Michaelides v Commissioner of State Revenue
[2016] VSC 256
•19 May 2016
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
TAXATION LIST
S CI 2015 02889
| GEOFFREY MICHAELIDES AND MARTIN O’MALLEY | Plaintiffs |
| v | |
| COMMISSIONER OF STATE REVENUE | Defendant |
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JUDGE: | GINNANE J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 8 February 2016 |
DATE OF JUDGMENT: | 19 May 2016 |
CASE MAY BE CITED AS: | Michaelides & Anor v Commissioner of State Revenue |
MEDIUM NEUTRAL CITATION: | [2016] VSC 256 |
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TAXATION – Duties – Transfer of property – Whether transfer made solely because of the retirement of a trustee or the appointment of a new trustee or other change in trustee – Whether change in trust property or estate in land – Effect of transfer creating tenancy in common – Whether transferees took as trustees – Findings of fact by Victorian Civil and Administrative Tribunal – Whether questions of law – Leave to appeal refused – Duties Act 2000 s 33(3).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr A W Sandbach | Katherine Moorhouse Perks |
| For the Defendant | Mr C J Horan QC and Mr C J Tran | Solicitor for the Commissioner of State Revenue |
HIS HONOUR:
Two friends developed two townhouses on land at 19 Norwood Street, Sandringham through a partnership and their family trusts. When the development was completed the land was transferred to them.
The defendant, the Commissioner of State Revenue (‘the Commissioner’), assessed the duty on the transfer to be $77,000. The friends, the plaintiffs, Geoffrey Michaelides and Martin O’Malley contend that the transfer was exempt from duty under s 33(3) of the Duties Act 2000 (‘the Act’) because it was made solely because of a retirement, appointment of or change in the trustees of a trust and in order to vest the property in the trustees for the time being entitled to hold it.
The Commissioner and then the Victorian Civil and Administrative Tribunal (‘VCAT’ or ‘the Tribunal’)[1] disagreed with the contention that the transfer was exempt. The plaintiffs seek leave to appeal on questions of law from VCAT’s orders.
[1]Michaelides v Commissioner of State Revenue [2015] VCAT 624 (Senior Member R Davis). The proceeding was referred to VCAT at the request of the plaintiffs. The application is made under s 148 of the Victorian Civil and Administrative Tribunal Act 1998.
The facts
The decision of the Senior Member of VCAT relied on the following facts. On 29 January 2009, Mr O’Malley and his wife Felicity O’Malley purchased the property for $1.25 million. Mr O’Malley decided that he would use the property for a development carried out jointly with his friend Mr Michaelides. On the advice of his accountant he decided to undertake the development through a company acting as the trustee for a partnership. On 1 May 2009, Saint Swan Pty Ltd (‘Saint Swan’) was incorporated to act as trustee for that purpose. Mr Michaelides and Mr O’Malley were the sole directors and shareholders of Saint Swan. The trust was not in writing. Saint Swan was to be nominated as the subsequent purchaser, to receive funds from Mr Michaelides and Mr O’Malley and to receive borrowings from the National Australia Bank (‘NAB’) guaranteed by them. Saint Swan was to develop the property into two townhouses through a joint venture or partnership between the plaintiffs as trustees or agents of their respective family trusts. No written partnership deed was drawn up. The property was transferred to Saint Swan on 27 May 2009.
There were therefore three trusts involved in the property development: the Saint Swan partnership trust and two family trusts; the Michaelides Investment Trust, which was Mr Michaelides’ family trust and was established on 21 April 2009; and the Naxabron Family Trust, which was the O’Malley family trust and was established on 10 May 2009. Mr and Mrs O’Malley were the trustees of the Naxabron Family Trust and Laynan Pty Ltd (‘Laynan’) was the trustee of the Michaelides Investment Trust. Mr Michaelides was the sole director and shareholder of Laynan.
The trusts were discretionary trusts and included immediate family members as named beneficiaries as well as a wider class of eligible beneficiaries.
Mr O’Malley, on behalf of Saint Swan, executed a Notice of Trust Acquisition of Interest in Land pursuant to s 46K of the Land Tax Act 2005, stating that Saint Swan acquired the property as trustee for the Saint Swan partnership.
The transfer
The transfer (or the disputed transfer) that was assessed for duty was dated 24 January 2012 and was registered on 14 December 2012. It included the following terms:
Land:
CERTIFICATE OF TITLE VOLUME 2875 FOLIO 871Estate and Interest:
ALL ITS ESTATE IN FEE SIMPLEConsideration:
UPON THE DISSOLUTION OF PARTNERSHIP WITHIN THE REGISTERED PROPRIETOR CORPORATE ENTITY, SAINT SWAN PTY LTD A.C.N. 136 888 161 TO THE INDIVIDUAL NATURAL PERSON PARTNERS GEOFFREY MICHAELIDES & MARTIN O’MALLEY WHERE NO MONEY IS PAID FOR THE TRANSFERTransferor:
SAINT SWAN PTY LTD A.C.N. 136 888 161Transferee:
GEOFFREY MICHAELIDES of 72 Edward Street, Sandringham 3191 and MARTIN O’MALLEY of 19 Norwood Street, Sandringham 3191 as tenants in common in equal shares
On 27 February 2012, the plaintiffs’ solicitor lodged the transfer and the appraisal of the property’s current market value of $1.4m with the State Revenue Office for assessment of duty. The solicitor applied on the plaintiffs’ behalf for the application of the apparent purchaser exemption contained in s 34 of the Act arguing that Saint Swan was the nominee registered proprietor for the real purchasers, Mr Michaelides and Mr O’Malley.
Mr O’Malley’s statutory declaration of 23 January 2012 in support of the s 34 exemption application stated:
From July 2009 to November 2010 financial year, Geoff and I made director/shareholder loans to Saint Swan Pty Ltd for it to pay the National Australia Bank mortgage and the Builder costs.
