The exemption in s 104-55(5)
101 As already noted, Taras sought to rely upon s 104-55(5) of the ITAA 1997. For the reasons stated hereafter, however, s 104-55(5)(a) cannot assist it because:
(a) Taras was not the sole beneficiary of the trust over the Taras Land, and/or
(b) Taras was not absolutely entitled to the Taras land as against the Land Trustee.
102 As stated earlier, Taras contended that it was the sole beneficiary of the trust over the Taras Land, because, under the terms of the JVA and the Trust Deed, the Land Trustee held the Taras Land solely for Taras, and not for the other Land Holding Parties. As Mr de Wijn put it, the effect of the Trust Deed, the JVA and the transfers executed by the Land Holding Parties was to create three separate trusts for each of them, rather than to create one trust. In developing this argument, senior counsel for Taras referred to provisions of the JVA, which were inconsistent with the construction that the Commissioner sought to place upon the combined operation of the JVA, the Trust Deed and the transfers. These provisions of the JVA included cl 2.1(a)(1)-(3) (including that Taras would execute a transfer of Taras land to the Land Trustee "as trustee for Taras"); cl 2.1(a)(4) (the Land Trustee to execute a trust deed declaring it holds the land "as trustee for the respective Land Holding Parties); cl 2.2(c) (the Land Trustee appointed by the Land Holding Parties as their respective attorneys regarding their "respective portions of the Land"); cl 2.2(d) (the Land Holding Parties indemnified in respect of risk etcetera "relating to their respective portions of the Land"); cl 2.3 (refers to the "price for each Land Holding Party's portion of the Land"); cl 6 (distributions partly referable to land portion originally held by a Land Holding Party); cl 10.4 (contemplating a transfer of its land to another interest). On Taras' argument, the Trust Deed was largely immaterial, its senior counsel submitting that "all of this could have been done without a transfer to the trustee". On Taras' argument, the Trust Deed simply reflected what had been achieved by the JVA. In this connection, senior counsel for Taras referred to recitals A and B of the Trust Deed and to cl 2.1, cl 2.2 and cl 2.3. Senior counsel for Taras submitted that:
What's being done is the landholding parties are giving authority or a direction to the nominee to deal with [the land] on their behalf and in accordance with the joint venture agreement.
103 The major difficulty with this argument was that it was entirely inconsistent with the characterisation of the effect of the JVA, the Trust Deed and the transfers ultimately adopted by Batt JA (with whom Ormiston and Chernov JJA agreed) in Victoria Gardens (Court of Appeal). As already indicated, the Commissioner relied heavily on this decision to support the proposition that, under the Trust Deed, the Land Trustee held the whole of the Land, including the Taras Land, for all the beneficiaries, being SDA, the Marpine Trustee and Taras.
104 As I am about to explain, I accept that, as the Commissioner submitted, the decision in Victoria Gardens (Court of Appeal) is highly relevant to the current issue. First, the Court of Appeal in fact considered virtually the same set of facts with which I am presently concerned, discussing the clauses of the JVA and the Trust Deed in detail (at 66-71 [13]-[25]). It is true, as Taras noted, that the Court of Appeal was concerned with a different statute and a different question. The question being considered by the Court was whether an exemption to stamp duty, for transfers of real property "to a trustee or nominee to be held solely as trustee or nominee of the transferor without any change in beneficial ownership", applied to any of the three transfers of land described earlier: see [26]-[31] above. Batt JA held that "none of the transfers falls within the exemption": at 77 [37].
105 His Honour gave two reasons for this conclusion. First, he found that the transferred property "[was] not 'to be held' as trustee of the respective transferors, but rather [was] to be developed and sold or otherwise disposed of, or at least possibly sold or otherwise disposed of": at 77 [38]. His Honour then stated (at 77 [39]):
Secondly, disregarding the first reason entirely but taking into account all the terms of the Trust Deed and the JVA I am of opinion that their overall effect, though by no means their universal effect, is that each piece of land is on transfer not held on trust for the transferor alone, that is, not held or to be held "solely as trustee … of the transferor". The critical document is the JVA because the declaration of trust in the Deed is subject to the terms of the JVA.
