STIC (Australia) Pty Ltd & Anor v Commissioner of State Revenue (Taxation) [2010] VCAT 1057

Mr P. Fox of Counsel, instructed by Logie-Smith Lanyon Solicitors

Mr Peter Nicholas of Counsel, instructed by the Solicitor to the Commissioner of State Revenue

1. This proceeding concerned an assessment of tax under the 'Land Rich' entities provision of Part 2 of Chapter 3 of the Duties Act 2000.
2. R.E. Funds Management Limited, the second applicant in this proceeding is trustee of the Salta Office Unit Trust ('SOPT'). As such trustee it entered into a contract to purchase land at 1948-1962 Dandenong Road, Clayton with settlement occurring in January 2007. SOPT was established by deed of trust in October 2006. At its establishment Taras Nominees Pty Ltd as trustee of the Lorimer Street Trust held 500 one dollar units. The Lorimer Street Trust is a discretionary trust with the beneficiaries being Mr S.J. Trascio and his family.
3. The Salta Group aimed to enter the field of property management. According to its secretary and financial officer, Mr Brest:

SOPT was established to operate as a wholesale investment vehicle for external wholesale investors wanting to invest in property, particularly office property.

1. In March 2007 the terms of the SOPT deed were amended to enable it to operate as a wholesale unit trust scheme for the purposes of the Victorian Duties Act 2000.
2. The general scheme of the Duties Act provisions with which we are here concerned is that transfers of units in unit trust schemes with significant land holdings are assessed for duty purposes at the same rate as transfers of the underlying land would be.
3. The purpose of the amendments to the deed was to secure for SOPT an exemption from those provisions subject to its restricting unit transfers according to particular rules.
4. The significance of registering a unit trust scheme as a wholesale unit trust scheme is that by virtue of Section 79(3A) of the Duties Act 2000 qualified investors as that expression is defined at some length in Section 89K are not taken to be associated persons in relation to the scheme. Part 2 of Chapter 3 renders liable for Duties Act conveyance rates acquisitions of charging duty on what are defined in Section 79 of the Act as 'relevant acquisition'. An acquisition is in these circumstance relevant if it is of what is defined by Section 76 as a 'significant interest' and for the purposes of private unit trust schemes the benchmark is 20% (Section 76(2)(a)).
5. The effect of registration as a wholesale unit trust scheme therefore is to enable the disposition of interests in the unit trust scheme up to 20% to qualified investors without creating a liability for duty under Part 2 of Chapter 3.
6. Section 89O sets out the following criteria for registration of wholesale unit trust schemes.

(a) the scheme was not established for a particular investor; and

(i) the trustee of the scheme, as trustee, holds directly or indirectly an interest in not less than 3 parcels of land (whether in or outside Victoria), and at least 2 of those interests each have an unencumbered value of $10 000 000 or more; or

(ii) at least 6 of the unit holders in the scheme who are not associated persons each have a subscription under the scheme of not less than $3 000 000; and

(c) not less than 80% of the units in the scheme are held by qualified investors; and

(d) no qualified investor, either alone or together with associated persons, holds 50% or more of the units in the scheme; and

(e) registration is not being sought for the purpose of, or as part of a scheme or arrangement with a collateral purpose of, avoiding or reducing duty otherwise chargeable under this Part.

1. The term 'qualified investor' is defined in Section 89K in the following terms:

qualified investor in a unit trust scheme, means a person who holds units in the unit trust scheme in any of the following capacities -

(a) as trustee of a complying superannuation fund that has no less than 300 members;

(b) as trustee of a complying approved deposit fund that has no less than 300 members;

(e) as a life company, if its holding of the units in the unit trust scheme is an investment of a statutory fund maintained by it under the Life Insurance Act 1995 of the Commonwealth;

(ea) as the Crown in right of the Commonwealth, a State or a Territory (including any statutory body representing the Crown in right of the Commonwealth, a State or a Territory);

(f) as an agent for a trustee or life company or the Crown referred to in any of the preceding paragraphs in its capacity as such an agent;

(g) as the trustee of a wholesale unit trust scheme;

(ga) as custodian or trustee for an investor directed portfolio service, within the meaning of the relevant ASIC policy statement, if the custodian or trustee holds its interest in the unit trust scheme for not less than 300 clients as investors through the service, none of whom (individually or together with any associated person) is beneficially entitled to more than 20% of the units held by the custodian or trustee in the unit trust scheme;

(h) in a capacity approved by the Commissioner under subsection (3);

1. To cater for situations where a unit trust scheme has the potential to meet the criteria for registration as a wholesale unit trust scheme but does not meet them all initially Section 89P provides for registration of unit trust schemes as 'imminent wholesale unit trust schemes'. The criteria for such registration according to Section 89P(2) are:

(a) the unit trust scheme will meet the criteria for registration as a wholesale unit trust scheme within 12 months after the day on which the first units in the scheme were issued to a qualified investor; and

(b) units issued in the scheme before the scheme meets the criteria for registration as a wholesale unit trust scheme have been or will be issued only for the purpose of the scheme meeting those criteria; and

(c) registration is not being sought for the purpose of, or as part of a scheme or arrangement with a collateral purpose of, avoiding or reducing duty otherwise chargeable under this Part.

