In these proceedings, the Applicant seeks a review of a reassessment issued by the Chief Commissioner of State Revenue on 28 April 2014 in respect of land tax for the 2010, 2011, 2012, 2013 and 2014 land tax years.
The Applicant is the trustee of the Rovi Investments Unit Trust ("the Trust"). The Trust was for a number of years accepted by the Chief Commissioner as a "fixed trust" but, on 24 April 2014 in issuing the reassessment, the Chief Commissioner determined that it was a "special trust", within the provisions of s 3A of the Land Tax Management Act 1956 ("the Act").
The Applicant pursuant to this determination, was no longer entitled to the benefit of the tax-free threshold in respect of a property held by the Applicant and was charged land tax under the Land Tax Act 1956 at the rate prescribed for the relevant land tax years on the full value of the property.
The terms "special trust" and "fixed trust" are defined in the LTM, relevantly for present purposes, as follows:
"3A Special trust - meaning
1. For the purposes of this Act, a trust is a special trust if:
1. the trust property includes land, and
2. the trustee of the trust is the owner of the legal estate in the land, and
3. the trust is not a fixed trust.
1. For the purposes of this section, a trust is a fixed trust if the equitable estate in all of the land is the subject of the trust is owned by a person or persons who are owners of the land for land tax purposes (disregarding section 25(3)).
2. For the purpose of determining whether a trust is a fixed trust under this section, any equitable interest of the trustee of the trust is to be disregarded.
3. (3A) If a trust satisfies the relevant criteria, the persons who are beneficiaries of the trust under the trust deed are taken to be owners of an equitable estate in the land that is the subject of the trust and, accordingly, the trust is taken to be a fixed trust.
4. Note. Under section 25, owners of an equitable estate or interest are liable in respect of land tax as if they were legal owners of the land. Owners of an equitable estate in land are treated as secondary taxpayers.
5. (3B) For the purposes of this section, the relevant criteria are as follows:
1. the trust deed specifically provides that the beneficiaries of the trust:
1. are presently entitled to the income of the trust, subject only to payment of proper expenses by and of the trustee relating to the administration of the trust, and
2. are presently entitled to the capital of the trust, and may require the trustee to wind up the trust and distribute property or the net proceeds of the trust property,
1. the entitlement referred to in paragraph (a) cannot be removed, restricted or otherwise affected by the exercise of any discretion, or by a failure to exercise any discretion, conferred on a person by the trust deed,
2. if the trust is a unit trust:
1. there must be only one class of units issued, and
2. the proportion of trust capital to which a unit holder is entitled on a winding up or surrender of units must be fixed and must be the same as the proportion of income of the trust to which the unit holder is entitled."
The Trust was settled by a Deed of Trust ("the Deed") on 12 July 2007.
The original unit holders were Robert Petreski, his wife and their four children, each holding a single ordinary unit in the Trust.
Subsequently, further units were also issued from time to time to Tech 1 Pty Limited as the trustee for the Tech 1 Superannuation Fund and the original six unit holders. However, on 14 August 2013, Mrs Petreski and her four children redeemed all of their unit entitlements. As at 30 December 2014, there were only two unit holders - Robert Petreski (243,386 units) and Tech 1 Pty Limited as trustee for the Tech 1 Superannuation Fund (374,417 units).
Clause 1 of the Deed provided for interpretation of various terms used in the Deed and the general effect of the Deed. Under clause 1.1 of the Deed, the vesting date was defined as "the first to occur of the following dates namely:
1. the day specified as the "Vesting Day" in the Schedule (if any); or
2. 80 years from the date of this Deed; or
3. that date upon which shall expire the period of 21 calendar years after the death of the last survivor of the lineal descendants male or female now living of their late Majesty King George VI of England; or
4. such date as may be determined pursuant to Clause 7.3."
Clause 1.3 provided that all the "income payable in accordance with the provisions of this Deed to Unit Holders shall be payable to them separately and income and realised capital gains received by the Trustees shall not be received or be construed as received by or on behalf of the Unit Holders jointly or otherwise".
