GLDT Pty Ltd as trustee of the George Lemezina Discretionary Trust v Commissioner for Act Revenue; Zina Pty Ltd as trustee of the Michael Lemezina Discretionary Trust v Commissioner for Act Revenue (Administrative..
[2023] ACAT 50
•9 May 2023
ACT CIVIL & ADMINISTRATIVE TRIBUNAL
GLDT PTY LTD AS TRUSTEE OF THE GEORGE LEMEZINA DISCRETIONARY TRUST v COMMISSIONER FOR ACT REVENUE; ZINA PTY LTD AS TRUSTEE OF THE MICHAEL LEMEZINA DISCRETIONARY TRUST v COMMISSIONER FOR ACT REVENUE (Administrative Review) [2023] ACAT 50
AT 75/2022
AT 76/2022
Catchwords: ADMINISTRATIVE REVIEW – liability for duty under landholder provisions of Duties Act 1999 – where landholder was a private unit trust scheme that owned 40 properties in the ACT – where applicants owned all of the units in the trust in equal shares – where, on a notional distribution of all the property of the landholder, each applicant was entitled to 50% of the property distributed but had no interest in specific trust property – where the rights of unitholders were varied to give each applicant a 100% beneficial interest in 20 properties – where subsequently, on a notional distribution of all the property of the landholder, each applicant’s entitlement to a percentage of the property distributed remained materially unchanged – where each unitholder already had a “significant interest” in the landholder, whether the subsequent variation in unitholders’ rights resulted in each unitholder acquiring a “significant interest” in the landholder that they did not already have – decision to impose landholder duty and penalty tax set aside and substituted by a decision to allow the taxpayers’ objections
Legislation cited: ACT Civil and Administrative Tribunal Act 2008 s 68(3)
Duties Act 1999 ss 79, 80, 83, 84, 85, 86
Tax Administration Act 1999 s 8(5)
Tribunal:Senior Member M Orlov
Date of Orders: 9 May 2023
Date of Reasons for Decision: 6 September 2023
AUSTRALIAN CAPITAL TERRITORY )
CIVIL & ADMINISTRATIVE TRIBUNAL ) AT 75/2022
BETWEEN:
GLDT PTY LTD AS TRUSTEE OF THE GEORGE LEMEZINA DISCRETIONARY TRUST
Applicant
AND:
COMMISSIONER FOR ACT REVENUE
Respondent
TRIBUNAL:Senior Member M Orlov
DATE:9 May 2023
ORDER
The Tribunal orders that:
The Commissioner’s objection decision dated 22 August 2022 is set aside and substituted by a decision to allow the applicant’s objection against landholder duty and penalties.
The Commissioner is to pay the ACAT filing fee to the applicant.
The Tribunal will give reasons in writing at a later date.
…………(signed)…………
Senior Member M Orlov
AUSTRALIAN CAPITAL TERRITORY )
CIVIL & ADMINISTRATIVE TRIBUNAL ) AT 76/2022
BETWEEN:
ZINA PTY LTD AS TRUSTEE OF THE MICHAEL LEMEZINA DISCRETIONARY TRUST
Applicant
AND:
COMMISSIONER FOR ACT REVENUE
Respondent
TRIBUNAL:Senior Member M Orlov
DATE:9 May 2023
CORRECTED ORDER
The Tribunal orders that:
The Commissioner’s objection decision dated 22 August 2022 is set aside and substituted by a decision to allow the applicant’s objection against landholder duty and penalties.
The Commissioner is to pay the ACAT filing fee to the applicant.
The Tribunal will give reasons in writing at a later date.
……………………………
Senior Member M Orlov
REASONS FOR DECISION
Introduction
These proceedings concern the imposition of duty under the landholder provisions of the Duties Act 1999 (as in force on 4 March 2009)[1] on the acquisition of a “significant interest”[2] in a “landholder”.[3] A liability for duty under part 3.2 of the Act arises when a “relevant acquisition” is made.[4] The Commissioner for ACT Revenue issued assessments imposing duty, penalty tax and interest on the applicants, amounting in aggregate to $3,496,172.21, on the grounds that certain transactions entered into on 4 March 2009 were dutiable under the landholder provisions of the Act. On 22 August 2022, the Commissioner disallowed the taxpayers’ objections. On 19 September 2022, the taxpayers filed applications for review of the decisions to disallow their objections.
