Pharmos Nominees Pty Ltd v Commissioner of State Taxation - [2012] SASCFC 89

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court: Civil)
PHARMOS NOMINEES PTY LTD v COMMISSIONER OF STATE TAXATION
[2012] SASCFC 89
Judgment of The Full Court
(The Honourable Justice Anderson, The Honourable Justice Blue and The Honourable Justice Stanley)
27 July 2012
TAXES AND DUTIES - STAMP DUTIES - WHAT TRANSACTIONS OR INSTRUMENTS ARE LIABLE - CONVEYANCE OR TRANSFER ON SALE - SOUTH AUSTRALIA
TAXES AND DUTIES - STAMP DUTIES - ASSESSMENT AND AMOUNT PAYABLE INCLUDING FINES - GENERAL MATTERS - SOUTH AUSTRALIA
The trustee of a discretionary trust owned a commercial property on Greenhill Road, Wayville. In December 2005, the owners and controllers of the trustee negotiated with the taxpayer for the taxpayer to assume the effective ownership and control of the trust (and thereby the commercial property) in return for payment of $6.975 million. In February 2006, settlement of the transactions to effect the change of ownership and control of the trust took place. One aspect of the settlement was the grant by the trustee to the taxpayer of an “equity bond” which gave to the taxpayer rights to distributions of income and capital by the trust subject to defined limits in return for payment of $2.969 million.
The Commissioner assessed the “equity bond” to stamp duty as a conveyance based on a value of $6.975 million. The taxpayer objected to the assessment contending that no duty was payable on the instrument and alternatively it was excessive. The objection was disallowed and the taxpayer’s appeal to a single Judge was dismissed. The taxpayer appealed to the Full Court.
Whether the instrument was solely contractual or created proprietary rights in Pharmos – whether the instrument was a conveyance within the meaning of s 60 or a deemed conveyance pursuant to s 71 of the Stamp Duties Act 1923 (SA) – Whether the instrument vested all of the income and capital and the entire beneficial interest in the assets of the trust – whether the taxpayer took reasonable care to comply with the requirements of the Act and was therefore not liable to pay penalty tax.
Held: (Blue J, Anderson and Stanley JJ agreeing),
1.       The trial Judge correctly held that the instrument created proprietary rights in Pharmos.
2. The trial Judge correctly held that the instrument was a conveyance within the meaning of s 60.
3.       However, the instrument did not vest all of the income or capital or the entire beneficial interest in the assets of the trust and accordingly the Commissioner’s assessment of the value of the property is required to be reconsidered.
4.       The trial Judge was correct in upholding the Commissioner’s decision on penalty.
Stamp Duties Act 1923 (SA) 2(1), 3A, 4, 31, 60, 71, Schedule 2 ; Taxation Administration Act 1996 (SA) Part 6A; Stamp Duties Act 1920 (NSW); Land Tax Act 1958 (Vic), referred to.
Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226, applied.
CPT Custodian Pty Ltd v Commissioner of State Revenue (Vic) [2005] HCA 53; (2005) 224 CLR 98; Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (NSW) [1997] NSWSC 546; (1997) 42 NSWLR 505, discussed.
Chief Commissioner of State Taxation for the State of South Australia v Cyril Henschke Pty Ltd [2010] HCA 43; (2010) 242 CLR 508; Commissioner of Stamp Duties (Queensland) v Hopkins [1945] HCA 14; (1945) 71 CLR 351; Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd [2002] HCA 43; (2002) 209 CLR 651 ; Dadeeton Pty Ltd v Commissioner of State Taxation [2004] SASC 88; DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1982) 149 CLR 431, considered.

PHARMOS NOMINEES PTY LTD v COMMISSIONER OF STATE TAXATION
[2012] SASCFC 89
Full Court: Anderson, Blue and Stanley JJ

ANDERSON J: I agree with the conclusions reached by Blue J and with his reasons. I would hear the parties on the appropriate orders.
BLUE J: The Commissioner of State Taxation assessed stamp duty on an instrument entitled “Equity Bond” dated 24 February 2006 on the basis that it was a conveyance of an interest in property and that the value of the interest was $6,975,250.
