Jemag Pty Ltd ATF The Nawar Family Trust v Chief Commissioner of State Revenue

NCAT Administrative and Equal Opportunity|2024-11-28

REASONS FOR DECISION

The Applicant is Jemag Pty Ltd in its capacity as trustee for The Nawar Family Trust (the Trust).
The Applicant seeks review in this Tribunal of a decision of the Chief Commissioner of State Revenue (the Respondent) on 23 January 2024 to assess it as liable for surcharge land tax for the 2024 land tax year in respect of a residential land owned in Carlton, NSW.
The Applicant's case is that it was not aware of the operation of s 5D of the Land Tax Act 1956 (NSW) (LTA) and the surcharge land tax liability for discretionary trusts.
The Respondent says the Applicant was liable to surcharge land tax as the Applicant was deemed to be a foreign person for the purposes of s 5D of the LTA because the terms of the trust did not irrevocably prevent foreign persons from being potential beneficiaries of the trust at the relevant land tax date.

Materials filed with the Tribunal

The Applicant filed its application to the Tribunal on 13 August 2024 (A1). The Application attached a copy of the Objection Decision dated 12 August 2024, which disallowed the objection lodged by the Applicant on 6 June 2024.
The Respondent filed documents pursuant to s.58 of the Administrative Decisions Review Act 1997 (ADR Act) on 13 September 2024 (R1). The Respondent also filed written submissions (R2), and provided a Bundle of Authorities which was handed to the Tribunal and the Applicant at the hearing (R3).

Facts

The Trust was established on 5 July 2012 by deed entered into on that date (the Deed). The Deed relevantly provided that the trustee may decide, in its absolute discretion, what part of the income or capital of the Trust is to be distributed to a beneficiary or class of beneficiary (clause 16).
Clause 10 of the Deed provided: 10. The following shall be beneficiaries of the Trust: > all the persons named as beneficiaries in Schedule 1 to this deed; and > if any class of beneficiaries is named in Schedule 1 to this deed, then all the persons who belong to such a class. > any person or entity nominated by trustee belonging to any class of beneficiaries named in Schedule 1. The trustee may nominate any person as a member of an additional class of beneficiaries of the trust who is not named in Schedule 1 or may delete any class of beneficiaries from Schedule 1 to this Deed.
Under Schedule 1: 1. The "Named Beneficiaries" were George Nawar. 2. The classes of eligible beneficiaries include: the spouse, parents, parents of the spouse, children, grandchildren, brothers and sisters, nieces and nephews, uncles and aunts, the children of those uncles and aunts, the spouses of any children, the spouse of any grandchildren, the spouses of any brothers and sisters, the spouses of any nieces and nephews, of the named beneficiaries. schools, universities, colleges and other educational bodies of any kind either within or outside Australia; companies: of which any of the beneficiaries otherwise mentioned in this schedule is a shareholder or director, or in which at least one share is owned beneficially by any of the beneficiaries otherwise mentioned in this schedule; charities the trustee nominates for this purpose; or other legal entities the trustee nominates for this purpose.
On 25 February 2021, a Confirmation Deed was entered into as the original Deed had been misplaced. The Confirmation Deed annexed a replacement Deed, ratified the provisions of the original Deed and confirmed that no prior variations had been made to the Deed.
On 10 August 2022, the Respondent wrote to the Applicant advising that it may be liable for surcharge land tax.
On 9 March 2023, the Applicant lodged a Land Tax Variation Return declaring it was a "foreign entity" from 2 January 2016.
On 23 January 2024, the Respondent issued a land tax notice of assessment to the Applicant for the 2024 land tax year (the Assessment), assessing the Applicant as liable for surcharge land tax in the amount of $39,106.65.
On 27 March 2024, the Applicant wrote to the Respondent and requested that the Assessment be adjusted to treat the Applicant as not foreign. The Applicant also lodged a Land Tax Variation Return declaring it was not a foreign entity.
On 15 May 2024, the Respondent advised the Applicant that the Trust did not meet the requirements in s 5D of the LTA to irrevocably exclude foreign beneficiaries.
On 6 June 2024, the Applicant lodged an objection to the Assessment. In that objection, George Newar (a director of the Applicant) said the following: I am seeking your discretion concerning the additional surcharge applied to my account. The primary issue arises from a misunderstanding in the designation of foreign beneficiaries in my trust deed, which influenced the assessed amount. The property in question was sold and is set to settle on May 26, 2024. The standard land tax amount was expected to be $15,642. However, a surcharge of $39,106.65 was added based on an incorrect listing of foreign beneficiaries in my trust deed. I was unaware of this listing and had no intention of including foreign beneficiaries. This issue came to my attention only upon receiving the land tax notice, marking my first experience with such a tax, as my other trust-held property is exempt. Following legal consultation, steps are being taken to amend the Family Trust to ensure compliance with the Act and to prevent similar issues in the future. These amendments include: Removing any potential beneficiaries who are or might be considered foreign from Schedule 1 of the Trust. Incorporating a clause to prevent future amendments that might inadvertently include foreign persons as beneficiaries. Given these circumstances, I kindly request your discretion to reconsider the surcharge. This was a clerical error, and as a novice in commercial property investment, I was not fully aware of the requisite legal stipulations. Furthermore, the significant surcharge has imposed an undue financial burden, especially considering current interest rates and my economic situation, which necessitated the sale of the property.
On 12 August 2024, the Respondent disallowed the Applicant's objection.
The Application to the Tribunal for review was filed on 13 August 2024.

