Khalil & Associates Pty Ltd ATF The George Khalil Family Trust v Chief Commissioner of State Revenue

Issue for Determination

1. The issue for determination is whether the Amending Deed of 3 June 2021 (Amending Deed) satisfies the requirements of s5D of the Land Tax Act 1956 (NSW) (LT Act) for the tax year 2022 in that it irrevocably prevents foreign persons from being beneficiaries of the trust..

Jurisdiction of the Tribunal

1. Section 96 of the TA Act and s 9 of the Administrative Decisions Review Act 1997 (NSW) (ADR Act) give the Tribunal jurisdiction to review the Assessments. It is the decision to issue the Assessment, not the decision on the objection, which is the subject of the review: see Chief Commissioner of State Revenue v Paspaley [2008] NSWCA 184 at [28]; Ferella v Chief Commissioner of State Revenue [2014] NSWCA 378; 96 ATR 875 at [10]. As White J explained in Metricon Qld Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 982 at [26]: The court or tribunal reviewing the initial decision conducts a de novo review that is not limited to the materials before the Chief Commissioner. The parties are not bound by the grounds of objection or reasons for decision on the objection. The taxpayer is not required to show that the Chief Commissioner had erred on the materials before the Chief Commissioner, or that the exercise of any discretion by the Chief Commissioner was vitiated by a mistake of law, or failure to have regard to a consideration to which regard was required to be had, or by having regard to extraneous considerations (Tasty Chicks Pty Ltd v Chief Commissioner of State Revenue [2011] HCA 41; (2011) 245 CLR 446 at [13]-[22], 452-455). On the de novo review the court or tribunal is not confined to confirming or revoking the assessment. It can make an assessment in place of the Chief Commissioner's assessment, and can make an order for payment of any amount of tax that is assessed as being payable but has not been paid, including tax that is assessed by the court or tribunal as being payable (Taxation Administration Act, ss 3, 101(1)(b) and (c)).
2. In conducting that review, the Tribunal is required to determine the correct and preferable decision having regard to the materials before it and the applicable law: ADR Act s 63.

Relevant Legislative Provisions

1. Section 5D of the LT Act sets out provisions on surcharge land tax on discretionary trusts in the following terms: (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.
2. Section 2A of the Lt Act defines 'foreign person' by referring to s 2A of the Duties Act 1997 (NSW) (Duties Act) which refers to s 4 of the Foreign Acquisitions and Takeovers Act 1975 (Cth) FATA, which is in the following terms: foreign person" means: (a) an individual not ordinarily resident in Australia; or (b) a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or (c) 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 (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 (f) a foreign government; or (g) any other person, or any other person that meets the conditions, prescribed by the regulations. Note: In certain circumstances, an associate of a foreign person may be taken to be a foreign person even if the associate is not a foreign person (see subsection 54(7)).
3. Section 9 of the TA Act permits the respondent to make one or more assessments of a tax liability of a taxpayer. Section 9(2) states: (2) A reassessment of a tax liability is to be made in accordance with the legal interpretations and assessment practices generally applied by the Chief Commissioner in relation to matters of that kind at the time the tax liability arose except to the extent that any departure from those interpretations and practices is required by a change in the law (whether legislative or non-legislative) made after that time.

Applicant's submissions

1. The applicant submitted that the combination of clauses 16 and 18 of the Trust Deed meant that no potential beneficiary of the trust is a foreign person; the terms of the trust are not compatible of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person and the exercise or a failure to exercise of discretion under the terms of the trust cannot result in any property of the trust being distributed to or applied for the benefit of a foreign person.
2. The applicant submitted that the respondent's reassessment was ultra vires because it took into account irrelevant consideration which was that the Amending Deed did not include a definition of 'foreign person' and that it was unreasonable because it was perverse to find that 'foreign beneficiary' is of doubtful import and did not prevent all relevant foreign persons for the purpose of s 5D of the LT Act.
3. The applicant submitted that Practice Note CPN 004 V2 issued on 1 July 2020 did not require a definition of a 'foreign beneficiary' to be inserted into a Deed and the reassessment was conducted contrary to s 9(2) of the TA Act.
4. The applicant denied that it was claiming an exemption as asserted by the respondent. The applicant accepts that the onus is on it to prove its case (TA Act s100(3)).
5. The applicant submitted that trust deeds are interpreted in the same way as contracts. The applicant also relied on Hyhonie Holdings Pty Ltd v Leroy [2004] NSWCA 72 in regard to interpreting a deed. The applicant also referred to The Ross Tomlinson Trust [2020] NSWSC 1196 regarding the court 'correcting an obvious mistake.'
6. The applicant referred to Application of Walker Corporation Pty Ltd [2022] NSWSC 1609 and Stein v Sybmore Holdings [2006] NSWSC 1004 for the proposition that intention is relevant to construing a trust document.
7. The applicant submitted that there is no difference in the meaning between the term 'foreign beneficiary' as used in the Amending Deed and the term 'foreign person' as defined in s 5D of the LT Act. The applicant relied to s 5D(3)(a) which terms 'no potential beneficiary of the trust is a foreign person' as the 'no foreign beneficiary requirement'.
8. The applicant also referred to the State Revenue Legislation Further Amendment Bill 2019 [NSW] Explanatory Note which referred to the introduction of s 5D of the LT Act: If the terms of the trust prevent a foreign person from being a beneficiary, the trustee is not a foreign person for surcharge land tax purposes.