The Treasurer disallowed an objection by Pharmos Nominees Pty Ltd (“Pharmos”), a party to the instrument, and made an assessment of stamp duty to like effect.
Pharmos appealed to this Court against the Treasurer’s determination of the objection. A Judge of this Court dismissed the appeal and Pharmos now appeals against that dismissal.
The appeal raises the following issues:
1.     Did the instrument remove the trustee’s discretion as to distribution of income and capital?
2.     Did the instrument convert Pharmos from being a potential beneficiary to holding a vested beneficial interest in the trust?
3. Was the instrument a “conveyance” within the meaning of section 60 of the Stamp Duties Act 1923 (SA) (“the Act”)?
4. Alternatively, was the instrument deemed to be a conveyance by section 71(3)(a) and (4) of the Act?
5.     What was the relevant value of any interest in property which was vested in Pharmos?
Background facts
At all material times up to February 2006, RJ Developments Pty Ltd (“the Trustee”) was owned and controlled by Mr and Mrs Trim. They were its shareholders and Mr Trim was its director.
At all material times, the Trustee has been the trustee of a trust originally called the RJ Trim Developments Trust and since 24 February 2006 called the Jaslil Investments Trust (“the Trust”) pursuant to a Trust Deed (“the Trust Deed”). At all material times, the Trust was a discretionary trust. At all material times up to 24 February 2006, the Trust was controlled by the Trims in that they controlled the Trustee and Mr Trim was the appointor with power to change the trustee. Mr and Mrs Trim were also eligible beneficiaries (together with their relatives and entities and certain charities) and the default beneficiaries in default of appointment of taxable income.
At all material times, the Trust owned a commercial property on Greenhill Road, Wayville. The Trustee received rental income from the tenant or tenants of the property. As at December 2005, the property was carried in the accounts of the Trust at cost (or perhaps a historical re-valuation) of approximately $4 million.
At all material times, Pharmos was controlled by Mr and Mrs Angelos. On 27 January 2006, the Jaslil Trust was created by a deed. Pharmos became the Trustee. The Jaslil Trust was a discretionary trust. At all material times, it was controlled by Mr and Mrs Angelos by virtue of their control of Pharmos and they were eligible beneficiaries and the “Primary Beneficiaries” as defined.
In or before December 2005, Mr Angelos entered into negotiations with Mr Trim for the acquisition by the Angelos from the Trims of the benefit and control of the Greenhill Road property. They agreed a value of the property at $6,975,250. They negotiated a complex method whereby the Angelos would acquire the benefit and control of the property. While there was no direct evidence of these negotiations, the trial Judge made findings to that effect,[1] and there was no challenge to those findings on appeal.
[1] [2012] SASC 24 at [10].
The December 2005 agreement
On 23 December 2005, Mr Angelos, Mr Trim and the Trustee executed an agreement (“the Agreement” or “the December Agreement”).
The Agreement is complex. Its provisions may be summarised as follows.
1.Settlement of the transactions to be undertaken pursuant to its terms was to occur on 24 February 2006.
2.Prior to the settlement date, Mr Trim was to cause the Trustee to amend the Trust Deed to empower the trustee to issue a bond having defined characteristics.
3.On the settlement date:
(a)     Mr Trim was to cause the Trustee to make an interim distribution of the net income of the Trust for the year to date (up to 24 February 2006) to the existing beneficiaries of the Trust (the Trims);
(b)   Pharmos (as trustee of the Angelos Trust or another trust to be nominated by Mr Angelos) was to pay to the Trustee $6,975,250;
(c)    Mr Trim was to cause the Trustee to issue a bond to Pharmos having defined characteristics (“the Bond”) in return for that payment;
(d)    Mr Trim was to cause the Trustee to apply the $6,975,250 paid by Pharmos to pay out the existing liabilities of the Trust and to make an interim distribution of capital to the existing beneficiaries of the Trust (the Trims) of the balance of the sum of $6,975,250.
