Paul Murphy Real Estate Pty Ltd and Anor v Chief Commissioner of State Revenue [2006] NSWSC 1004 | Case summary

1 This is an application pursuant to s 96 of the Taxation Administration Act 1996 ("the TA Act") for a review of an objection decision of the respondent. It concerns a decision by the respondent to group Paul Murphy Real Estate Pty Limited ("PMRE") as trustee for the Paul Murphy Family Trust ("PMF Trust") and The Belmore Maitland Pty Limited ("TBM") as trustee for The Belmore Maitland Unit Trust ("TBM Unit Trust") as a single entity under the grouping provisions found in s 106I of the TA Act for purposes of the Pay-roll Tax Act 1971 ("the Act") and the respondent's refusal to determine under sections 16B and 16C of the Act that PMRE as trustee for the PMF Trust and TBM as trustee of the TBM Unit Trust were not members of a group for purposes of the Act. Background and relevant facts 2 The factual background of the relevant entities has been summarised in the written submissions prepared by counsel for the applicants, as follows: "6. On 9 April 1981 the PMF Trust was established under a Discretionary Trust Deed made between Tresou Pty Limited ("Tresou") as Trustee and Robert Shorten as Settlor with Paul Murphy and Beryl Murphy as the principal beneficiaries. 7. On 29 July 1981 Tresou changed its name to P Murphy and Co Pty Limited. 8. On 3 September 1981 the Paul Murphy Trust Deed was amended. 9. Sometime in 1981 the trustee of the PMF Trust, Tresou, commenced trading as a real estate business at Maitland. 10. In September 1993, the trustee commenced trading as Murphy Real Estate at Maitland. 11. On 28 July 2000 Paul Murphy Real Estate (Hunter Valley) Pty Limited was incorporated. On the same date, Paul Murphy Real Estate (Hunter Valley) Pty Limited was appointed the new trustee of the PMF Trust. 12. On 3 November 2000 Paul Murphy Real Estate (Hunter Valley) Pty Limited changed its name to Paul Murphy Real Estate Pty Limited ("PMRE"). Accordingly, as from this date PMRE was the trustee of the PMF Trust. 13. On 31 March 2004 The Belmore Maitland Pty Limited ("TBM") was incorporated. On the same day The Belmore Maitland Unit Trust ("TBM Unit Trust") was created with TBM as the trustee and David Wyatt as the founder. The original unit holder in the trust was St. Peter's Pastoral Pty Limited. 14. On 22 April 2004 Mackinnon Murphy Pty Limited ("MMPL") was incorporated. On the same day the unit held in the TBM Unit Trust was transferred by St. Peter's Pastoral Pty Limited to MMPL. 15. On 28 June 2004 TBM commenced trading as a hotel business under the name "Belmore Hotel Maitland". 16. On 7 January 2005 Joshua Murphy became the sole director and shareholder of TBM." 3 Sometime in September 2006, the respondent commenced a pay-roll tax investigation of PMRE and related entities and the events leading to this application were as follows: (1) On 12 March 2007, the respondent informed the accountant for PMRE that, on the basis of information then with the respondent, the PMF Trust was to be grouped with the TBM Unit Trust. No basis was given by the respondent. The respondent also sought particulars of the nature of the business conducted by the two entities and the reasons "why the two entities should be excluded from grouping or should not be grouped in the first place". (2) On 13 April 2007, the respondent wrote a letter to PMRE informing it that PMRE and the TBM were to be grouped in accordance with s 106I (2) (d) and (f) and s 106I (4) TA Act. (3) On 30 April 2007, the respondent informed PMRE that its investigation had been completed and that a determination had been made to group PMRE and TBM under s 106I of the TA Act as from 1 July 2004 and that the motor vehicle allowance exemption under s 10B (5) of the Act was not granted because "there were no records kept to show the business kilometres travelled". PMRE was also informed the amounts of pay-roll tax for the period 2004, 2005 and 2006. (4) On 8 June 2007, Farrow Wyatt, accountants (on behalf of the applicants) wrote to the respondent and informed him, inter alia, that the motor vehicle allowances were paid in accordance with the Real Estate Industry Award, that the allowance did not exceed the award amounts, and the employees fully expended the allowances on running costs. The letter also sought a determination that PMRE and TBM were not members of a group and, in any event, sought the exercise of the respondent's discretion to "de-group" these entities. The respondent treated this letter as an objection to the decision dated 30 April 2007 to group PMRE and TDM and to refuse the motor-vehicle allowance sought under s 10B of the Act. (5) On 13 October 2007, the respondent informed Farrow Wyatt that exclusion orders under s 16B of the Act were not available for grouping under s 1061 (4) of the TA Act as the grounds