Does the Act's s36A exemption apply?

36A Property passing to beneficiaries of discretionary trusts

(1) No duty is chargeable under this Chapter in respect of a transfer of dutiable property that is subject to a discretionary trust (the principal trust) to a beneficiary of a trust if -

• (a) the duty (if any) charged by this Act in respect of the dutiable transaction that resulted in the dutiable property becoming subject to the principal trust has been paid or the Commissioner is satisfied that the duty will be paid; and
• (b) the beneficiary -
  • (i) was a beneficiary at the relevant time; or
  • (ii) . . .
• (c) the transfer is -
  • (i) to the beneficiary absolutely; or
  • (ii) to the beneficiary as trustee of another trust of which all the beneficiaries are relevant beneficiaries; and
• (d) if -
  • (i) the transfer is to the beneficiary absolutely; and
  • (ii) the beneficiary is a corporation -

all the shareholders of the corporation are natural persons who were beneficiaries of the principal trust at the relevant time; and

(e) . . .

(2) . . .

(3) In this section -

(a) a natural person who -

• (i) was a beneficiary of that trust at the relevant time; or
• (ii) . . .

relevant time in relation to dutiable property that is subject to the principal trust, means the time at which the property first became subject to the principal trust.

1. Mr Hines for the applicant contended that all of the Act's s36A requirements were satisfied and the applicant was entitled to duty exemptions in respect of each of the transfers from the principal trust to the receiving trusts. These transfers were said to be to "relevant beneficiaries" as defined in sub-paragraph 36A(1)(c)(ii). The applicant's assumption was that the words "that trust" in the definition of "relevant beneficiary" in sub-section 36A(3) refer to the principal trust. Named beneficiaries of the receiving trust were also named beneficiaries of the principal trust at the "relevant time" when the principal trust first acquired the properties transferred at times between 9 August 2012 and 8 April 2013. On this basis, named beneficiaries of the receiving trust satisfied the sub-paragraph's requirement that the beneficiaries be beneficiaries of "that trust" at "relevant time".

1. In his answering argument, Mr Horan for the respondent denied that the transfers from the principal trust were made to "relevant beneficiaries" as that term should be understood. "[T]hat trust" in the defined sense of "relevant beneficiary" in sub-section 36A(3) of the Act referred to the receiving trusts rather than the principal trust. On this assumption, the exemption condition had not been satisfied.

1. The receiving trusts were created on 2 July 2013. It followed, according to Mr Horan's argument, that the "relevant beneficiaries" could not have been beneficiaries of the receiving trusts at an earlier time when the principal trust acquired the properties transferred. It will be recalled that the properties were acquired by the principal trust at dates between 9 August 2012 and 8 April 2013.

1. The applicant's first submission in the amended grounds of review was headed "Section 36A(1)(b)", commencing with the words:

1. The respondent's submission that the applicant as trustee of the Receiving Trusts was not a beneficiary of the Principal Trust at the relevant time should be rejected.

1. The applicant's submission is mistaken. The respondent did not address the Tribunal on whether the applicant as trustee of the receiving trusts was a beneficiary of the principal trust at the relevant time, or at any other time. Instead, the respondent's contention was that creation of the receiving trusts after the relevant time meant that the trust referred to in sub-para 36A(1)(c)(ii) as "another trust" could not have relevant beneficiaries at the relevant time.

1. To repeat, the Act's s36A exemption applicable to present facts is triggered by compliance with sub-para 36A(1)(c)(ii). To qualify for the exemption, a distribution had to be made from the principal trust to a beneficiary as trustee of another trust of which all the beneficiaries were relevant beneficiaries at the relevant time.

1. There are a number of reasons, mainly textual, for why the respondent's construction of sub-para 36A(1)(c)(ii) correctly incorporates a definition of "relevant beneficiary" which refers to the receiving trusts.

1. First, the scheme of the Act's s36A suggests that "relevant beneficiary" should be defined as a natural person who was a beneficiary of a receiving trust and not the principal trust at the time that the transferred property was acquired. Terms of the exemption must be limited. It could not be appropriate that the exemption should extend to an indefinite number of transferee trusts which the applicant might decide to create at any time. In Mr Horan's words, "the scheme of the section is to establish a continuity of beneficiaries of the principal trust and the receiving trust".