4.On the settlement date, Mr Trim was to:
(a)     cause the Trustee to issue new shares as required by Mr Angelos to pass control of the Trustee to Mr Angelos and/or his nominees and to buy back the existing shares of the Trims;
(b)    appoint Mr Angelos and/or his nominee(s) as director(s) of the Trustee and resign as director.
The “Bond” referred to in the Agreement was to have the following characteristics:
1.subject only to the interim distribution of income for the year to date, the right to receive all the net income of the Trust in priority to any of the beneficiaries until repayment of the Bond Value;
2.subject only to the interim distribution of capital, the right to payment of the corpus of the trust fund which does not form part of the “taxable income of the fund” in priority to all other beneficiaries;
3.the right to the repayment of the Bond was subordinated to all other liabilities of the trustee (including vested obligations of the trustee to beneficiaries in respect of entitlements to income and corpus).
The Agreement contemplated that, by the end of 24 February 2006, the Angelos would have paid $6,975,250 and would have acquired control of the Trustee and the Trust and thereby the benefit and control of the Greenhill Road property.
Variation to the Agreement
At some point or points before 24 February 2006, Mr Angelos, Mr Trim and the Trustee agreed to vary the Agreement. Pursuant to the variation(s):
1.the amount of the Bond Value was reduced to the difference between the current carrying value of the Greenhill Road property ($4,006,190.98) and the agreed amount of $6,975,250, resulting in the Bond Value being reduced to $2,969,059.02;
2.the monies payable by Pharmos for the Bond were no longer to be used to pay out the existing liabilities of the Trust on the settlement date: rather, Pharmos was to lend to the Trust an amount equal to those liabilities (approximately $4 million) which was to be used to refinance those liabilities on the settlement date;
3.the characteristics of the Bond were redefined to exclude repayment and limit the rights of the bond-holder and the Bond was renamed an “Equity Bond”;
4.on the settlement date, the Trustee was to amend the Trust Deed to substitute Mr Angelos for Mr Trim as the appointor and rename the Trust as “the Jaslil Investments Trust”.
No direct evidence of these variations was adduced. However, they were inferred by the trial Judge[2] and there was no challenge to those findings on appeal.
[2] [2012] SASC 24 at [28]-[40].
Creation of Jaslil Trust
On 27 January 2006, a deed of settlement creating the Jaslil Trust was executed. The Trust Deed provided that Mr and Mrs Trim were “Special Beneficiaries”. The effect of making them Special Beneficiaries was to bring Pharmos (as trustee of the Jaslil Trust) within the scope of the definition of eligible beneficiaries of the Trust. This is because the Trust Deed includes within the definition of eligible beneficiaries any trustee of a trust under which Mr or Mrs Trim have or may have a beneficial interest (clause 3.2(v)). The effect (and no doubt the purpose) of this was to qualify Pharmos (as trustee of the Jaslil Trust) as a potential recipient of an Equity Bond.
Grant of security by the Angelos interests
On 9 February 2006, Pharmos granted a debenture charge in favour of the Commonwealth Bank of Australia. On 19 February 2006, Gleneden Investments Pty Ltd (“Gleneden”) granted a debenture charge in favour of the Commonwealth Bank. It may be inferred that Gleneden was controlled by the Angelos.
It may be inferred that these debentures were granted to secure borrowings from the Commonwealth Bank to enable Pharmos to pay and/or advance monies to the Trustee on the settlement date as described below.
Amendment of Trust Deed
On 23 February 2006, the Trustee executed a deed of variation of trust. The amendment empowered the Trustee to issue to any beneficiary an Equity Bond.
An “Equity Bond” was defined by new clause 1.7 of the Trust Deed to mean:
an agreement, bond or contract made between the Trustee and a Beneficiary in accordance with clause 13.2.
The rights of an Equity Bond holder were defined by new clause 4.6 of the Trust Deed as follows:
A Beneficiary to whom an Equity Bond is issued by the Trustee shall have the entitlements rights and priorities with respect to the fund stipulate in the Equity Bond and in the event of any conflict between any of the provisions of the Equity Bond and any of this deed then subject to the limitations on the Trustee with respect to a revocation, resettlement or variation in clause 16.2 the provisions of the Equity Bond shall prevail.