1. By virtue of Section 89B where what is described as a 'disqualifying circumstance' occurs, the trustee of the unit trust scheme must give notice to the Commissioner within 28 days and the unit trust 'is taken to have been a private unit trust scheme from and including the relevant date', that is the duty concession referred to earlier ceases to apply. A disqualifying event broadly is a failure to meet the criteria of registration.
2. Following a lengthy exchange of e-mails between the State Revenue Office and Mr Michael Ganci on behalf of SOPT, a delegate of the Commissioner wrote to Mr Ganci by letter dated 7 May 2007 advising that on the basis of the information provided:

The Commissioner of State Revenue is satisfied that SOPT meets the criteria for registration as imminent wholesale unit trust schemes under Section 89P of the Duties Act 2000.

1. The letter advised that registration would 'commence from the date units in SOPT are first issued to a qualified investor'. The letter further advised that the registration would commence from the date on which the Commissioner was advised that units have been issued to a qualified investor for the first time and that such registration would last for 12 months following which SOPT would be required to lodge an application with the Commissioner 'to register SOPT as a wholesale unit trust scheme, once it is eligible to be registered as such under Section 89A of the Act'. The letter further stated that by virtue of Section 89R of the Act SOPT would be required:

To provide the Commissioner with documentary evidence by the end of the registration period referred to above [viz 12 months from the first issue of units to a qualified investor] that SOPT meets the criteria for registration as wholesale unit trust scheme under Section 89O of the Act.

1. The letter finally drew attention to the obligation to advise within 28 days of the occurrence of any disqualifying circumstance.
2. Mr Ganci had been engaged by the board of the Salta Group to market these units. In May 2007 both Mr Ganci and the board were confident that the offer of units in the SOPT would be a success.
3. STIC (Australia) Pty Ltd had been nominated by the Salta Group as the entity which would hold 10% of the units in the SOPT. The intention was that nine eligible investors would be found to hold 10% each of the units. Salta did not wish any individual investor to hold more than 10%, first to avoid any liability to duty under Part 2 of Chapter 3 of the Duties Act and secondly to avoid any outside investor separately holding a power to assert control over the management of the trust.
4. The information memorandum prepared for the purposes of the trust stated inter alia:

REF [that is the trustee] may accept any application in whole or in part or reject any application. If an application is rejected or partly accepted, the application monies received or the balance of the application monies received will be returned in full without interest to the investor.

1. According to Mr Brest who is the secretary, director and financial officer of STIC and of the Salta Group, it was intended to rely on this power to maintain the 10% limit on qualified investors' holding. Any investor who applied for a larger than 10% holding would have the application 'scaled back' in reliance on that provision in the memorandum.
2. The information memorandum also stated that SOPT would be a 'co-investor' as to 10% and this was the investment which was allocated to STIC as trustee for the STIC Australia Discretionary Trust.
3. There was an underwriting agreement entered into. According to Mr Brest this was not part of the investment architecture envisaged by Salta but was included merely at the request of a financier. The agreement was dated 1 May 2007 and was expressed to be between R.E. Funds Management Limited (the trustee of SOPT) and Salta Properties Pty Ltd. In the event no call was made under that underwriting agreement.
4. Some of the documents in some of the correspondence with the Commissioner for State Revenue referred to an underwriting agreement dated 15 January 2007. Mr Brest professed no knowledge of this document. Whether it existed and what its purpose or terms were remains a mystery so far as this proceeding is concerned.
5. Despite the sanguine hopes of Salta and Mr Ganci, the hoped for qualified investors were not forthcoming. The information memorandum was released with a closing date for investments of 28 November 2007. This was later extended to 21 December 2007. Despite apparently strong enquiry by 21 December 2007 the only confirmed qualified investor was Australian Ethical Investments Limited (AEI). As part of his marketing program Mr Ganci had assured potential investors including AEI that the Salta Group would underwrite the issue, that is, take up any shortfall. On 27 December therefore, the initial units issued to Taras were redeemed; 10% of units were allocated to AEI and 90% of the units were issued to STIC as trustee of the STIC Australia Discretionary Trust ('STICT'). This trust had been established to hold the 10% 'co-investment' which it was planned that the Salta Group would hold. The STIC Trust Deed was expressed to be made for the benefit of Mr Salvatore John Trascio and his family. The deed was in fairly orthodox terms for a family discretionary trust. It included however an additional provision in the following terms:

Notwithstanding any other provision of this deed, the trustee may in its sole discretion agree to issue fixed units over a fixed proportion of the trust fund on such terms as it sees fit and such units may be redeemable, preferential or otherwise.

1. By December 2007 the power had not been issued and no units were issued at the time when STICT took up its units in SOPT.
2. Mr Brest said that the Salta Group followed the steps described because it remained confident that the 90% of units taken up by the STICT could be 'sold down' to qualified investors in the ensuring 12 month period. It was for this reason that Salta did not adopt the option of relying on the quoted provision from the information memorandum to simply 'call the whole thing off'. Once the issue was proceeding Mr Brest said in light of the assurances given by Mr Ganci inter alia to AEI as part of the marketing campaign it was incumbent for some Salta entity to take up the shortfall in units. Mr Fox in the course of his submissions on behalf of the applicant contended that the relevant entities were under commercial pressure not to call off the issue because there were grave rumours relating to the alleged inability of one of the major players in the commercial property unit trust industry, namely Centro Properties, to refinance its liability. To call off the SOPT issue would in Mr Fox's submission be to place Salta in the eyes of the market in the same position as Centro. This was a matter to which I may need to return later. At present I observe, first, that this rationale was not proffered by Mr Brest when he was asked why the issue was not called off and secondly, there was another proposed issue in progress at the same time as SOPT, known colloquially as SIPT which was simply called off presumably without the dire consequences referred to by Mr Fox.
3. As will appear the respondent Commissioner of State Revenue regarded the issue of 90% of the units in the SOPT to SITC as creating a large liability for duty under Part 2 of Chapter 3 of the Duties Act. Those at Salta certainly had no such belief at the time they resorted to this expedient in the circumstances described. Mr Brest said that since the units were being allocated to a trust which had the same beneficiaries as the trust for which Taras acted, he believed that there would be no change in the beneficial interests to the underlying land and hence no liability to ad valorem duty under the Duties Act. Mr Ganci wrote to the State Revenue Office with respect to SOPT and also Salta Industrial Property Trust known as SIPT the issue for which was as previously noted, ultimately called off for lack of qualified investors. The letter stated inter alia:

Salta Funds Management has now closed the offer for Salta offers [that is SOPT]. The close of offer date was 21 December 2007 and the allotment date was 28 December 2007. The trust has one qualifying investor - Australian Ethical Investments Limited. They hold 10% of the units. The remainder are held by STIC Australia Pty Ltd, an investment company associated with the Salta Group. Copies of holding statements for both investors are attached.

1. One of the Commissioner's officers responded by letter dated 11 January 2008. He said inter alia:

I advise that, on the basis of the information provided, the Commissioner of State Revenue is satisfied that SOPT meets the criteria under Section 89P of the Duties Act 2000 for registration as an imminent wholesale unit trust scheme.

Accordingly, SOPT has been registered as an imminent wholesale unit trust scheme with effect from 27 December 2007, being the date units were first issued to a qualified investor (in accordance with the holding statements provided). Registration is for a period of 12 months.

1. The letter reminded Salta of the need to notify the Commissioner of any disqualifying circumstances within 28 days of occurrence. The letter continued:

It should be noted that one of the criteria for SOPT's registration as an imminent wholesale unit trust scheme is that SOPT will meet all the criteria under Section 89O of the Duties Act to be registered as a wholesale unit trust scheme by 27 December 2008. A failure to meet this requirement will constitute a disqualifying circumstance.

1. Regrettably Salta's optimism that it would be able to 'sell down' STICT's 90% interest was misplaced. As the year 2008 rolled on the circumstances for such placements became more and more adverse. As is notorious in September 2008 the world economy was struck by what has been described as the 'global financial crisis' with the world's financial and banking system facing threats not seen since 1931. Representatives of Salta including legal advisers called to confer with the Commissioner's officers 'to discuss Salta Office's progress in meeting the criteria assessed for an imminent wholesale unlisted trust'. By that time no further qualified investor had been identified and signed up.
2. Following that meeting which presumably did not yield a solution to SOPT's difficulty within the scope of the statute or the Commissioner's discretion, solicitors acting for SOPT wrote to the Treasurer of the State of Victoria by letter dated 1 December 2008. The burden of this letter was that with no further qualified investors forthcoming:

There will be a disqualifying circumstance and accordingly SOPT will be taken to have been a private unit trust scheme from the date it was first registered ie. it would be considered never to have obtained wholesale unit trust scheme status. Accordingly, all acquisitions in SOPT will then be reconsidered and viewed as acquisitions in the private unit trust scheme.

1. The letter noted that had Taras subscribed for the 90% of the units which were in fact issued to STICT 'no duty would have been payable'. The letter sought ex gratia relief 'to enable the trust to be unwound and reversed to private status'. The Treasurer's response stated inter alia:

The duty liability does not result from an unintended consequence or strict application of the Act. A relevant acquisition was made and a duty liability incurred. I am further advised this would be the case regardless of whether SOPT was registered as a wholesale unit trust scheme or not.

There are procedures for objecting to a duty assessment and I am advised that these rights have not been exercised. It is not appropriate for me to intervene when the relevant appeal processes have not yet been pursued.

The consequences of deliberate commercial decisions or deteriorating market conditions have no bearing on the application of the Act and are not generally circumstances that would invoke ex gratia relief from taxation.

1. On 23 December 2008 the solicitors wrote to the State Revenue Office observing that during the consultations at the SRO 'it was discussed that it would be necessary to lodge a land rich acquisition statement prior to 27 December 2008'. A notice of acquisition under Section 8 of the Duties Act was enclosed with the letter. The State Revenue Office responded by letter dated 29 December 2008 observing:

The correspondence will be taken as notification of a disqualifying circumstance for the purpose of Section 89B(2)(a) of the Duties Act 2000.

1. In a letter dated 23 February 2009 the solicitors calculated the duty payable at $1,103,850 calculated by reference to an asset value of $22,300,000. the letter concluded noting that:

Our client intends to make a further submission in relation to relief under S.85(2). We are also considering the current legislation with regard to corporate reconstruction relief, and may make a further application in that regard.

1. There followed a letter dated 2 March raising a number of issues. The letter described the provisions with which we are dealing as 'hideously complicated'. Seeking discretionary relief from liability under Section 85(2) of the Act the letter referred to the circumstances which led Salta's 90% interest being placed with STIC rather than Tara as based on happenstance arising out of Taras' undertakings given in relation to another project. The beneficiaries were in substance identical it was said. In those circumstances the lawyers stated:

For the Commissioner to claim duty ... would simply be for the Commissioner to take advantage of the parties' error in adapting on the one to substantial changes in commercial circumstances with which they were faced in December 2007.