By November 2010 the Borrowings of Saint Swan Pty Ltd from the National Australia Bank had been substantially reduced and, preparatory to completion of the development and cessation of our partnership we (Geoff and I) renegotiated the Saint Swan Loan from the National Australia Bank so that the money then still owed by Saint Swan Pty Ltd to the National Australia Bank was transferred to Geoff and I individually whilst Saint Swan Pty Ltd became merely the security provider for the new loans but under the old mortgage to the National Australia Bank.
Upon the development of the land being completed in late 2011 and a plan of subdivision being ready for lodgement, the directors of Saint Swan Pty Ltd (me and Geoff Michaelides) resolved to end the registration of the company Saint Swan Pty Ltd[[2]] and vest the land owned by Saint Swan Pty Ltd as our nominee into the name of the real purchasers — me and Geoff Michaelides — in equal shares.
We humbly request an exemption from stamp duty on the transfer from Saint Swan Pty Ltd to us on the basis we paid for the land owned by Saint Swan Pty Ltd, we were the real purchasers and Saint Swan Pty Ltd was the apparent purchaser.
[2]In fact, Saint Swan was not deregistered.
The application for an exemption under s 34 was rejected as the plaintiffs could not prove who provided the purchase money. However, the plaintiffs sought to explain the wording of the transfer, in particular its description of the consideration, as being caused by their initial reliance on the s 34 exemption.
The State Revenue Office issued an assessment for duty on the transfer of $77,000. The plaintiffs objected to the assessment contending that the s 34 exemption applied and if it did not, the s 36 exemption applied.
The plaintiffs’ solicitor wrote to the Commissioner on 22 May 2012 stating:
· The mortgage borrowings were repaid in equal shares by Michaelides and O’Malley – not the nominee company – although the contributions the friends made were channelled through Saint Swan Pty Ltd.
· By November 2011 the friends sought to remove what was in fact an unnecessary corporate structure entity (Saint Swan) and simply record the basic arrangement — each of them contributed to the purchase price of the land, each of them now sought to have that reflected in the title.
· The transfer was drawn up.
· An application was submitted for the Transfer to be exempt from duty not on the basis of section 34(1)(a) (a deed of trust) but upon a resulting trust (section 34(1)(b) (ie: payment of purchase money for the land). Accordingly a Deed of Trust per se does not exist. Evidence of the payment was submitted in the Statutory Declaration and the source spreadsheet from the accountant can be supplied.
(emphasis in original)
The Commissioner disallowed the plaintiffs’ objections to the assessment.
The subdivision
The development was completed in late 2011. The plan of subdivision was dated 21 September 2011 and signed by the Council’s delegate on 22 November 2011. On 3 September 2012, Mr O’Malley and Mr Michaelides, as transferors, signed a transfer of Lot 1 to Mr Michaelides and of Lot 2 to Mr O’Malley as transferees. The plan of subdivision was registered on 21 December 2012. On the same day, the transfers of Lot 1 from the plaintiffs to Mr Michaelides and of Lot 2 to Mr O’Malley were registered. The stated consideration for both transfers was ‘upon a dissolution of the partnership between the registered proprietors Geoffrey Michaelides and Martin O’Malley’. Each lot was registered subject to a mortgage to the NAB.
Mr and Mrs O’Malley had paid duty when they purchased the property. No additional duty was paid on the transfers of Lots 1 and 2 following the subdivision because those transfers came within the exemption contained in s 27 for the partition of land.
The provisions of the Duties Act 2000
Under the Duties Act, duty is charged on the ‘dutiable value’ of the property the subject of the dutiable transaction. A transfer of dutiable property is a dutiable transaction.[3] However, there are exemptions. The exemption relied on in this case is that set out in s 33 of the Act, which is in Part 5 of Chapter 2 of the Act, which contains provisions about ‘Exemptions and Concessional Rates of Duty’. Division 1 of that Part is headed ‘Trusts’.
[3]Duties Act 2000 s 7(1)(a).
Section 33 (1) and (3) state:
(1) In this section-
new trustee means a trustee appointed in substitution for a trustee or trustees or a trustee appointed in addition to a trustee or trustees;
…
(3) No duty is chargeable under this Chapter in respect of a transfer of dutiable property to a person other than a special trustee if the Commissioner is satisfied that the transfer is made solely –
(a) because of the retirement of a trustee or the appointment of a new trustee, or other change in trustees; and
(b) in order to vest the property in the trustees for the time being entitled to hold it.
Section 33(3) contains two conditions in order for the exemption to apply: the condition in paragraph (a) and that in paragraph (b).[4]
[4]There was no dispute that if the Commissioner had made an error of law alleged by the plaintiffs, at least in respect of grounds (a) and (e), that his decision that he was not satisfied of the conditions contained in s 33(3) should be set aside.
The plaintiffs during their dealings with the Commissioner, prior to the hearing at VCAT, also relied on s 34 and s 36, which in relevant parts state:
34 Property vested in an apparent purchaser
(1) No duty is chargeable under this Chapter in respect of—
(a)a declaration of trust made by an apparent purchaser in respect of identified dutiable property or marketable securities referred to in section 10(2)—
(i)vested in the apparent purchaser upon trust for the real purchaser who provided the money for the purchase of the dutiable property or marketable securities; or
(ii)to be vested in the apparent purchaser upon trust for the real purchaser, if the Commissioner is satisfied that the money for the purchase of the dutiable property or marketable securities has been or will be provided by the real purchaser; or
(b)a transfer of dutiable property or marketable securities referred to in section 10(2) from an apparent purchaser to the real purchaser in a case where dutiable property or marketable securities are vested in an apparent purchaser upon trust for the real purchaser who provided the money for the purchase of the dutiable property or marketable securities.
