Commissioner for Act Revenue v Leemhuis Investments Mitchell Pty Ltd (Appeal)
[2023] ACAT 83
•19 December 2023
ACT CIVIL & ADMINISTRATIVE TRIBUNAL
COMMISSIONER FOR ACT REVENUE v LEEMHUIS INVESTMENTS MITCHELL PTY LTD (Appeal) [2023] ACAT 83
AA 8/2023 (AT 61/2022)
Catchwords: APPEAL – liability for duty under the Duties Act 1999 – where the assets of a commercial partnership included a beneficial interest in land in the ACT purchased for investment – where the manager of the partnership held legal title to the land – where the land was developed and subdivided into four units in the course of the business and investment activity of the partnership – where the partners agreed to sell two units and dissolve the partnership with one partner taking the cash proceeds of sale of the two units and the other partner retaining the other two units – where upon dissolution of the partnership the manager held the remaining units on a bare trust for one of the partners absolutely – whether that result was obtained by a ‘declaration of trust’ within the meaning of the Act – whether a series of transactions giving effect to the agreement to dissolve the partnership and distribute the partnership property was a ‘declaration of trust’ within the meaning of the Act – Commissioner’s decision to disallow the taxpayer’s objection to the assessment of duty and penalty tax set aside and substituted by a decision to allow the objection
Legislation cited: ACT Civil and Administrative Tribunal Act 2008 s 68(3)
Civil Law (Property) Act 2006, ss 201, 203
Duties Act 1999, ss 6, 7, 8, 9, 10, 11, 12, 16, 79, 80, 83, 84, 85, 86
Partnership Act 1963, ss 5, 23, 24, 25, 32, 37, 38, 45, 50
Cases cited:Chief Commissioner of State Revenue (NSW) v Benidorm [2020] NSWCA 285
Commissioner of State Revenue v Rojoda [2020] HCA 7
Dencio v Dencio in her capacity as Administrator of the Estate of the late Brian Gordon Dencio, Deceased [2020] ACTSC 250
Duke Unley Pty Ltd v The Corporation of the City of Unley (2021) 399 ALR 164
Federal Commissioner of Taxation v Vegners [1989] FCA 80
Garrett v L’Estrange [1911] HCA 67
Leemhuis Investments Mitchell Pty Ltd v Commissioner for ACT Revenue [2023] ACAT 12
Meshumar v Otmy [2018] NSWSC 125
Texts cited:G. E. Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014)
J. D. Heydon and M. J. Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 7th ed, 2006)
Tribunal:Presidential Member G McCarthy
Senior Member M Orlov
Date of Orders: 19 December 2023
Date of Reasons for Decision: 19 December 2023
AUSTRALIAN CAPITAL TERRITORY )
CIVIL & ADMINISTRATIVE TRIBUNAL ) AA 8/2023BETWEEN:
COMMISSIONER FOR ACT REVENUE
AppellantAND:
LEEMHUIS INVESTMENTS PTY LTD
RespondentTRIBUNAL:Presidential Member G McCarthy
Senior Member M Orlov
DATE:19 December 2023
ORDER
The Tribunal orders that:
1.The appeal is disallowed.
2.The cross-appeal is allowed.
3.The Commissioner’s decision disallowing the respondent’s objection to the assessment of duty and penalty tax is set aside and substituted by a decision to allow the respondent’s objection.
4.The Commissioner is to pay the ACAT filing fee to the respondent.
…………………………
Presidential Member G McCarthy
For and on behalf of the Appeal TribunalREASONS FOR DECISION
PRESIDENTIAL MEMBER MCCARTHY
1.I have had the benefit of reading a draft of Senior Member Orlov’s reasons and wish only to comment on the outcome.
2.The respondent to the appeal, Leemhuis Investments Mitchell Pty Ltd (LIM), submitted the decision of the original tribunal is correct save for its conclusion at paragraph 63 of its reasons where it found transaction 3 constituted a declaration of trust. LIM then sought an order that duty be imposed on transaction 3 by reference to the transfer of a 50% partnership interest in the partnership to AUL Investments Mitchell Pty Ltd (AUL) among other consequential orders.
3.As I understood it, the respondent was submitting the decision of the original tribunal is correct but for a different reason, namely the transfer of the 50% partnership interest.
4.The respondent’s acknowledgement of duty payable consequent upon transfer of the partnership interest appears properly made, having regard to sections 7(1)(a), 10(1)(f), 11(1)(a) and 12 of the Duties Act 1999. However, as the respondent acknowledged, duty is payable by AUL as the transferee – not LIM – consequent upon transfer of the partnership interest. This contradicts the respondent’s submission that the original tribunal was correct, to the extent of who is liable to pay the duty.
5.There are two other difficulties.
6.First, the Tribunal’s jurisdiction is confined to the question whether the decision under review is correct. That does not involve consideration of AUL’s liability for duty for a different reason. Nor is it appropriate for the Tribunal to rule on AUL’s liability in the absence of submission from the Commissioner.
7.Second, LIM submits the ad valorem duty payable is $15,691.95 and we should so order, but it would be inappropriate for the Tribunal to do so without comment from the Commissioner upon the amount of duty payable consequent upon transfer of the partnership interest or whether that differs from the amount LIM would have been liable to pay by reference to 50% of the unimproved value of units 1-2 notwithstanding LIM’s acknowledgement at paragraph 20 of its statement of reasons for application for review dated 15 August 2022[1] that the dutiable property of the partnership is the total unencumbered value of units 1-2.
[1] T-documents, page 9
8.For these reasons, in my view, the correct course is to disallow the appeal, to allow LIM’s cross-appeal and to presume the Commissioner will liaise with AUL regarding liability for duty, penalty tax and interest by reference to different provisions of the Act, in particular the provisions governing the transfer of the partnership interest. The Commissioner should also pay LIM the filing fee ($1,224) it paid for the purpose of pursuing its cross-appeal.
SENIOR MEMBER ORLOV
Introduction
9.This appeal concerns the tax consequences of the dissolution of a commercial partnership between AUL Investments Mitchell Pty Ltd as trustee for The AUL Mitchell Trust (AUL) and PSL Investments Mitchell Pty Ltd as trustee for The PSL Mitchell Trust (PSL), the principal asset of which was land in the ACT subdivided into four units under the Unit Titles Act 2001. The respondent to the appeal, Leemhuis Investments Mitchell Pty Ltd (LIM), was appointed as manager of the partnership and held legal title to the land as agent for the partnership participants. Following the sale of two units, the net assets of the partnership were distributed in cash to PSL and in specie to AUL. The appellant (Commissioner) determined that this happened in a series of transactions on 19 September 2017. The Commissioner characterised the transactions as a declaration of trust by LIM in favour of AUL over the remaining two units. Duty, penalty tax and interest, totalling $156,248.17, was assessed on the basis of 100% of the value of the two units.
10.The Commissioner disallowed an objection to the assessment by LIM. In the proceedings appealed from, LIM sought review of the decision to disallow the objection (decision under review). A differently constituted tribunal (original tribunal) varied the decision under review and ordered the Commissioner to issue a revised assessment based on 50% of the value of the two units.
11.The Commissioner appealed, contending that the decision of the original tribunal is wrong in law and that the Appeal Tribunal should confirm the Commissioner’s decision to disallow the objection. By its notice of contentions, LIM contended that the decision is correct in the result but that the original tribunal erred in the reasoning by which it reached that result. However, a submission to the effect that the original tribunal erred in finding that the transactions on 19 September 2017 constituted a declaration of trust was treated as a cross-appeal.
12.The appeal and cross-appeal were conducted as a review of the decision of the original tribunal.
The facts
13.By an agreement in writing made on 16 March 2010 (Partnership Agreement), AUL and PSL entered into a commercial partnership (Partnership) for the purpose of acquiring and holding for investment commercial and other properties or businesses. Alex and Peter Leemhuis, who were father and son, controlled the respective trusts.
14.The following terms of the Partnership Agreement should be noticed.