1. The letter was copied to the Treasurer.
2. The Commissioner issued an assessment dated 27 March 2009 imposing duty of $1,103,850 (the same amount as calculated by the taxpayer's solicitor), a penalty of $55,192.50 with interest at $81,725. The total amount claimed was $1,240,767.50. In a lengthy covering letter bearing the same date a delegate of the Commissioner explained the Commissioner's reasoning expressing the view that the assessment was 'not anomalous, unintended or harsh'. The letter also observed:

Finally, it is noted that in December 2008 SOPT did not meet the criteria for registration as a wholesale unit trust scheme, meaning that in relation to its registration as an imminent wholesale unit trust scheme a disqualifying circumstance occurred. In the result, SOPT is considered to have never obtained wholesale unit trust scheme status.

1. The letter said that since no duty had been paid 'a tax default has occurred'. The letter continued:

It is considered that the tax default occurred because of a failure to take reasonable care. It is, therefore, considered appropriate to impose penalty tax and interest in respect of the tax default.

1. The Commissioner treated the matter as one which involved a voluntary disclosure whereby the standard rate of penalty tax was reduced by 80% leaving the penalty at 5% which was calculated as previously stated.
2. The applicants through their solicitors lodged a Notice of Objection dated 14 May 2009. The objection placed reliance on the Commissioner's discretion to treat the relevant acquisition as exempt under Section 85(2) of the Duties Act 2000. A delegate of the Commissioner determined to disallow the objection by Notice of Determination dated 26 August 2009. By letter dated 14 September 2009 solicitors for the applicant sought reference of their objection to the Tribunal.

1. Mr P. Fox of Counsel who appeared on behalf of the applicant sought leave to rely upon certain additional grounds of objection to the Commissioner's assessment which grounds are summarised below. Mr Nicholas, Counsel for the Commissioner did not oppose the grant of such leave under the Taxation Administration Act 1997 which was then granted.
2. Mr Fox contended first that discretionary relief should have been granted by the Commissioner under Section 85(2) of the Duties Act because it was not just and reasonable that the relevant provision should apply to the acquisition. 'There was no change in the underlying beneficial ownership of the property and assets of SOPT.' Mr Fox took me to a chart of the beneficiaries under each of the Lorimer Street Trust for which Taras Nominees acted and the STIC Australia Trust for which STIC acted as trustee. He noted that Section 75 of the Duties Act 'deems the beneficiaries of discretionary trusts to own or otherwise be entitled to the property of a trust'. He said:

But for Section 77(2AA) of the Act inserted in July 2007, there would not have been an acquisition of a significant interest by STIC as before then the interest acquired by a trustee of a discretionary trust does not apply beneficially.

1. He referred to the decision of Mandie J in Landrow Properties Pty Ltd v Commissioner of State Revenue [2008] VSC 590; (2008) 73 ATR 901 [Section 77(2AA) of the Act provides as follows:

Without limiting subsection (1), a person is taken to obtain an interest beneficially if the person obtains the interest as trustee of a trust.]

1. Mr Fox noted that Mandie J had held that an acquisition by a trustee was not an acquisition of an interest beneficially within the terms of Section 77(1) as it then stood.
2. He said however that in Landrow the beneficiaries of the acquiring trust were different from the beneficiaries in the disposing trust. He continued:

It is a harsh result where beneficiaries who have already borne duty on the transfer of land to a land rich trust should also bear duty when a different trustee for them has to pay land rich duty on acquiring interest in the trust.

1. It was anomalous he said that the duty should be payable when STIC acquired the units. It would not have been payable if Taras had acquired them.
2. According to Mr Fox:

Had the pool of eligible investment funds necessary to enable SOPT to transition from an imminent wholesale unit trust to a wholesale unit trust scheme not evaporated by the time new units were issued on 27 December 2007 the acquisition would not attracted the land rich provisions.

1. He said it was not just and reasonable that the land rich provisions:

Should apply where the expectation of wholesale unit trust scheme status is frustrated by general market conditions drying up the pool of eligible investment funds which had been counted on to enable the trust to qualify as a wholesale unit trust scheme.

1. In proceeding with the scheme rather than cancelling it at the end of 2007 according to Mr Fox, Salta was keeping faith with AEI:

By taking up the shortfall it also avoided the approbation [scil apprehension] that a failed issue might provoke in the market as witnessed by Centro's difficulties.

1. He concluded that 'a liberal application of Section 85(2) is necessary in these circumstances to avoid injustice'.
2. In his written outline of argument Mr Fox referred to the fact that the beneficiaries in default of appointment under both of the relevant trusts were to be public hospitals as defined in the Hospitals and Charities Act 1958. He said that by virtue of the interpretation Clause 1.2(c) of the relevant deeds, the reference to this statute should now be regarded as a reference to Schedule 1 to the Health Services Act 1988. He noted that Section 85(1) of the Duties Act renders exempt:

An acquisition by a person of an interest in a landholder who is an exempt acquisition if the means by which the person acquired the interest would have result in no ad valorem duty being payable under Chapter 2 had the subject of the acquisition been a transfer of the land to the landholder in person.

1. He said that by virtue of Section 45A(1)(f) of the Duties Act 'effective 31 March 2009' a transfer of the land owned by SOPT to a public hospital would have been exempt under that section or under Section 45(b) 'on the basis that public hospitals are corporations established for a charitable purpose'.
2. Mr Fox conceded that Section 45A had not commenced operation when the relevant acquisition occurred. He continued:

Then it is submitted it would be not just and reasonable to apply the land rich provisions to the acquisition for the benefit of the public hospital and the acquisition should be found to be exempt under Section 85(2).