specified under s 16C did not include grouping under s 106I (4) of the TA Act. (6) On 11 December 2007, Farrow Wyatt objected to the above decision on the basis that the relevant real estate business and hotel business (conducted respectively by PMRE and TBM in their capacities as trustees) were separate and sought the exercise of the relevant discretion under s 16B of the Act. (7) On 1 February 2008, the respondent determined all the above objections by wholly disallowing them. 4 On 27 January 2009, a deed was executed between Paul Murphy Family Trust, Paul Murphy as Appointer and Joshua Earnest Paul Murphy and The Bellmore Maitland Pty Limited as "Consenting Beneficiaries". The purpose of this Deed, executed one day before the hearing of this matter, was to amend the terms of the trust deed dated 9 April 1981 establishing the PMF Trust so as to exclude Joshua Murphy and The Belmore Maitland Pty Limited as beneficiaries of the PMF Trust, with retrospective effect from 6 January 2005 and 1 July 2005 respectively. It was purported that the trustee had power under Clause 12 of the PMF Trust Deed to amend the PMF Trust Deed to exclude Joshua Murphy and The Belmore Maitland Pty Limited as beneficiaries under the PMF Trust. Clause 12 provides as follows: "12 VARIATION OR REVOCATION OF TRUSTS BY TRUSTEE The Trustee shall have power from time to time and at any time prior to the vesting date by deed or deeds revocable or irrevocable to vary or revoke all or any of the trusts and powers (other than this present power of variation and revocation and the power contained in the next succeeding clause) herein declared, to such ends intents and purposes as the Trustee may in his absolute discretion from time to time think fit BUT NOT SO THAT (i) The Settlor or any other person acting as referred to in Clause 14 or the Trustee shall acquire or be enabled to acquire any interest in or benefit out of or connected with the Trust Fund or its income or have any possession enjoyment or benefit of whatsoever kind or in anyway whatsoever whether enforceable at law or in equity or not of or from the Trust Fund or its income (ii) the vesting date shall be extended beyond the date referred to in Clause 1 (b)(ii) hereof (iii) such power shall be exercised in relation to income of the Trust Fund derived earlier than the date of the of the exercise of such power. Provided further that if the appointer shall be living at the time of a proposed exercise of the power of variation or revocation conferred by this clause, such power shall not be exercised without his consent." 5 When the matter came up for hearing, the respondent conceded that the motor vehicle allowances paid during the relevant period were exempt in accordance with s 10B of the Act. It was further conceded by the respondent that the only period during which the respondent could group the applicants was for the period 7 January 2005 to 30 June 2007. The latter concession was made in view of changes to the Act that came into effect from 1 July 2007. Section 79 of the Act from 1 July 2007 allows the respondent to de-group businesses where substantial independence of those two businesses can be established. The respondent also exercised his discretion to de-group the applicants up to and inclusive of 6 January 2005. 6 The applicants' representative also conceded that unless the applicants succeeded on the ground that s 42 of the Act prevented the grouping of trustees or on the ground that the changes to the beneficiaries as a result of the Deed entered into on 27January 2009 did not allow the applicants to be grouped under s 106I, the respondent was entitled to group the applicants and refuse to de-group them in respect of the relevant period. Issues 7 In view of the concessions made by the parties, the only two issues for determination were: (a) Whether, given the provisions of s 42 of the Act, the grouping provisions found in s 106I of the TA Act apply to trustees who carry on business in their capacity as trustees and which are trustees of businesses in which wages are paid? (b) Whether the deed executed on 27 of January 2009 had its intended effect of removing certain beneficiaries of the Trust retrospectively? 8 For purposes of the hearing the first issue was referred to as "the section 42 issue" and the second issue was referred to as "the amending deed issue". Discussion Section 42 issue 9 This issue concerns the correct interpretation of the following provisions of s 42: "42 Agents and trustees (1) With respect to every agent and with respect also to every trustee the following provisions shall apply: (a) The agent or trustee shall be answerable as an employer for the doing of all such things as are required to be done by virtue of this Act or the regulations in respect of the payment of any wages which are subject to pay-roll tax under this Act. (b) The agent or trustee shall, in respect of any such wages, make the returns and be chargeable with pay-roll tax thereon, but in his capacity only, and each return shall, except as otherwise provided by this Act, be separate and distinct from any other. … (2) Nothing in subsection (1) affects the operation of Part 10A of the Taxation Administration Act 1996 and Part 4A of this Act in relation to trustees." 