Why was no amendment made prior to 31 December 2023?

No written submissions were filed by the Applicant.
Mr Nawar represented the Applicant at the hearing. He was a director of the trustee company, Jemag Pty Ltd. He was also - as noted above - the Principal Beneficiary under the terms of the Deed. He told the Tribunal that his wife's family "is all in Egypt" but the Trust had never made any payments (distributions) to them. He said that he accepted the facts as presented to the Tribunal by the Respondent.
He said that he was not a sophisticated investor, and had poor attention to detail. He had changed accountants, and the previous accountant had not said anything to him about the Property being subject to surcharge land tax, or that there was a need to change the Deed. When he got the assessment, he got advice from a tax lawyer, and a new amending deed had been prepared. He confirmed that an undated Deed of Amendment - which was handed up at the Hearing (and marked A2) - was not in place as at 31 December 2023. He also confirmed that the Property had been sold during the 2024 calendar year, and was therefore not held as at 31 December 2024.
He asked the Tribunal to exercise a discretion to relieve him from the surcharge land tax, if that was possible.

Jurisdiction and task of the Tribunal

The Taxation Administration Act 1996 (NSW) (TA Act) applies in respect of "taxation laws" which are defined in s 4 to include the LTA.
Section 96 of the TA Act provides that a taxpayer may apply to the Tribunal for an administrative review of a decision of the Respondent that has been the subject of an objection. The Tribunal therefore has administrative review jurisdiction to hear and determine this application under s 96 of the TA Act and s 9 of the ADR Act.
The relevant decisions on review are the assessments, and not the objection decisions: see Chief Commissioner of State Revenue v Paspaley [2008] NSWCA 184 at [28]; Ferella v Chief Commissioner of State Revenue [2014] NSWCA 378 at [10].
The Tribunal's task is to decide what the correct and preferable decision is having regard to the material before it, including any relevant factual material and any applicable written or unwritten law: ADR Act, s 63.
The Applicant has the onus of proving its case: TA Act, s 100(3). That means it must prove all matters necessary for the Tribunal to answer the statutory questions in its favour: Cornish Investments Pty Limited v Chief Commissioner of State Revenue (RD) [2013] NSWADTAP 25 at [36]. The standard of proof is the balance of probabilities.
Section 101 of the TA Act sets out the powers of the Tribunal in dealing with an application for review and provides that the Tribunal may, amongst other things, confirm or revoke the assessment or other decision to which the application relates, make an assessment or other decision in place of the assessment or decision to which the application relates or remit the matter to the Respondent for determination in accordance with its finding or decision.

Relevant Legislative Provisions

Surcharge land tax is charged for the 2017 and subsequent land tax years on residential land owned by "foreign persons" pursuant to s 5A of the LTA.
Section 5D of the LTA was introduced on 24 June 2020 by the State Revenue Legislation Further Amendment Act 2020 (NSW) (Amendment Act). It (relevantly) provides: 5D Surcharge land tax - discretionary trusts (1) The trustee of a discretionary trust is taken to be a foreign person in that capacity for the purposes of section 5A if the trust does not prevent a foreign person from being a beneficiary of the trust. (2) If a discretionary trust prevents a foreign person from being a beneficiary of the trust, the trustee is not in that capacity a foreign person for the purposes of section 5A. (3) A discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if (and only if) both of the following requirements are satisfied - (a) no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement), (b) 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 (the no amendment requirement). Note--: Under the transitional arrangements for this section in Schedule 2 to the Principal Act, the no amendment requirement does not apply to a trust that satisfies the no foreign beneficiary requirement immediately before the commencement of this section. (4) A person is a potential beneficiary of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person. Note--: A potential beneficiary is not limited to persons named in the trust instrument and extends to the members of any class of persons to whom or for whose benefit trust property can be distributed or applied pursuant to the discretions of the trust. (5) For the removal of doubt, a person is not a potential beneficiary of a discretionary trust if the terms of the trust prevent any property of the trust from being distributed to or applied for the benefit of the person. (6) In this section, "property" includes money, and a reference to the distribution or application of property includes a reference to the payment of money.
Section 2A of the LTA defines "foreign person" as having the same meaning as in Chapter 2A of the Duties Act 1997 (NSW) (Duties Act) which, in turn, defines "foreign person" as having the same meaning as in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) (with certain modifications which are not presently relevant).
Section 4 of the FATA defines "foreign person" as meaning: … (d) the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or (e) the trustee of a trust in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or …
That section also defines the expression "substantial interest" as follows: substantial interest: a person holds a substantial interest in an entity, trust or unincorporated limited partnership if: (a) for an entity or unincorporated limited partnership - the person holds an interest of at least 20% in the entity or partnership; or (b) for a trust (including a unit trust) - the person, together with any one or more associates, holds a beneficial interest in at least 20% of the income or property of the trust.
Section 18 of the FATA sets out rules for determining percentages of interests in entities; and s 18(3) provides, inter alia: Discretionary trusts (3) For the purposes of this Act, if, under the terms of a trust, a trustee has a power or discretion to distribute the income or property of the trust to one or more beneficiaries, each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary.