Clause 2.1 of the Deed provided "that the Trustee shall stand possessed of the Trust Fund and the income thereof upon the trusts and with and subject to the powers and provisions hereinafter expressed concerning the same". The only asset of the trust was land situated in Leichhardt during the relevant period.
Under clause 3.1 of the Deed the beneficial interest in the trust was vested in the Unit Holders. Pursuant to clause 3.3 of the Deed the beneficial interest of the Unit Holders was "in the Trust Fund as an entirety" and did not entitle "a Unit Holder to any particular security or investment comprised in the Trust Fund".
The Trust was "originally constituted by the Original Unit Holders contribution" divided into Units as specified in the First Schedule to the Deed (Clause 3.4). The Second Schedule to the Deed provided for three different classes of units:
1. Ordinary Units, which were subject to the main provisions of the Deed;
2. Income Units, which gave the holder of such units no right to vote or to move or second any motion or to speak at any general meeting of the Unit Holders but the holder was entitled to, at the discretion of the Trustee, participate in distribution of the net income of the Trust Fund; and
3. Equity Units, which gave the holder of such units no right to vote or to move or second any motion or to speak at any general meeting of the Unit Holders but the holder was entitled to, at the discretion of the Trustee, participate in distributions of the capital of the Trust Fund.
The Trustee, subject to the consent of the Unit Holders was, under clause 3.7 of the Deed, given discretion to create new classes of Units.
Clause 7.3 of the Deed provided that -
"The Trust may be terminated at any time before Vesting Day if so resolved by a Special Resolution of the Unit Holders and such termination shall take effect from a date to be named in the resolution."
Upon termination of the Trust, Clause 7.4 of the Deed provided that the assets of the trust fund be realised and the cash proceeds, less expenses incurred by the trustee, be distributed among the Unit Holders proportionately to their holdings.
Clause 7.7 of the Deed provided that the Trustee "may at any time and from time to time with the unanimous consent of the Unit Holders redeem the whole or any part of the Units held by a Unit Holder".
Under Clause 8.1 of the Deed, the Trustee was required to "collect receive and get in all dividends interest rents and other income from the investments of the Trust Fund". Pursuant to clause 8.2 of the Deed, the Trustee was authorised "to pay out of the gross income of the Trust Fund all costs and disbursements commissions fees taxes (including land tax and income tax) management charges and other proper outgoings in respect of the Investments and administration of the Trust Fund".
The Trustee was required to distribute the net income of the Trust Fund in accordance with clause 8.3 of the Deed, which provided as follows:
"Subject to any special rights or restrictions provided in the Second Schedule in relation to Units of any class the Trustee shall in each Accounting Period until the Vesting Day or the date of the termination of the Trust whichever shall first occur pay the net income of the Trust Fund of the Accounting period to or for the benefit of the Unit Holders in proportion to the number of Units of which they are respectively registered as Holders at the end of the Accounting Period."
Notwithstanding the power in clause 8.3 of the Deed, the Trustee was given, by clause 8.4 of the Deed, the discretion, with the consent of the holders of a majority of the issued voting Units and subject to any law in force at the relevant time, to accumulate all or any part of the net income of the Trust Fund.
The principal question for determination in this matter is whether the Trust was a "special trust" or a "fixed trust" in the relevant land tax years. In order to determine that question it is necessary to consider three issues. Firstly, as required by s 3A(3B)(a)(i) of the Act, whether the beneficiaries of the Trust were in the relevant years "presently entitled to the income of the trust", subject to payment of proper expenses by the trustee relating to the administration of the Trust. Secondly, as required by s 3A(3B)(a)(ii) of the Act, whether the Unit Holders were in the relevant years "presently entitled to the capital of the Trust Fund and had the power to require the Trustee to wind up the Trust Fund and distribute the trust property or the net proceeds of the trust property". Thirdly, as required by s 3A(3B)(b) of the Act, whether the entitlements referred to in the first and second issues could not be removed, restricted or otherwise affected by the exercise of any discretion, or by a failure to exercise any discretion, conferred on a person by the Trust Deed in the relevant years.