15.Clause 1 contained the following definitions:
“Commercial Management Agreement” means an agreement dated the day of, 16th March 2010, between the Partnership Participants and the Manager
“Manager” means the person or entity appoint [sic] pursuant to the Commercial Management Agreement
“Participating Interest” means, in respect of each Partnership Participant, it’s equal undivided sham [sic] as tenant in common of the following rights and obligations (such share being expressed as a percentage) as specified or calculated in accordance with this Agreement:
(a) the obligations under this Agreement to contribute to the Partnership Expenses,
(b) the beneficial ownership as tenant in common of an undivided share in all Partnership property, and
(c) all other Rights, liabilities and obligations accruing to or incurred by the Partnership Participants in or arising out of this Agreement in respect of Partnership Management;
16.Clause 2.1 provided:
This Agreement sets down in formal manner the terms and conditions which shall continue to govern the relationship of the parties hereto unless and until it is terminated as hereinafter provided.
17.Clause 2.3 provided:
Except as otherwise expressly provided, nothing contained in this Agreement shall be construed so as to constitute any Partnership Participant, an agent or representative of the other Partnership Participant or to create any trust for any purpose.
18.Clause 3.1 provided that the objects of the Partnership shall be:
(a) to maintain, develop and carry out the business and investment activity of the Partnership pursuant to Approved Budgets;
(b) to deliver to each Partnership Participant its share of profits commensurate with its Participating interest subject to the provisions of Clause 5.2; and
(c) to do all such things as may be ancillary to the foregoing.
19.Clause 3.2(a) provided that:
the Manager must run the business and investment activity of the Partnership on a sound commercial basis having regard to its obligations as specified in Clause 6 of this Agreement;
20.Clause 4.1 provided:
The Partnership shall continue until terminated by party [sic] by provision of sixty days notice in writing, unless a shorter notice period is agreed between the parties.
21.Clause 4.2 provided:
If the Partnership terminates in accordance with Clause 4.1, then Partnership property shall be realised and the net proceeds of such realisation shall be distributed between the Partnership Participants, subject to Clause 5.2, in the proportions that their respective Partnership Participating interest bear to the total of the same at the date of such termination.
22.Clause 5.1 provided that each Partnership Participant has a 50 percent Partnership Participating interest.
23.Clause 6.1 provided that:
subject to Clause 6.2, all actions to be taken by the Manager on behalf of the Partnership pursuant to this Agreement shall be taken by the Manager as agent for the Partnership Participants in proportion to the Partnership Participating interests.
24.Clause 6.2(l) provided that the functions and powers of the Manager include to:
have possession and control but not ownership of the Partnership property;
25.Clause 11(1)(a) provided that a default would occur where:
[a] Partnership Participant fails to meet the due date for any payment arising under this Agreement, which failure continues for a further period of fourteen days after notice of non-payment has been given to that Partnership Participant by the other Partnership Participant or by the Manager then that Partnership Participant is a Defaulting Party and the following provisions of this Clause 11 apply.
26.Clause 11.2 provided:
If a Partnership Participant is taken to be a Defaulting Party by operation of Clause 11.1(d) then:
(a) the Partnership Participating interest of the Defaulting Party is diminished in the proportion by which the amount unpaid relates to the value of the Partnership Participating interest of the Defaulting Party at the due date for payment; and
(b) unless otherwise agreed by the Partnership Participants, the value of the Partnership Participating interest of the Defaulting Party at the due date for payment will be established by independent valuation of the net assets of the Partnership by a party appointed by the Manager.
27.LIM was registered on 15 March 2010. The directors were Peter and Alex Leemhuis. Each owned half the shares in the company.
28.By an agreement in writing made on 16 March 2010 (Management Agreement) AUL and PSL appointed LIM as Manager to manage the Partnership and act as their agent for the purposes of the Partnership Agreement on the terms and conditions set out in the Management Agreement. The Management Agreement specified the duties, responsibilities and obligations of the Manager and the Partnership Participants in relation to the appointment.
29.Clause 2.3 provided for the Manager to be the authorised agent of the Partnership Participants for the purposes of the Management Agreement.
30.Clause 2.6(a) provided for the Manager to undertake the ‘Duties and Responsibilities’ (as set out in Schedule 2) which included in clause 1.2(l) to “have possession and control but not ownership of the Partnership Property”. By clause 2.6(b) the Manager was required to “conform to, observe and comply with all resolutions, regulations and directions from time to time made or given by the Partnership Participants”.
31.In July 2010, LIM acquired Block 16 Section 22 Mitchell, known as 62 Dacre Street, Mitchell (Dacre Street property) on behalf of the Partnership for $825,000. The Partnership subsequently carried out a development on the property. In May 2017, Units Plan No 4330 was registered, subdividing the property into four units.
32.In early 2017, Peter’s brother, David Leemhuis expressed an interest in purchasing units 3 and 4. Peter indicated he was prepared to sell his interest in the Partnership. Alex (the father) wished to keep his interest. Peter and Alex agreed to sell units 3 and 4 to a company controlled by David. It was agreed that Peter, through PSL, would receive most of the cash proceeds, amounting to 50% of the net Partnership assets and Alex, though AUL, would keep PSL’s half interest in units 1 and 2 with a small cash adjustment to balance the accounts.[2]
[2] Witness statement of Peter Leemhuis dated 20 October 2022, paragraphs 6-8; witness statement of Alex Leemhuis dated 20 October 2022, paragraphs 6-8;
33.On 1 September 2017, LIM entered into contracts to sell Unit 3 for $594,300 and unit 4 for $1,394,400 to AHB Property Holdings Pty Ltd, a company controlled by David Leemhuis. The sales settled on 19 September 2017.
34.The net proceeds of sale – approximately $1.7 million – was paid (most likely) to PSL, although the original tribunal noted the actual recipient of the payment was not clear on the evidence.
35.In May 2018, the need to regularise the separation of Peter’s and Alex’s interests in the Partnership assets became apparent. An email on 16 May 2018 from Ross Reid (Director, Think First Act Last, presumably a consultant of some kind) to Darrell Leemhuis (Peter’s son) replying to an earlier email from Darrell on 10 May 2018 (which was not in evidence) asked for more details of what was required to transfer Peter’s interest in the Dacre Street, Mitchell property. Darrell replied by email the next day that LIM was held 50/50 by PSL and AUL and that “my Dad has sold his share to my Grandfather” for $1.7 million and attached a valuation. In a further email on 18 May 2018, Darrell advised that units 3 and 4 were sold to his father’s brother and “basically my dad took the cash and my grandfather kept the property”.
36.Ross Reid replied by email on 21 May 2018:
OK, so … LIM owned the 4 units. Units 3 & 4 were sold, Peter took the cash and G/father is supposed to “own” units 1 & 2. -- So a cleanup is required!
Why doesn’t Peter just sell his shares in LIM to g/father? If LIM owns other assets that Peter has an interest in and that is not an option, then LIM has to sell units 1 & 2 to g/father in his own name OR a company of his choosing OR set up a new entity to own them? Which will it be? Other questions will flow after we determine which way you want to jump?
37.Darrell wrote back the same day:
this is the only property LIM owns so this is the option I want to go for
Peter just sells his shares in LIM to Alex
38.On 21 May 2018, Mr Reid emailed instructions to LIM’s accountants requesting them to prepare a share transfer from Peter to Alex, which “I’ll get signed and lodged down here with a valuation as it’s a land rich entity”.
39.On 8 June 2018, Peter Dukes, the accountant for LIM, advised Darrell:
1. Please see attached form 484 and share transfers for Leemhuis Investments Mitchell Pty Ltd, in favour of Alex Leemhuis, such that he will hold 100 percent. You will need to enter the appropriate value before submitting to titles office for stamping…
2. Ross will need to draft a new agency agreement between [LIM] and [AUL], as the remaining titles will now be held as agent for [AUL] only…
3. The 2018 Accounts for Leemhuis Investments Mitchell partnership will reflect the sale of the two properties, however, Capital Gains can normally only be reported in each partner’s tax return (not in the partnership return). As such, the full gain will be reported in PSL Mitchell Trust’s 2018 tax return.
4. Any remaining assets and liabilities will then be transferred from the partnership accounts to AUL Mitchell’s accounts. Any disparity in the final partners balances will need to be reviewed and settled (if applicable).