…
36 Property passing to beneficiaries of fixed trusts
(1)No duty is chargeable under this Chapter in respect of a transfer of dutiable property that is subject to a fixed trust (the principal trust) to a beneficiary of the trust if—
(a)the duty (if any) charged by this Act in respect of the dutiable transaction that resulted in the dutiable property becoming subject to the principal trust has been paid or the Commissioner is satisfied that the duty will be paid; and
(b)the beneficiary was a beneficiary at the relevant time; and
(c) the transfer is—
(i) to the beneficiary absolutely; or
(ii)to the beneficiary as trustee of another trust all the beneficiaries of which are—
(A)natural persons who were beneficiaries of that other trust at the relevant time; or
(B)a corporation as trustee of a further trust all the beneficiaries of which are natural persons who were beneficiaries of that further trust at the relevant time; and
(d)the dutiable value of the property transferred does not exceed the value of the beneficiary's interest in the principal trust; and
(e)the Commissioner is satisfied that the transfer is not part of a sale or other arrangement under which there exists any consideration for the transfer.
…
The VCAT decision
The Tribunal confirmed the Commissioner’s decision. It decided that the estate in the land changed after the disputed transfer. The Senior Member stated:
[p]rior to the transfer, the property was held as one whole estate for the benefit of the partnership trust. Subsequent to the transfer, whether or not the [plaintiffs] were acting as trustees, the land was clearly held by them as tenants in common ie the estate changed. That is, prior to the transfer, Saint Swan held the property on trust as a whole undivided interest. Subsequent to the transfer, each of the plaintiffs held a half interest in the property as tenants in common.[5]
[5]Michaelides v Commissioner of State Revenue [2015] VCAT 624, 6 [27].
The term ‘partnership trust’, contained in the quote, appears to have been a reference to the partnership involved in a joint venture to develop the property into two lots.
The Tribunal held that the effect of the transfer of 24 January 2012 was that the estate in land changed from being the whole of the undivided property to two estates held as tenants in common in equal shares. In the Senior Member’s opinion s 33(3) did not apply, because as a result of the change:
It thus necessarily follows, that as the trust altered as a result of the transfer, as a consequence the exemption referred to in s 33 does not apply. Any trust that may have been held after that time was very different from the trust to which the partnership trust was the beneficiary. That is the partnership trust was at best the beneficial owner of the whole property. After the transfer the property was two divided shares as tenants in common.[6]
[6]Ibid 7 [32] (emphasis in original).
The Tribunal considered two further issues that arose, although it considered that it was not necessary to do so because of its conclusion on the first issue, dealing with the alteration in the trust.
The second issue was whether the beneficiary of the trust changed after the transfer. The financial records of the partnership trust did not treat the property as an asset in the 2011 and 2012 financial years. The financial records did not support the view that the plaintiffs intended the trust to continue. The partnership was brought to an end and the partnership property divided between them.
The third issue was whether there was a change of trustee or merely a splitting of the property at the time of the transfer. The Tribunal found that there was no reliable evidence that as a result of the transfer the plaintiffs were appointed as trustees instead of Saint Swan. The transfer stated that it was made as a consequence of the dissolution of the partnership trust in order to transfer the properties to the individual partners, that is, the plaintiffs. The partners decided to split the property and distribute the separate interests to each partner. The Senior Member said that:
the transfer did not constitute a change of trustee but rather, a transfer to two individuals who were holding the property on their own behalf as tenants in common.[7]
[7]Ibid 9 [45].
Questions of law
The plaintiffs seek to rely on the following questions of law arising from the Tribunal’s decision:
(a)Whether the disputed transfer changed the estate in the land in a manner which precluded the plaintiffs holding the land as transferees on the same trusts as those on which Saint Swan Pty Ltd held the land.
(b)Whether the disputed transfer created a situation which is materially similar to the facts in Commissioner of State Revenue v Victoria Gardens.[8]
(c)Whether the transfer of primary liability for the loan monies owed to the National Australia Bank from Saint Swan Pty Ltd to the plaintiffs individually was inconsistent with the maintenance of the trusts upon which the property was held after the disputed transfer.
(d)Whether the state of accounts of Saint Swan Pty Ltd is determinative of the question of whether the trusts were maintained upon the disputed transfer.
(e)Whether the disputed transfer is capable of having the legal effect of terminating the trust in favour of parties other than the transferee plaintiffs.
[8][2000] VSCA 233.
The proposed grounds of appeal are:
1.The learned Senior Member erred in holding that the plaintiffs did not hold the property on the same trusts as Saint Swan Pty Ltd because the estate in the property changed after the disputed transfer from the whole of an undivided property to two estates as tenants in common;
2.The learned Senior Member erred in holding that the disputed transfer created a similar situation to the facts of Victoria Gardens wherein three owners of six separate lots transferred their land to the taxpayer to be developed and sold as joint venture;
3.The learned Senior Member erred in holding that the trusts upon which Saint Swan Pty Ltd [sic] were necessarily altered as a result of the disputed transfer;
4.The learned Senior Member erred in holding that the that the transfer of primary liability for loan monies owed to National Australia Bank from Saint Swan Pty Ltd to the plaintiffs individually was inconsistent with maintenance of the trusts on which the property was held after the disputed transfer;
5.The learned Senior Member erred in holding that the documentary evidence all points against the contention that the plaintiffs were appointed trustees instead of Saint Swan Pty Ltd;
6.The learned Senior Member erred in holding in holding that the effect of the disputed transfer was that two separate interests were distributed to each partner.
Evidence before VCAT
I have set out above excerpts from Mr O’Malley’s statutory declaration of 23 January 2012 explaining why the transfer was made.
