Watertite Investments Pty Ltd ATF Isgrove Trust v Chief Commissioner of State Revenue

Materials before the Tribunal

1. The Applicant relied on the affidavit of Tony Isgrove affirmed on 5 June 2023, submissions dated 8 June 2023 and submissions in reply dated 28 August 2023.
2. The Respondent relied on documents filed pursuant to s 58 of the ADR Act and submissions dated 14 August 2023.

Relevant Legislative Provisions

1. Surcharge land tax is charged for the 2017 and subsequent land tax years on residential land owned by "foreign persons" pursuant to s 5A of the LTA.
2. Section 5D of the LTA was introduced on 24 June 2020 by the State Revenue Legislation Further Amendment Act 2020 (NSW) (Amendment Act). It provides, relevantly: 5D Surcharge land tax - discretionary trusts (1) The trustee of a discretionary trust is taken to be a foreign person in that capacity for the purposes of section 5A if the trust does not prevent a foreign person from being a beneficiary of the trust. (2) If a discretionary trust prevents a foreign person from being a beneficiary of the trust, the trustee is not in that capacity a foreign person for the purposes of section 5A. (3) A discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if (and only if) both of the following requirements are satisfied - (a) no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement), (b) the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement). (4) A person is a potential beneficiary of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person. (5) For the removal of doubt, a person is not a potential beneficiary of a discretionary trust if the terms of the trust prevent any property of the trust from being distributed to or applied for the benefit of the person.
3. Part 34 of Schedule 2 of the Land Tax Management Act 1956 (NSW) (LTMA) contains savings and transitional provisions consequent on the enactment of the Amendment Act. It provides that s 5D of the LTA applies in respect of the 2017 and subsequent land tax years, but provides for exemptions in certain circumstances.
4. Clause 66 of Schedule 2 to provides, relevantly: 66 Amendments relating to discretionary trusts (1) Section 5D of the Land Tax Act 1956 applies to the assessment of land tax liability in respect of the 2017 land tax year and subsequent land tax years. (2) If the trustee of a discretionary trust is liable in that capacity as a foreign person for surcharge land tax in respect of the 2017, 2018, 2019 or 2020 land tax year - (a) the trustee is exempt from that land tax if the terms of the trust have been amended, before payment of the land tax is due and before midnight on 31 December 2020, so that the trust prevents a foreign person from being a beneficiary, or … (3) A trust that satisfies the no foreign beneficiary requirement under section 5D of the Land Tax Act 1956 immediately before the commencement of that section is considered for the purposes of that section to prevent a foreign person from being a beneficiary of the trust (without having to satisfy the no amendment requirement under that section).
5. Section 2A of the LTA defines "foreign person" as having the same meaning as in Chapter 2A of the Duties Act 1997 (NSW) which, in turn, defines "foreign person" as having the same meaning as in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) (with certain modifications which are not presently relevant).
6. Section 4 of the FATA defines "foreign person" as meaning: (a) an individual not ordinarily resident in Australia; or (b) a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or (c) a corporation in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or (d) the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or (e) the trustee of a trust in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or (f) a foreign government; or (g) any other person, or any other person that meets the conditions, prescribed by the regulations.
7. That section also defines the expression "substantial interest" as follows: substantial interest: a person holds a substantial interest in an entity, trust or unincorporated limited partnership if: (a) for an entity or unincorporated limited partnership - the person holds an interest of at least 20% in the entity or partnership; or (b) for a trust (including a unit trust) - the person, together with any one or more associates, holds a beneficial interest in at least 20% of the income or property of the trust.
8. Section 18 of FATA sets out rules for determining percentages of interests in entities, and relevantly sets out in s 18(3): Discretionary trusts (3) For the purposes of this Act, if, under the terms of a trust, a trustee has a power or discretion to distribute the income or property of the trust to one or more beneficiaries, each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary.