1. Secondly, the wording "the beneficiary as trustee of another trust of which all the beneficiaries are relevant beneficiaries" in sub-paragraph 36A(1)(c)(ii) [emphasis added] contrasts with the wording of the provision for distribution to corporate beneficiaries in the next paragraph 36A(1)(d). That paragraph expressly provides that "shareholders of the corporation" must be "beneficiaries of the principal trust". The words "natural persons who were beneficiaries of the principal trust" were used where the draftsperson wished require that recipients be beneficiaries of the principal trust. The applicant has not explained the omission of this specificity in sub-paragraph 36A(1)(c)(ii). It cannot be dismissed as accidental.

1. Thirdly, definitions of "relevant beneficiary" in subsection 36A(3) of the Act operate more consistently if sub-paragraph 36A(3)(c)(ii) refers to the receiving trusts rather than the principal trust. Subparagraph (a)(i) of the definition of "relevant beneficiary" as a beneficiary of "that trust at the relevant time" in s-s36A(3) would make little sense if the following sub-paragraph (a)(ii) were to include a natural person who was a beneficiary of another receiving trust within sub-paragraph 36A(3)(c)(ii) at the time that the dutiable property became the subject of the principal trust.

1. Fourthly, the history of s36A of the Act suggests that "relevant beneficiary" at "the relevant time" in sub-section 36A(3) of the Act refers to beneficiaries of the receiving trusts rather than the principal trust.

1. Prior to 2006, the former s36 of the Act provided an exemption for a transfer to a beneficiary absolutely (not being by way of sale). Where the beneficiary acquired property as trustee for a second trust, all beneficiaries of the second trust had to be natural persons and beneficiaries at the time that the property became an asset of the first trust.

1. The new ss 36, 36A, 36B and 41A of the Act were inserted in 2006. Respectively, the new provisions covered fixed trusts, discretionary trusts, unit trust schemes and superannuation funds. The Explanatory Memorandum to the State Taxation Legislation (Miscellaneous Amendments) Bill 2006 indicated that the new provisions were not intended to operate on a broader basis that the old s36. Instead, the new provisions were to provide specific exemption criteria tailored appropriately to trusts of different types. No general exemption was proposed for discretionary trusts as recipient trusts whenever created. The Explanatory Memorandum described the effect of the new 36A(1)(c) less than precisely in the following terms:

the transfer is to a beneficiary either absolutely or as a trustee of another trust where, at the time the trust acquire the property, all the beneficiaries were relevant beneficiaries as described in sub-section (3).

1. At hearing, Mr Hines for the applicant argued that it was "anomalous" for paragraph 36A(1)(c) to require that beneficiaries be beneficiaries of the receiving trusts and not the principal trust. The following submission was made in the amended grounds of review:

1. Thirdly, there is s36A(1)(c)(ii), which requires beneficiaries merely to have been beneficiaries of a trust at the relevant time. It is submitted that this provision is satisfied if the beneficiary at the relevant time was a beneficiary of the principal trust or the 'other' trust, in this case one of the Receiving Trusts.

1. I do not accept the argument. Sub-para 36A(1)(c)(ii) does not refer indifferently to the principal trust and the receiving trusts. Nor does it refer to "the relevant time". For the reasons put forward by the respondent, the s36A exemption condition is unavailable in this case because it imposes an impossible requirement. Receiving trust beneficiaries must be receiving trust beneficiaries before the trusts were created.

1. Mr Hines argued that the applicant had an alternative means of satisfying sub-para 36A(1)(c)(ii). Any reference to the beneficiaries of the principal trust, he said, meant and included the beneficiaries of the receiving trusts. The principal trust and the receiving trusts had identical beneficiaries.

1. However, explicit differences in relevant classes of potential beneficiaries as between the principal trust and the receiving trusts have been noted.[4]

1. The definition of "beneficiary" in subsection 36A(3) of the Act is as follows:

beneficiary of a discretionary trust means a person, or member of a class of person, in whom, by terms of the trust, the whole or any part of the capital of the trust estate may be vested or reaming vested -

(a) in the event of the exercise of a power or discretion in favour of the person (whether or not that power is presently exercisable); or

(b) in the event that a discretion conferred under the trust is not exercised);

1. In her 2 July 2015 statement, the applicant sets out lists of her relatives then existing in the classes described both in the principal trust and the receiving trusts.[5] She stated that the identity of persons in both sets of lists was the same. This assertion should be accepted. The respondent led no evidence to the effect that the applicant's statement was untrue.