1. These contentions relative to public hospitals were not mentioned in the course of oral submissions nor were they mentioned by Mr Nicholas on behalf of the Commissioner during his oral presentation. His written outline however does respond to these matters. For the purposes of my determination I will assume that this argument relative to public hospitals is amongst the additional grounds which Mr Fox sought to add and that this ground is properly before me by virtue of the leave to amend which I granted.
2. Mr Fox submitted that the Tribunal's role was to:

Make the determination itself [viz to assess or not assess] on the basis of the facts found, and without necessarily having regard to the policies employed by the primary decision-maker, in reliance on the powers conferred by S.51 Victorian Civil and Administrative Tribunal Act 1998 and S.111 Taxation Administration Act 1997.

1. He referred to Chief Commissioner of State Revenue v Lee (2000) 45 AATR 130 at [26] per Meagher JA; Commissioner of Taxation of the Commonwealth v Swift (1989) 20 ATR 143, 145-6 per French J. Accordingly he said the Tribunal in applying the Section 85(2) discretion was not confined to a consideration of what was anomalous, unintended or harsh.
2. Next Mr Fox contended that the acquisition should be regarded as exempt by virtue of Section 250B of the Duties Act. That Section provides:

(1) A member of a relevant corporate group may apply to the Commissioner for an exemption under this Division -

(a) any time before the eligible transaction occurs to which the application relates; or

(b) within 3 years after the eligible transaction occurs to which the application relates.

(2) The Commissioner must grant an exemption from duty under this Act on an instrument or transfer of dutiable property if the Commissioner is satisfied that -

(a) the instrument or transfer is, or arises out of, an eligible transaction; and

(b) the eligible transaction does not arise from arrangements or a scheme devised for the principal purpose of taking advantage of the benefit of this section; and

(c) the conditions of the exemption, if any, will be met by the applicant.

(3) If duty under this Act has been paid on an eligible transaction, the Commissioner must refund any duty paid that, by reason of the exemption, is not payable.

(4) The Minister must, before 31 October in each year, cause to be laid before each House of the Parliament a report of exemptions granted and refunds made under this Division in the preceding financial year, including -

(a) the name of each member of a relevant corporate group that has had the benefit of an exemption or refund; and

(b) the amount of duty that would have been chargeable but for the exemption and the amount of any refund.

1. He noted that Section 250 under the heading 'What is a corporate group?' defined corporation to include a unit trust scheme with relevant corporate group defined as follows:

relevant corporate group means the members of a corporate group that are parties to an eligible transaction and those members of the corporate group necessary to establish the connection between the parties as a parent corporation and subsidiary or as subsidiaries of the same parent corporation.

1. The same section defines 'corporation' to include a unit trust scheme.
2. Section 250A of the Duties Act defines eligible transaction to refer to transactions on or after 1 January 2004 including inter alia:

(e) a relevant acquisition to which section 80 applies by a member of a corporate group from another member of the group;

1. Mr Fox contended that the STIC Australia Trust could be regarded as a unit trust scheme because units were issued under Clause 7.3 of the relevant trust deed in June 2008.
2. According to Mr Fox:

Upon the acquisition of the units, STICT became the parent of SOPT, thus constituting the corporate group at which STICT was the parent and SOPT was the subsidiary for the purposes of Section 250(1) of the Act.

1. Accordingly he contended it did not matter that it was the very acquisition in dispute which formed the relevant corporate group for the first time.
2. Mr Fox noted that by virtue of Section 79(1) of the Duties Act 'a relevant acquisition was the acquisition of a 'significant interest' '. He noted that by virtue of Section 76(2) of the Act:

A person who, by virtue of S.79(1) has an 'interest' in a landholding (being an entitlement to a distribution of property from the landholder on the winding up of the landholder), has a 'significant interest' in the landholder if the person in the event of a distribution of all the property of the landholder immediately after the interest was acquired, would be entitled to [the relevant percentage of the property distributed]. (emphasis in the original)

1. He said therefore that the 'significant interest' does not arise upon acquisition of the units, but upon the notional winding up immediately after the interest was acquired.
2. Mr Fox said that were his submissions not to succeed and the assessment were not set aside, nevertheless the penalty of 5% should be remitted together with any interest charged on that sum. He said:

The fact is that the applicants have not engaged in any step to reduce their tax liability, but have complied with their commercial and legal obligations in a most harsh environment for raising new capital and have not acted negligently in doing so. The applicants should not be punished for not taking steps to reduce their tax liability.

1. Counsel for the Commissioner noted first that there was no written underwriting agreement which obliged the first applicant to acquire the units which it did. This acquisition he said was as a result of a decision made by the applicants in December 2007 voluntarily. As to the operation of Section 85(2) of the Act he submitted the following principles should govern:

(a) Where a tax is imposed subject to a dispensing power, the purpose of the dispensing power is to avoid the need to specify each and every circumstance where the tax burden may be relieved;

(b) The power is incidental and ancillary to the primary object of the statute in which the power is located, and must be applied in a manner which does not defeat that primary object;

(c) In exercising the discretion the Commissioner (and the Tribunal) is to be guided and controlled by the policy and purpose of that statute.

1. He referred to Chief Commissioner of State Revenue v Pacific General Securities Limited [2005] NSWADTAP 54; (2005) 63 ATR 127 [39] where the New South Wales Administrative Decisions Tribunal Appeal Panel said that a provision such as this was included to deal with unforeseen circumstances:

The discretion might be open to be applied also where there is an unexpected social policy consequence of a taxation measure which should be ameliorated in the short-term, ahead possibly, in some instances, of amending legislation.

1. In his written outline Mr Nicholas denied the contention that there was an identity of beneficial ownership between the Lorimer Street Trust of which Taras Nominees was trustee and the STICT of which STIC Australia was trustee. Ultimately however he did not press those arguments and conceded that the beneficiaries could be regarded as identical. Nevertheless, he said:

The applicants, having chosen a particular course that best suited what, it seems, were perceived to be their commercial imperatives, must be bound by the fiscal consequences that follow. Those consequences are not 'anomalous', but arise because of the application of the legislation to the facts.

