Keddas Pty Ltd ATF Kaluarachchi Family Discretionary Trust v Chief Commissioner of State Revenue

NCAT Administrative and Equal Opportunity|2024-05-13

Introduction

On 15 September 2023 the Respondent issued a land tax notice of assessment to the Applicant for the 2019 to 2023 land tax years (Assessment) assessing the Applicant as liable to land tax and surcharge land tax in respect of residential land at St Mary's and at Colyton (Properties) owned by the Applicant as trustee for the Kaluarachchi Family Discretionary Trust (Trust).
It is not in dispute that the Applicant was liable to land tax for the relevant land tax years in respect of the Properties.
The Applicant seeks this Tribunal's review of the Assessment under s 55 of the Administrative Decisions Review Act 1997 (NSW) (ADR Act) in so far as the surcharge land tax amounts are concerned.
The Applicant lodged an objection against the Assessment on 16 October 2023 and the Respondent determined that objection by notice dated 30 November 2023.
Section 96 of the Taxation Administration Act 1996 (NSW) (TAA) provides that a taxpayer may apply to the Tribunal for a review of a decision of the Respondent that has been the subject of an objection.
The Respondent assessed the Applicant as liable to surcharge land tax because he determined that the Applicant was deemed to be a foreign person for the purposes of s 5D of the Land Tax Act 1956 (NSW) (LTA) so that surcharge land tax was payable under s 5A of the LTA (these provisions are set out below).
The Applicant contends that the Tribunal should "reverse" the surcharge land tax amounts assessed because, it says: 1. There are no foreign beneficiaries of the Trust and no Trust distributions have been made in any relevant land tax year; 2. 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; 3. As soon as the Applicant learned of the requirement to amend the Trust Deed, the Trust Deed was amended to preclude foreign beneficiaries; 4. 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.

Materials before the Tribunal

The Applicant relied on its application and documents filed together with the application.
The Respondent relied on documents filed pursuant to s 58 of the ADR Act and submissions dated 22 April 2024.

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 provides, relevantly: 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). (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. (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.
Part 34 of Schedule 2 of the Land Tax Management Act 1956 (NSW) (LTMA) contains savings and transitional provisions consequent on the enactment of the Amendment Act. It provides that s 5D of the LTA applies in respect of the 2017 and subsequent land tax years but provides for exemptions in certain circumstances.
Clause 66 of Schedule 2 provides, relevantly: 66 Amendments relating to discretionary trusts (1) Section 5D of the Land Tax Act 1956 applies to the assessment of land tax liability in respect of the 2017 land tax year and subsequent land tax years. (2) If the trustee of a discretionary trust is liable in that capacity as a foreign person for surcharge land tax in respect of the 2017, 2018, 2019 or 2020 land tax year - (a) the trustee is exempt from that land tax if the terms of the trust have been amended, before payment of the land tax is due and before midnight on 31 December 2020, so that the trust prevents a foreign person from being a beneficiary, or … (3) A trust that satisfies the no foreign beneficiary requirement under section 5D of the Land Tax Act 1956 immediately before the commencement of that section is considered for the purposes of that section to prevent a foreign person from being a beneficiary of the trust (without having to satisfy the no amendment requirement under that section).
Section 2A of the LTA defines "foreign person" as having the same meaning as in 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 (Cth) (FATA) (with certain modifications which are not presently relevant).
Section 4 of the FATA defines "foreign person" as meaning: 1. an individual not ordinarily resident in Australia; or 2. a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or 3. a corporation 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 4. 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 5. 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 6. a foreign government; or 7. any other person, or any other person that meets the conditions, prescribed by the regulations.
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.

Taxation Administration Act 1996 (NSW) (TAA)

The TAA applies in respect of "taxation laws" which are defined in s 4 of the TAA to include the LTA and the LTMA.
As previously mentioned, s 96 of the TAA 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.
Section 100 of the TAA provides that the Applicant's and Respondent's cases on an application for review are not limited to the grounds of the objection and that the Applicant has the onus of proving its case.
Section 101 of the TAA 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.