Taxation Administration Act 1996 (NSW) (TAA)

1. The TAA applies in respect of "taxation laws" which are defined in s 4 of the TAA to include the LTA and the LTMA.
2. As previously mentioned, s 96 of the TAA provides that a taxpayer may apply to the Tribunal for an administrative review of a decision of the Respondent that has been the subject of an objection.
3. Section 100 of the TAA provides that the Applicant's and Respondent's cases on an application for review are not limited to the grounds of the objection and that the Applicant has the onus of proving its case.
4. Section 101 of the TAA sets out the powers of the Tribunal in dealing with an application for review and provides that the Tribunal may, amongst other things, confirm or revoke the assessment or other decision to which the application relates, make an assessment or other decision in place of the assessment or decision to which the application relates or remit the matter to the Respondent for determination in accordance with its finding or decision.

Facts

1. The following facts are not in dispute.
2. By deed executed on 18 July 2000 the Isgrove Trust (Trust) was established. The trustee of the Trust was originally Tony Isgrove Painting & Decorating Specialists Pty Ltd. That trustee retired and was replaced by the Applicant on 27 September 2011.
3. The Trust is a discretionary trust. The Trust Deed provides that the trustee may apply or set aside the income of the Trust for the General Beneficiaries (clause 4.3.2) and the capital of the Trust for the beneficiaries (clause 7). Beneficiaries are defined in clause 1.5 of the Trust Deed to mean the General Beneficiaries.
4. General Beneficiaries is defined in clause 1.2 of the Trust Deed to mean and include: 1. (clause 1.2.1) The Specified Beneficiary or Specified Beneficiaries (named in the Schedule as Tony Isgrove, Rodney Isgrove and Roberta Isgrove); 2. (clause 1.2.2) Various relatives of the Specified Beneficiaries; 3. (clause 1.2.3) Any corporation wherever incorporated or resident any share in which is beneficially owned or held by any General Beneficiary or by the Trustee of any trust or Settlement under which any General Beneficiary has any interest whether absolute or contingent or by way of expectancy and whether liable to be defeated by the exercise of any power or appointment or revocation or to be diminished by the increase of the class to which he or she belongs and the Trustee of any Trust or Settlement, including a Superannuation Fund, which the Trustee may at any time and from time to time nominate in writing as a General Beneficiary and whether or not any such Corporation Trust or Settlement is in existence at the date of this Settlement; 1. (clause 1.2.4) An executor and trustee of the will and administrator of the estate of a General Beneficiary; 2. (clause 1.2.5) A person who has the legal custody of a General Beneficiary; 3. (clause 1.2.6) Any charity or charitable, educational, benevolent, sporting or religious institution, person or persons, corporations or associations whom the Trustee in the Trustee's absolute discretion considers worthy of receipt of funds; 1. (clause 1.2.7) Additional persons if named or described in the Schedule as members of the class of General Beneficiary. The Schedule names Suzana Janko as a member of the class of General Beneficiary.
5. Other relevant provisions of the Trust Deed include: 1. The preamble to Clause 1 which provides: IN this Deed the following expressions shall, unless there is something repugnant to or inconsistent with the subject matter, have the meaning hereunder set out: 1. Clause 1.2.9: the Trustee may declare in writing that any Beneficiary shall be excluded from the class of General Beneficiaries; 2. Clause 1.16: "the expression "person" shall include a corporation, legal entity an individual or body of persons"; 3. Clause 1.18 which provides: Where any doubt exists as to the interpretation of any part, word or phrase the shame (sic) shall be interpreted in accordance with the rules of common sense and as far as is possible for the benefit of the beneficiaries 1. Clause 1.19 which provides: where any part or clause of this deed is found to be invalid or of no effect then the rest of this deed shall be read down so as to remove the invalid or ineffective part but so as to preserve as much as possible of the remainder of this deed which shall continue to have full force and effect; 1. Clause 19: the Trustee may revoke, add to or vary all or any of the provisions of the Trust Deed including any beneficial interests under the Trust Deed.
6. A Deed of Variation was executed by the Applicant as a deed poll on 1 June 2020.
7. It inserted a new clause 26 into the Trust Deed as follows: 26 Exclusion of Foreign Beneficiary Any current or future foreign beneficiary that may exist in this trust is irrevocably excluded from receiving any current, or future trust distributions. For the avoidance of doubt this clause will supersede any other clause under this deed.
8. It contained a definition of "foreign beneficiary" as follows: Foreign Beneficiary means a natural person is a foreign person if they are not: 1. A citizen of Australian (sic), or 2. A permanent resident who has actually been in Australia during 200 or more days of the preceding 12-month period.
9. I note that, it is apparent from the materials before the Tribunal that a different version of the 1 June 2020 Deed of Variation (also, somewhat surprisingly, dated 1 June 2020) had originally been provided by the Applicant to the Respondent. That version of the Deed of Variation is not in evidence. After the Respondent told the Applicant that that version of the deed did not satisfy the requirements of s 5D(3) of the LTA because it did not define "foreign persons", the Applicant indicated that it had provided the Respondent with the incorrect Deed of Variation and provided the Deed of Variation in the above terms to the Respondent with its objection. It is the Deed of Variation in the terms above which Mr Isgrove deposes was executed and upon which the Applicant relies.