The issue of an Equity Bond was empowered by new clause 13.2 of the Trust Deed as follows:
The Trustee shall have the power to issue to any Beneficiary an Equity Bond conferring on the holder all or any of the following entitlements, rights, powers and privileges and subject to such conditions and obligations as to payment and otherwise as the Trustee may in its discretion determine. Without any limitation of such power the Trustee may issue an Equity Bond which:
(i)entitles a Beneficiary who is the holder of the Equity Bond to be paid in priority to all other Beneficiaries:
(a)     all or a stipulated part of the income or nett income of the fund during the existence of the Equity Bond or for some lesser period;
(b)     all or a stipulated part of the fund during the existence of the Equity Bond or for some lesser period; and
(c)     all amounts subscribed or paid by that beneficiary or any predecessor in title of the Beneficiary to the Trustee in respect of the issue of the Equity Bond;
(ii)imposes on the intended holder or holder of the Equity Bond an obligation to pay or subscribe an amount or amounts in respect of the issue of the Equity Bond;
…
(iv)provides for the satisfaction and termination of the Equity Bond …
Existing sub-clauses of the Trust Deed providing for the distribution and accumulation of income and for early termination of the Trust were made subject to the entitlements of any holder of an Equity Bond.
Financial statements of the Trust
On or before 24 February 2006, an agreed set of financial statements for the Trust as at 24 February 2006 was prepared. The balance sheet disclosed that the carrying value of the Greenhill Road property had been re-valued to $6,975,250 (reflecting the effect of the Agreement), giving rise to an asset revaluation reserve of $2,969,059.02.
The balance sheet also disclosed the following liabilities:
·$2,095,500 to National Australia Bank pursuant to a commercial bill;
·$934,888.08 lent by Mr Trim and $969,250 lent by the RJ Trim Family Trust;
·$6,852.90 owing for GST.
Events on settlement date
On 24 February 2006, the following events occurred.
1.Pharmos paid to the Trustee $2,969,059.02.
2.The Trustee and Pharmos executed the instrument entitled “Equity Bond” (“the Instrument” or “the February Instrument”).
3.Pharmos advanced by way of loan to the Trustee $4,006,190.98 which was used by the Trustee to pay out the existing debts of the Trust to the National Australia Bank, Mr Trim, the RJ Trim Family Trust and for GST.
4.The Trustee made an interim distribution of year to date income to the Trims.
5.The Trustee made an interim distribution of capital of $2,969,059.02 (being the amount of the asset revaluation reserve) to the Trims.
6.The Trustee executed the deed of variation of trust to change the appointor from Mr Trim to Mr Angelos and the name of the Trust to the “Jaslil Investments Trust”.
7.The Trustee issued new shares to the Angelos and bought back the existing shares from the Trims.
8.Mr Trim ceased to be, and Mr Angelos became, the director of the Trustee.
Items 4, 5 and 7 were not the subject of direct evidence, but may be inferred because they were required to occur by the terms of the Agreement.
Subsequent grant of security
On 3 March 2006, the Trustee granted in favour of the Commonwealth Bank:
1.a mortgage over the Greenhill Road property expressed to be collateral security for the same monies secured by the Gleneden debenture charge and stamped to $4,060,000 and a debenture charge (which may be inferred to be further collateral security in respect of the same monies);
2.a second debenture charge and a second mortgage over the Greenhill Road property, which mortgage was expressed to be collateral to the debenture charge and was stamped to $7,040,000.
It may be inferred that on 3 March 2006 temporary borrowings from the Commonwealth Bank which had been secured by temporary security since 24 February were refinanced by more permanent borrowings secured directly by the Trustee by way of mortgage over the Greenhill Road property and debenture charge over the assets of the Trust.
Reasoning of the trial Judge
The reasoning of the trial Judge may be summarised as follows.