(Emphasis added.)
106 His Honour noted various clauses of the JVA supporting his conclusion, before remarking (at 77 [39]) that "[a] transferor to the Land Trustee [VGD] is not entitled to possession in virtue of beneficial ownership but only as a joint venturer (if it be such)". In particular, his Honour said (at 77 [39]):
A critical provision in the latter is cl 2.2(a), whereby the transferors irrevocably make their respective portions available to the joint venture "for the purposes envisaged by" the JVA. The transferor is not entitled to a re-transfer of the land. It cannot assign, mortgage or charge it without consent. The transfer of the relevant portion of the Land that is provided for in cl 10.4 is nominal or notional, and whether the declaration of trust confirming that the Land Trustee holds the land transferred on trust for the Transferee is really about that portion of the Land or rather about the whole of the Land or in truth about a right to be paid depends upon a review and analysis of the whole document, which of course includes cl 10.4 itself.
107 Turning to cl 6.2, which governed the distribution of cash becoming available from the development and sale of the land, his Honour stated (at 78 [39]):
In return for the land transferred the transferor, by cl 6.6 together with cll 2.2(b) and 2.3(c), is entitled only to receive a distribution of cash in accordance with cl 6.2. In whatever circumstances the land is sold and however the JVA comes to an end cl 6.2 ultimately operates. For a correct appreciation of the operation of the JVA, it is necessary to decide whether cl 6.2 is merely a contractual provision as to the manner in which a transferor's money entitlement is to be paid or is a substantive provision bearing on the transferor's entitlement in equity or in other words evidencing or constituting its proprietary rights. I have concluded that it is the latter. The universality of operation of cl 6.2 emphasises its significance in the determination of the entitlements of the parties. A transferor's essential entitlement is to receive ultimately an amount of money calculated in accordance with cl 2.3, but this is subject to the operation of cl 6.2, pursuant to which that essential entitlement may be delayed, defeated in part or (except in the case of Staged Developments) defeated in whole. Similarly, each of the 3 transferors is entitled, in certain circumstances depending on the order of selling and the price obtained, to receive money generated by the sale of land contributed by one or both of the others. In addition, in the event of a surplus of Cash over $65 million the 2 joint venturers alone share. Although the circumstances of this case do not bring it, strictly, within any of the established categories where the doctrine of conversion in equity applies it is hard to resist the conclusion that the JVA treats previous rights in land as converted into rights to money. Further, equitable ownership is always commensurate with the right to relief in a court of equity and it is difficult here to think of a case where a transferor would obtain relief declaring its interest to be in the land originally transferred by it or giving effect of an interest so defined. In most cases the relief would be pecuniary or would define the interest in pecuniary terms. It is artificial to view the "payment" provisions as separate from those setting out how the Land Trustee holds the land. For these reasons, it is correct to look, as his Honour did, to cl 6.2 in ascertaining the interests of the transferor.
(Emphasis added.)
108 His Honour continued (at 78 [40]):
I conclude that, if the transferors' rights in land are not to be treated as converted into money, at any rate all three transferors have an interest in all the land transferred as tenants in common in equity collectively, provisionally in the shares or proportions which the price to which they respectively are entitled as set out in Annexure B bears to the total price there set out. On the true construction of the whole JVA and the Trust Deed the words of severance and of beneficial ownership, so far as they do not merely refer to the position at the moment of execution, that is, immediately before the coming into effect of the several transfers, are overridden by the contrary indicia and have no real force. Nor does cl 10.4.
(Emphasis added.)
109 In its written submissions in the present case, Taras said of this decision:
The [Commissioner's] reliance on this decision is misplaced, first because the case dealt with exemptions from stamp duty, the effect of which depended upon their own unique terms, and secondly because Batt JA himself expressed doubt about his conclusion.