40.The 30 June 2017 Partnership accounts show partners’ funds as $2,473,281.91, including non-current assets (property, plant and equipment) of $2,436,535.88, reflecting the value of the four units. The Partnership made a profit of $67,999.65, which was distributed in equal shares to AUL and PSL.
41.The 30 June 2018 Partnership accounts show partners’ funds (comprising cash and cash equivalents) as $55,168.57. The Partnership made a profit of $72,932.02, of which $58,858.42 was distributed to AUL and $14,073.60 to PSL. The cash proceeds of sale of units 3 and 4 was not included as a current asset and the value of units 1 and 2 was not included as a non-current asset, indicating that these were no longer considered Partnership property. The larger share of the profits distributed to AUL presumably reflects a cash adjustment to ensure that each partner received their half share of the net value of the Partnership assets on final distribution.
42.On 8 August 2018, Peter transferred his shares in LIM to Alex. He remained a director of the company (with Alex) until 18 March 2020.
The legislation
43.Chapter 2 of the Duties Act 1999[3] (Duties Act) imposes ad valorem duty on transfers of dutiable property and certain transactions concerning dutiable property, including a ‘declaration of trust’ over dutiable property.[4]
[3] The version of the Act in force when the alleged dutiable transaction occurred – i.e. 19 September 2017 – is Republication No 69 which came into effect on 18 September 2017
[4] Section 7(1)(b)(ii)
44.Land in the ACT is dutiable property.[5]
[5] Section 10(1)(a)
45.‘Declaration of trust’ means:
any declaration (other than by a will or testamentary instrument) that any identified property vested or to be vested in the person making the declaration is or is to be held in trust for the person or people, or the purpose or purposes, mentioned in the declaration although the beneficial owner of the property, or the person entitled to appoint the property, may not have joined in or assented to the declaration. [6]
[6] Section 6
46.For the purposes of assessing the duty payable on a declaration of trust over dutiable property –
(a)the property transferred is taken to be the property vested or to be vested in the declarant;
(b)the transferee is taken to be the person declaring the trust; and
(c)the transfer of dutiable property is taken to have happened when the declaration is made.[7]
[7] Section 8(2), Table 8
47.It is immaterial whether a dutiable transaction is effected by an instrument or by any other means, including electronic means.[8]
[8] Section 9
48.A liability to pay duty under chapter 2 arises when the transfer occurs, or if the transfer is effected by an instrument, when the instrument is first executed.[9]
[9] Section 11(1)
49.Duty is payable by the transferee unless chapter 2 requires another person to do so.[10]
[10] Section 12
50.Where the dutiable transaction is a declaration of trust over dutiable property, duty is payable within 90 days of the day when the declaration is made.[11]
[11] Section 16(1), Table 16
The decision under review
51.The Commissioner determined that a dutiable transaction occurred on 19 September 2017 under section 7(1)(b)(ii) of the Duties Act – namely a declaration of trust over units 1 and 2 in favour of AUL. On 31 August 2021, the Commissioner issued a notice of assessment to LIM assessing the amount payable as $156,248.17, comprising duty of $85,525, 50% penalty tax of $42,762.50 and interest of $27,960.67.
52.On 18 July 2022, the Commissioner disallowed LIM’s objection to the assessment. The Commissioner was satisfied that an oral declaration of trust was made over units 1 and 2 on 19 September 2017 for the following reasons:
(a)Once settlement of the sale of units 3 and 4 occurred on 19 September 2017, PSL, as 50% beneficial interest holder in LIM, retained the sale proceeds and in consideration, subsequently transferred its 50% interest in LIM to AUL, resulting in AUL having 100% beneficial ownership of units 1 and 2.
(b)LIM acknowledged in its objection that:
immediately after the sale of Units 3 and 4, LIM distributed the net proceeds of sales of Units 3 and 4 to PSL, being made in full satisfaction of PSL’s entitlement as a partner under the Partnership and was paid on the dissolution of the Partnership. You further acknowledge that the Partnership agreed upon receipt of the cash payment of the proceeds of the sales of Units 3 and 4, LIM commenced to hold Units 1 and 2 on trust for AUL absolutely. [Original emphasis]
(c)This of itself confirmed that an oral declaration of trust was made over units 1 and 2 on 19 September 2017, as the beneficial ownership of units 1 and 2 changed from the Partnership to AUL absolutely.
(d)The Partnership ceased to exist on 19 September 2017 when PSL ended its interest in the Partnership. From that date, LIM held units 1 and 2 beneficially for AUL absolutely.
(e)The Partnership accounts for the year ended 30 June 2018 do not reflect any current assets, confirming that the Partnership was not the beneficial owner of units 1 and 2.
53.In summary, the Commissioner concluded:
I consider it was the sale transaction of Units 3 and 4 that resulted in PSL transferring its shares in LIM to AUL. It is the actual completion date of these sales transactions, being 19 September 2017, that I consider is the date when the Partnership dissolved and when a declaration of trust was made over Units 1 and 2. It is also the date which PSL received the sale proceeds of Units 3 and 4. Further, I am satisfied that the share transfer lodgement date in August 2018 was merely the date in which the “clean-up” process occurred.
54.As to whether an oral declaration of trust is a dutiable transaction for the purposes of the Duties Act, the Commissioner reasoned as follows:
(a)Considering the effect of sections 9 and 14 of the Duties Act and the explanatory memorandum for the Duties Bill 1998, a dutiable transaction, including a declaration of trust, need not be in writing.
(b)The meaning of ‘declaration of trust’ in the Duties Act 1997 (NSW) (which is defined in the same terms in the ACT Duties Act) was considered by the NSW Court of Appeal in Chief Commissioner of State Revenue (NSW) v Benidorm [2020] NSWCA 285 (Benidorm) where the Court said at [60]:
A transaction, even one which is entirely oral (such as the delivery of goods the subject of an offer of sale, or a declaration of trust of personalty which is dutiable property) is a dutiable transaction.
(c)Considering the similarities between the NSW and ACT legislation, the fact that the ACT Duties Act was based on the NSW legislation and the decision in Benidorm, a ‘declaration of trust’ for the purposes of the Duties Act may be made orally.
(d)Section 201(2) of the Civil Law (Property) Act 2006 (CLP Act), which provides that a declaration of trust by a person in relation to an interest in land must be in writing signed by the person or made by the person’s will does not apply to the Duties Act. The Duties Act includes a specific definition of ‘declaration of trust’ for the purposes of chapter 2. Further, whereas a ‘declaration of trust’ for the purposes of the CLP Act may be made by a will, that is not the case for the purposes of the Duties Act. The apparent inconsistency between the definitions implies that the CLP Act definition was not intended to apply to the Duties Act.
The decision of the original tribunal
55.The original tribunal observed that the matter at issue was of some complexity and accepted the Commissioner’s submission that the starting point was to examine the position before and after “a set of relevant transactions of 19 July 2017”.[12] This was a slip. It is common ground that the relevant transactions are those that occurred on 19 September 2017. The position before and after 19 September 2017 was referred to respectively as the ‘original position’ and the ‘subsequent position’. Where appropriate to maintain consistency, we have used the same terminology.
[12] Leemhuis Investments Mitchell Pty Ltd v Commissioner for ACT Revenue [2023] ACAT 12 at [24]
56.After referring briefly to the facts preceding the sale of units 3 and 4, the original tribunal summarised each party’s characterisation of the ‘original position’. LIM characterised the ‘original position’ as a fixed trust created for the benefit of AUL and PSL, with each having a 50% interest in accordance with their respective partnership interest. The Commissioner accepted the characterisation of the relationship between the various entities as a trust but disputed that it was a fixed trust. Thus, the original tribunal observed, “the parties are largely in accord as to a trust existing in some form, as at the original position but dispute its nature and extent”.[13]
[13] [2023] ACAT 12 at [30]
57.After referring to the circumstances of the sale of units 3 and 4 and the distribution of the sale proceeds to PSL, the original tribunal summarised each party’s characterisation of the ‘subsequent position’ and submissions as follows.