1.The Instrument:
(a)     implemented the overall purpose and effect of the arrangements which was to transfer the economic benefit of the Trust to Pharmos;
(b)    removed the Trustee’s discretion as to the distribution of income and capital of the Trust;
(c)    obliged the Trustee to exercise its discretion to distribute both income and capital in favour of Pharmos.[3]
2.The Instrument:
(a)     converted Pharmos from being merely a potential beneficiary under a standard discretionary family trust to the holder of a vested actual beneficial interest in the Trust;
(b)    in substance comprised an appointment or vesting of the trust fund and assets in favour of Pharmos.[4]
3.By reason thereof, the Instrument comprised an assurance to, or vesting in, Pharmos of the property of the Trust or an interest in such property and thereby comprised a “conveyance” within the meaning of section 60 of the Act.[5]
4.In the alternative, the Instrument was deemed to be a conveyance by section 71(3) of the Act because it:
(a) created or transferred an interest in property subject to trust within the meaning of section 71(3)(a)(iii) or (iv) of the Act; and
(b) related to land or an interest in land within the meaning of section 71(4) of the Act.[6]
[3] [2012] SASC 24 at [41], [76], [90]-[94], [97].
[4] [2012] SASC 24 at [90], [94]-[97], [103]-[104].
[5] [2012] SASC 24 at [96]-[97].
[6] [2012] SASC 24 at [98]-[103].
The trial Judge upheld the Treasurer’s and Commissioner’s assessment pursuant to section 60A of the Act of the market value of the property conveyed or transferred as being $6,975,250. This was on the following basis.
1.Pursuant to the Instrument, Pharmos obtained a vested interest in the assets of the Trust (the Greenhill Road property) which had been agreed as having a value of $6,975,250.[7]
2.Pharmos was entitled to the net income from the Trust property: the market value of a commercial property is the net present value of the future net income.[8]
3.Pharmos was entitled to the net income and any capital profits from the Trust property: the market value of a commercial property is the present value of the sum of those two amounts (net income and profit implying that liabilities and expenses are satisfied). The Trustee also agreed to distribute sale proceeds, which can be seen as a crystallisation or realisation into a lump sum of the future income and capital profit streams.[9]
[7] [2012] SASC 24 at [126] and [129].
[8] [2012] SASC 24 at [127].
[9] [2012] SASC 24 at [128].

The trial Judge upheld the Commissioner’s imposition of penalty tax, which was five per cent of the amount of stamp duty on the Instrument.[10]
[10] [2012] SASC 24 at [130]-[139].
Approach to characterisation of instrument
The Commissioner and Treasurer assessed stamp duty on the February Instrument. They did not assess stamp duty on the December Agreement pursuant to section 31 of the Act.[11] Nor did they proceed on the basis that the entirety of the arrangement between the parties constituted a tax avoidance scheme for the purpose of enabling liability for stamp duty to be avoided within the meaning of Part 6A of the Taxation Administration Act 1996 (SA).
[11] Section 31(1)(a) excludes from the operation of that section a contract for the sale of an interest in property which cannot vest in the purchaser except upon registration of a conveyance. This excludes the sale of a legal estate in fee simple in Torrens system land, but the exclusion does not apply to an equitable interest in land (the conveyance of which cannot be registered under the Real Property Act 1886 (SA)).
In these circumstances, the correct approach to characterising the legal nature and effect of the Instrument was as succinctly summarised by Gleeson CJ in Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (NSW):
The characterisation of an instrument for the purpose of the Stamp Duties Act may require an understanding of the transaction from which the instrument emanates. Nevertheless, what is to be determined is the legal nature and effect of the instrument in question. The principal criticism which the appellants make of the reasoning of Dunford J is that he appears to have allowed irrelevant considerations of economic equivalence to affect his reasoning.[12]
Was the instrument a conveyance?
[12] [1997] NSWSC 546; (1997) 42 NSWLR 505 at 508. See also Commissioner of Stamp Duties (Queensland) v Hopkins [1945] HCA 14; (1945) 71 CLR 351 at 360 per Latham CJ, 369-370 per Rich J and 378 per Dixon J; DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1982] HCA 14; (1982) 149 CLR 431 at 449 per Mason J (Stephen J agreeing); Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd [2002] HCA 43; (2002) 209 CLR 651 at [35] per Gleeson CJ, Gummow, Kirby and Hayne JJ (Callinan J agreeing).