Mr O’Malley gave evidence in his witness statement that he and Mr Michaelides resolved to vest the land into their names in equal shares, on the basis that they would hold the land on behalf of their family trusts. They continued to hold the land as bare trustees for their family trusts until the subdivision was registered. Lot 2 was then transferred to him as trustee for his family trust – the Naxabron Family Trust. Although, he signed the transfer, he did not understand why Lot 2 was transferred only to him and not also to Mrs O’Malley. Nevertheless, he considered that the property was transferred to him as trustee of the Naxabron Family Trust.
The Saint Swan partnership was a partnership or a joint venture either between the two family trusts or between Mr Michaelides and Mr O’Malley as agents for their family trusts. The Tribunal appears to have adopted the former analysis. The 2011 and 2012 partnership accounts did not record the property a partnership asset nor record any liability to the NAB. The Saint Swan partnership profit and loss statement for 2011 included income of $1.4 million from the sale of the property. The accounts indicated that the Saint Swan partnership was dormant in the 2012 financial year, but that in the 2013 financial year it undertook new investment activities.
The accounts of the Naxabron Family Trust for the year ending 30 June 2012 did not record any interest in the property or liability to the NAB. Mr O’Malley agreed that this suggested that at the end of the 2012 financial year that the Naxabron Family Trust did not hold any interest in the property. However, he maintained that he and his wife did hold such an interest.
Mr Michaelides disputed that the effect of the transfer was to transfer the property from Saint Swan to him and to Mr O’Malley. He said that the transfer was not to him but to Laynan, of which he is director and sole shareholder. But in fact, not only was the property transferred to him, but when the property was subdivided, Lot 1 was transferred to him and not to Laynan.
The Michaelides Investment Trust accounts for the year ended 30 June 2012 show an interest in a unit, presumably the unit or town house on Lot 1, but recorded no liability to the NAB.
Mr O’Malley’s accountant, Mr Brendan Harper, gave evidence about the legal and accounting structures adopted for the property development. He said that the Naxabron Family Trust retained its interest in the property until the land was subdivided. He said that the Naxabron Family Trust accounts and the partnership accounts were prepared on the basis that the property was purchased by the partnership. As previously stated, in 2011 the partnership accounts no longer included the property as an asset, but included the income from sales, although no sales had yet occurred. In the 2012 financial year, the transfer of land was effected and Mr Harper said:
the partnership of the family trusts no longer had an asset on their books, and their sole purpose was property development. Therefore the partnership for all intents and purposes wasn’t trading beyond that … liabilities.[9]
[9]Transcript of Proceedings, Michaelides v Commissioner of State Revenue (VCAT, Senior Member R Davis, 30 April 2015) 49–50.
Mr Harper said that, in essence, the Saint Swan partnership in respect of the property was dissolved and the partnership lay dormant. Mr Harper agreed that at ‘a technical level’ the accounts did not record Naxabron Family Trust’s interest in the property, but he said that the partnership accounts had been prepared to reflect the partners’ wishes and intentions about where the property was going. Mr Harper considered that only in December 2012, following the subdivision, when the transfers of the two lots were registered did the ownership of the property change.
The plaintiffs’ submissions
The plaintiffs submitted that the Tribunal erred by failing to consider whether the beneficial interests in the property had remained the same before and after the transfer. The transfer did not affect the equitable interest of the beneficiaries of the discretionary trusts as they retained their equitable interest of an undivided fee simple in the land. The beneficiaries had not consented to changes in the trust. The transfer of land only dealt with the legal estate. The new trustees, Mr Michaelides and Mr O’Malley, held the whole of the land on the same trusts. No new trust was created.
The plaintiffs’ evidence established that under the transfer they took the property as trustees for their respective family trusts that, in turn, comprised the partnership. The Tribunal had failed to consider Mr O’Malley, Mr Michaelides and Mr Harper’s evidence that the partnership trust had continued. It did not make a finding whether the equitable estate in the property had changed. The trustees of the two family trusts were the beneficial owners of the property before the disputed transfer and remained the beneficial owners of the whole of the same property after the transfer.
The disputed transfer was not for value and the transferees, Mr O’Malley and Mr Michaelides, as new trustees were not bona fide purchasers for value without notice. They held the property on a constructive trust, or on a fixed trust, upon the same terms as Saint Swan had held it for the trustees of the family trusts. The trustees remained the trustees of the partnership trust. The beneficiaries did not consent to a variation in the trust or in their interests. Mrs O’Malley and Laynan, who were trustees of the respective family trusts, did not sign the disputed transfer.
The plaintiffs relied on Lord Browne-Wilkinson’s statement as to the continuation of the proprietary interest held under a trust that:
Once a trust is established, as from the date of its establishment the beneficiary has, in equity, a proprietary interest in the trust property, which proprietary interest will be enforceable in equity against any subsequent holder of the property (whether the original property or substituted property into which it can be traced) other than a purchaser for value of the legal interest without notice.[10]
[10]Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 705.
The financial statements were wrong in suggesting that the land was sold and ceased to be an asset of the partnership in the 2011 financial year.
The only relevant requirement of the exemption contained in s 33(3) was that there be a change in trustee. The reasoning of the Court of Appeal in Commissioner of State Revenue v Konann Pty Ltd (‘Konann’)[11] and of Croft J at first instance in that case, supported the plaintiffs’ contentions. Particular reliance was placed on the passage in Croft J’s judgment that recorded submissions by the applicant that were accepted by his Honour:
[i]n any event equitable, beneficial, ownership will not change as a result of transactions involving trustees, purported trustees or intending trustees absent the agreement of the holder of the equitable, beneficial, interest or the intervention of a bona fide purchaser for value without notice.[12]
[11][2015] VSCA 278.
[12]Konann Pty Ltd v Commissioner of State Revenue [2015] VSC 23 [43] (emphasis in original).
