Waverley Investments Pty Ltd atf The Five Oaks Trust v Chief Commissioner of State Revenue

The land tax and SLT legislation

1. Land tax is imposed on the taxable value of all non-exempt land in New South Wales: Land Tax Management Act 1956 (NSW) (LTMA), s 7. Land tax for each land tax year (a land tax year is the same as a calendar year) is charged on land owned at midnight on the 31 December immediately preceding that year: LTMA, s 8. Land tax is payable by the landowner: LTMA, s 9.
2. For the 2017 and subsequent land tax years, the Land Tax Act 1956 (NSW) (LTA) imposes SLT in respect of residential land owned by a foreign person: LTA, s 5A(1). SLT is payable in addition to (ordinary) land tax: LTA, s 5A(3).
3. Section 2A of the LTA adopts the meaning of 'foreign person' in Chapter 2A of the Duties Act 1997 (NSW). That Chapter contains s 104J(1), which says the expression 'foreign person' means 'a person who is a foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975 of the Commonwealth, as modified by this section'. (The modifications referred to are not relevant here.) A 'foreign person' includes, for example, a non-citizen who ordinarily resides outside Australia.
4. Section 5D(1) of the LTA takes the trustee of a discretionary trust to be a foreign person 'if the trust does not prevent a foreign person from being a beneficiary of the trust'. To prevent a foreign person from being a beneficiary of the trust, two requirements must be met under s 5D(3). They are that: 1. no potential beneficiary of the trust is a foreign person (the 'no foreign beneficiary requirement'), and 2. 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').
5. The concept of 'potential beneficiary' is explained in s 5D(4) and (5) as follows: (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. Note. A potential beneficiary is not limited to persons named in the trust instrument and extends to the members of any class of persons to whom or for whose benefit trust property can be distributed or applied pursuant to the discretions of the trust. (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.
6. Section 5D was introduced by the State Revenue Legislation Further Amendment Act 2020 (NSW) (the Amendment Act), which commenced on 24 June 2020. Transitional provisions had the effect of exempting the trustee of a discretionary trust in the following circumstances: 1. If the trust satisfied the 'no foreign beneficiary requirement' immediately before the commencement of s 5D on 24 June 2020 - the trust is considered to prevent a foreign person from being a beneficiary of the trust, without also having to satisfy the 'no amendment requirement': LTMA, Schedule 2, clause 66(3); 2. Otherwise - the trustee would be exempt for the 2017 to 2020 land tax years if all the requirements of s 5D(3) were met before 31 December 2020: LTMA, Schedule 2, cl 66(2).

The facts

1. The Five Oaks Trust was established by trust deed dated 30 June 1986. It was established in South Australia and has at all times operated from there. The initial trustee and appointor was Stephen Gilbert. The named 'Primary Beneficiaries' are Mr Gilbert and his wife Sandra Gilbert, while other 'Primary Beneficiaries' (described by class) include their children, grandchildren and former spouses. The 'General Beneficiaries' are the 'Primary Beneficiaries' and the spouses of the 'Primary Beneficiaries'.
2. Waverley Investments Pty Ltd was appointed as trustee of the trust (replacing Mr Gilbert) by amending deed dated 30 March 1988.
3. In 2014, Waverley Investments Pty Ltd purchased a residential property in Potts Point, Sydney. It did so as trustee of the Five Oaks Trust.
4. In the original form of the trust deed, the beneficiaries of the trust included foreign persons, namely relatives of Sandra Gilbert who live in the United Kingdom. That changed on 22 December 2020, when the trust deed was amended by the first amending deed. (It will be recalled that the transitional provisions introduced with the Amendment Act exempted the trustee of a discretionary trust such as the Applicant from SLT for the 2017 to 2020 land tax years if the requirements of s 5D(3) were met before 31 December 2020: 12 above.)
5. The first amending deed inserted a new clause 1.14 as follows: 1.14 Notwithstanding any other provision of this Deed, 1.14.1 a foreign person shall not be a beneficiary of the Trust; and 1.14.2 any foreign person who is or may be a Primary Beneficiary or a General Beneficiary is expressly excluded and disentitled from being a beneficiary of the Trust. 1.14.3 any foreign person who is or may be entitled to be a Primary Beneficiary or a General Beneficiary is expressly excluded and disentitled from being a beneficiary of the Trust. and the Trustee and the Appointor shall not amend or vary this clause 1.14 of this Deed for at any time when and for so long as the assets of the Trust include residential land in New South Wales.
6. The concluding words of clause 1.14, commencing with the words 'and the Trustee and the Appointor shall not amend …', are later referred to in these reasons as the amendment subclause.
7. The first amending deed also defined a 'foreign person' in the same way as s 2A of the LTA.
8. The SLT assessment for the 2017 to 2021 land tax years was made on the basis of the Chief Commissioner's view that, while the first amending deed met the 'no foreign beneficiary requirement' in s 5D(3)(a) of the LTA, it did not meet the 'no amendment requirement' in s 5D(3)(b).
9. Presumably to guard against exposure to an adverse outcome for future land tax years as well, the trust deed was further amended on 20 December 2021 by the second amending deed, by which:

• it was 'IRREVOCABLY DECLARE[D] that a foreign person shall not be entitled to be a beneficiary of the Five Oaks Trust'; and
• a new clause 1.14 was inserted, which deleted the amendment subclause from the earlier version.

1. As indicated above, the Chief Commissioner now accepts the 'no amendment requirement' has been met for the 2022 and subsequent land tax years.

The Applicant's submissions

1. The Applicant contends that the first amending deed satisfies the 'no amendment requirement'. It points to the nature of land tax as a recurring, annual tax and submits the requirement that the terms of the trust are not capable of amendment is tested and must be satisfied at the time of each taxing point of midnight 31 December for each land tax year. At each relevant taxing point, since the assets of the trust included residential land in New South Wales, the terms of clause 1.14 could not be amended and as a result, foreign persons were expressly excluded and disentitled from being a beneficiary.
2. The Applicant says the Chief Commissioner is wrong to require the terms of the trust deed preventing a foreign person from being a beneficiary to be irrevocable. The word 'irrevocable' does not appear in s 5D(3)(b); furthermore, to require irrevocability is tantamount to reading the words 'at any time' into the legislative provision. It would mean the terms of the deed must be incapable of amendment in all circumstances, for all time in perpetuity, irrespective of whether the trust is at some future point in time the owner of residential land in New South Wales and thereby subject to the provisions of the NSW land tax legislation.
3. The Applicant notes the word 'irrevocable' is not only absent from the statute; it is also not referred to in the Explanatory Note for the bill that became the Amendment Act. Its first use was in the Minister's Second Reading Speech (Hansard, Legislative Assembly, 22 October 2019, page 1955), but even then, the Applicant says, the Minister was talking about surcharge purchaser duty under s 104JA of the Duties Act, not surcharge land tax under the LTA.
4. The Applicant notes a liability imposed under the Duties Act arises at a single point in time, and so it makes sense for an irrevocability requirement in the duties legislation to guard against re-amendment of the deed immediately after that single solitary taxing point. It submits it makes no sense for the same requirement in the context of an annually recurring tax. But in any event, the words of the Minister in the Second Reading Speech should not be elevated above the words of the statute.
5. The Applicant contends a consideration of the statutory text in its context will reject an interpretation implying irrevocability in favour of an interpretation requiring the 'no amendment requirement' to be considered at each taxing point in seriatim.
6. The Applicant claims the Chief Commissioner's interpretation of s 5D(3)(a) and (b), by effectively controlling events that could occur even after the trustee ceases to be liable to land tax, results in extra-territorial reach of the legislation which, it submits, is inconsistent with s 31(1) of the Interpretation Act 1987 (NSW) and ss 4 and 5 of the Constitution Act 1902 (NSW).
7. Moreover, the Chief Commissioner's interpretation, which implicitly includes in the statute words and concepts that are not in the text, namely 'at any time' and 'irrevocable', leads to an improbable and inconvenient result, which should tell against its correctness: IRG Technical Services Pty Ltd v Federal Commissioner of Taxation [2007] FCA 1867 at [21]. Indeed, if the legislature had intended to require the terms of the trust to be incapable of amendment 'at any time', not just at the taxing date, then it would have included that qualification - as it has done elsewhere in the legislation.
8. The Applicant's preferred construction is instead to read the statute as if the words 'as at the taxing date' were implied in each subsection of s 5D. This, it is submitted, is consistent with the nature of land tax as an annual tax with specific taxing points in seriatim.