1. The effect of there being a divergence in the descriptions of classes of parents, brothers, sisters and others as between the principal trust and the receiving trusts may be of no consequence. For the definition of "beneficiary" in subsection 36A(3) of the Act "means a person, or members of a class of person", but does not include an unborn person.

1. However, a significant difference eligible beneficiaries does exist between the trusts. A different "settlor" and a different class of persons who were the settlor's relatives were excluded from benefit under the receiving trusts when compared to the principal trust.[6] This displaced the possibility that the principal trust and the receiving trusts had identical beneficiaries.

The applicant's additional grounds of objection

1. In the applicant's statement of legal contentions, Mr Hines outlined the following additional grounds of objection:

Ground 1: no dutiable transaction because no beneficial interests in the land held by any person other than the holder of the legal estate in fee simple

Ground 2: no duty chargeable because dutiable property the subject of any dutiable transaction had no dutiable value

Ground 3: determination of dutiable value should take into account trustee's right of indemnity and exoneration

Ground 4: no dutiable transaction because beneficial interests remained the same

Ground 5: no dutiable transaction because no power to enter into transactions

At hearing on 7 December 2015 the applicant gave notice that the fifth additional ground of objections was no longer relied upon.

36. Paragraph [20] of the applicant's statement of legal contentions made in support of Ground 1 states that the assessment cannot be maintained because

. . . before and after the transactions treated by the respondent as being dutiable, there was no change of the applicant's ownership of the dutiable property.

1. Liability for duty under the Act arises when a dutiable transaction occurs (s11). Duty is generally payable by the transferee (s12). In order to identify the person liable to pay duty, s8 of the Act provides that duty is to be charged on a dutiable transaction within para 7(1)(b) as if it were a transfer of dutiable property. Dutiable transactions are deemed to be transfers of dutiable property. The operation is accomplished pursuant to s-s8(2), which sets out a table of the nine charging transactions in para 7(1)(b), stating in each case what is taken to be the value transferred, who is the transferee and the time at which the transfer occurred.

1. The respondent conceded that the transactions comprising the "distributions in specie" by the applicant as trustee of the principal trust to the applicant as trustee of the receiving trusts were not transfers of dutiable property within paragraph 7(1)(a) of the Act. Instead, the distributions were said to be dutiable transactions within sub-paragraphs (i) and (vi) of paragraph 7(1)(b). Therefore it was of no significance for the satisfaction of those sub-paragraphs that there was no transfer and that the applicant's ownership interests in dutiable property never changed.

1. Paragraph [23] of the applicant's (undated) statement of legal contentions asserted in relation to Ground 1 that the powers that a trustee might have to appoint trust properties in favour of herself would be "tantamount to absolute ownership of all of the properties"[7]

1. The High Court of Australia decision in Kennon v Spry (2008) 238 CLR 366 was cited for the proposition that "because the relevant power permitted appointment of the whole of the trust funds to the trustee absolutely, the value of her property was the value of the trust funds." This is not persuasive outside the context of that decision. The conclusion reached by the majority in Kennon v Spry has no application to the present facts and was specific to the meaning of the words "property of the parties to the marriage or either of them" in s79 of the Family Law Act 1975 (Cwth). The value of the applicant's interest, hope or expectancy under each of the trusts prior to the making of an appointment was the same as the value of any other object's interest, hope or expectancy. Ground 1 cannot be sustained.

41. Paragraph [36] of the applicant's statement of legal contentions made in support of Ground 2 states:

If contrary to ground 1 there was a dutiable transaction, the property taken to be affected was the particular interest transferred or the property the beneficial interest of, not in which was changed: see s8(2)(a) and Table of the Act. The only such property was (if any) the limited interests or rights of persons other than the trustee. Such property had a negligible value . . . (sic)

37. See para [37] of the applicant's statement of legal contentions made in support of Ground 3:

. . . the trustee's right of exoneration needs to be deducted from the dutiable value. This appears to produce a nil valuation in each case. In no sense can the right of indemnity have been the subject of a dutiable transaction; at all times it remained with the trustee and was hers absolutely.