Consideration

1. As set out above, surcharge land tax is charged under s 5A of the LTA for the 2017 and subsequent land tax years on residential land owned by foreign persons.
2. It is not in dispute that the Property was residential land owned by the Applicant as trustee of the Isgrove Trust at all relevant dates.
3. Pursuant to s 5D of the LTA a trustee of a discretionary trust is deemed to be a foreign person for the purposes of s 5A of the LTA unless the trust prevents a foreign person (as defined by s 4 of the FATA) from being a beneficiary of the trust.
4. Pursuant to cl 66(3) of Schedule 2 of the LTMA, a trust will be considered to prevent a foreign person from being a beneficiary of the trust if, as at the commencement date of s 5D of the LTA, namely 24 June 2020, no potential beneficiary of the trust was a foreign person (as defined by s 4 of the FATA).
5. Further, pursuant to cl 66(2) of Schedule 2 of the LTMA, a trustee of a discretionary trust liable for surcharge land tax in respect of the 2017 to 2020 land tax years will be exempt from land tax if the terms of the trust have been amended before midnight on 31 December 2020 so that the trust prevents a foreign person (as defined by s 4 of the FATA) from being a beneficiary of the trust.
6. Accordingly, there are two circumstances in which the Applicant may avoid liability to surcharge land tax for the 2018 to 2020 land tax years, namely: 1. If, as at 24 June 2020, no potential beneficiary of the Trust was a foreign person as defined in s 4 of the FATA; or 2. If the Trust Deed was amended before midnight on 31 December 2020 to prevent a foreign person as defined by s 4 of the FATA from being a beneficiary of the Trust.
7. The definition of foreign person in s 4 of the FATA is set out at paragraph [18] above. As can be seen it includes individuals not ordinarily resident in Australia, as well as corporations (or trustees of a trust) in which an individual (or two or more individuals together) not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest.
8. Under the Trust Deed, General Beneficiaries include natural persons including the Specified Beneficiaries and their extended family members.
9. Other than the affidavit of Mr Isgrove, which I consider below, there is no evidence before the Tribunal as to who those natural person beneficiaries were or whether they were ordinarily resident in Australia.
10. Under the Trust Deed, the General Beneficiaries of the Trust also include "any corporation wherever incorporated or resident any share in which is held by a General Beneficiary" (clause 1.2.3) and charitable, educational, benevolent, sporting or religious corporations (clause 1.2.6).
11. Accordingly, at least prior to the Deed of Variation, it is clear that the potential beneficiaries of the Trust included foreign persons as that term is defined by s 4 of the FATA, namely: 1. a corporation, in which a share is held by a General Beneficiary, in which a substantial interest is also held by an individual or individuals not ordinarily resident in Australia, a foreign corporation or foreign government, or 2. a charitable, educational, benevolent, sporting or religious corporation in which a substantial interest is held by an individual or individuals not ordinarily resident in Australia, a foreign corporation or foreign government.
12. The Applicant relied on the affidavit of Mr Isgrove which deposed: As of 31 May 2022, there were no beneficiaries of the trust that were foreign persons. No distributions from the trust have been set aside for any foreign person either before or after the Deed of Variation of 1 June 2020.
13. However, those statements are unsupported by any documents or information identifying the beneficiaries or any evidence demonstrating that none of the natural person beneficiaries held shares in corporations in which a substantial interest was held by a person not ordinarily resident in Australia, a foreign corporation or a foreign government, or that no charities which were foreign persons under s 4 of the FATA had not been nominated as a beneficiary. There are numerous authorities which caution against the unqualified acceptance of self-serving statements directed towards the ultimate issue in revenue cases: Chapman v Chief Commissioner of State Revenue [2010] NSWADT 124 at [130], Hashim v Chief Commissioner of State Revenue [2020] NSWCATAD 67 at [76]-[77].
14. In any event Mr Isgrove's evidence does not address whether any of the potential beneficiaries of the Trust were foreign persons as at 24 June 2020.
15. Whether the Applicant can satisfy either cl 66(3) or cl 66(2) of Schedule 2 of the LTMA will, accordingly, turn on whether the Deed of Variation amended the Trust Deed so as to prevent a foreign person as defined by s 4 of the FATA from being a beneficiary of the Trust.