Application of the law to the facts

The effect of s 5D of the LTA is that the trustee of a discretionary trust will be deemed to be a foreign person for the purposes of s 5A, and liable to surcharge land tax, unless the requirements of both s 5D(3)(a) and (b) are satisfied.

Section 5D(3)(a) was not satisfied

As submitted by the Respondent, the "no foreign beneficiary requirement" in s 5D(3)(a) requires that no potential beneficiary of the trust be a foreign person. A "potential beneficiary" is not just the named beneficiaries. A "potential beneficiary" includes any members of a class of beneficiaries if the exercise or failure to exercise a discretion under the Deed can result in any property being distributed to, or applied for the benefit of, the person.
The classes of eligible beneficiaries are set out at paragraph.9(2) above. Mr Newar noted that his wife's family has many relatives in Egypt. The classes of eligible beneficiaries are relevantly potential beneficiaries of the Trust for the purposes of s 5D(4) as the trustee has a discretion to distribute income or capital of the trust fund to or for the benefit of those beneficiaries. I agree that it is plain from the broad terms of those classes that the potential beneficiaries of the Trust include foreign persons.
Accordingly, I find that the Trust did not satisfy the "no foreign beneficiary requirement" in s 5D(3)(a) at the relevant taxing date of 31 December 2023 (or, for completeness, prior to s 5D commencing.)

Section 5D(3)(b) was also not satisfied

The Trust also did not satisfy the "no amendment" requirement in s 5D(3)(b) of the LTA.
I accept the submissions of the Respondent that there is no provision in the Deed that precludes a foreign person being a beneficiary of the Trust, let alone any provision preventing the terms of the Trust being amended in a manner that would result in there being a potential beneficiary of the Trust who is a foreign person.
Any Deed of Variation executed after the relevant taxing date of 31 December 2023 has no application, even if produced.

No discretion

There is no discretion granted to the Tribunal under the legislation to reduce or waive the liability to surcharge land tax, nor indeed to warn a taxpayer of a new duty: Monisse v Chief Commissioner of State Revenue [2023] NSWCATAP 27 at [33]. As said in Feng v Chief Commissioner of State Revenue [2024] NSWCATAD 56 at [49]: The Tribunal has repeatedly emphasised that the factors contributing to an applicant's failure to satisfy a statutory requirement are irrelevant (unless, of course, the statute itself says otherwise): Lawrence v Chief Commissioner of State Revenue [2022] NSWCATAD 266 at [38]; Song v Chief Commissioner of State Revenue [2023] NSWCATAD 301 at [80]. Also, the Tribunal has no overriding discretion to waive tax that is otherwise payable: Chu v Chief Commissioner of State Revenue [2021] NSWCATAD 238 at [30].
Accordingly, although I am sympathetic to the fact that the Applicant was unaware of the requirements in s 5D and the liability for surcharge land tax, no remedy is available. As submitted by the Respondent, liability to surcharge land tax is created by direct operation of the LTA, and notions of fairness or "justice" do not apply when the statutory provision contains no relevant discretion: Commissioner of Taxation v Ryan (2000) 201 CLR 109.
The Respondent, and in review proceedings this Tribunal, is required to administer the law in accordance with its terms.

Conclusion

Having regard to my findings and the applicable statutory provisions, the Applicant was taken to be a "foreign person" for the purposes of s 5A of the LTA for the 2024 land tax year.
It follows that the correct and preferable decision is that surcharge land tax was payable by the Applicant for the 2024 land tax year as assessed.

Orders

I make the following order: 1. The assessment under review is confirmed.

I hereby certify that this is a true and accurate record of the reasons for decision of the New South Wales Civil and Administrative Tribunal. Registrar I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar

Amendments 13 January 2025 - Date of decision amended. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 January 2025

State Revenue Legislation Further Amendment Act 2020(NSW)

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