[1] Duties Act 1999 (Republication 36) chapter 3, part 3.2
[2] Duties Act 1999, section 83
[3] A landholder is an entity that has a landholding in the ACT (section 79). A landholding is any interest in land, other than the interest of a mortgagee, charge or other secured creditor or a profit á prendre (s 80)
[4] Duties Act 1999, section 85
The applicant in AT 75/2022 is GLDT Pty Ltd as trustee of the George Lemezina Discretionary Trust (GLDT). The applicant in AT 76/2022 is Zina Pty Ltd as trustee of the Michael Lemezina Discretionary Trust (MLDT). At all material times GLDT and MLDT were the beneficial owners, in equal shares, of all the units in the Lemezina Investment Unit Trust (LIUT) which had substantial landholdings in the ACT. Under the terms of the trust deed, GLDT and MLDT were each entitled to 50% of the property of LIUT on a winding-up but neither was entitled to an interest in specific property. The net aggregate value of LIUT’s landholdings in early 2009 was $18,266,000. If LIUT was wound up then, GLDT and MLDT were each beneficially entitled to a distribution of $9,160,000.
By a deed of variation made on 4 March 2009 and related transaction documents, the assets of the trust were split between GLDT and MLDT with effect from that date. Each acquired a 100% beneficial interest in specific properties, designated “specific investments” for the benefit of the individual unit holder. Both before and after 4 March 2009, the terms of the trust deed precluded a distribution of property in specie. Thus, if LIUT was wound up, the deed of variation meant GLDT and MLDT would each receive 100% of the net proceeds of the specific investments allocated to them, instead of 50% of the net proceeds of all the property of LIUT. As of 4 March 2009, specific investments allocated to GLDT and MLDT represented 49.82% and 50.18% respectively of all the property of LIUT available for distribution on a notional winding up. Relevantly, the entitlement of GLDT and MLDT to a percentage of the property distributed was materially unchanged by the deed of variation.
The Commissioner decided these circumstances amounted to the acquisition of a significant interest in a landholder and imposed duty, penalty tax and interest of $1,742,760.56 on GLDT Pty Ltd and $1,753,411.65 on Zina Pty Ltd. Penalty tax was imposed at 75% because the Commissioner took the view the taxpayers had contrived a “tax avoidance scheme”.[5]
[5] ‘Tax avoidance scheme’ is defined in section 8(5) of the Tax Administration Act 1999
I heard the applications on 9 May 2023. At the conclusion of the submissions, I made orders pursuant to section 68(3) of the ACT Civil and Administrative Tribunal Act 2008 in each matter setting aside the Commissioner’s decision disallowing the taxpayer’s objection and substituting a decision to allow the objection against landholder duty and penalties. I informed the parties I would provide reasons in writing at a later date. The following are my reasons.
The statutory context
The statutory context may be summarised briefly. A person has an interest in a landholder if the person has an entitlement to a distribution of property from the landholder on the winding up of the landholder or otherwise.[6] A person has a significant interest in a landholder if, in the event of such a distribution immediately after the interest is acquired, the person would be entitled to 20% of the property distributed if the landholder is a private unit trust scheme, or at least 50% if the landholder is a private company or wholesale unit trust scheme.[7]
[6] Duties Act 1999 section 83(1), subject to an exception where the entitlement is as a creditor or other person to whom the landholder is liable
[7] Duties Act 1999, section 83(2)
A person acquires an interest in a landholder if the person obtains an interest or the person’s interest increases in the landholder, regardless of how it is obtained or increased.[8] A liability for duty arises when a “relevant acquisition” is made.[9] A person is taken to have made a relevant acquisition if the person acquires a significant interest in the landholder, or acquires an interest that when aggregated with other interests in the landholder held by the person or an associated person, or acquired by the person or other people in associated transactions, results in an aggregation that amounts to a significant interest in the landholder.[10]
[8] Duties Act 1999, section 84(1)
[9] Duties Act 1999, section 85
[10] Duties Act 1999, section 86(1)
Relevantly, without limiting how a person may acquire an interest in a landholder, one way is by variation, abrogation or alteration of a right attaching to a share or unit in the landholder.[11]
Additional background
[11] Duties Act 1999, section 84(2)(a)(ii)
LIUT was established on 1 July 1983 with Lemezina Investments Pty Ltd (LIPL) as the trustee. The trust deed provided in clause 5A(a):
The Registered Holders shall be beneficially entitled to the Trust Fund in proportion to the units registered in their names and all such units shall be of equal value but no Holder shall be entitled to any individual security or investment forming part of the Trust Fund.