10 The applicants' submission was that following the decision of his Honour Lee J in Permanent Trustee Nominees (Canberra) Limited v Chief Commissioner of Pay-roll Tax (NSW) 87 ATC 4230, the provisions of s 42 have 'to be construed to deal expressly and separately with the case of pay-roll tax on wages paid in a business carried on by a trustee (or by an agent)". 11 It was further submitted by the applicants that - "The clear indication from the grouping provisions as well as section 42 itself is that the legislature intended to confine the liability of all trustees to pay-roll tax to the amount of the wages paid in the business subject to the trust ( Permanent Trustee at 532 per Lee J). In such circumstances, the grouping provisions cannot apply to make the trustee company liable to pay-roll tax in circumstances wholly unrelated to its representative capacity. Section 42(2) of the Act does not assist in arriving at a different conclusion ( Permanent Trustee at 532 per Lee J). 36. Permanent Trustee was subsequently applied by Hansen J in CS and Co Legal Services Pty Limited v Commissioner of State Revenue (Victoria) (1996) 32 ATR 539 at 544, 546-548 and the reasoning of Lee J in Permanent Trustee has been found to be compelling ( Trevisan v Commissioner of Taxation (1991) 29 FCR 157 at 162-163 per Burchett J. 37. To the extent that the decisions of Judicial Member Gibson of the Victorian Administrative Tribunal in Re Kivelos Nominees Pty Limited and Commissioner of State Revenue (1997) 37 ATR 1025 at 1032 and in The Muir Electrical Company Pty Limited v Commissioner of State Revenue (Victoria) 99 ATC 2083 at paragraphs 39-43 have not followed Permanent Trustee , it is submitted that these decisions were decided incorrectly and the Tribunal is not, in any event, bound by these decisions. 38. Significantly, Permanent Trustee was applied by Judicial Member Hole of the ADT in Re Fanfold Business Forms Pty Limited and Chief Commissioner of State Revenue [2004] NSWADT 210; 57 ATR 462 at paragraphs [17]-[25] in finding that the provisions of section 42(1) of the Act as applied to corporations in their capacities as trustees of a trust were not subject to the grouping provisions of section 16D off the Act (grouping of commonly controlled business) (This section was repealed as from 1 July 2003 when Part 10A TAA was enacted, which included section 106I TAA). Section 106I TAA (primary groups of commonly controlled businesses) is the successor to section 16D of the Act and is the section relied on by the Respondent to group PMRE and TBM." 12 The respondent rejected the submission made by the applicants on several bases. Firstly, the respondent argued that s 42 is a "miscellaneous provision of the Act" which imposes administrative duties and responsibilities on an agent and a trustee and "is virtually identical to s. 64 of the Land Tax Management Act 1956 (NSW) and s. 254 of the Income Tax Assessment Act 1935 (Cth)" which was described by the High Court in Howey v Federal Commissioner of Taxation (1930) 44 CLR 289 as a "collecting section and not a taxing section" and "that it does no more in respect of trustees than provide machinery for carrying out the provisions of (the relevant taxing section)". 13 Secondly, it was argued that s 42(2) "explicitly provides in relation to s. 42(1) and the grouping provisions that: Nothing in subsection (1) affects the operation of Part 10A of the Taxation Administration Act 1996 and Part 4A of this Act in relation to trustees." 14 Thirdly, it was submitted that the decision in Permanent Trustee was in relation to the "former s. 16B (the general equivalent of s. 106G of the TAA), which concerned grouping of related corporations under the applicable corporations legislation". In this matter, it was argued that the respondent relies on s 106I of the TAA and that in Permanent Trustee the court "explicitly recognised that s.42 (2) overrode s.42 (1) in relation to the trust grouping under former s.16D of the Act (the general equivalent of s.106I of the TAA)". 15 It was further submitted that in Trevisan the court relied on Permanent Trustee to merely support its observation in relation to "the irrationality of lumping trusts together, simply because they had as trustee, the one trustee company" and that in CS & Co Legal Services Pty Limited the Victorian Supreme Court was "concerned with the Victorian payroll tax legislation, which did not have trust grouping provisions or an equivalent of s.42 (2) of the Act". 