To support its contention that Batt JA's conclusion was tentative, Taras pointed to his Honour's remark (see [105] above) that a change in beneficial ownership was the "overall effect, though by no means [the] universal effect" of the terms of the JVA and of the Trust Deed, and also to a footnote in the judgment (at 78 [40] fn 44) acknowledging that another possible view was that it was the Joint Venturers (Taras and the trustee of the Marpine Trust) alone who were interested in the land, "as tenants in common in equal shares in equity".
110 Referring to Upjohn LJ's remarks in Re Pilkington's Will Trusts [1961] Ch 466 at 489, Taras submitted that the Court of Appeal's conclusions "must be read in relation to the issues which they had to try", and that in light of the different statutory context this Court should "consider the application of the capital gains tax rules afresh, and should not be unduly influenced by the reasoning in that decision".
111 As already noted, it may be accepted that the Court of Appeal's decision did not relate specifically to whether a CGT event happened. It may also be accepted that, in light of the first reason for Batt JA's decision (see [105] above), the second reason was, strictly speaking, an independent and non-essential reason for the decision, ultimately based on a finding of fact that, in any event, this Court is not bound to accept. Nevertheless, I would respectfully adopt Batt JA's conclusion that the transfers changed the beneficial ownership of the land at least to the point that the Land Holding Parties had "an interest in all the land transferred as tenants in common in equity collectively", for the reasons set out in his Honour's detailed analysis as well as those that follow. While it is true that his Honour's attention was ultimately directed to whether an exemption to stamp duty applied, his conclusion on beneficial ownership and his considered interpretation of the connection between the JVA, the Trust Deed and the transfers are of great relevance to the question of beneficial ownership currently before this Court.
112 As a preliminary matter, Taras' claim that Batt JA "expressed doubt about his conclusion" must be rejected. His Honour's remark (at 77 [39]) that his conclusion was "by no means [the] universal effect" of the terms of the relevant documents followed from his recognition (at 73 [30]) that "[d]ifferent provisions point in different ways"; it should not be read as distancing his Honour from the opinion he reached by considering those provisions as a whole. His Honour stated that his preferred view, that the previous rights in the land were converted into rights to money, was "hard to resist". Alternatively, all three transferors acquired an interest in all of the land as tenants in common collectively. As an aside, his Honour acknowledged that the beneficial interest in the land could also be viewed as being shared by the two Joint Venturers alone. It is clear enough that his Honour did not doubt that the transfers changed the beneficial ownership of the land in one way or another, which is what is relevant for present purposes, and that the various alternatives his Honour proposed were each, with respect, sound interpretations of what occurred.
113 In this Court, Taras maintained that the Land Holding Parties did not intend any transfer of the beneficial ownership of the Taras land at any time prior to the sale of the land. As already indicated, in support of this submission, Taras emphasised language in the JVA and the Trust Deed which would, all else being equal, indicate that each parcel of land was to be held on trust exclusively for its previous legal owner, who would retain beneficial ownership. Thus, for example, the Land Trustee declared that it held the land "on trust for the respective Land Holding Parties" (Trust Deed, cl 2.1) (emphasis added), while each Land Holding Party made "that portion of the Land of which it is the beneficial owner available to the JV" (cl 2.2(a)) (emphasis added). Problematically for Taras, other language in the JVA and the Trust Deed weighs against this view, as Batt JA recognised in Victoria Gardens (Court of Appeal). This much is revealed even when clauses Taras relied upon are set out more fully. The Land Trustee in fact declared in cl 2.1 of the Trust Deed that it held the land "on trust for the respective Land Holding Parties subject to the terms of the [JVA] and of [the Trust Deed]" (emphasis added), while under cl 2.2(a), "[e]ach of the Land Holding Parties irrevocably makes that portion of the Land of which it is the beneficial owner available to the JV for the purposes of the [JVA]" (emphasis added). Another example is cl 2.2(a) of the JVA, which provided that "[t]he Land Holding Parties … are not entitled to a transfer back of their respective portions of the Land" (emphasis added).