Facts

The following facts are not in dispute.
By deed executed on 17 August 2007 the Kaluarachchi Family Discretionary Trust (Trust) was established. The trustee of the Trust is Keddas Pty Ltd, the Applicant.
The Trust is a discretionary trust. The Trust Deed provides that the trustee may pay, apply or place to the credit in the books of account of the Trust the whole or any part of the income of the Trust for the benefit of any one or more of the General Beneficiaries (clause 4.6.1) and the capital of the Trust for the benefit of any Beneficiary (clause 5). The Beneficiaries of the Trust are the Nominated Beneficiaries and the General Beneficiaries (clause 2).
The Nominated Beneficiaries are Mr Harsha Kaluarchchi, a director of the Applicant, his wife and two daughters (clause 2.1, the Schedule). Each of those persons are, and were at all relevant times, Australian citizens.
General Beneficiaries are defined in clause 2.1 of the Trust Deed to mean and include, relevantly: 1. (clause 2.2.1) The Nominated Beneficiaries; 2. (clause 2.2.2) Various relatives of the Nominated Beneficiaries; 3. (clause 2.2.4) Any Corporation wherever incorporated or resident any share in which is beneficially owned or held by any General Beneficiary or by the Trustee of any Trust or Settlement under which any General Beneficiary has any interest whether absolute or contingent or by way of expectancy and whether liable to be defeated by the exercise of any power or appointment or revocation or to be diminished by the increase of the class to which he she it or they belong, and the Trustee of any Trust or Settlement in which a General Beneficiary has any interest whatsoever whether Capital or Income and whether absolute or contingent, presumptive or prospective, and the Trustee of any Trust or Settlement, including a Superannuation Fund of which a General Beneficiary is a member, which the Trustee may at any time and from time to time nominate in writing as a General Beneficiary and whether or not any such Corporation, Trust or Settlement is in existence on the Commencement Day 1. (clause 2.2.5) An executor and trustee of the will and administrator of the estate of a General Beneficiary; 2. (clause 2.2.6) A person who has the legal custody of a General Beneficiary; 3. (clause 2.2.7) 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: 1. Clause 2.4: 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. 2. Clause 19: 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 and in 2017 the Applicant purchased residential land at Colyton as trustee for the Trust.
On 26 July 2022 the Respondent 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.
A Deed of Variation was executed on 15 September 2023 which varied the Trust Deed to irrevocably exclude foreign beneficiaries. The Respondent accepts that the Deed of Variation meets the requirements of s 5D of the LTA and that for the 2024 and subsequent land tax years the Trustee will be determined not to be a foreign person.