1. Chapter 2 of the Act is headed "Transactions concerning dutiable property". Section 7 imposes duty on "certain transactions concerning dutiable property". "Dutiable transactions" are defined in s-s7(2) to include "a transfer of dutiable property" under para 7(1)(a) and the nine transactions referred to in paragraph 7(1)(b), including "a declaration of trust relating to dutiable property" (sub-para (i)) and "any other transaction that results in a change in beneficial ownership of dutiable property" (sub-para (vi)).

1. Duty is charged on the "dutiable value" of the dutiable property the subject of the dutiable transaction, at the rates set out in Part 3 of the Act. "Dutiable value" is defined by s20 to be the greater of the consideration for the dutiable transaction - that is, the value exchanged by the parties - and the unencumbered value of the dutiable property.

1. Separate interests in the dutiable property or rights secured over dutiable property are consequently irrelevant for the purpose of computing the dutiable value of that property. Grounds 2 and 3 cannot be sustained.

45. Paragraph [39] of the applicant's statement of legal contentions made in support of Ground 4 states:

If, which is denied, under The Zou Family Trust [scil. the principal trust] and the Zou Family Trust Nos 3, 5 or 7 [scil. the receiving trusts] any person (other than the trustee) held an interest in dutiable property, as a matter of construction of the terms of the relevant Trusts, the person held the same interest under The Zou Family Trust as the person did under the other Trust.

1. Ground 4 asserts that there was no dutiable transaction because beneficial interests remained the same. As Mr Hines for the applicant argued at hearing, "transfers" from the principal trust to the three receiving trusts were "not substantial as no substantial interests passed". The "effective ownership of real property" did not change. All that changed was "mere legal ownership", "expectancies and remote contingent interests".

1. The applicant quoted Mandie J in Trust Company of Australia Ltd v Commissioner of State Revenue (2007) 19 VR 111 at [59] on the drafting of the Act. His Honour stated that "beneficial ownership" is different from a "beneficial interest" or an "equitable interest" and amounted to "full ownership in equity of the trust property".[8] There was at least a "presumption", according to Mandie J, that the legislature intended this sense when using the words.

1. Mr Hines asserted that recent amendments to s-s7(4) of the Act dealing with "beneficial ownership" and "change in beneficial ownership" should be understood in the light of the following matters: s35 of the Interpretation of Legislation Act, applicable Parliamentary second reading speeches, paragraph [42] of the Explanatory Memorandum accompanying the amending legislation and dicta in the decision of the Victorian Court of Appeal in White Rock Properties Pty Ltd v Commissioner of State Revenue [2015] VSCA 77 at [94]. Beneficial ownership was said to be a substantial organizing category of the Act. If so substantial an amendment to the Act as a change in the definition of beneficial ownership were intended, the change would have been much better highlighted than it was. These contentions will be further examined under the next heading.

"change of beneficial ownership of dutiable property"

1. In his 3 September 2015 statement of legal contentions, the respondent asserted that each of the distributions in specie made by the trustee of the principal trust to the trustees of the receiving trusts was a "dutiable transaction" within s-s7(1) of the Act. The distributions in specie were instances of "any other transaction that results in a change of beneficial ownership of dutiable property" referred to in the charging provision in sub-para 7(1)(b)(vi).

1. For the purposes of the assessments, the respondent relied on the following definitions in the Act's s-s7(4):

beneficial ownership includes, but is not limited to, ownership of dutiable property by a person as trustee of a trust;

change in beneficial ownership includes, but is not limited to -

(a) the creation of dutiable property;

(b) the extinguishment of dutiable property;

(c) a change in the equitable interests in dutiable property;

(d) dutiable property becoming subject to a trust;

(e) dutiable property ceasing to be the subject of a trust;

1. One of the stated purposes of the Explanatory Memorandum which accompanied the Duties Amendment Bill 2008 which introduced the new definitions in s-s7(4) of the Act was "to clarify when duty is payable in relation to change in beneficial ownership" in the following way.