16 Finally, it was submitted that the Tribunal erred in Fanfold in placing reliance on Permanent Trustee "to support its finding that s.42 (1) prevented the grouping provisions in former s.16D (the general equivalent of s.106I) from applying in that case". 17 I think the decision of his Honour Lee J in Permanent Trustee has to be read carefully to determine what it stands for. The court was concerned with the interpretation of s 16B of the Act which, at the relevant time, allowed grouping of any two or more companies if by reason of the corporations law in New South Wales applicable then were deemed "to be related to each other". Prior to Permanent Trustee the Commissioner had not used the provision to group trustee companies. It was a test case. 18 His Honour in reading s.42 made the following observations: "In my view … the legislature was intending, in sec. 42, to deal expressly and separately with the case of pay-roll tax on wages paid in a business carried on by a trustee." (at ATC 4233) and "… there is, in my view, a clear indication … that the legislature is intending to confine the liability of all trustees to pay-roll tax to the amount of the wages paid in the business subject to the trust." (at ATC 4234) 19 These observations seem to have been relied on to conclude that s 42 prevents the grouping of trustees, whether as individuals or as corporations. It is, however, important to note that his Honour went on to make the following further observations: "It was claimed by counsel for the Chief Commissioner that subsec. (2) of sec. 42 was a clear indication of an intention on the part of the legislature to render the grouping provisions, including sec. 16B, applicable to trustee companies, but I do not see the matter in that light. The grouping provisions of the Act have in sec. 16D(3)(e) and (6)(b), expressly dealt with grouping in the cases of trusts and provision such as subsec. (2) in sec. 42 was needed to make clear that those particular grouping provisions override se. 42(1). The fact that sec. 16D concerns itself expressly with trustees and when they are to be grouped as employers, and then in subsec. (4) expressly groups a corporation which has a controlling interest in a business with any other corporation related to it by reason of sec. 7(5) of the Code is again, in my view, a clear recognition by the Act that employers whether corporations or not, who are trustees are intended to be dealt with separately from employers whether corporations or not, who are trustees." 20 When these additional observations are carefully examined it becomes clear that his Honour was not suggesting that the provisions found in s 42(1) had the effect that grouping provision had no application whatsoever to a trustee. Lee J was concerned not with the grouping provisions in their entirety, but only the grouping provisions that were set out in s 16B. His Honour recognised that there were grouping provisions, which applied to trustees, and as submitted by Mr Rider, his Honour in particular mentioned the operation of s 16D to trustees. 21 The applicants placed some reliance on the decision of Hansen J in CS & Co Legal Services. In that case Hansen J applied the decision of Lee J in Permanent Trustee to express the view that s 42 of the Victorian Pay-roll Tax Act 1971 operated so as to exclude trustee employers from the application of the grouping provisions of s 9A of the Victorian Pay-roll Tax Act 1971. As correctly, submitted by counsel for the respondent the relevant Victorian s 42 before Hansen J did not have the equivalent of s 42(2) of the Act in respect of the period Hansen J was asked to consider the question. In not applying Permanent Trustee in Kivelos Nominees Pty Ltd Judicial Member Gibson in relation to the Victorian pay-roll tax legislation made the following observations: "Sections 9A(1C)(f), (1D), (1E) and (1F) were inserted by (Act 65 of 1987). When a similar issue arose in the Supreme Court of Victoria in C S & Co Legal Services Pty Ltd v Comr of State Revenue (1996) 32 ATR 539; 96 ATC 4651, counsel for the taxpayer conceded that those amendments precluded the argument which in substance had been adopted by Lee J. 13 In 1993 s 42(i) was introduced. That makes it abundantly clear that that section does not otherwise affect the grouping provisions. In the course of the Second Reading speech of the bill for that amendment, the Treasurer referred to the decision of Lee J. He said that the Government had been advised that the decision was wrong, but it had decided to amend the Act to clarify the position. He said the Government did not intend that the making of the amendment should be taken as implying that under the current legislation trustees cannot be grouped with other employers." 