In the determination of these issues, it is necessary to have a clear understanding of the two concepts referred to in s 3A of the Act - "present entitlement to a share of the trust income of a trust" and "present entitlement to the capital of the trust".
As noted by his Honour Gazell J (with Meagher JA and Tobias AJA agreeing with his Honour) in Sayden Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 111 at [15]: "Present entitlement to income is a well-known concept in taxation law". His Honour went on to cite the now popular understanding of the meaning of this concept given by the High Court (Mason CJ, Deane, Dawson, Toohey and McHugh JJ) in Harmer v Commissioner of Taxation (1991) 173 CLR 264 at 271 -
"The parties are agreed that the cases establish that a beneficiary is 'presently entitled' to a share of the income of the trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment." (Footnote omitted)
His Honour also noted that the above passage "was cited with approval" more recently by the High Court (French CJ, Gummow, Hayne, Heydon and Crennan JJ) in Commissioner of Taxation v Bamford [2010] HCA 10; (2010) 240 CLR 481 at [37].
In Sayden, Gzell J also explained when a beneficiary was presently entitled to the capital of a trust -
"By contrast, present entitlement to capital is novel. Presumably it means an interest in the trust property vested in interest and in possession in that there is no other interest in the property that precedes it, together with a present legal right to demand division of the trust property or its proceeds among the beneficiaries.
Any interest of the trustee under its right to indemnity is not relevant in this context because s 3A(3) of the Management Act requires any equitable interest of the trustee to be disregarded."
By way of summary, his Honour noted that -
"If a trust deed specifically provides that the beneficiaries are presently entitled to the income subject to payment of the trustee's proper expenses and they are presently entitled to the capital of the trust and may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property, the trust satisfies the relevant criteria and by reason of s 3A(3A) of the Management Act, the beneficiaries are taken to be owners of an equitable estate in the land the subject of the trust and the trust is a fixed trust."
In the present matter, the Applicant's case was that -
"In view of clauses 1.3 and 8.3 of the Rovi Trust deed, the unit holders as beneficiaries of the Trust are presently entitled to the income of the trust because:
they have an indefeasible, absolutely vested, beneficial interest in possession in the trust income (see also clause 3.1) of the Rovi Trust deed); and
are able to demand immediate payment by terminating the Rovi Trust at any time before Vesting Day (see clause 7.3)"
Clause 1.3 of the Deed provided that:
"All income payable in accordance with the provisions of this Deed to Unit Holders shall be payable to them separately and income and realised capital gains received by the Trustee shall not be received or be construed as received by or on behalf of the Unit Holders jointly or otherwise."
Clause 8.3 of the Deed provided that:
"Subject to any special rights or restrictions provided in the Second Schedule in relation to Units of any class the Trustees shall in each Accounting Period until the Vesting Day or the date of termination of the Trust whichever shall first occur pay the net income of the Trust Fund of the Accounting period to or for the benefit of the Unit Holders in proportion to the number of Units of which they are respectively registered as Holders at the end of the Accounting Period."
The Applicant also placed some reliance on the financial statements of the Rovi Trust that recorded that the income was in fact distributed to the unit holders.
It was also submitted by the Applicant that, under clause 7.3 of the Deed, the beneficiaries did have power to require the trustee to wind up the trust at any time before the Vesting Date and, pursuant to clause 7.4.2, the trustee was required to upon termination of the trust to distribute the cash available to the Unit Holders proportionally to their unit holdings.
As regards the third issue, the Applicant made the following submission:
"The Rovi Trust deed does not provide unfettered discretion to the Trustee to create new units and units of any class which would result in the Trust not being a fixed trust. Rather is (sic) allows for the creation of units and the variation of the Trust by consent of unit holders in the usual way. As such, no discretion has been conferred on a person which would result in beneficiaries (sic) entitlement to income and capital being removed, restricted or otherwise affected."