Subclause (5) inserts a number of new definitions into section 7(4) of the Duties Act 2000. It introduces a definition of beneficial ownership and change in beneficial ownership. These changes are a response to the decision in Trust Corporation of Australia Ltd (atf the Clayton 3 Trust) v Commissioner [2007] VSC 451, which raised uncertainty in relation to the application of the charging provision under section 7(1)(b)(vi). The amendments will clarify the operation of the provision in accordance with the underlying policy intent.

1. The second reading speech which moved the Duties Amendment Bill 2008 stated relevant statutory policy as follows.[10]

The bill amends the Duties Act 2000.

The broad policy underlying the provisions of the Duties Act 2000 (the act) is that they should be wide enough so that where effective control or ownership of real property is obtained a liability to stamp duty will arise.

In the Supreme Court decision Trust Corporation of Australia Ltd (atf the Clayton 3 Trust) v Commissioner [2007] VSC 451 (Trust Company case) the court pointed to the difficulty in identifying the relevant beneficial owner in certain transactions. This included, for example, those involving discretionary trusts or unit trusts where units are not held absolutely. This may have an effect on certain important provisions of the act which seek to captured such transactions for stamp duty purposes.

The bill seeks to overcome these doubts. It is important to note that the wording of the relevant provisions of the old Stamps Act 1958 (replaced by the Duties Act 2000) demonstrates that it was always contemplated that the provisions would have this breadth. Other jurisdictions also intend that such transactions involving an effective change in ownership would be brought to duty.

1. New definitions of "beneficial ownership" and "change in beneficial ownership" override the general law senses of those terms. At the same time, for the purposes of the Act, it is now possible to be both a trustee and a beneficial owner of the same property.[11]

1. For the purposes of the distributions in specie which are the subject of the current applications, this means that the applicant as trustee of the receiving trusts acquired beneficial ownership of dutiable property distributed to those trusts by the applicant as trustee of the principal trust. Dealings by the applicant as trustee of any of the receiving trusts are undertaken in a different capacity from the applicant's dealings as trustee of the principal trust.

1. The respondent asserted that paragraph (d) of the Act's s-s7(4) definition of "change in beneficial ownership" applied when dutiable property was distributed in specie by the applicant as trustee of the principal trust to the applicant as trustee of each of the receiving trusts. Dutiable property ceasing to be the subject of the principal trust and becoming the subject of the receiving trusts is a specific instance of the "change in the beneficial ownership". For this reason, the applicant's distributions in specie are within the words of the sub-para 7(1)(b)(vi) charging provision: "any other transaction that results in a change of beneficial ownership of dutiable property".

1. The applicant's liability in present circumstances is within the policy underlying the Act to be seen from the second reading speech extracted above at paragraph [52]. Effective ownership or control of the dutiable property subject to the receiving trusts in the present case did pass from the principal trust to the receiving trusts. Certainly the applicant was trustee of both the principal trust and the receiving trusts. But this fact does not detract from the conclusion that dutiable property was owned legally and controlled by the applicant through different trusts and in different capacities before and after the distributions in specie occurred.[12]

1. Paragraphs [15] to [22] of the applicant's amended grounds of review attempt to distinguish the Act's sub-para 7(1)(b)(vi) charging provision on several bases. I do not accept these arguments on the basis that they are inconsistent with the amended terms of Chapter 2 of the Act.

1. Alternatively and in addition, the respondent contends that the applicant is chargeable to duty in respect of the distributions in specie under sub-para s7(1)(b)(i). This is another charging provision of the Act, which provides that duty is payable on:

a declaration of trust relating to dutiable property the specification of which forms part of the declaration of trust or part of the transaction constituted by the declaration of trust.

1. The respondent did not advance a construction of events which located "the specification" of dutiable property as part of the declaration of any of the receiving trusts or any transaction constituted by those declarations.

1. Clause 1.1 of each receiving trust deed dated 2 July 2013 defines the "Trust Fund" to be the $50 with which the trust was settled and any additions transferred to or accepted by the Trustee.

1. The in specie distributions to the receiving trusts took place pursuant to the applicant's oral resolution as trustee of the principal and receiving trusts on 26 September 2013. The resolution was made approximately four months after the date when the receiving trusts were "declared".[13]

1. Declarations of the receiving trusts appear to have been made independently of any "specification" of dutiable property as required by sub-para s7(1)(b)(i) of the Act. Nor did such a "specification" appear to be part of any "transaction constituted by the declaration of trust". The point was not argued and will not be considered further.[14]

1. In the applicant's amended grounds of review, relevant arguments were collected under the heading "Section 7(1)(b)(i): the distributions are not declarations of trust within the meaning of the statute".