22 Judicial Member Gibson's observations confirm that in CS & Co Legal Services the Victorian legislation that Hansen J had to consider was the Victorian legislation prior to the amendment of both s 9A and s 42. It was held by Judicial Member Gibson that s 9A after the amendment gave clear authority to the Commissioner to group trustees if they fall within the grouping provisions. 23 I must therefore reject the global submission made by the applicants that s 42 prevents the respondent from grouping trustees. My view is that the respondent was entitled under s 106I of the TA Act to group the applicants. Having taken this view on the basis of the above grounds, it is not necessary for me to consider other arguments presented by the respondent. In passing I should, however, make an observation in relation to Mr Rider's submission that s 42 is not a taxing provision and "merely provides from whom the tax may be collected". Whilst there is merit in his submission, it really requires a competent judicial body to consider the whole question de novo. Unfortunately the Tribunal lacks that authority. Amending Deed Issue 24 This issue concerns the legal status of the deed executed on 27 January 2009 between Paul Murphy Real Estate Pty Limited (PMRE) as trustee for the Paul Murphy Family Trust (PMF Trust), Paul Murphy as Appointer and Joshua Earnest Paul Murphy (Joshua Murphy) and The Belmore Maitland Pty Limited (TBM) as "Consenting Beneficiaries" (Deed). The purpose of the Deed was to amend the terms of the trust deed dated 9 April 1981 establishing the PMF Trust so as to exclude Joshua Murphy and TBM as beneficiaries of the PMF Trust with retrospective effect from 6 January 2005 and 1 July 2005 respectively. 25 The applicants' case was that the Deed was a remedial deed which "provides a clear acknowledgment of the intention of the Settlor and of the Trustee that the Trust from time to time must by its express provisions permit the Trustee to manage the affairs of the Trust to secure the best available tax outcomes". It was also submitted that the "intention of the Settlor, and the Trustee of the Paul Murphy Family Trust, was to establish a vehicle to minimise tax consequences" and that the Deed gave effect to their intention. 26 The applicants placed reliance on Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 31 ATR 281; 95 ATC 4620; 41 NSWLR 329 for their submission that the Deed retrospectively amended the terms of the trust deed dated 9 April 1981 which established the PMF Trust so as to exclude Joshua Murphy and TBM as beneficiaries of the PMF Trust. Some reliance was placed on the decision in Stein v Sybmore Holdings [2006] NSWSC 1004 for this contention. 27 It was further submitted that the decisions of the Federal Court in Davis v Federal Commissioner of Taxation (2000) 44 ATR 140 and Baxter v Commissioner of Taxation (2002) 51 ATR 209 relied on by the respondent are distinguishable on public policy grounds and that in this matter the Deed accords with public policy for the Deed to have retrospective effect as against the respondent, because the respondent could still recover payroll tax from the entities respectively on real wages. 28 The respondent's preliminary submission, which was described as a "threshold matter", was that - "… the Deed is wholly ineffective at law and in equity to achieve its intended purpose, because there is no provision of the Trust Deed which permits the Deed to make its purported amendments to the Trust Deed (see cl. 12 of the Trust Deed). Rather, the Trust Deed only permits the trustee to vary or revoke its existing powers under the Trust Deed, not to give itself new powers, such as the power to exclude beneficiaries under cl. 1 of the Deed. On this basis, the Deed fails entirely in its intended purpose and operation." 29 The respondent's substantive case was that "the Deed was ineffective at law to retrospectively exclude Joshua Murphy and TBM as beneficiaries of the Trust" for purposes of the Act and the TA Act. It was submitted that the decisions of the Federal Court in Davis v Federal Commissioner of Taxation and Baxter v Federal Commissioner of Taxation "are authority for the fundamental principle that taxing (and related) statutes, such as the Act and the Taxation Administration Act 1996 (NSW) (TAA), operate only on those facts which exist on the taxing date and that inter-parties arrangement (such as the Deed) cannot affect or change the facts which existed at the relevant time or have effect against a taxing authority (such as the Respondent)". 30 Mr Rider also submitted that the decision in Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd did "not assist the Applicants' case" "because Carlenka was concerned with the rectification of a document ab initio on the basis that it did truly record the parties' original intention". It was further argued that "neither Robert Shorten nor Tresou Pty Limited have provided any evidence that it was their intention when they settled the Trust in 1981 to exclude certain persons as beneficiaries so as to avoid the payroll grouping provisions". 