The Chief Commissioner's submissions

1. The Chief Commissioner contends the 'no amendment requirement' was not met in respect of any of the 2017 to 2021 land tax years because at each taxing date it was within the Applicant's power and discretion to take steps that would result in there being a potential beneficiary of the trust who is a foreign person. Specifically, it was open to the Applicant to sell the property and then amend the trust deed to add a potential foreign beneficiary. In that sense the terms of the trust deed were 'capable' of amendment.
2. As for the Applicant's contention that the trust was not 'capable' of amendment on each of the relevant taxing dates because it then owned residential land in New South Wales, the Chief Commissioner submits the Applicant is effectively restating the test to be that the trust was not 'immediately capable' of amendment - which is not the statutory test.
3. The language of the 'no amendment requirement', in the Chief Commissioner's submission, is the language of capacity and future possibility: the provision looks to what is 'capable' of being done to 'result in' a particular outcome. The provision thus directs attention to what may (as at the taxing date) occur in the future, as opposed to what is immediately capable of happening on that date. In this case, as at each relevant taxing date, the terms of the trust were 'capable' of being amended to result in the existence of a foreign beneficiary if the trustee or others had, as at each of those taxing dates, the power or discretion to take steps that would have that outcome.
4. The Chief Commissioner rejects the Applicant's contention that the Minister's Second Reading Speech was directed towards surcharge purchaser duty, not surcharge land tax, by pointing out that the Minister had earlier introduced his comments in the following way, referring to both surcharges (Hansard, page 1954): Dealing firstly with the surcharge purchaser duty and related surcharge land tax amendments, surcharge purchaser duty and surcharge land tax are imposed on foreign persons who acquire or own residential land. …
5. The Chief Commissioner also notes the Minister's later reference (Hansard, page 1955) to the 'no amendment requirement' being: … an important anti-avoidance measure to ensure that a deed cannot simply be amended to avoid surcharge and then be re-amended for the purposes of distributing income or assets to foreign persons. The terms of the trust deed preventing a foreign person from being a beneficiary under the trust must be irrevocable.
6. The Chief Commissioner contends the first amending deed allowed the very mischief the 'no amendment requirement' is trying to guard against. Consistent with the amendment subclause, the Applicant could sell the trust's residential land in New South Wales, vary clause 1.14 to add a foreign beneficiary, and then distribute the proceeds of sale (or other trust property) to that foreign beneficiary.
7. In relation to the use of the word 'irrevocable' (first mentioned in the Minister's Second Reading Speech and subsequently in the Chief Commissioner's determination of the Applicant's objection), the Chief Commissioner submits the word is simply a convenient shorthand to describe the intended effect of the provision.
8. The Chief Commissioner submits the 'no amendment requirement' has no temporal limitation: it means that, as at the taxing date, the terms of the trust must not be capable of being amended (at any subsequent time) to add a foreign beneficiary. The words 'at any time' do not need to have been included in the provision since this is the natural meaning of the expression in any event.
9. On the 'extra-territorial reach' argument, the Chief Commissioner says the Applicant has misconstrued the taxable event. It is submitted as follows (Respondent's Written Submissions at [49], emphasis in the original): Rather, the taxable event is the current ownership of residential land in NSW (as at the taxing date) by an actual or deemed foreign person: LTA ss 5A, 5D. Once a territorial connection is established via ownership of land in NSW, the powers of the NSW Parliament are 'virtually absolute', and it is up to the NSW Parliament to decide how far it should go in the exercise of those powers: Johnson v Commissioner for Stamp Duties (1955) 55 SR (NSW) 398, 409 (upheld in Johnson v Commissioner of Stamp Duties [1956] AC 331, 352); Broken Hill South Ltd (Public Officer) v Commissioner of Taxation (NSW) (1937) 56 CLR 337, 375 (Dixon J).