Nature and effect of the Instrument
Pharmos contends that the trial Judge erred in the first step in his reasoning in construing the February Instrument as “transferring the economic benefit of the Trust … to Pharmos” and operating “to remove any discretion that the trustee formerly had as to distribution of the income and capital of the Trust” and to oblige the trustee “to exercise its discretion to distribute both income and capital in favour of Pharmos”.
The “Bond” required by the December 2005 Agreement would largely have had the effect described by the trial Judge and the February 2006 variation of the Trust Deed empowered the issue of an “equity bond” capable of having the effect described by the trial Judge.
However, “the Equity Bond” comprised by the February Instrument had a more limited effect.
1.The priority right to distributions of income granted by the Instrument to Pharmos was subject to an upper limit. The upper limit was the “Estimated Interest Payment” in respect of the following year of income, which was defined to be the amount estimated by Pharmos as the interest and fees likely to be incurred in that following year on loan funds borrowed for the purpose of making the payment of $2,969,059.02. This left a residual discretion in the trustee to distribute the balance of the net income for the year (if any) to any eligible beneficiary.
2.The priority right to distribution of capital was:
(a) limited to distribution out of the proceeds of realisation of property of the Trust;
(b) subject to an upper limit being the greater of $2,969,059.02 and any excess of those proceeds above the current value of the current property of the Trust;
which left a residual discretion to distribute capital in excess of the defined upper limit or other than from proceeds of realisation of property.
It follows that the effect of the Instrument was not to vest all of the income or the capital of the Trust in Pharmos, and that the effect of the Instrument was not to vest the entire beneficial interest in the assets of the Trust in Pharmos.
Contractual versus property rights
Pharmos contends that the trial Judge erred in the second step of his reasoning in holding that the Instrument converted Pharmos from being a potential beneficiary under a discretionary trust to the holder of a vested beneficial interest in the Trust. Pharmos contends that the February Instrument was purely contractual: it did not create, vest or otherwise deal in any way with proprietary rights at all. I reject that contention.
As the trial Judge observed, the Instrument does not provide for a loan by Pharmos to the Trustee of $2,969,059.02. It does not provide for the payment of interest or repayment of principal. Indeed, it contains several express provisions to avoid the concept of loan or repayment (clauses 6 and 7). It provides instead for Pharmos in its capacity as a beneficiary of the Trust to receive distributions of income and capital. Even the word “equity” in the title of the Instrument suggests a proprietary interest as opposed to a contractual debt.
Moreover, clause 4.6 of the Trust Deed itself confers upon a beneficiary to whom an equity bond is issued “entitlements, rights and priorities with respect to the fund”. Those entitlements, rights and priorities are given priority by the Trust Deed over any inconsistent provisions of the Trust Deed.
Pharmos contends that, as a matter of law, such rights as are given to Pharmos as a bond holder pursuant to the combination of the Trust Deed and the February Instrument are not in any event proprietary interests.
In Chief Commissioner of Stamp Duties (NSW) v Buckle,[13] Mr Buckle was the trustee of a trust described (albeit hesitantly) by the High Court as a discretionary trust. The trust owned real estate in Brookvale, New South Wales, valued at approximately $4 million and owed approximately $4 million to two lenders who had financed the acquisition of the property. Trust distributions of income depended on the exercise of discretion by the trustee, subject to a provision that, in default of exercise of the discretion, income was distributed equally to Mr Buckle’s living children on the relevant date. Similarly, the distribution of capital on the vesting date depended on the exercise of the trustee’s discretion, subject to a similar default provision. Mr Buckle had a son and a daughter.
[13] [1998] HCA 4; (1998) 192 CLR 226.