31 Finally, the respondent submitted that the Deed clearly contravened public policy as it had the effect of avoiding tax "that legally fell due based on facts which existed at the taxing date". 32 I agree with Mr Rider, counsel for the respondent, that in Davis v Federal Commissioner of Taxation (2000) 44 ATR 140 at p. 151, Hill J recognised that, although parties were entitled to enter into an agreement that has a retrospective effect to their relationship, but that the agreement cannot have retrospective effect for revenue laws. Hill J stated these principles as follows: "The parties to an agreement can not effect a change to an agreement retrospectively so that the agreement between them is altered as against the rest of the world. The parties can, no doubt, enter into an agreement, binding as between them, that a prior agreement they have entered into will be construed in a particular way from the moment the prior agreement was entered into. But the original agreement will, so far as the Commissioner is concerned, govern their relationship until the time of its amendment. For example A and B enter into an agreement which provides, inter alia, that certain income will, for the term of the agreement, be held by A in trust for B. Later the parties may as between them agree to alter the agreement ab initio to provide that that income will not be held in trust for B, but will always be treated as belonging to A beneficially. The agreement will be binding inter partes, but for income tax purposes the income will, until the date of the agreement, still be treated as beneficially the income of B." 33 Having stated that, his Honour then went on to acknowledge as follows: "[56] The example above noted should be distinguished from the case where parties have entered into an agreement under the mutual mistake that the document they have executed records the terms of their bargain when it does not. In such a case an application could be made to a court for rectification of the written document. But even where an order of a court is obtained to rectify the written agreement, the court order does not operate to alter the past. The order of the court merely recognises what has always been the case, namely that the true agreement between the parties was not that which they mistakenly executed, but what they in truth agreed upon. [57] As an alternative to an order of rectification the parties could execute a deed rectifying the prior writing. That deed, if truly operating to record that the parties were under a mutual mistake, and also setting out what the parties acknowledge to be the true agreement between them would not, any more than a court order, actually alter the position as between the parties. It would merely record that agreement as it always was. Whether by court order or by deed, rectification requires that there be a mutual mistake, that is to say what is required is that there be a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect that the instrument which they executed in fact had: cf Comr of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329; 31 ATR 281; 95 ATC 4620. Mistake as to the revenue consequences of the agreement would not bring about the same result: Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 at 384." 34 In Baxter v Commissioner of Taxation (2002) 51 ATR 209, Gyles J took a similar approach: "It is submitted for the applicant that the problem is cured by the Deed. The answer on behalf of the respondent is that such an ex post facto "rectification" may have effect between the parties, it cannot undo an actual historical position that has already had revenue law consequences. … The decision of Hill J in Davis v Commissioner of Taxation (Cth) (2000) 171 ALR 6654 particularly at [54] - [58] in rather similar circumstances provides support for the respondent's argument (see also Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 and Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 (at 384 - 385). Even if a deed which rectifies an earlier transaction in accordance with the principles which would be applied in equity in ordering rectification can be effective for revenue purposes, in my opinion, the facts here do not fall within that principle. The parties to the Lease had no common intention that the term of the Lease would be any different to that recorded. No doubt, if they had been told that a later date was required to achieve sales tax exemption, they would have acted accordingly, but they had no such contemporaneous understanding. The case falls squarely within the authorities to which I have referred." 