1. The revenue law applies to taxpayers whether they know about it or not. He referred to Laverton Property Development Pty Ltd v Commissioner of State Revenue [2010] VCAT 35 [106].
2. Mr Nicholas submitted that market failure could not be blamed as a consequence for the applicants' revenue liabilities. Accordingly he said the acquisition by STICT in December 2007 created the liability and:

Liability to pay duty on the acquisition was never contingent upon whether or not SOPT could by 27 December 2008 meet all the criteria under Section 89A of the Act.

1. The acquisition in December 2007 was of more than 50% and attracted duty whatever happened in the ensuing 12 months.
2. Mr Nicholas said that the appeal to Section 45 of the Duties Act was unavailing because a private trust like the STICT was not within the accepted heads of charities. He referred to Federal Commissioner of Taxation v AidWatch Inc [2009] FCAFC 128; (2009) 178 FCR 423 [10] - [12]. He said:

Properly construed, S.45A does not operate to apply to a trust of a private trust, of which only the ultimate takers in default comprise public health services or public hospitals.

1. Mr Nicholas conceded that the Tribunal was not bound to apply the Commissioner's revenue ruling DX.049. It was however a significant matter of which account should be taken. He referred to Drake v Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634.
2. He submitted that the penalty was properly imposed. He contended that the Commissioner had been more than fair in reducing the prima facie penalty by 80%.

1. I deal first with the argument based upon the status of public hospitals as takers in default under the STIC Australia Trust. Sections 45 and 45A of the Duties Act do provide for exemptions for duty for transfers of property to inter alia 'a corporation or body of persons established for religious, charitable or educational purpose' in the case of Section 45 and in the case of Section 45A(1)(f) a public hospital. Without having been taken to any extensive citation of authority on these sections or perhaps much at all, it seems to me clear that these sections are intended to apply to conveyances or transfers where the entire interest goes to the relevant institution. Accepting that the provision of a taker in default under a discretionary trust is to be regarded as a vested interest and not a merely contingent ones, the interests of the discretionary objects being the contingent one, nevertheless in circumstances where the overwhelming likelihood is that there will be an appointment to one of the family members of Mr Tarascio it would be an abuse of language in my view to regard a transfer of land to a trust established for the benefit of the family of Mr Tarascio as being a transfer to a charity merely because the charity is a taker in default. That ground if pressed (and I am not sure if it was pressed) fails.
2. I turn next to the issue of relief for corporate reconstruction. Mr Fox's argument based upon the timing issues arising out of Section 76(2) must fail. Section 76(2) provides as follows:

(2) A person who, by virtue of subsection (1), has an interest in a landholder has a significant interest in the landholder if the person, in the event of a distribution of all the property of the landholder immediately after the interest was acquired, would be entitled to -

(a) in the case of a private unit trust scheme - 20% or more of the property distributed; or

(b) in the case of a landholder other than a private unit trust scheme - 50% or more of the property distributed.

1. The purpose of the reference in this provision to the situation 'immediately after the interest was acquired' in my view is not to provide any delayed operation for revenue purposes of the acquisition but merely to provide a process for evaluation whether the interest in question is a significant interest. The purpose of Section 250B of the Duties Act as I understand it is to provide for relief against liability for duty which might otherwise arise for transactions 'within the family' of the relevant corporate group. I do not believe that Parliament's intention was to create an exemption where the very transaction which forms the family or by which the acquirer joins the family is in question.
2. One further embarrassment to this contention is the fact that at the relevant date the STICT did not answer the description of 'unit trust scheme' in the Duties Act, a necessary step in the view that the transaction rendered STICT and SOPT members of a corporate group for the purposes of the Duties Act 2000. The premise for the view that they were members of the same corporate group for the purposes of the Act is that both are unit trust schemes. The definition of unit trust scheme in Section 3 of the Act is as follows:

unit trust scheme means any arrangements made for the purpose, or having the effect, of providing, for persons having funds available for investment, facilities for the participation by them, as beneficiaries under a trust, in any profits, income or distribution of assets arising from the acquisition, holding, management or disposal of any property whatever pursuant to the trust;

1. STICT as previously noted is a discretionary trust for the benefit of the family of Mr Tarascio. Mr Fox contended that Clause 7.3 quoted above enabled STICT to be regarded as a unit trust scheme for the purposes of his submissions on this point. Without expressing any view as to whether what occurred in 2008 rendered STICT a unit trust scheme I cannot accept that the mere existence of a power in effect to convert a discretionary trust into a unit trust wholly or partially can lead to the conclusion that some seven or so months before such power is exercised the discretionary trust can be regarded as a unit trust.
2. The corporate reconstruction ground therefore fails.
3. The final matter for consideration is the operation of Section 85(2) of the Duties Act. That provision is as follows:

An acquisition by a person of an interest in a landholder is an exempt acquisition if the Commissioner so determines, being satisfied that the application of this Part to the acquisition in the particular case would not be just and reasonable.