Several provisions of the deed of variation should be noticed specifically.
First, by clause 5B it was provided:
The Trustee may at the request of a Registered Holder treat any asset of the Trust Fund selected by that Registered Holder as an investment specifically for the Registered Holder (a “Specific Investment”) so that:
(i) Notwithstanding anything else in this Deed, for such time as the asset is a Specific Investment, the Registered Holder in respect of whom the asset has been selected shall be entitled to distributions of net income and capital in accordance with the terms of this Deed in an amount equal to the net income and the net capital proceeds from the Specific Investments;
…
(v) In determining the entitlement of the Registered Holder in respect of income or capital of such part of the Trust Fund as is not a Specific Investment of any Registered Holder in accordance with the terms of this Deed, the Registered Holder shall be treated as if it did not hold such number of units (or fraction of units) in the Trust having a market value equal to the net value of the Specific Investment (being an amount equal to the market value of the Specific Investment reduced by the liabilities attached to that Specific Investment).
Second, by clause 14(c) it was provided:
For such time as an asset of the Trust Fund is treated as a Specific Investment in accordance with Clause 5B, the Registered Holder in respect of whom the asset is deemed to be held by the Trustee shall have the power, to the exclusion of all other Registered Holders, to appoint and remove Trustees with respect to the Specific Investment so that any Trustee appointed by the Registered Holder under this Clause 14(c):
(i) will hold the Specific Investment upon the trusts of the Trust to the exclusion of all other Trustees of the Trust; and
(ii) shall not be empowered by appointment under this Clause 14(c) to hold any other property forming part of the Trust Fund upon the trusts of the Trust.
Third, by clause 14(g) it was provided:
The right of indemnity which a Trustee has pursuant to Clause 22(b) and section 59 of the Trustee Act 1925 (ACT):
(i) shall be limited to such property of the Trust Fund that is held by that Trustee or its duly appointed nominee;
(ii) for the avoidance of doubt, shall exclude such property of the Trust Fund that is held by another Trustee or its duly appointed nominee.
Fourth, by clause 29 it was provided:
(a) Subject to Clause 29(c) it shall not be necessary for the title to any property forming part of the Trust Fund to be held or registered in the name of the Trustee but the same may in the discretion of the Trustee be held or registered in the name of a nominee of the Trustee or any other name.
…
(c) A Trustee appointed pursuant to Clause 14(c) may exercise the power to appoint a nominee under this Clause 29 to the exclusion of all other Trustees who do not hold the same property provided however that a Trustee so appointed shall only be empowered to appoint a nominee under this Clause 29 with respect to property of the Trust Fund that it holds as a Specific Investment.
On the same date as the deed of variation was made, certain other transactions were effected.
First, LIPL resolved to accept requests made by Lem Pty Ltd, the then trustee of GLDT, and Zina Pty Ltd, as trustee of MLDT, for LIPL to treat assets comprising half its landholdings as Specific Investments for each unit holder and to apportion the liabilities attached to the Specific Investments accordingly.
Second, Zina Investments (ACT) Pty Ltd (Zina (ACT)) replaced LIPL as trustee of LIUT.
Third, Zina (ACT) appointed LIPL to hold legal title as nominee for Zina (ACT) in respect to property held as Specific Investments for GLDT.
Subsequently, on 1 September 2015, GLDT Pty Ltd replaced Lem Pty Ltd as trustee of GLDT.
The issue
The issue is whether the transactions that took place on 4 March 2009, by which the rights attaching to units in LIUT were varied as described above, resulted in GLDT and MLDT making a “relevant acquisition” within the meaning of section 86(1).