35 A great deal of reliance was placed by the applicants on the decision of the Court of Appeal of New South Wales in Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd. In that case, a trust deed was amended on advice that it would be advantageous to the trust fund and the beneficiaries for taxation purposes to include a company as a beneficiary, which was not a beneficiary in the original trust deed. The amendment to include the company as a beneficiary had the effect of making the company a beneficiary entitled to a share in any capital or income distribution by the trust. As the company was entitled to a share in any distribution of capital held by the trust, the Commissioner of Stamp Duties (NSW) took the view that the amending deed was a "conveyance of property made without consideration in money or money's worth" and was therefore liable to ad valorem duty. Proceedings were commenced by Carlenka as trustee to rectify the deed of amendment. In the first instance Brownie J accepted the evidence that Carlenka's "intention at all times up to the execution of the deed poll was to obtain a taxation advantage by arranging for a corporation to be a beneficiary of the trust as to the income from the trust but otherwise the corporation should have no interest in the trust" and allowed the rectification of the amending deed. 36 The Court of Appeal agreed with Brownie J and dismissed the Commissioner's appeal. The principal judgment was handed down by Sheller JA. In agreeing with the judgment of Sheller JA, McLelland AJA added the following observation: "In general, the remedy of rectification of an instrument is available where it is established by clear and convincing proof that at the time of execution of the instrument the relevant party or parties as the case may be had an actual intention (if more than one party, a common intention) as to the effect which the instrument would have which was inconsistent with the effect which the instrument as executed did have in some clearly identified way. In this context 'effect' means the legal and factual operation of the instrument according to its true construction, but does not include legal or factual consequences of the operation of the instrument of a more remote, or collateral, kind ( eg its liability to stamp duty). In the present case, there was clear and convincing proof that at the time Carlenka Pty Limited executed the amending deed poll of 26 June 1990, it was the intention of those whose intention is to be imputed to that company that the legal operation of the instrument would not go beyond empowering the trustee of the trust of the trust deed of 3 March 1975 to distribute income of the trust to a person or corporation nominated by the trustee. The deed poll as executed had a further unintended legal operation, which was correctly removed by the order for rectification under appeal." 37 The decision of the Court of Appeal in Carlenka was considered in Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 by Young J in the Equity Division of the New South Wales Supreme Court. The case concerned a corporate restructure and the relevant parties had been advised by their accountant that the transfer of certain shares by the shareholders to their holding company would not attract capital gains tax because of the roll-over provisions of s 160zzn of Division 17 of Part IIIA of the Income Tax Assessment Act 1936 (Cth). The parties proceeded to transfer the shares on the advice of their accountant. Subsequently, the accountant's advice was found to be incorrect and the parties sought to retract the transfers on the ground "that they entered into their respective transfers under a mistake as to the fiscal effect and consequences of the transfer". The case was as acknowledged by his Honour "brought under rather unusual circumstances" because all the litigants consented to the orders sought. The only question was whether the Court could make the order. 38 His Honour refused to make the order sought and distinguished the facts from those in Carlenka as follows (at p 384): "Indeed, in the present case, no mistake was made in putting the parties' agreement into effect. The parties were under a misapprehension as to the tax implications of the transaction, but this was in the words of McLelland A-JA in Commissioner of Stamp Duties (NSW) v Carlenka Pt Ltd (1995) 31 ATR 281 at 294; 95 ATC 4620 at 4,633 an error with respect to 'legal or factual consequences of the operation of the instrument of a more remote, or collateral kind' and is not the type of error which the court will recognize as a mistake which justifies rectification." 39 His Honour in Baird also made, relevant to the present matter, the following observation: "… that equity does not interfere for the purpose of carrying out an intention which the parties did not have when they entered into a transaction, but which they might or even would have had if they had been more correctly informed as to the law: see Dinwiddle v Self 33 NE 892 (1983)." 