The Tribunal had erred in law in its consideration of the second issue of whether the beneficiaries of the trust had changed after the disputed transfer. The transfer was intended to partition the property when the development ended and not before. The partition of land and the distribution of partnership assets to the individual members of the partnership did not occur until the end of 2012, when the subdivision and partition marked the end of the development. Then, Lot 1 was transferred to Mr Michaelides and Lot 2 to Mr O’Malley.
The third finding by the Tribunal, that the disputed transfers did not transfer the property to the plaintiffs as trustees was also in error because there was evidence that the plaintiffs were appointed as trustees instead of Saint Swan. The disputed transfer differed in that respect from the final transfers of December 2012 which were intended to dissolve the partnership and distribute the separate interests.
The Commissioner’s submissions
The Commissioner submitted that the plaintiffs had not established an error of law which affected the outcome of the Tribunal’s decision. The Commissioner submitted that:
(a)The Tribunal made findings of fact which were fatal to the Plaintiffs’ contention that the Disputed Transfer was exempt under s 33(3) of the Duties Act, and those findings were open on the evidence and do not raise any question of law; and
(b)in any event, the Tribunal was correct in concluding that the interest in the Property held by each of the Plaintiffs after the Disputed Transfer was different from the interest in the Property held by Saint Swan prior to the Disputed Transfer, so that each of the Plaintiffs did not hold the Property on the same trust.
The Commissioner submitted that the Tribunal had made the following findings of fact:
(a)The partnership (and the trust of the Property for the partnership) was brought to an end on the completion of the development, and the Property was split or divided between the partners. The Property was no longer an asset of the partnership, which ceased trading.
(b)There was no evidence that the Plaintiffs had been appointed as trustees for the partnership and in the place of Saint Swan.
(c)The cause and purpose of the Disputed Transfer was to dissolve the partnership and to distribute separate interests in the Property to each of the Plaintiffs. Accordingly, the Disputed Transfer was not made because of a change in trustee of the partnership trust.
The Tribunal’s findings of fact included that the transfer was not made solely ‘because of the retirement of a trustee or the appointment of a new trustee, or other change in trustees’ of the partnership trust, nor ‘in order to vest the property in the trustees for the time being entitled to hold it’.
Each of those findings of fact was open on the evidence before the Tribunal. It could not be said that they were ‘simply not open’ on the evidence.[13] Whether the requirements of s 33(3) had been satisfied was a question of fact and the Tribunal had to apply ‘a rigorous test of a factual nature’.[14]
[13]See S v Crimes Compensation Tribunal [1998] 1 VR 83, 89–91 (Phillips JA).
[14]Perpetual Trustee Co Ltd v Commissioner of State Revenue [2000] VSC 177 [54], dealing with the predecessor of s 33(3).
The Tribunal’s decision rested on three separate bases:
(a) the change in the trust property (‘the alteration of the trust’);
(b)the change in the beneficiaries (arising from the dissolution of the partnership); and
(c) the failure to prove any appointment of the Plaintiffs as trustees of the partnership trust, after the transfer.
In deciding whether the s 33(3) exemption applied, the Tribunal assumed in the plaintiffs’ favour that the transferees received the property under the disputed transfer as trustees.
The second and third bases of the Tribunal’s decision involved findings of fact adverse to the plaintiffs which were open on the evidence and which could not be challenged by the plaintiffs in this proceeding.
The Tribunal correctly concluded that prior to the transfer, the entire interest in the property was held by Saint Swan on trust for the partnership between Mr Michaelides and Mr O’Malley as trustees or agents of their respective family trusts. Importantly, the Tribunal found that Saint Swan held the property as trustee for a partnership between the plaintiffs as agents for their respective family trusts. The Senior Member did not, as the plaintiffs contended, find that the beneficiaries were the trustee of the Michaelides Investment Trust and the trustees of the Naxabron Family Trust. It was wrong to contend that the Saint Swan partnership was a partnership of the two family trusts.
On the assumption that the plaintiffs received the property under the transfer as trustees, the partnership trust was replaced with two trusts of half interests in the property as tenants in common.
The purpose of the transaction was to distribute the property of the joint venture in the partnership to the joint venturers or partners, Mr Michaelides and Mr O’Malley. The property was not held on the same trust after the transfer as before. After the transfer, neither Mr Michaelides nor Mr O’Malley held any interest in the other’s interest in the property. Therefore, the subject matter of the relevant trusts, the trust property before and after the disputed transfer, was different. The Commissioner contended that the beneficiaries had converted their interests into separate property. There was no longer a trust held for a partnership. Each partner gave up their rights and received in return a discrete, separate interest as a tenant in common as to one half share in the property.
A transfer of property on the termination or cessation of a trust does not involve a ‘change in trustees’ within the meaning of s 33(3)(a) of the Act, even if the transferee is the trustee of a different pre-existing trust. The exemption requires that the new trustees are appointed as a trustee of a continuing trust, that is, the same trust.[15] The particular partnership for the development of the property was at an end. The partnership trust did not continue after the disputed transfer.
[15]The Commissioner referred to the Court of Appeal judgment in Commissioner of State Revenue v Lend Lease Funds Management Pty Ltd (2011) 33 VR 204, 210 [24] (Maxwell ACJ), 236 [129] (Tate JA).
There was no need to apply a constructive trust to the interests that Mr Michaelides and Mr O’Malley held following the disputed transfer. The decision in Konann[16] was an example of the enforcement of a pre-existing trust against a third party who was not a purchaser for value without notice. The disputed transfer was executed with the consent of all necessary persons.
[16][2015] VSCA 278.
There was no evidence that the Naxabron Family Trust still claimed an interest in the property after the disputed transfer.
The argument that there was no consideration supporting the transfer should not be accepted. Consideration was provided by the dissolution of the partnership.