Two years after the creation of the trust, a supplemental deed was executed which varied the provision for distribution of capital on the vesting date in default of exercise of the discretion. Instead of the capital being distributed between Mr Buckle’s living children in equal shares, the variation provided for one third to his daughter and two thirds to his son. The Commissioner of Stamp Duties assessed the supplemental deed to duty as a conveyance on the basis that the value of the property conveyed was $4 million, being the value of the real property of the trust.
The High Court held that the settlement deed did comprise a conveyance of an interest in property and was chargeable with duty. The High Court said:
This strong discretionary element in the trusts created by the Deed of Settlement is significant for the present appeal in at least two respects. These are the identification of the property of which the Supplemental Deed was a conveyance within the meaning of the Act, and the value to be attributed to that property.
…
The result [of the Supplemental Deed] was to require the trustee, as from the distribution date, to hold the Trust Fund as to two-thirds for the second respondent and one-third for the third respondent. The interest of each respondent was vested but subject to divesting upon death before the distribution date. The interest was also liable to divestment by the exercise of the power of appointment in cl 2.21. Moreover, the extensive powers given the trustee, exercisable at discretion and from time to time, rendered unstable the content of those interests.
The interests identified by Sheller JA were vested in the second and third respondents by means of the Supplemental Deed. The submissions for the Chief Commissioner proceeded on the footing that, if the only subject matter conveyed, within the meaning of the Act, by the Supplemental Deed to the second and third respondents were the interests we have identified, valuation would be so difficult and the amount of duty so small as to make it impracticable to assess more than nominal duty. The Chief Commissioner’s submission was that the Supplemental Deed effected a resettlement or appointment of the Trust Fund as a whole and was subject to duty on that basis.
…
The issue is one of identification of that property in New South Wales which, by means of the instrument, was transferred to or vested in or accrued to the second and third respondents. To that extent only was there a conveyance within s 65 of the Act.
…
The Supplemental Deed did not bring about the vesting in the second and third respondents of the whole of the Trust Fund in its then state of investment. ... The definition in s 65 identifies the conveyance charged with ad valorem duty as an instrument whereby property is transferred to or vested in or accrues to any person. The Supplemental Deed caused the vesting in the second and third respondents not of the Trust Fund but of interests of a lesser nature. These were vested interests in a technical sense. They might, given the presence in New South Wales of the trustee and the assets comprising the Trust Fund, and the broad definition in s 3(1) of “property”, be treated as property in New South Wales within the meaning of the Act. However, their present value had to reflect the vicissitudes which were an essential element of the structure created by the Deed of Settlement.[14]
(Citations omitted)
[14] (1998) 192 CLR 226 at [10], [23]-[24], [26], [34], [40] per Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ.
The Stamp Duties Act 1920 (NSW), the subject of the decision in Buckle, defined “conveyance” to include an instrument “whereby any property in New South Wales is transferred to or vested in or accrues to any person.” While not identical, this language is similar to the definition in section 60 of the Act of “conveyance” to include an instrument “by virtue of which … the property is assured to, or vested in, any person”. While not identical, the definition of “property” in the NSW Act was relevantly similar in effect to the definition in the Act.
The decision of the High Court in Buckle has relevance, not only to the question whether the February Instrument dealt with proprietary rights, but also to the question (addressed in the next section) whether its effect or operation vested an interest in property in Pharmos.
In Buckle, the High Court went on to address the value of the interest in property which was vested in Mr Buckle’s son and daughter. Because that interest was subject to divestment, the High Court concluded that its value was minimal. The High Court proceeded to construe the phrase “unencumbered value” in section 61(1) of the NSW Act. Although addressing the concept of an “encumbrance” for this purpose, nevertheless the reasoning of the High Court is instructive in relation to the underlying concept of an interest in property. The High Court said:
Section 66(1) charges the conveyance with ad valorem duty upon the property conveyed by means of that instrument. The effect of the Second Schedule, which is to be read in conjunction with s 66(1), in a case such as the present is to impose upon the instrument the same duty as if the unencumbered value were the amount of consideration for the conveyance. This suggests that "unencumbered" is used in s 66(1) not in a loose sense but to refer to security interests in, or charges or other liabilities which attach to, the property in question.