The Applicant's Submissions in Reply

1. In reply the Applicant repeated its submission that the 'no amendment' provision in a trust deed does not have to be irrevocable. It did this by tracing the history of the surcharge provisions and the Chief Commissioner's administration of the relevant law.
2. The introduction of the surcharge provisions on 21 June 2016, according to the submission, had the unintended consequence of rendering many discretionary trusts 'foreign persons'. As a result, the Minister for Finance, Services and Property approved a 'variation to statute' pending the introduction of legislation to deal with the unintended consequences. The 'variation to statute' permitted the Chief Commissioner to exercise a discretionary power to give retrospective effect to amendments made by trustees of discretionary trust deeds that restricted foreign persons as beneficiaries.
3. To this end, the Chief Commissioner issued a public ruling on the issue, Revenue Ruling G010 (in effect from 21 June 2016 to 12 September 2017), which articulated how the discretionary powers conferred on the Chief Commissioner by operation of the 'variation to statute' would be exercised.
4. In short, the Chief Commissioner indicated the discretion would be exercised if he was satisfied that the trustee was not involved in a scheme or arrangement for the evasion or avoidance of the surcharge. This was contingent on the trust deed being amended within 6 months to remove the trustee's power to make distributions to foreign persons.
5. A revised version of Revenue Ruling G010 came into effect on 13 September 2017 and remained in place until immediately before the introduction of s 5D of the LTA on 24 June 2020. This revised version, known as G010v2, provided by way of a footnote as follows: The Chief Commissioner will not be satisfied that there is no scheme or arrangement to avoid tax, where the amendment of the trust deed to remove the trustee's power to make a distribution to a foreign person is not irrevocable.
6. In other words, the 'irrevocability' requirement was to address the Chief Commissioner's concerns about tax avoidance. The Applicant acknowledges this requirement may have been well founded at the time since there were then no anti-avoidance provisions in the land tax law the Chief Commissioner could have invoked.
7. But when s 5D was introduced on 24 June 2020 it included subsection (7), adopting the anti-avoidance mechanism in the then Chapter 11A of the Duties Act (and since subsumed into a general anti-avoidance provision in Chapter 10A of the TAA). In light of the introduction of subsection (7), the Applicant submits at [24] of its submissions in reply: Indeed, if the Chief Commissioner is correct that s 5D(3)(b) of the LTA requires that such amendments be 'irrevocable' (or not 'capable' of amendment within that sense), what purpose does s 5D(7) serve? According to the Chief Commissioner's own rulings an irrevocable amendment would not be a scheme or arrangement for the evasion or avoidance of surcharge. Section 5D(7) of the LTA would be superfluous and have no application.
8. According to the submission, the perceived mischief to which the 'irrevocability' requirement is directed - the avoidance of the surcharge - has been addressed by the anti-avoidance provisions. It is therefore not necessary to read the word 'irrevocable' into s 5D(3).
9. Furthermore, if the Chief Commissioner doubts the bona fides of the first amending deed he should consider invoking Chapter 11A of the Duties Act, which he has not done.

Consideration

1. There is no doubt that the requirements specified in s 5D must be met as at midnight on 31 December in each of the relevant years: so much, at least, is common ground between the parties.
2. It is also common ground that at each of those moments in time no potential beneficiary of the trust was a foreign person. This is because, at each of those moments in time, clause 1.14 of the trust deed excluded and disentitled foreign persons from being beneficiaries of the trust. So the requirement in s 5D(3)(a) is met.
3. It is also clear that the trustee was prohibited, because of the continuing ownership of residential land in New South Wales, from amending the trust deed at any one of those particular moments in time so as to make foreign persons potential beneficiaries.
4. But the requirement in s 5D(3)(b) is put more broadly than that. In my view, the question to ask at midnight on 31 December is whether the terms of the trust can ever be amended to include foreign persons as potential beneficiaries. In context, that is the natural meaning of the words 'the terms of the trust are not capable of amendment'. In this respect there is no relevant difference between the once-only taxing point under the Duties Act, and the annual taxing points under the land tax legislation.
5. There is nothing untoward in the Chief Commissioner's use of the word 'irrevocable': it is simply a convenient shorthand to describe the requirement in the statute.
6. In summary, I accept the Chief Commissioner's submission that the language of the 'no amendment requirement' is the language of capacity and future possibility. The provision looks to what is 'capable' of being done to 'result in' a particular outcome - and it is self-evident that the particular outcome, if it ever occurs, will occur at some point in the future, and necessarily after the relevant taxing point when the question (whether the terms of the trust are capable of amendment) is being addressed. That the particular outcome may occur after the land in NSW has been disposed of is irrelevant. In simple terms, s 5D(3)(a) looks to the position now, while s 5D(3)(b) looks to future possibilities.
7. The Applicant's argument that this outcome results in extra-territorial reach beyond NSW is not well founded. Clearly enough, the SLT provisions will not apply once the trust no longer owns residential land in NSW. They will apply only while the trust owns such land in NSW, and they will apply because during the periods of such ownership there is, or in this case there was, the prospect of future distribution of trust property to foreign persons.
8. Finally, I am not persuaded that the enactment of the anti-avoidance provisions points towards an opposite outcome in this case. Those provisions are quite restrictive in their application: they apply only where a scheme is entered into for the 'sole or dominant purpose' of avoiding or evading tax. It may very well be that, objectively viewed, the first amending deed would not meet that threshold. But neither that fact, nor the approach the Chief Commissioner may have taken under either version of Revenue Ruling G010, has any direct relevance to the proper construction of s 5D(3)(b).

Conclusion

1. At each of the relevant taxing points, midnight on 31 December in 2016, 2017, 2018, 2019 and 2020, the 'no amendment requirement' in s 5D(3)(b) of the LTA was not met. As a result, for the purposes of s 5D(1) of the LTA, the trust did not at those times prevent a foreign person from being a beneficiary of the trust.
2. The assessments are therefore confirmed.

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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: 28 September 2023