58.LIM contended that following the sale of units 3 and 4 (which was transaction 1) it held the cash proceeds of sale of the units and legal title in units 1 and 2 on trust on behalf of AUL and PSL in equal shares. This was followed by a distribution of the net proceeds of sale of units 3 and 4 to PSL (which was transaction 2) and the surrender by PSL of any interest in the remaining partnership property, the effect of which was to dissolve the partnership. Upon dissolution, LIM continued to hold legal title to units 1 and 2 under the existing trust but now on behalf of AUL alone (which was transaction 3). The alteration in equitable ownership was formalised in August 2018 by Peter transferring his shares in LIM to Alex, such that Alex then held 100% of the shares in the company (which was transaction 4). LIM characterised the series of transactions as a change in the beneficial ownership of the existing trust and disputed that it gave rise to a dutiable transaction.
59.The original tribunal noted that while LIM denied there was a declaration of trust, it “does allow the possible concession that if a declaration is found transaction 3 would have the effect of transferring PSL’s partnership interest to AUL”.[14] As the interest was 50% of the unencumbered value of units 1 and 2 (which was agreed as $1,700,500) LIM conceded duty would be payable on $855,250.
[14] [2023] ACAT 12 at [37]
60.LIM disputed that a ‘declaration of trust’ could be effective without writing, relying on section 201 of the CLP Act. It submitted that even if it is accepted that an oral declaration is sufficient, it is necessary to establish that an express declaration was made, citing Duke Unley Pty Ltd v The Corporation of the City of Unley[15]and Meshumar v Otmy[16]. Further, if a declaration of trust is found to have occurred without writing and without express intent, it must nevertheless be a declaration of a new trust and not simply a declaration rearranging beneficial entitlements under an existing trust. In this case, the interest each partner had in the partnership property was not an equitable chose in action as described by the High Court in Commissioner of State Revenue v Rojoda (Rojoda).[17] Rather, by the terms of the Partnership Agreement and Management Agreement, LIM held units 1-4 on a fixed trust in which AUL and PSL each had a 50% beneficial interest. As a result of the 19 September 2017 transactions, LIM continued to hold the units under the existing trust but for the benefit of AUL absolutely. The change was in the beneficial ownership, not the creating of a new trust.
[15] (2021) 399 ALR 164 at [46]-[48]
[16] (2018) 97 NSWLR 615 at [449]
[17] [2020] HCA 7 at [32]-[34]
61.The Commissioner contended that in the ‘original position’ AUL and PSL were entitled to call for an accounting and distribution of the net proceeds after sale of the partnership assets, which is an equitable chose in action as described in Rojoda. The Partnership Agreement and Management Agreement did not alter the nature of the partners’ interests in the partnership property. This was a ‘trust relationship’ where LIM held the legal title to the units and the partners had equitable rights with respect to partnership property. AUL and PSL did not have a specific, identifiable 50% beneficial interest in units 1-4. Rather, each had a non-ascertained but distinctive personal estate. The Commissioner contended that in the ‘subsequent position’ the series of transactions that occurred on 19 September 2017 constituted a declaration of trust by LIM that it holds units 1 and 2 on trust solely for AUL.
62.The Commissioner submitted that words are not required for a ‘declaration of trust’ for the purposes of the Duties Act and can be created by circumstances. The scheme of the Duties Act is to impose duty on transactions, not on instruments. The Duties Act is concerned with the substance or effect of the transaction – i.e., the change in beneficial ownership of property – rather than the form it might take. The definition is deliberately drafted in broad terms such that, according to the respondent’s written submissions “the only limitation that the Duties Act places on a declaration of trust is that it is other than by will or other testamentary instrument”.[18]
[18] [2023] ACAT 12 at [56]
63.Further, Benidorm makes clear that the Duties Act provides a code by which to determine whether a transaction is dutiable. The code was designed by the legislature to create an entirely new dutiable regime. Adapting the language of the Court in Benidorm, the Commissioner submitted that for the purposes of the Duties Act a ‘declaration of trust’ is “apt to be broader than what the law of trusts might regard as a declaration of trust”.[19] This supported the respondent’s contention that any departure from general law form requirements, such as the absence of an express declaration, does not defeat the liability for duty.
[19] [2023] ACAT 12 at [57]
64.Thus, the respondent submitted, the only question to be asked is whether there was a ‘declaration of trust’ within the meaning of the Duties Act.
65.The original tribunal identified the issue to be determined as follows:
The matter turn on the correct application of the Duties Act to the 19 September 2017 transactions, specifically, whether the circumstances by which the applicant came to hold Units 1 and 2 on trust for AUL absolutely constituted a “declaration of trust” in terms of section 7.[20]
[20] [2023] ACAT 12 at [59]
66.The original tribunal found as follows:
The Tribunal accepts the Rojoda characterisation of the AUL and PSL’s interest as partners in the partnership property in the original position as that of an unascertained personal estate. But the combined effect of the Partnership Agreement and the Management Agreement appointment of LIM to hold legal title in the partnership property for the partners adds a further equitable interest. The respondent contended that these additional arrangements were merely “internal partnership business”. This is not accepted. In the original position these transactions created a fixed trust in an ascertained proportion, namely a 50% share each.[21]
[21] [2023] ACAT 12 at [60]
67.The original tribunal considered that the effect of the 19 September 2017 transactions was to alter “AUL’s equitable interest in partnership interests from 50% to 100%”.[22] This amounted to a declaration of trust, which the original tribunal described as a “trust for AUL absolutely of a 100% equitable interest” in units 1 and 2.[23] This was a dutiable transaction. Because the trust was a “continuation of the trust existing in the original position”[24] whereby AUL already held a 50% equitable interest in partnership property, ad valorem duty was payable on 50% of the unimproved value of units 1 and 2.
[22] [2023] ACAT 12 at [61]
[23] [2023] ACAT 12 at [63]
[24] [2023] ACAT 12 at [63]
68.The original tribunal concluded:
The Tribunal finds that duty is payable. The tribunal accepts as accurate the applicant’s calculation of the duty payable on 50% of the unencumbered value (namely $855,250) of the dutiable property of the partnership, being Units 2 and 3 [sic]. To this should be added penalty tax. For the reasons set out in the respondent’s submissions, in particular that there was no evidence of disclosure by the applicant prior to the commencement of its investigation in 2021, the Tribunal sets the penalty payable at the default rate of 50% pursuant to section 31(2) of the TA Act. To this should be added interest calculated in accordance with section 25 of the TA Act.
The grounds of appeal
69.The Commissioner’s grounds of appeal identified three errors of law in the original tribunal’s findings at [60] of the reasons.
1. The Tribunal’s finding that “the combined effect of the Partnership Agreement and the Management Agreement appointment of LIM to hold legal title in the partnership property for the partners adds a further equitable interest” … (First Error). As a matter of legal characterisation, the appointment of the Respondent (or Leemhuis) to hold legal title to partnership property did not create a further equitable interest.
2. The Tribunal’s finding that the effect of this (i.e., matters described in the First Error) was that in the Original Position there was “a fixed trust in ascertained proportions, namely a 50% share” … (Second Error). As a matter of legal characterisation, the interest of the partners in the partnership in the Original Position is properly characterised as a “Rojoda Interest” (see Commissioner of State Revenue v Rojoda Pty Ltd (2020) 376 CLR 246) and not an interest in a fixed trust.
3. The Tribunal’s finding that what followed from this (i.e., as described in the First and Second Error) was that “[t]he relevant transaction of 19 September 2017 altered AUL’s equitable interest in partnership interests from 50 percent to 100 percent” … (Third Error). The Third Error is a finding against the conceded position of the Respondent (or Leemhuis) that the transaction had dissolved the partnership. The Third Error follows from the First and Second Errors.
The grounds of cross-appeal
70.In its notice of contentions and associated submissions dated 10 May 2023, LIM submitted that the original tribunal erred in finding at paragraph 63 of the reasons that the transactions on 19 September 2017 constituted a declaration of trust. The Appeal Tribunal treated this as a cross-appeal and by orders made on 8 June 2023, dispensed with the formal requirements for lodging an appeal within the tribunal, save for payment of the filing fee.