Analysis
I consider that only the first and fifth proposed questions of law raise questions of law. The second proposed question seeks to make factual comparisons with the facts in another s 33(3) exemption case. The third proposed question raises the consequences of the liability for loans in connection with the developments and the fourth question deals with the state of Saint Swan’s accounts. The second, third and fourth proposed questions therefore raise evidentiary questions or evidentiary questions mixed with legal issues which do not raise questions of law. However, even if they do raise questions of law, my conclusion concerning the outcome of this proceeding would not alter.
The terms of the s 33(3) exemption raise two significant questions: what was the purpose of the disputed transfer and what was the effect of the disputed transfer.
I consider that the Tribunal did not make an error of law in deciding that the plaintiffs had not established that the s 33(3) exemption applied. In my opinion, the correct decision on the evidence before the Tribunal was that the transfer was not made solely because of the retirement of the trustee or the appointment of a new trustee, or other changes in trustees and in order to vest the property in the trustees for the time being entitled to hold it. The plaintiffs bore the onus of proof of establishing that the transfer attracted the s 33(3) exemption.[17]
[17]Taxation Administration Act 1997 s 110.
The first reason for that conclusion is that the findings of fact made by the Tribunal meant that the plaintiffs could not rely on the exemption in s 33(3). The Tribunal found that at the end of the development the partnership was brought to an end and the property divided between the two plaintiffs. That finding was certainly open on the evidence.
The transfer appears to have been executed as part of a process that culminated in the subdivision of the property into two lots, one of which was transferred to Mr Michaelides and the other to Mr O’Malley. On that basis alone, the transfer was not made solely because of a circumstance described in s 33(3). The terms of the transfer, the content of Mr O’Malley’s statutory declaration and the evidence at the VCAT hearing all suggest that the disputed transfer was made because the property development of the town houses was nearing completion. The plaintiffs did not present any evidence to the Tribunal to displace the explanations for the disputed transfer contained in Mr O’Malley’s statutory declaration and their solicitor’s letter. The duty exemption that the plaintiffs claimed prior to the Tribunal hearing was that contained in s 34 rather than in s 33(3).
The evidence suggested that the transfer occurred as a step in the realisation of the interests that Mr Michaelides and Mr O’Malley held in the property. The evidence before the Tribunal did not support any different conclusion.
The second reason why the exemption contained in s 33(3) did not apply is the effect of the conversion of the legal estate in the property into tenancies in common. Before the disputed transfer, Saint Swan was the sole registered proprietor of the property. It held the property as trustee, either for the partners or joint venturers as agents or trustees of their family trusts or for the trustees of those family trusts. The Tribunal adopted the former analysis and I do not consider that it erred in doing so.
However, after the disputed transfer Mr Michaelides and Mr O’Malley were the registered proprietors of the property as tenants in common in equal shares. Their legal estate as tenants in common differed from that held by Saint Swan as sole registered proprietor. The nature of any trust on which they held the property therefore altered. They could exercise the power of tenant in common and sell their share of the property. Even, if the plaintiffs’ contention that the disputed transfer did not alter the equitable interests of the beneficiaries is accepted, the interest held by Saint Swan and transferred to Mr Michaelides and Mr O’Malley did alter and accordingly, the disputed transfer did not fall within s 33(3). They received the property as tenants in common, whether they were acting as trustees or not.
Therefore, the Tribunal did not err in law in deciding that the disputed transfer created a new trust. The original trust was not regulated by a written trust deed and therefore there was no express provision for alteration of, or addition to, the trust property.
The authorities establish that s 33(3) only applies to the appointment of a new trustee to carry out that pre‑existing trust and not to the appointment of a trustee to carry out a newly created trust.[18] Where a new trust is created, neither of the preconditions of s 33(3) is satisfied. Reference to five cases establishes this proposition.
[18]See Commissioner of State Revenue v Victorian Gardens Developments Pty Ltd [2000] VSCA 233.
The authorities
In Perpetual Trustee Co Ltd v Commissioner of State Revenue, which concerned the construction of the predecessor section in the Stamps Act1958, which required a transfer ‘solely in consequence of ‘ rather than ‘solely… because of’, Hansen J stated:
The expression ‘solely in consequence of’ requires that for the exemption to apply it must be established, as a matter of fact, that the transfer of real property of the trust was executed only in consequence of a change of trustee and in order the vest the real property of the trust in the name of that new trustee. The consequence is that the legislature has imposed a rigorous test of a factual nature which a taxpayer must surmount for the exemption to apply.[19]
[19]Perpetual Trustee Co Ltd v Commissioner of State Revenue [2000] VSC 177 [54].
In Commissioner of State Revenue vVictoria Gardens Developments Pty Ltd,[20] several joint venturers had each transferred land to a trustee to hold on trust subject to the terms of the joint venture agreement and trust deed. The Court of Appeal held that the exemptions contained in the predecessor provision to s33(3) did not apply to the appointment of a trustee to perform a newly created trust, and that the transfers had not been made solely in consequence of the appointment of the trustee, or solely in order to vest the property in the trustee for the time being entitled to hold it. Batt JA said that, following the transfer, each parcel of land was held not on trust for its joint venture alone, but rather was held by the transferor on trust for all joint venturers collectively.[21]
[20][2000] VSCA 233.
[21]Ibid [39] (Ormiston JA and Chernov JA agreeing).
In Konann[22] Hansen JA, said of s 33(3):
It is important to bear in mind the dominant importance of the language in which the exemption is granted, read in the context of the Duties Act and considered in the light of the evident policy to save from duty transfers of land made ‘solely because of’ a change in trustee. Without overlooking the full terms of s33(3), that is the nub of it, or the broad policy involved.[23]
[22][2015] VSCA 278.
[23]Ibid [60].