40 Similarly, in the present case, the applicants cannot say that they did not intend for Joshua Murphy and TBM to be beneficiaries of the Trust at the relevant time. Nor can the applicants rely on lack of proper advice when the Trust was set up in 1981. Both Robert Shorten, Settlor of the Trust, and Tresou Pty Limited, Trustee of the PMF Trust, have not provided any evidence that it was their intention when they settled the Trust in 1981 to exclude any beneficiary for purposes of payroll tax grouping provisions. 41 The decision in Carlenka is of little assistance to the applicants. In Carlenka, the court approved rectification of the trust deed ab initio on the strong evidence produced to show that it did not truly records the parties' original intention. It is important to note that rectification requires not only proof that the document executed was not what was intended, but also proof of what was intended. In the present matter, that is not the case. The applicants have merely sought to amend the PMF Trust Deed from certain dates to avoid the payroll tax grouping provisions and essentially avoid payroll tax. 42 Some reliance was placed by the applicants on the decision of Campbell J in Stein v Sybmore Holdings. In that case, the Mr Stein sought an order to empower the trustee of his family trust to make an amendment to the trust deed that would significantly defer the vesting date. The deed did not give any power to the trustee to extend the vesting date and the application was made under s 81 of the Trustee Act, 1925 for a court order authorising the change. Under that section the court can order the change if it is in the opinion of the court "expedient" to do so. The court exercised the discretion to extend the vesting date on the facts before the court. Campbell J, in exercising his discretion, observed that in the absence of proof of what was intended, the court could not rectify the relevant deed but that there were sufficient grounds to exercise its discretion under s 81 of the Trustee Act. 43 In the present matter, the amending Deed has not been the subject of any application to the courts for either rectification of the PMF Trust Deed or the exercise of the discretion under s 81 of the Trustee Act to allow the proposed amendment. This brings me to the threshold issue raised by the respondent. A trustee can only do things authorised by the trust deed. As for example, in both Carlenka and Sybmore Holdings the trustees had to seek the assistance of the court in the absence of the necessary power in each case for what they were seeking to do. The amending Deed in this matter was purported to have been made under powers given to the Trustee by clause 12 of the PMF Trust Deed. The respondent submitted that clause 12 of the PMF Trust Deed "only permits the Trustee to vary or revoke its existing powers under the Trust Deed, not to give itself new powers, such the power to exclude beneficiaries under cl. 1 of the Deed". 44 By concluding that the amending Deed was not effective for purposes of pay-roll tax, the threshold issue is essentially one for the parties and it is not necessary for me to conclusively deal with the issue. In passing, I should, however, make the observation that even if the trustee has power to exclude beneficiaries under clause 12, the trustee is not permitted by clause 12 (iii) to exercise the power "in relation to income of the Trust Fund derived earlier than the date of the exercise of such power". My reading of that subclause would suggest that the trustee cannot retrospectively remove beneficiaries entitled to the trust income under clause 1. In any case, an amendment of the PMF Trust Deed is not necessary to exclude a beneficiary because the trust is a discretionary trust and the trustee can nominate such beneficiaries by choice that are to receive income from the trust in a particular year. But that can only be done by the trustee on a prospective basis. 45 Accordingly, the Deed could not retrospectively change the fact that Joshua Murphy and TBM were beneficiaries of the PMF Trust at the relevant time for pay-roll tax purposes. That is, the Deed did not have retrospective effect as against the respondent, nor could it affect the application of the Act or the TA Act to the facts, which existed at the relevant time. Order 46 The decision of the respondent to group the applicants for the period 7 January 2005 to 30 June 2007 for purposes of pay-roll tax is affirmed.

Paul Murphy Real Estate Pty Ltd and Anor v Chief Commissioner of State Revenue

At a glance

Court

Decision date

Catchwords

Source

Catchwords

Judgment (10 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (5)

Cited By (35)