The parties’ submissions on appeal
71.The Commissioner submitted that the critical issue on appeal is the correct legal characterisation of the interest of the partners in the partnership assets in the original position. LIM, as agent for the Partnership, held the partnership assets, including units 1 to 4, on trust for the partners. Each partner had an unascertained 50% interest in the net proceeds of the trust upon a winding up, which is the same interest as described by the High Court in Rojoda (Rojoda interest). The original tribunal fell into error in finding that the Management Agreement made the interest of the partners in the original position something other than a Rojoda interest – namely, that each had a 50% interest in a fixed trust. The Management Agreement simply determined that LIM would be the legal owner of the partnership assets which were to be held on trust for the partners but did not alter the legal characterisation of their interest as a Rojoda interest.
72.The Commissioner submitted that as a result of the transactions on 19 September 2017, in the subsequent position AUL acquired an ascertained or fixed beneficial interest in units 1 and 2, which were held in a fixed trust brought about by a ‘declaration of trust’ within the meaning of the Duties Act. The original tribunal erred in finding that the declaration of trust simply increased AUL’s interest in an existing fixed trust from 50% to 100%.
73.LIM submitted that Rojoda is distinguishable. The case considered the interests that partners have in partnership property held by a partner. In this case, LIM was not a partner. It held the property on a fixed agency trust for the partners in equal shares. LIM submitted:
It was open for the Partners to, at any stage, direct LIM to deal with the Property and LIM would have been required to do so for the benefit of the Partners in equal shares. For example, AUL and PSL could have directed LIM to transfer the Property to them in specie as tenants in common in equal shares. That right cannot properly be described as a right to share in the net proceeds of partnership property upon winding up, as it does not require the winding up of the Partnership.[25]
[25] Respondent’s Notice of Contentions and Associated Submissions, dated 10 May 2023 at [32]
74.The effect of the transfer of the sale proceeds of units 3 and 4 to PSL (or at PSL’s direction) and the dissolution of the Partnership was that units 1 and 2 continued to be held by LIM as trustee under the existing agency trust. There was simply a change in the beneficiaries in the trust, with AUL becoming the sole beneficiary absolutely under the existing trust. No new trust came into existence.
75.In the alternative, LIM submitted that the 19 September 2017 transactions were not a ‘declaration of trust’ for the purposes of the Duties Act. In Benidorm, the NSW Court of Appeal held that a document meeting the description of a ‘declaration of trust’ under the NSW Duties Act (which is the same as the definition in the ACT Duties Act) did not constitute a ‘dutiable transaction’ because it did not alter the legal or equitable rights or obligations concerning property. In other words, it was not a transaction at all. The Court made it clear that an oral declaration of trust could be a dutiable transaction provided that it altered legal or equitable rights or obligations concerning property. However, Benidorm is not authority for the proposition that an oral declaration of trust over land or an interest in land is a ‘dutiable transaction’.
76.An oral declaration of trust over land would not meet the requirements for writing in section 201(2) of the CLP Act and accordingly would not alter the legal or equitable rights or obligations concerning property. LIM referred to the decision in Dencio v Dencio in her capacity as Administrator of the Estate of the late Brian Gordon Dencio, Deceased [2020] ACTSC 250 (Dencio) where Burns J held that any oral declaration of trust that may have been made by the deceased person over his interest in land was unenforceable for lack of writing.
77.In the further alternative, LIM submitted that there was no oral declaration of trust. Both Alex and Peter Leemhuis gave evidence in the proceeding before the original tribunal that they did not make an oral declaration of trust. Unlike, for example, the Duties Act 2001(Qld), which provides that a dutiable transaction occurs when either a person who holds property other than as trustee starts to hold the property as trustee, or who holds property as trustee for one trust starts to hold that property for another trust where the beneficiaries are not exactly the same, the ACT Duties Act is drafted on the basis that a dutiable transaction occurs when a declaration of trust is made. LIM referred to Meshumar v Otmy [2018] NSWSC 125 where Robb J observed that although the word ‘trust’ is not essential for any declaration of trust, there must be words that clearly indicate an intention on the part of the person in whom the trust property is vested to hold the property on trust and those words must mention the beneficiary for whose benefit the property is to be held.[26] LIM submitted that it was clear from the evidence given by Peter and Alex Leemhuis in the proceeding before the original tribunal that these requirements were not met.
[26] [2018] NSWSC 125 at [340]-[341]
78.In reply, the Commissioner submitted that the approach suggested by LIM is the very approach the Duties Act was intended to preclude – expressly so in respect to the use of companies and trusts to effect changes in land ownership. The Commissioner stressed that “it is the effect or substance of the transaction (i.e., the change in ownership of property) rather than the form of it that is the concern of the [Duties] Act”.[27] The Commissioner noted that in Benidorm, Leeming JA discussed the purpose, scheme and approach to construction of the NSW Duties Act, which is relevantly the same as the ACT Duties Act, where he said:
[82] On the one hand, s 8(1) contains powerful indications that the basis of imposing duties under the statute is transactional, involving an alteration in legal or equitable rights, rather than turning on the existence of a particular piece of paper. Hence, the central definition of “dutiable transaction” in s 8(2), which extends to transfers of dutiable property and any of the “following transactions” in s 8(1)(b). Each of the listed transactions in s 8(1)(b) denotes, as a matter of ordinary legal terminology, something which alters the legal or equitable rights or obligations concerning property. That, after all, is the natural meaning of “transaction in this context”.
[83] Most significantly, there is no reference to instrument. There is no reference to any requirement of writing. There is no Div. 3A. An oral declaration of trust of personalty, which has for centuries been effective without writing as a matter of general law, now is a dutiable transaction if the property answers the description of “dutiable property” as defined in s 11 [equivalent to section 10 in the ACT Duties Act]. Section 10 [equivalent to section 9 in the ACT Duties ACT] confirms that the duty does not turn on the existence of an instrument.
[27] Applicant’s Outline of Reply Submissions, dated 25 May 2023 at [14] and [19]
79.Finally, the Commissioner referred to a long line of authority that the Statute of Frauds (and its modern equivalents such as section 201 the CLP Act) cannot be used as an instrument of fraud. The Commissioner submitted that LIM was seeking to invoke section 201 of the CLP Act “to defraud (in the sense in which that term is used in the authorities concerning Statutes of Fraud) the Commissioner by avoiding paying duty on certain transactions which have created a change in in the beneficial ownership of property”.[28]
[28] Applicant’s Outline of Reply Submissions, dated 25 May 2023 at [37]
The issue
80.The issue the Appeal Tribunal must decide is whether the transactions that took place on 19 September 2017 are correctly characterised as a ‘declaration of trust’ within the meaning of the Duties Act – specifically, whether the transactions on 19 September 2017 constituted a declaration by LIM that it holds 100% of the beneficial interest in units 1 and 2 in trust for AUL. This is a question of law. The underlying facts are not in dispute.
Consideration
81.Relations between partners and their interests in partnership property are governed by the Partnership Act 1963 (Partnership Act) and the terms of the partnership agreement if there is one – in this case, the Partnership Agreement between PSL and AUL. I consider each in turn.
82.The Partnership Act provides that the rules of equity and common law applying to partnership continue in force except insofar as they are inconsistent with the Act.[29] The mutual rights and duties of partners, whether ascertained by agreement or defined by the Act, may be varied by consent of all partners, which may be express or inferred from a course of dealing.[30]
[29] Partnership Act, section 5(1)
[30] Partnership Act, section 23
83.All rights and interests in property acquired, whether by purchase or otherwise, on account of a firm[31] or for the purposes, and in the course of business, of a firm is partnership property[32] subject to a presently immaterial exception.[33]
[31] The dictionary for the Partnership Act defines firm to mean (for a partnership other than an incorporated limited partnership) the collective name for the people who have entered the partnership with one another
[32] Partnership Act, section 24
[33] Section 25 of the Partnership Act provides that where co-owners of an estate or interest in land, that is not partnership property, are partners as to profits made by use of the estate or interest or of the land and purchase out of the profits another estate or interest in land to be used in like manner, in the absence of agreement to the contrary the estate or interest so purchased belongs to them, not as partners, but as co-owners for the same respective estates or interests as are held by them at the date of purchase in the first mentioned estate or interest
84.Section 32 provides that unless the contrary intention appears, where an estate or interest in land has become partnership property, it is treated as between the partners, the legal personal representatives of a deceased partner and the persons entitled under the will or upon administration of the estate of a deceased partner, as personal property and not real property.