114 It is clear enough from its express terms that the Trust Deed was made subject to the JVA and that the JVA prevails to the extent of any inconsistency. Clause 6.2 of the JVA, which was fundamental to Batt JA's conclusion, provided for the distribution of cash to the Land Holding Parties upon sale of the land, or parts of the land, as follows, broadly speaking:
The first cumulative $8 million was to be distributed to SDA;
Thereafter 50% was to be paid to Taras until it had received the $28.5 million "price" set out in Annexure B, "in payment for portions of Taras Land actually sold … or … on account of future sales of parts of Taras Land";
The remaining 50% was to be paid to SDA until it had received $11.5 million (including the $8 million it received first), and then to the trustee of the Marpine Trust until it had received $25 million;
Any cash in excess of $65 million was to be distributed equally.
115 Batt JA found that cl 6.2, in light of the inability of the Land Holding Parties to have their respective prior lots returned to them, determined alone the entitlements of the parties in relation to the land they contributed to the Joint Venture. This was clearly the case. Yet the sums to be received by each Land Holding Party under cl 6.2 were not, except perhaps in a loose way, even proportional to the value of the land each had originally contributed to the Joint Venture. The parties to this proceeding accepted that the "prices" in Annexure B of the JVA, which are the basis for the distribution scheme established by cl 6.2, did not reflect the market value of the three parcels of land in 1998. Even if one supposed that those "prices" were at least proportional to the value of each parcel of land, the scheme envisaged by cl 6.2 in no way guaranteed that the Land Holding Parties would ultimately be paid amounts in those proportions. For example, because of the equal distribution of amounts over $65 million, Taras would have been paid a lesser proportion of the total sum if the sale price had been $200 million than if it had been $65 million. This illustrates that Taras' entitlements under the JVA were based not on the value or even the relative value of the Taras land, but instead on a contractual formula which would pay Taras a greater or lesser proportion of sale monies based, ultimately, on the amount received for so much of the aggregated land as was sold. This weighs strongly against Taras's argument that it retained beneficial ownership of the Taras land, and in favour of the view that after the transfers made pursuant to the JVA, all three Land Holding Parties had a collective interest in all of the land.
116 The above discussion makes it plain that there was only one trust, not three separate trusts as Taras claimed, and that the Land Trustee held the whole of the land, including the Taras land, for all three Land Holding Parties. The Taras land was not held by the Land Trustee for Taras alone. Rather, all three transferors had an interest in it.
117 In these circumstances, Taras was not the sole beneficiary of a trust over the Taras land and was not absolutely entitled to the Taras land as against the Land Trustee. The Land Trustee owed fiduciary obligations with respect to all the land, including the Taras land, to SDA, the Marpine Trustees and Taras. In this circumstance, all three were beneficiaries of the trust which included the Taras land within the meaning of s 104-55(5)(a) of the ITAA 1997: see, for example, Kafataris at 249-230 [42]-[43] (Lindgren J)); also Yazbek v Commissioner of Taxation [2013] FCA 39 at [20]-[24] (Bennett J). Amongst other things, as discussed above, the Land Trustee had fiduciary obligations to administer the trust in accordance with the Trust Deed and therefore the JVA, including to distribute the proceeds from the development (whether or not by way of sale) of the Taras land among all three in accordance with cl 6 of the JVA: see Trust Deed, cll 2.3, 2.4 and JVA, cll 2.2(b), 2.3(c), 11.4, 12.8.