An outline of the arguments
It was common ground that before and after 4 March 2009, each unit holder had a significant interest in LIUT. The Commissioner’s case was that the deed of variation effected a change in the nature of each unit holder’s interest. Whereas before 4 March 2009, GLDT and MLDT did not have a beneficial interest in specific property but were each entitled to 50% of all the property of LIUT on a notional winding up, after 4 March 2009 each was entitled to a 100% beneficial interest in the specific investments allocated to them, which was a new and different kind of interest to the interest they held previously. According to the Commissioner, this amounted to the acquisition of an “interest” for the purposes of the landholder provisions that of itself was a “significant interest” in LIUT and therefore was dutiable.
The Commissioner’s argument is encapsulated in the following extract from the written submissions:[12]
The relevant matter that has attracted duty is that subsequent to the Transaction the Applicant became the beneficial owner of 20 specified properties (listed in annexure A) which then became held on trust specifically for it by LIUT. Prior to the transaction, the Applicant was not the beneficial owner of those properties. It thus acquired the beneficial ownership of these specific properties by reason of the Transaction. That acquisition is the dutiable transaction.
The significant interest that was acquired by the Applicant within the meaning of s 83(1) and s 86(1)(a) is the beneficial interest in the Annexure A properties which it acquired by reason of the Transaction and which it did not hold prior to the Transaction.
The interest in LIUT that was acquired by the Applicant in the form of the beneficial interest in the Annexure A properties is a significant interest within the meaning of s 83(2) by reason that the Applicant would be entitled to at least 50% of the property held by LIUT upon a winding up.
[12] Respondent’s Outline of Submissions dated 8 March 2023, para. 26-28
Counsel for the Commissioner submitted there was “an acquisition of an interest because it was an interest that subsists in the applicant that did not before” [13] – relevantly, a right to income and distribution of 20 properties. The legislation does not require a comparison with the original position, which is “the historical basis or precursor to the current acquisition”.[14] The test is simply “is there a new interest that was not there before”. Critically, “the nature of the legislation is that it levies duty on a change in the form of the right or interest”. Counsel for the Commissioner concluded by submitting:[15]
…[The] transaction falls within the plain meaning of the sections, and legally there has been a new right, an interest acquired by the applicant which…the legislation says is levied in a certain way, and that’s what has taken place. The applicant is seeking to distract from the terms of the legislation by adding an analysis which is looking at…certain dollar amounts and the fact there was no change in the ultimate or total of the property held by the trust, but the fact that the total sum of the trust property did not change is not to the point.
The point from the Commissioner’s view is that the applicant acquired certain interests in that trust property which it did not have before and which it was prohibited under the trust deed from having before, and the applicant enacted these series of transactions which countered the prohibition and enabled it to have this new right, which the Commissioner says is…a dutiable transaction.
[13] Transcript, 9 May 2023, page 35 line 8-9
[14] Transcript, 9 May 2023, page 36, line 1-8
[15] Transcript, 9 May 2023, page 39
GLDT and MLDT did not dispute the material facts, including that the purpose of the transactions on 4 March 2009 was to effect a splitting of the trust assets. They submitted that whether this gave rise to a dutiable transaction fell to be considered under chapter 2 rather than chapter 3 of the Act. They argued that focussing on the acquisition of “beneficial ownership” of specific trust property is alien to the assessment required by the landholder duty provisions. Their case centred on the specific meaning given to “interest” for part 3.2 of the Act – namely, “an entitlement…to a distribution of property from the landholder on a winding up of the landholder or otherwise”.[16] The statutory test under section 83(2) is whether, on a “distribution of all the property of the landholder” the person would be entitled to “at least 20% of the property distributed”. Applying the test requires an assessment of a notional winding-up of the landholder immediately after the interest is acquired, in which all the property of the landholder is distributed after payment of all debts and liabilities, and then to ask – would the person be entitled to at least 20% of all the property distributed. Which part or parts of the trust property may be distributed to the person is irrelevant because section 83(2) is concerned only with the proportionate share of “the property distributed” as a percentage of “all the property of the landholder”.