85.Subject to any agreement between the parties, a partnership entered into for an undefined time is dissolved by a partner giving notice of the partner’s intention to dissolve the partnership.[34] Where this happens, the partnership is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is mentioned, as from the date of communication of the notice.[35]
[34] Partnership Act, section 37(1)(c)
[35] Partnership Act, section 38
86.On the dissolution of partnership, every partner in the firm is entitled to have the partnership property applied in payment of the debts and liabilities of the firm and to have the surplus applied in payment of what may be due to each partner after what may be due from that partner as a partner in the firm.[36] In settling accounts between the partners in a firm after dissolution of the partnership, section 50(3) provides that subject to any agreement to the contrary, after payment of all debts and liabilities from the partnership property, the residue shall be distributed to the partners in the manner and order provided by the section.[37]
[36] Partnership Act, section 45(1)
[37] Partnership Act, section 50(3)
87.In this case, the purpose of the partnership between PSL and AUL included to acquire and hold for investment commercial property, properties or businesses as agreed by the partners from time to time.[38] The Partnership Agreement and Management Agreement, when read together, provided for LIM to run the business and investment activity of the Partnership as the authorised agent for PSL and AUL in proportion to their respective Participating Interests and, for that purpose, to “have possession and control but not ownership of the Partnership property”.[39] This is the hallmark of an agency relationship.
[38] Partnership Agreement, recital A
[39] Partnership Agreement, clause 6.2(k); Management Agreement, clause 1.2(l) of schedule 2
88.However, where title to property, other than money, is vested by a principal in an agent, the agent holds the property as trustee. The agent is bound to follow the principal’s directions in regard to the trust property and does not have the usual powers and discretions of a trustee.[40]
The ‘original position’
[40] J. D. Heydon and M. J. Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 7th ed, 2006), [210] (Jacob’s Law of Trusts); G. E. Dal Pont, Law of Agency (LexisNexis Butterworths, 3rd ed, 2014), [2.12]
89.It is common ground that LIM acquired the Dare Street property and subsequently developed and subdivided the property into four units for the purposes, or in the course of, the business and investment activity of the Partnership. Although legal title resided in LIM, at all material before and after subdivision of the property into four units LIM held the beneficial interest in the property on trust for the firm as Partnership property. The duties, responsibilities and obligations of LIM in respect to Partnership property were specified in the Partnership Agreement and Management Agreement.
90.The partnership accounts for 2017 confirm that the Dacre Street property was Partnership property.
91.The rights and obligations of PSL and AUL in respect to Partnership property were set out in the Partnership Agreement. Relevantly, the Partnership Agreement provided that the Participating Interest of each partner comprised an equal undivided share, as tenant in common, of a bundle of rights and obligations as specified or calculated in accordance with the agreement.[41]
[41] Partnership Agreement, clause 1.1
92.Although the bundle of rights and obligations included beneficial ownership as tenant in common of an undivided share in all Partnership property, this was subject to the partner’s obligation to contribute to Partnership Expenses and to all other rights, liabilities and obligations accruing to or incurred by the partners in or arising out of the Partnership Agreement in respect of the management of the business activities of the Partnership.[42]
[42] Partnership Agreement, clause 1.1 – definition of Participating interest and Partnership Management
93.Further, although each partner had a Participating Interest of 50%,[43] clause 11.2 provided that in the event of a continuing default in payment of an amount due under the Partnership Agreement for a period of fourteen days after notice of the default was given to the partner, the Participating Interest of the defaulting partner would diminish in the proportion by which the unpaid amount related to the value of the Participating Interest of the defaulting partner at the due date for payment. Insofar as the bundle of rights and obligations comprising a partner’s Participating Interest included beneficial ownership as tenant in common of an undivided share in all Partnership property, the interest was not fixed at 50% but was defeasible in the circumstances provided for by clause 11.2.
[43] Partnership Agreement, clause 5.1
94.Each partner was entitled to a distribution of profits commensurate with its Participating Interest subject to the provisions of the Partnership Agreement. There was no entitlement to a distribution of capital unless the Partnership was terminated. In that event, LIM was required to realize all Partnership property and distribute the net proceeds between the partners in the proportions that their respective Partnership Interests bear to the total at the date of termination. As described above, the proportions at the date of termination may not necessarily be 50% each.
95.The original tribunal found that the combined effect of the Partnership Agreement and Management Agreement was that LIM held the beneficial interest in the Dacre Street property on a fixed trust for PSL and AUL, each being entitled to a 50% beneficial interest.
96.In Federal Commissioner of Taxation v Vegners [1989] FCA 80, Gummow J said:
A fixed trust is used to describe a species of express trust where all beneficiaries are ascertainable and their beneficial interests are fixed, there being no discretion in the trustee or any other person to vary the group of beneficiaries or the quantum of their interests.[44]
[44] [1989] FCA 80 at [12]
97.In this case, PSL and AUL each had a Participating Interest of 50%. However, the percentage share of each partner was contingent on the partner not being in default of its payment obligations as provided in clause 11.2 and therefore was not ‘fixed’ in the sense required for a fixed trust.
98.Further, the conclusion that the partners had a fixed beneficial interest in the Dacre Street property requires the part of the definition of Participating Interest that refers to “beneficial ownership as tenant in common of an undivided share in all Partnership property” to be disassociated from the partner’s obligation to contribute to Partnership Expenses and to all other rights, liabilities and obligations accruing to or incurred by the partners in or arising out of the Partnership Agreement in respect of the management of the business activities of the Partnership. This is not possible.
99.In Rojoda, the majority of the High Court accepted that in the absence of provisions to the contrary in the partnership agreement, partnership property is held on trust for the partners[45] and explained the nature of a partner’s interest in partnership property as follows:
However, unlike the beneficiary of a fixed trust, it was well established that a partner’s interest was not an interest in, or in relation to, any specific asset other than an entitlement to the partner’s share of the net proceeds from the sale of each asset at the completion of winding up. In other words, the only right that the partners have, both before and after dissolution, in relation to each asset is a right to the account and distribution after sale of the proceeds of that asset – “not to an individual proportion of a specific article, but to an account: the property to be made the most of, and divided”. Hence, a partner’s equitable interest is not accurately expressed as a “beneficial interest”, at least in the sense of being a right to any proportion of, or for the personal use of, or for the benefit from, any particular asset.
In a famous description that encapsulated the equitable principles, Lindley described a partner’s interest as “his proportion of the partnership assets after they have been all realised and converted into money, and all the debts and liabilities have been paid and discharged”…
The description by Lindley emphasised that although the partners have an existing equitable interest in relation to each and every asset for the payment of their share after winding up is complete, that interest can fluctuate during trading and is not ascertained until the assets are realised in a fund upon winding up. Hence, despite some contrary authority, where the partnership property was land the equitable interest was described as a “personal estate” in relation to the land to signify that there was no vested or ascertainable right in relation to the particular legal estate in the land. [46]
[45] [2020] HCA 7 per Bell, Keane, Nettle and Edelman JJ at [26]
[46] [2020] HCA 7 per Bell, Keane, Nettle and Edelman JJ at [33]
100.Referring to section 32 of the Partnership Act 1895 (WA), which is similar in effect to section 32 of the ACT Partnership Act mentioned earlier, the majority said the section “makes certain that, in the absence of agreement, partners will lack a vested interest in any land that is partnership property”.[47]
[47] [2020] HCA 7 at [38]
101.I do not accept LIM’s submission that Rojoda should be distinguished on the basis that the case considered the interests that partners have in partnership property held by a partner. The statements of principle to which I have referred are of general application. The proper construction of the Partnership Agreement and the context provided by the Partnership Act leads to the same result.
102.LIM’s submission to the effect that the partners could have directed LIM to transfer the property to them in specie as tenants in common in equal shares must be rejected. The Partnership Agreement did not provide for PSL and AUL to have a vested 50% beneficial interest in the Dacre Street property before or after subdivision and there was no evidence that any other agreement existed to that effect. The Management Agreement regulated the rights and obligations of the parties with respect to the appointment of LIM as manager of the Partnership but did not alter the legal character of PSL’s and AUL’s interest in the Partnership property, including the Dacre Street property. That interest is appropriately described as a Rojoda interest.