Consideration

As set out above, surcharge land tax is charged under s 5A of the LTA for the 2017 and subsequent land tax years on residential land owned by foreign persons.
It is not in dispute that the Properties were residential land owned by the Applicant as trustee of the Trust at all relevant dates.
Pursuant to s 5D of the LTA a trustee of a discretionary trust is deemed to be a foreign person for the purposes of s 5A of the LTA unless the trust prevents a foreign person (as defined by s 4 of the FATA) from being a beneficiary of the trust.
Pursuant to s 5D(3) a discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if, and only if, no potential beneficiary of the trust is a foreign person and the terms of the trust are not capable of being amended in a manner that would result in there being a potential beneficiary who is a foreign person.
A person is a potential beneficiary of a discretionary trust if the exercise or failure to exercise of 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 (s5D(4) LTA).
The definition of foreign person is set out at paragraph [17] above. As can be seen it includes individuals not ordinarily resident in Australia, as well as corporations (or trustees of a trust) in which an individual (or two or more individuals together) not ordinarily resident in Australia or a foreign corporation or a foreign government holds a substantial interest.
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.
Under clauses 4 and 5 of the Trust Deed the trustee had discretion to distribute the income and capital of the Trust to or for the benefit of the General Beneficiaries. The General Beneficiaries were, therefore, potential beneficiaries under s 5D(4) of the LTA regardless of whether distributions were in fact made to them.
Under the Trust Deed, the General Beneficiaries included natural persons including the four Nominated Beneficiaries and various relatives of the Nominated Beneficiaries.
While it is accepted that each of the Nominated Beneficiaries was not a foreign person, there is no evidence before the Tribunal as to who the relevant relatives of the Nominated Beneficiaries were or whether they were ordinarily resident in Australia.
Under the Trust Deed, the General Beneficiaries also included the executor and trustee of the will and administrator of the estate of a General Beneficiary and a person who has the legal custody of a General Beneficiary. There is also no evidence before the Tribunal as to whether there were any such potential beneficiaries and, if so, whether they were ordinarily resident in Australia.
Further, under the Trust Deed, the General Beneficiaries of the Trust also included "any corporation wherever incorporated or resident any share in which is beneficially owned or held by any General Beneficiary" (clause 2.2.4) and charitable, educational, benevolent, sporting or religious institutions whom the Trustee considered worthy of receipt of funds (clause 2.2.7).
There is no evidence before the Tribunal 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, see paragraph [38] above) 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 within the meaning of s 4 of the FATA).
It follows that I find the Applicant has failed to discharge its onus of proof that prior to the Deed of Variation, there were no foreign beneficiaries of the Trust. While the Nominated Beneficiaries were not foreign persons, the General Beneficiaries extended well beyond those persons and I cannot be satisfied on the evidence before me that none of the General Beneficiaries, who were potential beneficiaries, were foreign persons for the purposes of s 5D of the LTA. Accordingly, the Trust would not have been considered to prevent a foreign person from being a beneficiary of the Trust under s 5D(3) of the LTA and, therefore, the trustee would, under s 5D of the LTA, be deemed to be a foreign person for the purposes of s 5A of the LTA.
I also note that, even if I could have been satisfied that no potential beneficiaries were foreign persons (which I cannot), 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 of the Trust who was a foreign person, such that the Trust would not have been considered to prevent a foreign person from being a beneficiary of the Trust under s 5D(3) of the LTA in any event.
On 15 September 2023 the Trust Deed was amended to irrevocably preclude foreign beneficiaries. The Respondent accepts that the Deed of Variation complies with s 5D of the LTA to prevent foreign persons being beneficiaries of the Trust. However, the Deed of Variation did not purport to have retrospective effect. In any event, the subsequent alteration of rights under a discretionary trust does not affect the operation of taxing legislation at the time a liability arises: Axiom88 Pty Ltd ATF Axiom88 Trust v Chief Commissioner of State Revenue [2023] NSWCATAD 252 at [67]; Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184. The Deed of Variation applies only in respect of the 2024 land tax year and onwards.
There is no provision in the LTA or in the savings and transitional provisions of the LTMA that permits amendments to the Trust Deed after the 31 December deadline. Nor does the Respondent have any discretion to extend the time for amending the Trust Deed. 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 at [40]; Monisse v Chief Commissioner of State Revenue [2023] NSWCATAP 27. I accept that, had it been aware of the need to do so, the Applicant would have amended the Trust Deed sooner. However, in the absence of any power to extend the time for amending the Trust Deed, the fact that the Applicant was not aware of the need to do so is not relevant.
As the Trust Deed was not amended to prevent foreign persons from being a beneficiary of the Trust by the relevant date (midnight on 31 December 2020 for the 2019 to 2021 land tax years pursuant to the exemption in cl 66 of Schedule 2 to the LTMA, midnight on 31 December 2021 for the 2022 land tax year and midnight on 31 December 2022 for the 2023 land tax year) the Applicant trustee is taken to be a foreign person under s 5D of the LTA in respect of each of the 2019 to 2023 land tax years and liable to surcharge land tax for those years pursuant to s 5A of the LTA.
The Applicant did not contend that the exemption in s 5B of the LTA (the principal place of residence exemption) applies and I note that it could not apply. That exemption applies to a natural person, not to a corporate entity: Axiom88 at [64]. Nor did the Applicant contend that any other exemption applied.
It follows that I find that the Respondent correctly determined that the Applicant trustee was a foreign person under s 5D of the LTA and, as such, liable to surcharge land tax for the 2019 to 2023 land tax years under s 5A of the LTA.
The Applicant argued that it should not be liable to surcharge land tax where the liability has arisen as a result of a genuine mistake. Again, I accept the Applicant's evidence as to why the Deed of Variation was not executed earlier. However, neither the LTA nor the LTMA give the Respondent, or the Tribunal on review, any discretion to waive, wholly or in part, the Applicant's liability for surcharge land tax: Volpatti v Chief Commissioner of State Revenue [2007] NSWADT 222 at [27]; Axiom88 at [73].
To the extent that the Applicant appeals to notions of fairness and appeals of leniency or natural justice such matters are not relevant when considering the validity of the assessment under review: see Commissioner of Taxation v Ryan (2000) 201CLR 109. The Respondent (and the Tribunal on administrative review) is required to administer the law in accordance with its terms. Axiom88 at [74] - [75].

Conclusion

For the reasons given, I find that the Applicant has not discharged its onus of proof and I find that the assessment of surcharge land tax for the 2019 to 2023 land tax years in respect of the Properties is the correct and preferable decision and should be confirmed.

Orders 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 Civil and Administrative Tribunal of New South Wales. Registrar 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: 22 May 2024

State Revenue Legislation Further Amendment Act 2020(NSW)

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