[16] Duties Act 1999, section 83(1)
GLDT and MLDT submitted they were entitled to a distribution of 50% of all the property of LIUT before 4 March 2009 and 49.82% and 50.18% respectively after 4 March 2009. The variation of unitholders’ rights giving them a right to distribution of 100% of specific trust property did not cause their entitlement to the property distributed on a notional winding up after 4 March 2009, as a percentage of all the property of LIUT, to change in a relevant respect. They argued this means there was no relevant acquisition of an interest in LIUT, within the meaning of part 3.2 of the Act.
The applicant’s argument is neatly encapsulated in the following extract from their written submission:[17]
The tests in ss 83 and 86 are, respectfully, simple ones: where, as in this case, a person already had, prior to the relevant transaction, an “entitlement to a distribution of property from a landholder”, what the landholder provisions call for is a simple comparison. What has to be compared is the person’s (unitholder’s) entitlement before the transaction with the person’s entitlement after the transaction. A comparison might show that the person had “acquired” another, separate “significant interest” (para (i) of s 86(1)(a)); or had acquired, on aggregation with the person’s other pre-existing interests, a “significant interest” (para (ii) of s 86(1)(b)); or had acquired a “further interest”, in addition to the person’s pre-existing “significant interest” (s 86(1)9b)). Had any of those three events occurred, the acquisition would have been a “relevant acquisition”, and landholder duty would have been rightly payable. But none of those three events (under s 86(1)) did occur on 4 March 2009 – and no landholder duty was payable as a result.
[17] Applicant’s Submissions dated 22 December 2022, para. 10
In response to the Commissioner’s argument that liability for landholder duty arose because the taxpayers became entitled to 100% of the distribution of properties designated as their specific investments, the applicants emphasised this is not the statutory test. They submitted:[18]
The legislation does not require, in fact does not permit, an examination of the properties held by the landholder that would be the source of the distribution – for that is completely irrelevant to the question of whether or not a person has acquired an entitlement to “at least 20% of the property distributed” on a (notional) “distribution of all the property of the landholder”: s 83(3). The particular type of property, or the identity of the property, held by the landholder is completely irrelevant to the test under s 83(1) and the test under s 83(2).
Consideration
[18] Applicant’s Submissions dated 22 December 2022, para 56
Chapter 2 of the Duties Act 1999 charges duty on certain transactions concerning dutiable property, including a declaration of trust over dutiable property.[19] A declaration of trust means, for the purposes of chapter 2, any declaration (other than by 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.
[19] Duties Act 1999, section 7
A declaration of trust over an interest in land is dutiable under chapter 2.[20]
[20] Duties Act 1999, sections 7(1)(b)(ii), 10(1)(a)
The evident purpose of the deed of variation and the related transactions that took place on 4 March 2009 was to achieve a trust split, to permit GLDT and LMDT to achieve autonomous control over their proportionate share of the landholdings of LIUT.[21]
[21] Email from Domenic Festa to Mile Petrevski sent on 15 September 2008 at 3:14 pm, being Attachment GL-18 to the witness statement of George Lemezina, dated 23 December 2022
Taxation Determination TD 2019/14[22] (the Determination) issued by the Australian Taxation Office (ATO) ruled that a trust split as described in the Determination will result in the creation of a trust by declaration or settlement, as the trustee has new personal obligations and new rights have been annexed to property. The Determination provides the following explanation of arrangements that may be described as a ‘trust split’ for capital gains tax (CGT) purposes:
[22] TD 2019/14 – Income tax: will a trust split arrangement of the type described in this Determination cause a new trust to be settled over some but not all assets of the original trust with the result that CGT event E1 in subsection 104-55(1) of the Income Tax Assessment Act 1997 happens? TD 2019/14 –
1. There are many forms of arrangement that can be described as a trust split. For the purposes of this Determination, ‘trust split’ refers to an arrangement where the parties to an existing trust functionally split the operation of the trust so that some trust assets are controlled by and held for the benefit of a subset of beneficiaries, and other trust assets are controlled and held for the benefit of others. A trust split usually involves a discretionary trust that is part of a family group. A common reason given for ‘splitting’ the trust is to allow different parts of the family group to have autonomous control of their own part of the assets held on trust (that is, their own part of the trust fund).