103.I am satisfied that the original tribunal erred in finding that the combined effect of the Partnership Agreement and Management Agreement was that LIM held the beneficial interest in the Dacre Street property on a fixed trust for AUL and PSL with each having a vested 50% beneficial interest in the property.
Events leading to dissolution of the Partnership
104.Peter and Alex Leemhuis each provided a witness statement, tendered in the proceeding before the original tribunal, in which they gave evidence to the effect that in early 2017, following an approach to Peter by his brother, David, expressing interest in purchasing units 3 and 4, Peter was agreeable to selling his half interest in the Partnership, while Alex wished to retain his interest. Peter and Alex agreed that Peter could take his half share in cash and Alex would take his half share by retaining units 1 and 2 plus a small amount of cash as a balancing adjustment. To achieve this, Peter and Alex agreed to sell units 3 and 4 to a company controlled by David. Peter and Alex agreed that Peter (via PSL) would receive most of the cash proceeds of the sale, amounting to 50% of the net value of the Partnership property and Alex (via AUL) would keep Peter’s half interest in units 1 and 2. Both said they saw this as an agreement between them as partners dealing with their interests in the Partnership. They did not discuss the mechanics of the transaction, other than in the general terms mentioned above, nor who owned legal title to the property.
105.Both gave evidence to the following effect in their witness statements:
I have never, in my capacity as a director of the Applicant or otherwise, made any declaration whether in writing or orally that the Lots 1 and 2 of 62 Dacre Street, Mitchell ACT are held, or are to be held, in trust by the Applicant for AUL Investments Mitchell Pty Ltd as trustee for the AUL Mitchell Trust, or for the benefit of AUL Investments Mitchell Pty Ltd as trustee for the AUL Mitchell Trust, as beneficiary absolutely.
106.Neither witness was cross-examined, and the witness statements were tendered without objection.
107.It is common ground that on 1 September 2017, LIM entered into contracts to sell units 3 and 4 to AHB Property Holdings Pty Ltd, a company controlled by David, for a combined sale price of $1,988,700. Settlement took place on 19 September 2017. LIM then paid the net proceeds of sale – approximately $1.7 million – to or on account of PSL. It is common ground that the Partnership terminated or was dissolved at that point.
108.There matters rested until 8 August 2018 when Peter transferred his shares in LIM to Alex. The winding up of the Partnership was completed on 14 March 2019, when the Partnership accounts for the year ended 30 June 2018 were finalised. The accounts record the final distributions of the profits of the Partnership to PSL and AUL, although there is no evidence as to when the distribution occurred.
109.The agreement between Peter and Alex leading to the dissolution or termination of the Partnership was entirely oral. There is no evidence the agreement was ever documented.
110.The terms of the agreement are important. First, it was agreed by PSL (represented by Peter) and AUL (represented by Alex) to dissolve the Partnership. Second, it was agreed that following completion of the sale of units 3 and 4, Peter would take the net value of his Partnership Interest in cash and Alex would take the net value of his Partnership Interest in specie by ‘retaining’ units 1 and 2.
111.Clearly, neither considered the mechanics of the transactions required to achieve this result. However, it was implicit that Peter and Alex, as the directors of LIM, intended that LIM would do everything necessary to achieve the desired result.
112.Further, although not expressly stated, I infer that the common intention was for the Partnership to terminate or dissolve upon distribution of the assets of the Partnership, rather than immediately or at some specified future date. In my view, until the distribution was completed the agreement for dissolution of the Partnership remained executory.
The transactions on 19 September 2017
113.Upon settlement of the sale of units 3 and 4 on 19 September 2017, LIM held the net cash proceeds of sale and the beneficial interest in units 1 and 2 on trust for AUL and PSL as Partnership property.
114.On the same day, LIM paid the net cash proceeds of sale to PSL. The transaction:
(a)implemented the oral agreement between Peter on behalf of PSL and Alex on behalf of AUL for the dissolution or termination of the Partnership and the transfer of each partner’s interests in the Partnership property;
(b)operated as a transfer by AUL to PSL of AUL’s equitable rights in relation to that part of the Partnership property comprised of the net cash proceeds of sale of units 3 and 4 in consideration for a simultaneous transfer by PSL to AUL of PSL’s equitable rights in relation to that part of the Partnership property comprised of the unencumbered value of units 1 and 2;
(c)effected a distribution of the Partnership property subject only to LIM finalising the Partnership accounts for the year ended 30 June 2018 and distributing the profits to give effect to any cash adjustment required to balance the account between the former partners.
Did LIM declare a trust of in favour of AUL?
115.LIM always held legal title to units 1 and 2 but it never held the beneficial interest in the properties otherwise than on trust. That remained the position after the 19 September 2017 transactions. Hence, the steps taken subsequently to transfer Peter’s shares in LIM to Alex, in our view, is not relevant to the issues in this appeal.
116.Clearly, there was a change in the beneficial ownership of units 1 and 2 on 19 September 2017. Instead of LIM holding the beneficial interest in the properties on trust for the Partnership, upon the transfers of the partners’ respective equitable interests in relevant parts of the Partnership property and the simultaneous dissolution of the Partnership on 19 September 2017, the result was that LIM – which remained the legal owner of the properties – now held the beneficial interest on a bare trust for AUL absolutely.
117.The Commissioner submitted that this result was obtained by LIM declaring a trust in favour of AUL on 19 September 2017.
118.The Commissioner’s submission that the only question to be asked is whether there was a ‘declaration of trust’ within the meaning of the Act is orthodox. As Benidorm makes clear, the focus of the Duties Act is on ‘transactions’, not instruments. The Act is not necessarily declaratory of the general law. The issue is whether something has occurred that amounts to a ‘transaction’ for the purposes of the Act.
119.In written submissions, the Commissioner submitted that a ‘declaration of trust’ within the meaning of the Duties Act did not require words. In oral submissions, the Commissioner submitted that whether there has been a ‘declaration of trust’ within the meaning of the Duties Act may be inferred or implied from the circumstances.[48] The Commissioner accepted that an oral declaration of trust over an interest in land would be unenforceable by the person asserting the declaration was made because of the lack of writing required by section 201(2) of the CLP Act, however submitted this did not mean that a dutiable transaction has not occurred for the purposes of the Duties Act.[49] The Commissioner accepted that, conceptually, the Commissioner’s position was that duty may be payable on a something called a ‘transaction’ that was unenforceable at law.[50] Hence, it was submitted, unenforceability under the CLP Act does not bear upon the dutiable nature of a transaction under the Duties Act.[51]
[48] Transcript of proceedings dated 6 June 2023, page 64, lines 28-31 and page 65, lines 28- 31
[49] Transcript of proceedings dated 6 June 2023, page 68, lines 14-34
[50] Transcript of proceedings dated 6 June 2023, page 68, lines 36-45
[51] Transcript of proceedings dated 6 June 2023, page 69, lines 12-13
120.Pressed to explain the basis upon which a dutiable transaction can arise in circumstances that are incapable of giving rise to legal or equitable rights under the CLP Act, the Commissioner pointed to LIM’s admission that a trust existed[52]. This lead to the following exchange:
SENIOR MEMBER ORLOV: Well, that just raises a question as to what circumstances gave rise to the trust. It could be an implied trust, could be a resulting trust, all sorts of ways in which trusts can arise.