Respondent's submissions

1. The respondent submitted that the applicant bears the onus to establish all matters necessary to sustain an entitlement to an exemption. Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614 at 624
2. The respondent submitted that the Amending Deed does not satisfy the requirements of s5D(3)(a) or s5D(3)(b) of the LT Act.
3. First, the respondent submitted that the Tribunal cannot be satisfied that the term 'foreign beneficiary' has the same meaning as 'foreign person' because the words are different, the term 'foreign person' has an extended definition in s 4 of the FATA but the word 'foreign' has an ordinary meaning taken from Shorter Oxford Dictionary to mean: Belonging to, coming from, or characteristic of another country or nation. Foreigner situated outside the country: not in ones on land.
4. Second the respondent submitted that it is relevant to consider that the Amending Deed was drafted by legal advisors familiar with taxation law.
5. The respondent submitted that the Deed would not prevent a corporation incorporated in Australia from being a beneficiary with the directors or shareholders who are individuals who are not Australian citizens. However the extended definition of 'foreign person' would exclude such a corporation from the class of potential beneficiaries. This the respondent submits creates uncertainty.
6. Secondly the respondent submitted that the word 'may' in reference to the existence of foreign beneficiary does not or may not prevent the addition of future foreign beneficiaries.
7. As to s 5D(3)(b), the respondent submitted that the reference to 'irrevocably excluded' in the Amendment Deed is to a foreign beneficiary receiving trust distributions. The Amendment Deed does not disable any future amendment to the Deed.

Consideration

1. The Tribunal must determine whether the term of the Amending Deed satisfies the requirements of s 5D(3)(a) and (b). of the LT Act. The onus is on the applicant to prove its case on an application for review. The applicant has not filed any evidence in these proceedings. It asserts that on a proper construction, the Tribunal should be satisfied that the terms of the Amending Deed comply with s 5D of the LT Act.
2. The principles concerning the construction of contracts apply to the construction of a deed. The meaning of contractual terms is to be determined by what a reasonable person would have understood them to mean: This normally requires the consideration of the text, the surrounding circumstances known to the parties, and the purpose and object of the transaction. Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; 240 CLR 45 at [10], Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 at [22] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ.
3. I will deal with s 5D(3)(b) of the LT Act first as it is straightforward. There was no dispute between the parties that s 5D(3)(b) of the LT Act requires the trust to contain a term that prohibits any future amendment that would result in there being a potential beneficiary of the trust who is a foreign person.
4. I see no ambiguity in the Amending Deed in regard to the reference to irrevocable exclusion. There are no words in the Amending Deed that a reasonable person would understand to mean that the terms of the trust deed are not capable of amendment in a manner set out in s 5D(3)(b) of the LT Act.
5. I accept the respondent's submission that the Amendment Deed and the trust deed read as a whole does not disclose a term that the trust is not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person. On a plain reading of the Amendment Deed, the reference to 'irrevocably excluded' refers to a foreign beneficiary receiving trust distributions. The Amendment Deed does not preclude the applicant from amending the trust deed in the future to make a foreign person a potential beneficiary of the trust.
6. This is determinative of the application and on this basis I am satisfied that the respondent's decision is the correct and preferable decision and dismiss the application.
7. However if I am wrong in this regard I also address s 5D(3)(a) of the LT Act. In my opinion taking into account the regulatory context in which the Amending Deed was concluded, the consideration of the text and the object of the transaction, the Amending Deed does not comply with s 5D(3)(a) for the following reasons.
8. First, the regulatory context is one that involves a complicated web of interacting and intersecting statues. Words are often defined, such as in this case and are not given their ordinary dictionary meaning. It is critical therefore to use precise words as defined. I accept the applicant's submission that the bold reference to 'the no foreign beneficiary requirement' in s 5D(3)(a) is intended to summarise or characterise the words 'no potential beneficiary of the trust is a foreign person'. However in this particular case the state of the evidence is such that I am not able to draw any inference about the objective intention of the applicant. This is because there was not evidence before the Tribunal about what is the meaning of what the applicant wrote in the Amending Deed.
9. The applicant relied on decisions about 'correction of obvious mistakes' but relied on no evidence that a mistake was made in the preparation of the Amending Deed. As such, in the absence evidence, the Tribunal is unable to accept the applicant's submission that the Amending Deed was prepared in 'good faith' with the purpose and object of complying with ss 5D(3)(a) and (b) of the LT Act.
10. I accept the respondent's submission that there is uncertainty about whether the words 'foreign person' has the same meaning as 'foreign beneficiary' in this case. Taking into account the evidence before the Tribunal and the relevant law, I am not satisfied that the Amending Deed complies with s 5D(3)(a) or s 5D(3)(b) of the LT Act.
11. I make the following order: 1. The Applicant's application is refused.

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: 24 January 2024