2. A trust split in this sense will exhibit all or most of the following features:
·The trustee of an existing trust is removed as trustee of part/some of the trust assets and a new trustee is appointed to hold those assets.
·Control of the original trustee is changed such that control passes to a subset of the beneficiaries of the original trust. The new trustee is controlled by a different subset of beneficiaries.
·A different appointor is appointed in respect of the part of the fund held by the new trustee, the control of the new appointor aligned with the control of the new trustee.
·The rights of indemnity of the trustee are segregated such that each trustee can only be indemnified out of the assets held by that trustee.
·The expectation is that the new trustee will exercise its powers in respect of the assets it holds independently of the original trustee to benefit one subset of beneficiaries to the exclusion of others. The original trustee is also expected to exercise its powers in respect of the assets held by it independently of the new trustee to benefit instead a different subset again to the exclusion of others. This is so whether the range of beneficiaries that can benefit from particular assets is expressly limited.
·The rights, obligations and powers of the trustees and beneficiaries remain governed by the one deed.
...
3. It is assumed in this Determination that the steps needed to implement the trust split arrangement are able to be achieved at law, including by valid amendment of the trust deed as necessary, without bringing the whole trust to an end for trust law purposes and thereby resettling the trust.
The transactions on 4 March 2009 exhibit at least some of these features. Where before 4 March 2009, GLDT and MLDT were entitled, on a distribution of the assets of LIUT, to 50% of the Trust Fund but did not have a beneficial interest in any of LIUT’s landholdings, as a result of the transactions on 4 March 2009, GLDT obtained a beneficial interest in all of the income and capital of 20 out of 40 properties held as Specific Investments on trust for GLDT and MLDT obtained a beneficial interest in all of the income and capital of the other 20 properties held as Specific Investments on trust for MLDT.
The Tribunal is not concerned with the issue whether a CGT liability accrued in the circumstances, although the evidence shows that professional advice given at the time suggested it did not. However, whether the circumstances involved declarations of trust over the Specific Investments held for the benefit of GLDT and MLDT respectively would seem to be obvious questions to ask, not least because the statutory premise for duty to be chargeable on a transaction under chapter 3 is that the transaction is not a dutiable transaction under chapter 2.[23] It appears that did not happen. Counsel for the Commissioner appeared to suggest the Commissioner had a choice whether to proceed under chapter 2 or chapter 3 and decided the latter was more appropriate in the circumstances. If that truly reflects the Commissioner’s decision making processes, in my view the Commissioner erred.
[23] Duties Act 1999, section 77
The determinative criterion for duty to be imposed under chapter 3 is a person’s proportionate entitlement to distribution of property as a percentage of all the property distributed. The identity of the property available for distribution is immaterial for chapter 3 purposes. While it is true that GLDT and MLDT acquired beneficial interests in the Specific Investments allocated to each of them, I accept the applicant’s submissions that this did not trigger a liability for landholder duty under chapter 3 because they already had an entitlement to a distribution of 50% of all the property of LIUT before 4 March 2009 and their proportionate entitlement to a percentage share of all the property of LIUT remained materially unchanged immediately following the transactions on that date. The change in the nature of GLDT’s and MLDT’s interests in trust property, on which the Commissioner’s case focussed attention, did not result in GLDT and MLDT acquiring a significant interest in LIUT they did not have already.
The applicant’s submissions reproduced in paragraph 26 above correctly state the applicable test. Applying the test, I am satisfied that GLDT and MLDT did not make a ‘relevant acquisition’ on 4 March 2009 and accordingly were incorrectly assessed for duty under chapter 3. Whether the transactions attracted a liability for duty under chapter 2 does not arise for decision in this application.
I am satisfied the correct decision is to set aside the Commissioner’s decision to disallow the applicant’s objections and substitute a decision to allow the applicant’s objection against landholder duty and penalties.
………………………………..
Senior Member M Orlov
| Date of hearing: | 9 May 2023 |
| Counsel for the Applicant: | Mr T Grace with Mr M Gioskos |
| Solicitors for the Applicant: | Mr A King, King & Collins |
| Counsel for the Respondent: | Ms N Obrart |
| Solicitors for the Respondent: | Mr C Phillipson, ACT Government Solicitor |
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