Interpretation of Deed of Variation - parties' submissions

1. The Deed of Variation executed on 1 June 2020 inserted a provision into the Trust Deed irrevocably excluding any "current or future foreign beneficiary" from receiving trust distributions.
2. As noted above foreign beneficiary was defined as follows: Foreign Beneficiary means a natural person is a foreign person if they are not: 1. A citizen of Australian, or 2. A permanent resident who has actually been in Australia during 200 or more days of the preceding 12-month period.
3. The Respondent accepts that the Deed of Variation amended the Trust Deed to prevent foreign persons who are natural persons from being a beneficiary of the Trust. However, the Respondent submits that the definition of "Foreign Beneficiary" in the Deed of Variation is limited to natural persons so that the Trust Deed did not, thereafter, prevent foreign persons who are not natural persons from being a beneficiary and, therefore, did not comply with cl 66(3) of Schedule 2 of the LTMA or s 5D of the LTA.
4. The Applicant accepts that the definition of foreign beneficiary in the Deed of Variation is awkwardly drafted but submits that the Respondent's interpretation of the definition involves too narrow a construction of the Deed of Variation. It submits provisions within a trust deed generally should not be construed narrowly: Kearnes v Hill (1990) 21 NSWLR 107.
5. It submits that the definition in the Deed of Variation indicates the circumstances where a natural person will be considered a foreign person, but does not limit foreign beneficiaries to natural persons. The Applicant points to cl 1.18 of the Trust Deed which provides that "where any doubt exists as to the interpretation of any part, word or phrase, the same shall be interpreted in accordance with the rules of common sense" and submits that to interpret the definition as asserted by the Respondent is not in accordance with common sense. It also points to cl 1.19 of the Trust deed which provides that where any part of the deed is found to be invalid or of no effect then the rest of the deed shall be read down to remove the invalid or ineffective part of the deed.
6. In the alternative, it submits that because the expression "person" as defined in cl 1.16 of the Trust Deed includes corporations, the combination of cl 1.16, the definition of Foreign Beneficiary in the Deed of Variation and the insertion of clause 26 into the Trust Deed was that no potential beneficiary of the Trust, whether a natural person or a corporation, could be a foreign person.
7. It also submits that cl 1.2.3 and 1.2.6 of the Trust Deed, which are prefaced (as is all of cl 1) with the words "IN this deed the following expressions shall, unless there is something repugnant to or inconsistent with the subject matter, have the meaning set out hereunder" must be read subject to the Deed of Variation so that, to the extent cl 1.2.3 or cl 1.2.6 might allow foreign persons to be beneficiaries, that is prevented by the Deed of Variation.
8. The Applicant submits that in interpreting the Deed of Variation regard must be had to the context in which the Deed was prepared and the trustee's intentions.
9. It relies on the following passage from Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 at [35] (footnotes omitted): Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating.
10. Here, it submits there was a change in the land tax regime and the trustee had the power to amend the Trust Deed to avoid surcharge land tax. That context, it submitted, should colour the interpretation of the Deed so that it should be interpreted in a manner such that it would be compliant with the legislation.
11. The Applicant also submits that, while it does not concede that the Deed of Variation contains any error, the Applicant could have sought rectification of the Deed of Variation in the Supreme Court which reinforces, it submits, that the Deed should be interpreted in the Applicant's favour.