118 Further, Taras was not absolutely entitled to the Taras Land as against the Land Trustee. The expression "absolutely entitled" in s 104-55(5)(a) (and in s 104-60) of the ITAA 1997 refers to a situation "in which the beneficiary of a trust has a vested, indefeasible and absolute entitlement in trust property and is entitled to require the trustee to deal with the trust property as the beneficiary directs": see Kafataris at 253-254 [61]. Taras did not have a vested, indefeasible and absolute entitlement in the Taras Land and was not entitled to require the Land Trustee to deal with the Taras Land in accordance with its directions. As already noted, the terms of the trust pursuant to which the Land Trustee held the Taras land prevented the return of that land to Taras (Trust Deed, cl 2.2(a) and (b)) and required that the land be developed and used by the Land Trustee with the whole of the Land in accordance with the JVA, which Taras was not permitted (by cl 2.5) to vary without prior written agreement of each of the Joint Venturers. Moreover, the Land Trustee, not Taras, had the power of sale of the Taras land; and hence any interest of Taras in the Taras land was a defeasible interest. Taras' relevant entitlements under the trust were to the cash distributions in accordance with cl 6 of the JVA. Clause 6.2 dealt with distributions that were to occur upon sale of the developed land; and cl 6.3 dealt with the distribution of profit, to which the Joint Venturers were equally entitled. In the circumstances Taras was not absolutely entitled to the Taras land as against the Land Trustee.
119 Accordingly, the exemption in s 104-55(5) of the ITAA 1997 had no application in this case.
120 In the present context, it is appropriate to mention Taras' submission that the constraints on it with respect to the Taras land were purely contractual in nature. I consider this submission misconceived for two reasons. First, the submission leaves out of account the fact that the parties intended that the executed transfers of land pursuant to the JVA and the Trust Deed were the mechanisms by which their land would be brought on a combined basis into the structure they established to conduct their business affairs. As noted already, the Trust Deed imposed clear and distinct fiduciary obligations on the Land Trustee in its capacity as trustee with respect to the JVA, the benefit of which enured to the benefit of the three beneficiaries - the Marpine Trustee, SDA and Taras. The Taras submission wrongly disregards the transfers and the Trust Deed.
121 Secondly, the evidence of Mr Veevers was to the effect that the parties to what became the JVA agreed to commit their land to a Joint Venture before they entered into formal agreements. Taras and the Marpine Trustee shared the costs of work done on or in respect of that land, including the costs of having the land re-zoned. In cross-examination, Mr Veevers said that there were negotiations between the parties about the terms of the JVA in the period 1 August 1997 to 20 August 1998; and that whilst "the terms of the positive agreement had been … in place for more than 12 months", not all the terms of the JVA were agreed prior to August 1998. There was, as Mr Davies QC submitted, no disposal of the proprietary interests in the land until August 1998.
122 In the present context, it is also appropriate to discuss Taras' reliance on s 100-35 of the ITAA 1997 and on Booth v Ellard. Taras referred to s 100-35 of the ITAA 1997 in support of the proposition that, from a commercial perspective, it did not stand to "make capital gains in a commercial sense until the land was sold to third parties". It pointed to s 100-35 to support its claim that the "general principle" of the provisions dealing with CGT was that a capital gain was "only" made where the taxpayer received capital amounts from a CGT event that exceeded the total costs associated with the event. Taras' inclusion of "only" is not consistent with the terms of s 100-35, which relevantly provides:
For most CGT events:
You make a capital gain if you receive (or are entitled to receive) capital amounts from the CGT event which exceed your total costs associated with that event.
…
(Emphasis added.)
123 Section 100-35 evidently states that a mere entitlement to receive capital amounts exceeding total associated costs constitutes a capital gain for "most" CGT events. Moreover, the section clearly anticipates that for some CGT events, a capital gain may be made even without the receipt of or an entitlement to receive capital amounts in excess of total associated costs. The fact that Taras did not make any gain, commercially speaking, until the aggregated land was sold to third parties does not, therefore, bear on whether a CGT event occurred; nor does it bear on whether there was a change in the beneficial ownership of the Taras land. Section 100-35 does not assist Taras.