In White Rock Properties Pty Ltd v Commissioner of State Revenue,[24] the situation was somewhat the reverse of the present case. The five testamentary trustees, each held a one‑fifth interest in land as tenants in common prior to the transfer, and after the transfer, the appellant held the entire fee simple estate in the land as trustee agent for a partnership between the testamentary trustees. The Court of Appeal decided that the appellant held the land on a new and different trust so that the exemption under s 33(3) was not available. The Court of Appeal noted that prior to the partnership agreement and the transfers, one set of testamentary trustees acting alone could not sell the entirety of any of the three blocks comprising the land or the land as a whole. The purpose of the partnership agreement and the partnership trust was to carry on the partnership business of developing and selling the land.
[24][2015] VSCA 77 [56] (Santamaria, Kyrou and Ferguson JJA).
The decision in Commissioner of State Revenue v Lend Lease Funds Management Ltd[25] is to the same effect. In that case, Maxwell ACJ, who dissented on the question of whether the trust had ended, but not as to relevant legal principles, stated:
[25](2013) 33 VR 204.
[a]s noted earlier, the two limbs of s 33(3) pose quite distinct questions. The first limb question concerns the cause of the transfer: “Was the transfer made solely because of the change in trustees?” The second limb question concerns the purpose of the transfer: “Was the transfer made solely for the purpose of vesting the property in the trustees for the time being?”[26]
[26]Ibid 212 [34] (emphasis in original).
Tate JA explained that:
the exemption under s 33(3) extends only to the retirement of a trustee, or the appointment of a new trustee, or other change in trustees (for example, the removal of a trustee), in relation to a pre-existing and continuing trust. It does “not extend to the appointment of a trustee to perform a newly created trust”. So too, it does not extend to a change in trustees consequent upon the termination of a trust and a transfer of property to a trustee of a different and separate trust. The clear implication from the Victoria Gardens line of authority is that the exemption does not so extend even if the different and separate trust pre-existed the change in trustees and continued after that change, and was in this sense a “continuing trust”.[27]
[27]Ibid 236 [129] (citations omitted).
Applying this line of authority, her Honour continued:
[f]urthermore, the transfer was made solely because of a change in the identity of the entity performing trustee functions. The legal steps giving effect to the commercial objective, the takeover, had all been completed before the direction was given to transfer the Maribyrnong property. This stands in contrast to the circumstances in Victoria Gardens and Perpetual Trustees where the transfer was done as part of the carrying out of the commercial transaction.[28]
[28]Ibid 240 [152] (emphasis in original).
Pagone AJA stated:
[i]t is a factual inquiry that is called for by s 33(3) and, in particular, a factual inquiry about whether the transfer was executed only in consequence of a change of trustee and in order to vest the real property of the trust in the name of the new trustee.
…
The section calls for an examination of the causal relationship between the transfer and the change in trustees. It must be the change that explains the transfer.[29]
[29]Ibid 247 [171], 248 [173] (citations omitted).
In my opinion, the Tribunal did not make an error of law by deciding that the transfer of the property to two tenants in common, changed the estate and the trust property that Saint Swan had previously held. The Tribunal’s conclusion that a new trust had been created was correct.
The significant difference between the estate of a joint tenant and a tenant in common supports the conclusion that a new trust was created. A tenant in common has a distinct, although undivided, share in the property. Brennan J described a tenant in common’s individual interest in the property in the following way:
The share or interest which a tenant in common has in land is an ‘undivided’ share, that is to say, ‘a distinct share in property which has not yet been divided among the co-tenants’. A division of the property is repugnant to the nature of a tenancy in common, for it is an essential characteristic of a tenancy in common that each of the tenants has the right to occupy the whole of the property in common with the others. Like joint tenants, tenants in common have a unity of possession; unlike joint tenants, they need not have a unity of interest, nor a unity of title, nor need there be a unity in the time when the interests of the co-owners vest. Each tenant in common has a separate and individual title to the property, limited according to the estate or term granted to or acquired by the tenant. Thus one tenant in common may be seised of an estate in fee simple, another seised of an estate for life, while a third may be a tenant for a term of years, each of their interests being separately acquired at different times. There is no right of survivorship among tenants in common. And thus, at common law, a tenant in common who wished to sell his interest in land was constrained to sell subject to the right of any co-tenant to remain in possession of the whole land.[30]
[30]Nullagine Investments Pty Ltd v Western Australian Club Inc (1993) 177 CLR 635, 643–4 (citations omitted), see also, 656 (Deane, Dawson and Gaudron JJ).
Professor Butt described the right of a tenant in common to deal with his or her share of the property in the following manner:
Where two or more persons hold land as tenants in common, each has a proportionate interest in the land. Their interests are not identifiable in any physical sense. One cannot say, “This is my physical portion, and that is yours”. For this reason, the share of a tenant in common is said to be “undivided” — meaning that, though a distinct share, it has not been physically divided from the other shares. Rather, each has an “aliquot” portion of all those rights that together make up ownership of the whole. Each is “seised” of his or her own share only, not of the whole. In this way, the seisin of the property is distributed amongst them all.
A tenant in common may generally deal with his or her undivided share as he or she wishes — for example, by alienating it in fee simple, granting it for life with remainders over, or devising it. On death intestate, a tenant in common’s share descends to the persons entitled to his or her property under the rules governing intestate succession.[31]
[31]Peter Butt, Land Law, (Law Book Co, 6th ed, 2010) 223–4.
The four essential indicia of the existence of a trust at general law are: the trustee, the trust property, the beneficiary and an equitable obligation annexed to the trust property.[32] Most trust deeds will permit changes in the trust property without disturbing the continuum of the trust. But, in this case there was no trust deed. In addition, the evidence provided by the plaintiffs to the Commissioner suggested that the disputed transfer was executed because the development had ended. The financial accounts of the partnership trusts and of the two discretionary trusts for the 2011 and 2012 financial years further support that conclusion.