1. At paragraph [9] of the amended grounds the applicant asserted that the declarations of the receiving trusts did not comply with the definition of "declaration of trust" in s-s7(4) of the Act. This was put in terms of the competence of the applicant as trustee of the principal trust. However, there is nothing inconsistent in that definition with the applicant declaring a discretionary trust in favour of herself and other persons. Mr Hines did not raise the fact that the receiving trusts were declared of $50 sums.[15]

1. The applicant also asserted that the charging provision in sub-para 7(1)(b)(i) of the Act had not been attracted because the receiving trusts were declared unilaterally and not in a transaction with some other person. The simple answer to this assertion is that the word "transaction" where it occurs in sub-para 7(1)(b)(i) is part of an alternative to "a declaration of trust relating to dutiable property". The word is not defined in the Act. Remarks of Lord Reid in Greenberg v IRC [1971] 3 All ER 136 at 149 deny more generally that a unilateral activity cannot also be a "transaction".[16]

1. In conclusion, Ground 4 of the applicant's objection and the amended grounds of review cannot be sustained. I confirm the respondent's assessments of the applicant pursuant to the Act.

[1] Differences mainly relate to potential beneficiaries. Receiving trust deeds have wider definitions of "spouse" than the principal trust. Classes of parents, brothers, sisters, uncles and aunts under the receiving trusts are ascertained at the later execution date of the receiving trusts. Some of these differences may not be significant. See paragraphs [11] and [32]-[33] below.

[2] Receiving trusts deeds exclude Patrick Kypreos or any child of Patrick Kypreos from any interest or benefit from the trust fund of a receiving trust. By contrast, the ZF trust deed excludes Xue Mei Leng and any child or spouse of Xue Mei Leng.

[3] The document "Applicant's reply to respondent's submissions made at the hearing and application under s109 of the Taxation Administration Act" and additional authorities were filed with the Tribunal on 22 December 2015.

[7] Citing FCT v Vegners [1989] FCA 480; (1989) 20 ATR 1645 at 1649 per Gummow J and ASIC v Carey (No 6) [2006] FCA 814; (2006) 153 FCR 509 at [36]- [42] per French J.

[8]9 Quoting Lord Diplock in Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167 at 177-178.

[10] Victoria, Legislative Assembly, Debates, 4 December 2008, p5030 (Mr Holding, Minister for Finance, WorkCover and the Transport Accidents Commission).

[11] The general law does acknowledge the existence of situations where equitable interests in property are vested in trustees subject to the terms of a trust. Most trustees are empowered to declare further trusts of trust property. See Commissioner of State Revenue v Lam & Kim (2004) 10 VR 420 at [15] and Halloran v Minister Administering National Parks and Wildlife Act 1974 [2006] HCA 3; (2006) 229 CLR 545 at [69], [72].

[12] See Article 11 of the Trusts (Hague Convention) Act 1991 (Cwth) and Ford & Lee: The Law of Trusts ed A Lee, M Bryan and J Glover (looseleaf and online) at [24.550]: Trust property constitutes a separate fund. A trustee may sue and be sued in each capacity as trustee.

[13] For almost 50 years, High Court of Australia authority has maintained that the creation of trusts is independent of later additions of property to those trusts. New trusts do not normally arise in respect of later added property. See J Glover "Nominal or 'dummy' settlors: is it time to reform the law of trusts?" [2012] 1 Journal of Equity 19 at 22-23.

[14] I note the respondent's unlikely assertion in para 48 of his statement of legal contentions that the terms of a confirmatory declaration made subsequently to the distribution in specie resolution would constitute evidence "on the face of the Resolutions and the Deeds that there is a declaration of trust which subjects land which was previously held upon the Principal Trusts to new and different trusts."

[15] The applicant did not question whether the declaration of the receiving trusts referred to identified property and/or whether the receiving trusts were sub-trusts of the principal trust at the relevant time.

[16] Authority quoted by the applicant in para [14] of the further submissions.