1. The best known examination of a provision such as this is the decision of the High Court of Australia in Giris Pty Ltd v Federal Commissioner of Taxation [1969] HCA 5; (1969) 119 CLR 365 under the then provisions of the Income Tax Assessment Act 1936. Section 99A provided that a particular fund penal rate of tax would apply to trust income unless the Commissioner of Taxation were of opinion that it would be unreasonable that that section applied in which event a non-penal rate would be payable. The Court considered a constitutional challenge to the validity of Section 99A which it rejected. Barwick CJ said:

It would also follow from my interpretation of the section that the Commissioner is in substance able to choose whether the trust income will be taxed at one rate rather than another, or perhaps, put more accurately, assessed under one section rather than another. He is able to make the choice in exercise of what, for want of a more precise expression, I shall call a legislative discretion: he can apply one section rather than the other if he thinks it unreasonable to apply the latter of them. I have been unable to find any content for the word "unreasonable" in the context of the two sections except considerations of a kind upon which a legislature acts in deciding whether an enactment or its particular terms are or are not unreasonable having regard to the interests of the public generally, of the citizen to be affected, of the revenue and of the requirements of those policies, political, economic and fiscal which the Parliament is prepared to sanction.

[1969] HCA 5; (1969) 119 CLR 365, 372

1. More recently French J as a trial judge of the Federal Court of Australia (as the present Chief Justice of the High Court of Australia then was) considered the operation of a similar provision in the Taxation (Unpaid Company Tax) Assessment Act 1982. The Act in Section 5(4) included a dispensing power exercisable by the Commissioner where he or she considered it 'unreasonable that the primary taxable amount should be taken to exist or to have existed in relation to the person'. His Honour was considering an appeal by the Commissioner from a decision of the Administrative Appeals Tribunal which exercised that dispensing power in favour of the taxpayer. His Honour dismissed the appeal. His Honour observed that the purpose of the statute as a whole was to collect company tax which had been evaded. He continued:

The dispensing power is incidental and ancillary to the primary object of the legislation. In respecting of cases in which it could conceivably be exercised, there will be a threshold beyond which it would defeat the primary object of the legislation. It is unnecessary to define that threshold for present purposes. The discretion cannot, however, be limited to the case where a person has not in any way benefited from the evasion giving rise to the recoupment tax liability. And in this respect ground 4(c) of the grounds of appeal was rightly abandoned. The absence of such a simply expressed limitation from the language of s.5(4) is indicative of the absence of any such legislative intention. That is not to say that it is not open to consider whether a person claiming dispensation under the sub-section benefited from the sale of shares in the subject company. But, it is not, as a general rule, conclusive.

There may of course be irrelevant factors which lie quite outside the framework of the Act, and which, if taken into account, would stamp a decision based upon them as arbitrary, fanciful or manifestly unreasonable. And it is on this basis that the Commissioner's attack is largely founded.

Federal Commissioner of Taxation v Swift (1989) ALD 679, 696-7

1. In the present instance the Commissioner placed reliance upon Revenue Ruling DA.049. That ruling which is designated 'Land Rich Provisions - Acquisitions of Interest in a Landholder' states inter alia:

Under Section 85(2) of the Act, a person's acquisition of an interest in a land rich landholder may be treated as an exempt acquisition if the Commissioner so determines, being satisfied that the application of Part 2 of Chapter 3 of the Act to the acquisition in that particular case would not be just and reasonable. It is considered that this section provides the Commissioner with a measure of discretion to deal with unforeseen consequences, anomalies or unexpected outcomes arising from the application of Part 2 of Chapter 3 of the Act to the facts of a particular case. As a result, the section is not considered to have a broad application and can only be applied in a manner that does not defeat the legislative objectives of Part 2 of Chapter 3 of the Act. Generally, the discretion under Section 85(2) of the Act will only be exercised in cases where the acquisition of an interest in a land rich landholder is dutiable because of an anomaly, unintended consequence or harsh outcome in the application of Part 2 of Chapter 3 of the Act.

1. Mr Nicholas also referred to and relied upon the remarks of he Appeal Panel of the New South Wales Administrative Decisions Tribunal dealing with a similar provision in the New South Wales Duties Act where the Panel said that the relevant provision provided a measure of discretion to deal with unforseen circumstances, anomalies or unexpected outcomes and continued:

The discretion might be open to be applied also where there is an unexpected social policy consequence of a taxation measure which should be ameliorated in the short-term, ahead possibly, in some instances, [of] amending legislation.

Chief Commissioner of State Revenue v Pacific General Securities Limited [2005] NSWADTAP 54; (2005) 63 ATR 127 [39]

1. Mr Nicholas also said that the dispensing provision in question was included 'to avoid the need to specify each and every circumstance where the tax burden may be relieved'.
2. The Revenue Ruling is a public policy and in accordance with Drake's case (supra) should be given considerable weight. On the other hand in the special context of a provision such as Section 85(2) the exegeses of the discretion contained in revenue rulings, Court and Tribunal decisions can only be of limited assistance. The Commissioner quite rightly contends that a discretion such as Section 85(2) is included because not every future circumstance where Part 2 of Chapter 3 will create a tax liability can be foreseen and exhaustively provided for. The discretion is if you will, intended to give elbow room. It is in the very nature of such a discretion so given that it cannot be exhaustively explained or confined. If an exhaustive analysis were possible the discretion would not have been included in the first place. Moreover, concentration upon the words in particular Court or Tribunal decisions or Revenue Rulings leads to the vice frequently condemned in recent times by the High Court of Australia of concentrating attention upon exegeses of a statute rather than upon the statutory words themselves.
3. It is no doubt accurate to describe a provision such as Section 85(2) as intended to deal with anomalies, and unforeseen circumstances but just as one person's terrorist is another person's freedom fighter one person's anomaly is another person's proper and appropriate operation of the revenue system.
4. One thing that emerges clearly from all analysis of provisions such as these is that they must be exercised in a manner which is not inconsistent with the primary purpose of the legislation. It would not be proper for instance in exercising this discretion to give ear to the contention put by STIC's lawyers in their letter to the Commissioner dated 2 March 2009 where they say:

Any intelligent observer asked to consider these provisions [Part 2 of Chapter 3 of the Duties Act 2000] for the first time could reasonably conclude that they were designed especially to trap the unwary and with the primary purpose of making business difficult and expensive. Those familiar with these provisions have long complained of their complexity and that there were many, far better ways to collect State revenue without exposing business people to the trap into which STIC has fallen.