MS OBRART: And all of those, in the commissioner’s submission, fall within the definition of a declaration of trust within the meaning of the Duties Act.[53]
[52] Transcript of proceedings dated 6 June 2023, page 70, lines 1-8
[53] Transcript of proceedings dated 6 June 2023, page 70, lines 10-16
121.The Commissioner conceded that under the general law a trust can arise in a wide variety of circumstances, including without writing and in the absence of any oral statement. The Commissioner accepted also that the fact there is an admitted trust relationship says nothing about the circumstances that gave rise to the trust and whether the circumstances fit within the statutory definition of a ‘declaration of trust’.[54] In spite of this, the Commissioner maintained that LIM’s admission that a trust exists and that LIM became the trustee for AUL implied that there was a ‘declaration of trust’ within the meaning of the Duties Act.[55] The Commissioner failed to identify satisfactorily the facts upon which the Commissioner relied and to explain how the facts met the definition of a ‘declaration of trust’.[56] Ultimately, the Commissioner agreed with the following proposition:
In essence your submission really comes down to this, doesn’t it? The taxpayer admits that at a presently unspecified point in time the property was held by LIM in trust for AUL, where previously that was not the case. And the Commissioner’s proposition is that from that fact, and that fact alone, one infers that that trust must have arisen as a result of a declaration of trust within the meaning of the Act. There’s no other way in which it could arise. That’s in essence your submission, isn’t it?[57]
[54] Transcript of proceedings dated 6 June 2023, page 71, line 10
[55] Transcript of proceedings dated 6 June 2023, page 71, line 40 to page 72, line 34
[56] Transcript of proceedings dated 6 June 2023, page 72, line 21 to page 74, line 5
[57] Transcript of proceedings dated 6 June 2023, page 77, lines 10-18
122.Even more plainly, the Commissioner conceded that the Commissioner’s case “is simply that a set of circumstances amount to a declaration of trust because the end result is a trust”.[58]
[58] Transcript of proceedings dated 6 June 2023, page 79, lines 19-27
123.The Commissioner’s submissions are misconceived and must be rejected.
124.Trusts are generally classified as express or declared trusts, implied or resulting trusts and constructive trusts. The latter class is not presently relevant.
125.In the case of an express or declared trust:
the creator has used language which expresses an intention to create a trust. The author of the trust has meant to create a trust, and has used language which explicitly or impliedly expresses that intention, either orally or in writing. The fact that a trust was intended may even be deduced from the conduct of the parties concerned but if there is any uncertainty as to intention, there will be no trust.[59]
[59] Jacob’s Law of Trusts (6th ed) at [306]
126.In the case of an implied or resulting trust:
the trust property reverts or ‘results’ to the settlor, by reason of an intention presumed by law in the absence of an intention by the settlor. This occurs in two sets of circumstances: first, where A pays for the purchase of property which is vested in another; it is presumed that the property is held on trust for A, although that presumption may be rebutted by the counter-presumption of advancement or by direct evidence that A intended beneficial ownership to pass. Second, where A transfers property to another on express trusts, but the trusts declared do not exhaust the whole beneficial interest, in which case the unexhausted residue is held on trust for A. These have been styled ‘presumed’ and ‘automatic’ resulting trusts although, in both cases, the resulting trust responds to the whole or partial absence of A’s intention to transfer beneficial interest to another.[60]
[60] Jacob’s Law of Trusts (6th ed) at [307]
127.It is plain that the statutory definition of ‘declaration of trust’ refers to an express trust and not to an implied or resulting trust. The “person making the declaration” must use language that explicitly or impliedly “declares” an intention to hold “identified” property “vested or to be vested in the person making the declaration” in trust for a person, people, purpose or purposes “mentioned” in the declaration.
128.The Commissioner’s submission that words are not required and that a declaration of trust can be inferred or implied from circumstances confuses the facts that must exist to satisfy the statutory definition and the evidence by which the existence of those facts may be proved.
129.The Commissioner’s submission that an unenforceable transaction nevertheless can be a ‘dutiable transaction’ is contrary to authority and is not supported by the text, context or purpose of the Duties Act. As Benidorm makes plain, the legislation is concerned to impose duty on ‘transactions’ that alter the legal or equitable rights or obligations concerning property. A purported ‘declaration of trust’ that does not alter the legal or equitable rights or obligations concerning property cannot be a ‘dutiable transaction’ for the purposes of the Act.
130.It does not follow from this that a declaration of trust by a person in relation to an interest in land that is not in writing signed by the person, as required by section 201(2)(a) of the CLP Act, is incapable of being a ‘declaration of trust’ within the meaning of the Duties Act. Section 203(1)(d) makes clear that section 201 does not affect the law about part performance. However, part performance is a large subject and was not touched upon in evidence or submissions before the original tribunal or on appeal. It is not necessary or appropriate to consider the issue here, which would require the Appeal Tribunal to do so in the abstract.
131.The application of the statutory test – whether there has been a ‘declaration of trust’ within the meaning of the Duties Act – demands careful attention to the statutory language and proof of the facts necessary to satisfy each element of the definition – namely:
(a)a declaration (other than by will or testamentary instrument);
(b)that identified property vested or to be vested in the person making the declaration;
(c)is or is to be held in trust for the persons or people, or the purpose or purposes, mentioned in the declaration; and
(d)although the beneficial owner of the property, or the person entitled to appoint the property, may not have joined in or assented to the declaration.
132.The facts in (a) to (c) are essential and their existence must be proved by evidence. The effect of (d) is that if the facts in (a) to (c) are established, it is not necessary to establish that the beneficial owner or person mentioned there has joined in or assented to the declaration.
133.The property said to be the subject of a ‘declaration of trust’ on 19 September 2017 is the beneficial interest in units 1 and 2. Hence, the Appeal Tribunal must be satisfied that, upon distribution of the cash proceeds of sale to PSL on 19 September 2017:
(a)the beneficial interest in units 1 and 2 was “identified property vested or to be vested” in LIM as the “person making the declaration”;
(b)LIM made a “declaration” that the beneficial interest in units 1 and 2 “is or is to be held in trust” by LIM for AUL, being “the person … mentioned in the declaration”;
(c)the “declaration” resulted in an alteration in the legal or equitable rights or obligations concerning units 1 and 2.
134.First, it is apparent that the beneficial interest in units 1 and 2 was not property vested or to be vested in LIM at any time before, on, or after 19 September 2017. Notwithstanding LIM held the legal title to the properties, it was not, and was never intended to become, the beneficial owner. It could not divest itself of a beneficial interest in land that it did not have. Hence, even if there was evidence that LIM had purported to make a declaration of trust in favour of AUL on 19 September 2017, the declaration would not have been made by a person in whom the “identified property [is] vested or [is] to be vested”.
135.As Griffith CJ said in Garrett v L’Estrange:
So in the case of a declaration of trust there must be an intention on the part of the person who makes the declaration to divest himself of the beneficial interest and constitute himself a trustee for the other party.[61]
[61] [1911] HCA 67; (1911) 13 CLR 430 at 434 per Griffith CJ, Barton and O’Connor J concurring
136.The principle is summarised by the learned authors of Jacob’s Law of Trusts as follows:
A person cannot create a trust of property which does not belong to him or her and the trustee has only a legal title and not the beneficial interest. The person to create the trust, and the person who is able to declare the trust, are one and the same, and consequently the beneficial owner is the person by law enabled to declare the trust.[62]
[62] Jacob’s Law of Trusts (6th ed) at [707]
137.Second, it is apparent that Peter and Alex, as the only directors of LIM, did not use language, whether on 19 September 2017 or at any other time, which explicitly or impliedly expressed an intention that LIM held or would hold the beneficial interest in units 1 and 2 in trust for AUL. The evidence given by Peter and Alex to that effect was unchallenged and there was no evidence to the contrary.
138.The earlier analysis of the agreement between PSL and AUL providing for transfer of their respective interests in parts of the Partnership property and the dissolution of the Partnership on 19 September 2017 shows that there was a transfer to AUL of PSL’s equitable rights in relation to the part of the Partnership property comprised of units 1 and 2 in consideration for the simultaneous transfer to PSL of AUL’s equitable rights in relation to the part of the Partnership property comprised of the cash proceeds of the sale of units 3 and 4. Where AUL provided all of the consideration but legal title was held by LIM, in the absence of evidence that beneficial ownership was intended to pass to LIM the result is that LIM held the beneficial interest in units 1 and 2 on a resulting trust for AUL alone. The trust is appropriately classified as a bare trust for AUL absolutely.
139.However, the transaction was not a ‘declaration of trust’ within the meaning of the Duties Act and was not dutiable as such.
Decision
140.The appeal must be dismissed and the cross-appeal allowed. The decision of the Commissioner to disallow the objection to the notice of assessment must be set aside and substituted by a decision to allow the objection.
………………………………..
Presidential Member G McCarthy
For and on behalf of the Appeal Tribunal
Date(s) of hearing: 6 June 2023
Appellant: Ms N Obrart, Counsel for the Appellant Respondent: D Bedford, McCullough Robertson Lawyers
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