneficiaries were not foreign persons, Senior Member Dunn noted there was no evidence as to the identities of the relevant relatives or whether they were ordinarily resident in Australia. It is also unclear whether there were any potential beneficiaries in the class of an executor and trustee of the will, administrator of the estate of a General Beneficiary or a person who has the legal custody of a General Beneficiary, and if there were, whether they were ordinarily resident in Australia.
It was also found that there was no evidence as to whether shares were held by any General Beneficiary in any corporations (or if so, whether any such corporations were foreign persons within the meaning of s 4 of the FATA) or whether the Trustee had considered any charitable or other relevant institution worthy of receipt of funds (or if so, whether any such institution was a foreign person under s 4 of the FATA).
Accordingly, Senior Member Dunn was not satisfied that none of the General Beneficiaries, who were potential beneficiaries, were foreign persons. Therefore, the Trust would not have been considered to prevent a foreign person from being a beneficiary of the Trust pursuant to s 5D(3) of the LT Act and the Applicant would be deemed a foreign person under s 5A.
Furthermore, Senior Member Dunn noted that until the Deed of Variation was executed, the terms of the Trust Deed were also capable of being amended in a manner that would result in there being a potential beneficiary who was a foreign person.
Senior Member Dunn noted that the subsequent alteration of rights under a discretionary trust does not affect the operation of taxing legislation at the time a liability arises and the Deed of Variation only applies to the 2024 land tax year onwards. There is no provision in the LT Act or the LTM Act that permits amendments to the Trust Deed after the 31 December 2020 deadline, nor is there any discretion in the Chief Commissioner to extend time for amending the Trust Deed.
Given that the Trust Deed was not amended by the relevant dates, the Applicant trustee is taken to be a foreign person for the 2019-2023 land tax years under s 5D and liable to surcharge land tax for those years pursuant to s 5A of the LT Act.
Senior Member Dunn confirmed that neither the Respondent nor the Tribunal have any discretion to waive the Applicant’s liability for surcharge land tax, and that notions of fairness and appeals of leniency or natural justice are not relevant in these matters.