1. The exercise of the discretion must be approached on the basis that the tax levied by Part 2 of Chapter 3 is the tax ordained by Parliament. In its general effect it is a right and proper way of raising State Revenue.
2. The principal matter relied upon by the applicants as supporting a favourable exercise of the Section 85(2) discretion is that the issue of 90% of the units in SOPT to STIC leaves the beneficial interest of that 90% equity where it originally was, namely held on discretionary trusts for the benefit of Mr Tarascio's family. In the Commissioner's written outline he disagreed with that interpretation of events. Ultimately however, Mr Nicholas conceded that this was the effect of the relevant trust deed. Mr Fox therefore submitted that since an arrangement which left the beneficial interest where it began would not be dutiable under Chapter 2 of the Duties Act which embodies the modern equivalent of the traditional conveyance duty provision, it would not be just and equitable to bring what was commercially the same effect to charge under Part 2 of Chapter 3. Taken literally this argument might make out a non-discretionary exemption under Section 85(1) of the Duties Act; but I was not taken to the detail of the provisions as to conveyance duty in Chapter 2. Mr Nicholas said that insofar as the 2007 amendment removed the ability to argue that a transferee who was not acquiring the relevant interests beneficially was not liable to duty to use the lack of change in beneficial interest as a discretionary ground to exempt the present transaction would be directly to subvert the intention of the 2007 amendments.
3. Mr Nicholas observed that the decision of Mandie J in Landrow followed the 2007 amendments; hence it could not be said that those amendments were made in response to his decision. Mr Nicholas did not as I understand it however quarrel with the view that the 2007 amendments could be regarded as a pre-emptive strike against the arguments which were successful for the taxpayer in Landrow. Mr Nicholas observed that His Honour's judgment was subject to appeal to the Court of Appeal and that the appeal would be heard shortly. Mr Fox noted that the transaction held by His Honour to be exempt in Landrow did work an alteration of the underlying beneficial interests in contrast to the situation in the present case.
4. In my view the broad sweep of the provisions with which we are dealing which can be traced back to their ancestors in the Stamps Act 1958 dating from 1987 is to bring to charge changes in beneficial interests in land in Victoria which are effected not through the conveyance of interests in the land itself but by transfer of interests in the share capital or unit trust structure of a landholder entity. To conclude therefore that it would not be just or reasonable to levy duty where there was no change in the underlying beneficial interests is not to my mind fundamentally inconsistent with the policy of the relevant provision.
5. It is also relevant I think to the exercise of the discretion to note that the relevant entities were seeking to avail themselves of exemptions deliberately created by the Duties Act in a manner consistent with what appears to have been in the contemplation of Parliament. To put it another way, there were no 'contrived' transactions aimed at achieving a result different from what Parliament apparently intended.
6. It is also appropriate to notice that STICT and related entitles were at pains through their solicitors to keep the Commissioner advised of events as they unfolded. There was no pretence or concealment.
7. Finally it is to be noted that the taxpayers have been held liable to duty upon a transaction (viz. the transfer of 90% of the units in SOPT to STICT) the duty significance of which was missed initially not only by the taxpayers but also by the Commissioner's office itself. The correspondence which failed to advert to this matter emanated from a unit in the State Revenue Office specialising in the duty levied under Part 2 of Chapter 3. In the Commissioner's adjudication on the issue of penalty in rejecting the objection to the imposition of the penalty he accused the taxpayers of 'negligence'. It would seem however that the taxpayers were in good company.
8. Generally revenue law applies to taxpayers whether they know about it or not. The Commissioner referred to my remarks in Laverton Property Developments Pty Ltd v Commissioner of State Revenue [2010] VCAT 35 [106]. A taxpayer generally cannot advantage its position by ignorance. In the most unusual circumstances of the present case however, I believe that the fact that this taxpayer has fallen into a pit unknowingly can be given some weight as a factor supporting a favourable exercise of the Section 85(2) discretion.
9. It is also of some but by no means great significance to note that the Salta Group could have achieved its ends subject to obtaining certain waivers relative to Taras Nominees Pty Ltd in a manner not commercially dissimilar from what was actually done but which would have attracted no duty.
10. In my view all of these factors together are sufficient to lead to the view that it is just and reasonable that the duty under Part 2 of Chapter 3 of the Duties Act should not apply to this transaction.
11. It should be stressed that this exercise of jurisdiction turns upon the particular facts. For instance another taxpayer who fell into the same pit could not necessarily expect to receive the same favourable exercise of discretion, first, because in the nature of things the surrounding circumstances would almost certainly be different from the ones before me and secondly because the very existence of this decision which publicises the pit into which these taxpayers fell would diminish the argument for a favourable exercise of discretion in any subsequent proceeding or assessment.
12. I should record for completeness that had the primary assessment stood I would have exercised the discretion under the Taxation Administration Act 1997 to remit the penalty imposed and any interest thereon in its entirety. In the circumstances described these taxpayers have made meticulous disclosure to the Commissioner at every turn. Characterising their conduct as 'negligent' was in the circumstances unfair.