The Chief Commissioner's case was essentially that the provisions of the Deed, which dealt with distribution of income of the Trust, did not comply with the relevant criterion in s 3A(3B)(a)(i) of the Act.
Ms Wong, counsel for the Chief Commissioner, submitted that the Deed did not specifically provide that the Unit Holders were "presently entitled to the income of the Trust" in the relevant tax years for at least three reasons.
Firstly, clause 8.3 of the Deed was "subject to any rights or restrictions provided in the Second Schedule in relation to Units of any class". The Trustee under clause 3.1.2 of the Second Schedule of the Deed was given the discretionary power to pay all or part of the net income of the Trust Fund to holders of Income Units. The Trustee could have, in the relevant years, made a discretionary determination to reduce to zero the amount of income to be distributed to an Ordinary Unit Holder in a particular accounting period resulting in the Ordinary Unit Holder's entitlement clearly not "vested in interest and vested in possession".
Secondly, pursuant to clause 8.4 of the Deed, the Trustee, with the consent of the holders of a majority of the issued voting Units could have accumulated all or any part of the net income of the Trust Fund that arose during an Accounting Period in the relevant tax years. Such a determination would have precluded a Unit Holder from obtaining a vested interest in the income for that particular period, as the Unit Holder would not have had a right to enforce a distribution to Unit Holders of the income, which would have been part of the capital of the Trust Fund.
Thirdly, because of the "mismatch" with the accounting period ending 30 June of each year under the Deed and the 31 December of each land tax year on which land tax liability is determined, no present entitlement to the income of the Trust could have been established as at 31 December of any of the relevant land tax years.
In relation to the second issue whether the unit holders were presently entitled to the capital of the Trust, the Chief Commissioner accepted that the unit holders could have gained access to the capital of the Trust by "(a) by termination of the Trust under cl.7.3 of the Trust Deed; and (b) by redemption of units held by a retiring Unit Holder under cl.7.7 of the Trust Deed". But it was pointed out that "both of these mechanisms" were not available at the request of an individual Unit Holder. In the case of termination, this required a Special Resolution of 75% majority of the Unit Holders present and entitled to vote on the resolution. The units also could only be redeemed under cl. 7.7 "with the unanimous consent of the Unit Holders". In these circumstances, it was submitted that it could not be said that the beneficiaries of the trust were "presently entitled to the capital of the trust".
It was also pointed out by the Chief Commissioner that a "further impediment to establishing a present entitlement to the capital of the Trust" was the power with the Trustee under clause 3.8 of the Deed to issue Equity Units and the discretion with the Trustee under clause 4 of the Second Schedule, which permitted the Trustee to pay to the Equity Unit Holders all or such part of the capital of the Trust Fund. This provision, it was submitted, precluded an Ordinary Unit Holder from establishing that their right to the capital of the Trust was in any way vested in interest or possession.
Further, it was submitted by the Chief Commissioner that the Deed did not specifically provide that the unit holders could require the Trustee to wind up the Trust and distribute the trust property or the net proceeds of the trust property in the relevant land tax years as required by s 3A(3B)(a)(ii) of the Act.
Finally, it was submitted that, although the entitlements required did not exist under the provisions of the Deed, any such entitlements could have been "restricted or otherwise affected by the exercise of the Trustee's discretion under cl. 3.7, 3.8, 8.4 and 8.7 and Schedule 2, cl. 3.1.2, 3.1.3, 4.1.2 and 4.1.3".
Essentially, the exercise to determine the status of the relevant Trust, requires, as noted by his Honour Gzell J in Sayden, "the interpretation of the Deed by reference to orthodox principles of construction: Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 at [102]-[105]". The basis for the question posed by s 3A(3A) of the Act as to whether a trust satisfied those criteria, is therefore to be answered solely by reference to the proper construction of the instrument or instruments constituting the trust. Section 3A(3B)(a) of the Act makes it clear that to satisfy the relevant criteria "the trust deed specifically provides" for the required entitlements. All surrounding circumstances are not relevant in determining this question.