124 In addition to s 100-35, as noted, Taras also referred to Booth v Ellard, in support of the proposition that there will be no taxable capital gain where there was none as a matter of commercial reality and that, in a 'pooling' arrangement such as happened in relation to land in this case, there was no change in the beneficial ownership of the land, even though the equitable interests might have changed. Taras also relied on Booth v Ellard in support of its contention that after the transfer of the Taras land to the Land Trustee, it remained absolutely entitled to the land as against the Land Trustee. Booth v Ellard does not support any of these propositions.
125 In Booth v Ellard the English Court of Appeal held that taxpayers who transferred shares to a trust of which they were beneficiaries did not realise taxable gains in so doing. Taras submitted that the reasoning in that case was applicable to this proceeding, quoting from the concluding passage of Oliver LJ's judgment (at 1450):
… the result seems to me to be in accordance with the common sense and commercial reality of the matter. … [I]t would seem capricious and unreasonable to tax these shareholders on a wholly illusory gain simply because of the technical machinery which they chose to adopt to effect an end which involved no quantitative alteration in their separate and individual beneficial entitlements.
126 As can be seen from the final clause of that passage, however, the decision turned on a finding that the arrangement in that case resulted in no change in the beneficial interest in the shares. The relevant finding is found in Buckley LJ's judgment (at 1448), with which Ackner and Oliver LJJ agreed:
The effect of the trust was to subject all the trust shares to powers and discretions conferred upon the trustees for what was conceived to be the collective benefit of the settlors but, subject to those power and discretions which the settlors collectively could override, the measure of the beneficial interests of the settlors remained unaffected by the trust. There was no transfer of any beneficial interest from any one of them to any other. …
On the true view of the facts the taxpayer, in my view, never lost his interest in 55,000 shares of the company. He subjected that interest to certain restraints, as did the other settlors in respect of their shares, but it was at all times within their collective power to abolish those restraints, whereupon each settlor would become absolutely entitled to the same number of shares as he had brought into the trust.
(Emphasis added.)
127 The facts could, however, have been different, and this may have altered the outcome, as Buckley LJ acknowledged (at 1448):
In the circumstances of the present case, Mr Nicholls submits, all the 12 settlors who contributed shares to the pool comprised in the trust were together collectively and concurrently entitled absolutely to the whole trust fund as against the trustees … So … as Mr Nicholls contends … the position must be viewed as though none of the settlors had disposed of his or her or their shares.
The logic of this argument seems to me to be unassailable unless it can be said that by participating in the pooling arrangement the several settlors lost their existing beneficial interest in their own particular shares and became entitled merely to an undivided or unappropriated share in the pool formed by their several contributions and that, because the latter interest was different from the former, there were dispositions not merely of the shares themselves but of the anterior beneficial ownerships of specified shares.
(Emphasis added.)
128 Booth v Ellard therefore does not answer the question whether Taras retained beneficial ownership in the Taras land, other than by directing attention to the arrangements that were in fact made. As much as it may be "capricious and unreasonable" to impose CGT where there has been no change in the beneficial ownership of property that has been pooled, that does not determine whether there was such a change. It is necessary to examine the relevant arrangement to determine whether there was any change in the entitlements of the contributors. This was the task that Batt JA completed in Victoria Gardens (Court of Appeal), and as shown above, in this case Taras' entitlements did change as a result of the JVA, the Trust Deed and the transfer of land. Moreover, cl 6.3 of the JVA, to be administered by the Land Trustee under the trust, made it clear that the Joint Venturers had equal entitlement to the profit derived by the Joint Venture otherwise than on sale of the land, to the exclusion of SDA, the third of the Land Holding Parties, with the result that the cash return could not be said to be reflective of their precise interests in the land before the relevant transactions were made. Booth v Ellard can therefore be distinguished from the present case: see also Victoria Gardens (Court of Appeal) at 78 [40].
129 This understanding of Booth v Ellard is confirmed by Jenkins (Inspector of Taxes) v Brown, which did no more than apply the principle in Booth v Ellard to a pooling arrangement with respect to land where the individual interests after transfer mirror the interests before transfer: see Jenkins (Inspector of Taxes) v Brown at 1177.