Interpretation of the Deed of Variation - consideration

1. The rules for construction of contracts also apply to trusts: Byrnes v Kendle [2011] HCA 26 at [102]. The proper interpretation of a document is not ascertained by extrinsic evidence as to the subjective intentions of its parties, but rather by an objective construction of the words used by the parties. The fundamental rule of interpretation is to ask "what is the meaning of what the parties have said?", not to ask "what did the parties mean to say?": Byrnes v Kendle per Gummow and Hayne JJ at [53]. Contractual construction depends on finding the meaning of the language of the contract - the intention which the parties expressed, not the subjective intentions which they may have had, but did not express: Byrnes v Kendle per Heydon and Crennan JJ at [98].
2. While I agree that the definition of foreign beneficiary is awkward and it seems that the words "is a foreign person" are unnecessary, it appears quite clear from the words the trustee has used that the definition of foreign beneficiary for the purposes of the new clause 26 of the Trust Deed is limited to natural persons.
3. There is no evidence before the Tribunal of the trustee's intention and even if it could be inferred that the trustee was attempting to comply with s 5D of the LTA, I cannot accept the proposition that, because the trustee was attempting to comply with the conditions of s 5D of the LTA, the deed should be read as though it did comply with that provision even though in its terms it does not.
4. The definition in cl 1.16 of the Trust Deed of "person" does not assist the Applicant because in the relevant provision of the Deed of Variation the word "person" is qualified by the word "natural". The broader definition of "person" cannot be imputed into it, as it would make no sense in the context of the definition of foreign beneficiary which defines natural persons by reference to their citizenship or residency status.
5. Nor do I think the preface to clause 1 or cl 1.19 assist the Applicant. These provisions deal with inconsistencies between, or invalidity of, provisions. These provisions are not triggered. There is no inconsistency between cl 1.2.3 and 1.2.6 of the Trust Deed and the new Clause 26 inserted by the Deed of Variation as it only relates to natural persons. They can sit comfortably alongside each other. Nor does the Deed of Variation somehow render cl 1.2.3 or cl 1.2.6 invalid.
6. I also reject the Applicant's submission that the fact that it may have been open to it to seek rectification of the Deed in the Supreme Court can have any bearing on the proper interpretation by this Tribunal of the Deed where no such application has been made. It is not for the Tribunal to second guess what the Supreme Court might have done on any such hypothetical application. Indeed, the suggestion that such an application might be open to the Applicant, supports my view that the interpretation the Applicant presses is, on the face of the document, not open to it.
7. Further rectification requires not only proof that the document executed was not what was intended, but also proof of what was intended, with sufficient certainty to enable the Court to make an order which states the words that need to be deleted from, and/or included in, the instrument to give effect to the actual intention: Stein v Sybmore Holdings [2006] NSWSC 1004 at [67].
8. The Applicant has not put to the Tribunal the actual construction it says the Deed of Variation should have, only that it should be read, somehow, as preventing all foreign persons, whether natural persons or corporations, from being beneficiaries.
9. I do not see how the Deed of Variation can be read in that way.
10. It follows that I find that the Deed of Variation did not amend the Trust Deed to prevent foreign persons as defined by s 4 of the FATA from being a beneficiary of the Trust.

Conclusion

1. It follows that I find that the Applicant has not established either that: 1. As at 24 June 2020, no potential beneficiary of the Trust was a foreign person as defined in s 4 of the FATA; or 2. The Trust Deed was amended before midnight on 31 December 2020 to prevent a foreign person as defined by s 4 of the FATA from being a beneficiary of the Trust.
2. Accordingly, by virtue of s 5D of the LTA, the Applicant is taken to be a foreign person for the purposes of s 5A of the LTA and surcharge land tax is payable by the Applicant in respect of the Property for the 2018 to 2020 land tax years.
3. I find that the Respondent's assessment of surcharge land tax in respect of the Property for the 2018 to 2020 land tax years is the correct and preferable decision and that the Assessment should be affirmed.

Orders 1. Pursuant to s 41 of the Civil and Administrative Tribunal Act (2013) time for filing the application is extended to 22 March 2023. 2. The decision under review is 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 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 October 2023