The Applicant placed reliance, in particular, on clauses 1.3 and 8.3 to submit that the Unit Holders as beneficiaries were presently entitled to the income of the Trust "by terminating the Rovi Trust at any time before the Vesting Day" under clause 7.3 of the Deed.
I agree with the reasoning advanced by counsel for the Chief Commissioner that the Unit Holders of the Trust did not have an interest in the income of the Trust, which was both vested in interest and vested in possession in the relevant land tax years as required by the criterion set out in s 3A(3B)(a)(i) of the Act. In particular, on the two grounds advanced by the Chief Commissioner. Clause 8.3 of the Deed was, as pointed out by the Chief Commissioner, "subject to any special rights or restrictions provided in the Second Schedule in relation to Units of any class". Under clause 3.1.2 of the Second Schedule, the Trustee had discretion to pay all or part of the net income of the Trust Fund to holders of Income Units. The Ordinary Unit Holders in those circumstances could not be said to "have an interest in the income of the Trust which was both vested in interest and vested in possession".
Also, as pointed out by the Chief Commissioner, clause 8.4 of the Deed allowed the Trustee with consent of holders of a majority of the issued voting units, to accumulate all or any part of the net income of the Trust Fund arising during an Accounting Period. If, a determination had been made by the Trustee under clause 8.4 of the Deed it would have clearly precluded a Unit Holder from having a vested interest in the income for that particular period and with no right to demand a distribution of the accumulated income which would have become capital of the Trust Fund.
I am also of the view that the Trust Deed did not specifically provide that the Unit Holders had a present entitlement to the capital of the Trust. As submitted by the Chief Commissioner, there were two ways that would have permitted Unit Holders to gain access to the capital of the Trust Fund. The Unit Holders could have sought to terminate the Trust under clause 7.3 of the Deed prior to the Vesting Date or have redemption of their units by retiring from the Trust Fund under clause 7.7 of the Trust Deed. I agree with the Chief Commissioner's submission that both were not available "at the request of an individual Unit Holder". In the case of termination, this was only possible by a special resolution of 75% majority of the Unit Holders present and entitled to vote. Under clause 7.7 of the Deed redemption was only permitted "with the unanimous consent of the Unit Holders".
There was, of course, as pointed out by the Chief Commissioner, two further "impediments to establishing a present entitlement to the capital of the Trust".
The Trustee had power to issue Equity Units under clause 3.8 of the Deed and clause 2 of the Second Schedule. If such units were issued, the Trustee had discretion to pay to the Equity Unit Holders all or such part of the capital of Trust as the Trustee in its discretion determined.
Further, the Deed permitted other classes of units to be issued with restricted voting rights. The Second Schedule to the Deed made it clear that Income Units and Equity Unit Holders did not have any right to vote or move or second any motion or to speak at any general meeting of the Unit Holders. Under clause 7.3 of the Deed the trust could have been terminated before the Vesting Date by a Special Resolution of the Unit Holders. But under clause 1.1 of the Deed a Special Resolution required the approval of 75% of the Unit Holders present and entitled to vote at a duly convened general meeting of the Unit Holders. Thus, the Income and Equity Unit Holders could not have on their own terminated the Trust. In these circumstances, it cannot be said that the beneficiaries of the trust were "presently entitled to the capital of the trust" in the relevant land tax years.
As I have found that the Applicant failed to satisfy the relevant criteria as set out in s 3A(3B) (a) (i) and (ii) of the Act, it becomes unnecessary in this matter for the Tribunal to consider the issue required by s 3A(3B)(b).
The reassessment must therefore be affirmed.
I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales.
Registrar
[3]
Amendments
19 June 2015 - Typo error in coversheet
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Decision last updated: 19 June 2015