[32]J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia, (Butterworths, 7th ed, 2006) [104]–[110], Federal Commissioner of Taxation v Commercial Nominees Australia Limited (2001) 179 ALR 655 and Federal Commissioner of Taxation v Clark (2011) 190 FCR 206, 233 [88] (Edmunds and Gordon JJ).
I do not consider that the transfer of primary liability to the plaintiffs for the repayment of the loan monies advanced to Saint Swan, which matter the plaintiffs seek to raise in proposed question of law (c), was material to the Tribunal’s decision or is relevant to this proceeding.
Nor do I consider the plaintiffs’ contention that there was no evidence that the beneficiaries consented to any alteration of the trust is correct. The beneficiaries of the Saint Swan partnership trust were either Mr Michaelides or Mr O’Malley, the partners in the Saint Swan partnership or joint venture as trustees or agents; or Mr Michaelides, through Layman as trustee of his family trust and Mr O’Malley and Mrs O’Malley as trustees of their family trust. Mr Michaelides gave evidence, but Mrs O’Malley did not. But there was no evidence that Mr Michaelides and Mr O’Malley signed the transfer, in their capacities as directors of Saint Swan as transferors and their capacity as transferees, without the authority of the beneficiaries. Neither Mr Michaelides nor Mr O’Malley suggested that was the case. Mr O’Malley said in his witness statement after noting that he and his wife were trustees of the Naxabron Family Trust that:
all dealings of that trust relating to the acquisition and development of the Land as a member of the Saint Swan Partnership were conducted by me on its behalf.
The Tribunal decided correctly that the plaintiffs had not proved that the s 33(3) exemption applied in circumstances where at least the interest of the trustee was converted into that of two tenants in common. Assuming that Mr Michaelides and Mr O’Malley did take as trustees, the transfer still changed the legal interest that Saint Swan had held to the interest that Mr Michaelides and Mr O’Malley held as tenants in common and thereby created a new trust.
Even if the interests of the beneficiaries of the Saint Swan trust had been as tenants in common in equity,[33] an issue which was not the subject of any detailed argument, I consider that the change in the interest held by Mr Michaelides and Mr O’Malley ended that pre-existing trust.
[33]Land can be held on a tenancy in common in equity, even though at law it is held on a joint tenancy. Equity has a dislike for joint tenancies: see Delehunt v Carmody (1986) 161 CLR 464, 473 (Gibbs CJ) and Peter Butt, Land Law, (Lawbook Co, 6th ed, 2010) 228–9.
The purpose of s 33(3) is to save from duty transfers of land made ‘solely because of’ a change in trustee and in order to vest the property in the trustees for the time being entitled to hold it. For the two reasons I have discussed, the evidence did not support a conclusion that that the disputed transfer was made ‘solely because of’ those reasons.
The Tribunal considered the second and third issues, although it said that that it was not necessary to do so in view of its findings on the first issue. As a consequence, if the Tribunal made any error of law in considering the second and third issues, it would not result in the plaintiffs succeeding in this proceeding unless that error affected the Tribunal’s decision on the first issue. I do not consider that the Tribunal’s determination of the second or third issues made any difference to the outcome of the proceeding before VCAT,[34] because its decision was based on its determination of the first issue concerning the alteration in the trust and the purpose of the transfer.
[34]Forster v Legal Services Board (2013) 40 VR 587, 615 [137] Kyrou AJA.
The second issue was whether the beneficiaries of the trust changed as a result of the transfer. Mr Michaelides and Mr O’Malley gave evidence that they continued to hold the property on behalf of their family trusts. However, the Tribunal concluded that the trust did not continue because ‘the partnership was brought to an end and divided between the two parties’ and that that ‘contradict[ed] the assertion that there was a new trustee of the trust property’.[35]
[35]Michaelides v Commissioner of State Revenue [2015] VCAT 624, 8 [38].
It is appropriate as Hansen JA said in Konann[36] to consider the whole of the evidence and to make a broad enquiry. Of particular relevance are the terms of the disputed transfer, Mr O’Malley’s statutory declaration, and the fact that the family trust financial statements for the 2011 and 2012 financial years did not record any interest in the property. I do not consider that the Tribunal made any error of law by deciding that the plaintiffs had not established that the partnership trust continued after the disputed transfer and that the property had been distributed to the two individuals. The Tribunal made mixed findings of fact and law and the plaintiffs did not identify any error in its approach.
[36][2015] VSCA 278 [72]–[73].
The third issue that the Tribunal considered was whether as a result of the transfer there was a change of trustee or merely a splitting of the property at the time of the transfer. Thus far in this analysis, I have assumed that the plaintiffs received their interests under the disputed transfer as trustees for their respective trusts.
The evidence failed to establish that the disputed transfer transferred the property to Mr Michaelides and Mr O’Malley as trustees. Mr Michaelides and Mr O’Malley did give evidence that they held their interest on behalf of their family trusts. But the tenor of their evidence suggested that they had little familiarity with the effect of the documents that they had signed. The accountant’s evidence was inconclusive, particularly as the plaintiffs asserted that the financial statements were in some respects in error. The Tribunal preferred the statements made at the time the transfer was signed and when the application was made for exemption from duty under s 34. Despite the plaintiffs’ reliance on the continuation of proprietary interests, I do not consider that the Tribunal’s conclusions on this third issue were not open to it. Much depended on the Tribunal’s assessment of the evidence of the three witnesses.
In any event, it follows from my conclusions in considering the first issue as to the alteration of the trust and the purpose of the transfer, that regardless of the capacity in which Mr Michaelides and Mr O’Malley held their interests as tenants in common in the property, the plaintiffs did not establish that the exemption in s 33(3) applied to the disputed transfer.
Conclusion
The plaintiffs have not established that there is any real or significant argument that the Tribunal erred.[37]
[37]Secretary to the Department of Premier and Cabinet v Hulls [1999] 3 VR 331, 335 (Phillips JA).
Therefore, I refuse leave to appeal.
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