The liabilities of the trustee to the two companies which provided the funds for the acquisition and development of the Brookvale site had not given rise, when the Supplemental Deed was executed, to any encumbrance upon the interests vested thereby in the second and third respondents. Those interests were to be distinguished from the assets, notably the Brookvale site, comprising the Trust Fund at the date of the Supplemental Deed.
However, even if the trusts created by the Deed of Settlement were of the traditional kind, whereby, for example, A held a life estate and B and C interests in remainder, the liabilities of the trustee would not have given rise to an encumbrance upon those beneficial interests…
Until the right to reimbursement or exoneration has been satisfied, "it is impossible to say what the trust fund is". The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the "property" to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not "trust assets" or "trust property" in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries...
However, the starting point in the class of case under consideration is that the assets held by the trustee are "no longer property held solely in the interests of the beneficiaries of the trust". The term "trust assets" may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets, there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not "encumbered" by the trustee's right of exoneration or reimbursement. Rather, the trustee's right to exoneration or recoupment "takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation". A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the "trust assets" which may be enforced in the same way as any other equitable charge. However, the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee. It is not a security interest or right which has been created, whether consensually or by operation of law, over the interests of the beneficiaries so as to encumber them in the sense required by s 66(1) of the Act. In valuing the interests of beneficiaries which are conveyed by an instrument, there is no encumbrance which the Act requires to be disregarded.[15]
(Citations omitted, emphasis added)
[15] (1998) 192 CLR 226 at [44]-[46], [48] and [50] per Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ.
An application of the principles identified by the High Court in Buckle leads to the conclusion that the February Instrument vested an interest in property in Pharmos. That interest was not subject to divesting or vicissitudes as was the case in Buckle. The rights given to Pharmos by the Trust Deed in its capacity as a beneficiary and holder of an Equity Bond are made paramount over the powers of the Trustee and the exercise of discretions which the Trustee would otherwise have.
Pharmos contends that the decision of the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue (Victoria)[16] establishes principles on the basis of which it should be concluded that Pharmos does not have an equitable interest in the assets of the Trust.
[16] [2005] HCA 53; (2005) 224 CLR 98.
In CPT Custodian, the trustee owned three shopping centres in Victoria, each of which it held as trustee of a separate unit trust. The trustee and the designated manager were entitled to charge professional fees and recoup them out of the assets of the trusts. In one case, there was a single unit holder, in another case there was a single unit holder via an intermediate unit trust and in the third case there were multiple unit holders. The Commissioner assessed the unit holders for land tax on the basis that they were “owners” of the land within the meaning of the Land Tax Act 1958 (Vic). The High Court observed that the Commissioner’s conduct was curious because in each case the trustee as legal owner was liable to pay land tax and there was no question of insolvency or other difficulty in recovering the tax from the trustee as legal owner.
The High Court held that the unit holder or holders were not the “owner” of the land within the meaning of the Land Tax Act. Ultimately, the decision turned on the meaning of the word “owner” as used in that Act. However, the Court made some observations about the existence and nature of beneficial interests held by unit holders under complex Trust Deeds such as existed in that case. The Court cautioned against first characterising a trust as a unit trust (or discretionary trust) and then drawing conclusions about the nature of the beneficial interests thereunder. The Court stressed that each Trust Deed must be considered for its own terms and effect.
The High Court said:
In [Glenn v Federal Commissioner of Land Tax], Griffith CJ said of an argument for the Revenue that it was:
“based on the assumption that whenever the legal estate in land is vested in a trustee there must be some person other than the trustee entitled to it in equity for an estate of freehold in possession, so that the only question to be answered is who is the owner of that equitable estate. In my opinion, there is a prior inquiry, namely, whether there is any such person. If there is not, the trustee is entitled to the whole estate in possession, both legal and equitable.”
That statement was a prescient rejection of a “dogma” that, where ownership is vested in a trustee, equitable ownership must necessarily be vested in someone else because it is an essential attribute of a trust that it confers upon individuals a complex of beneficial legal relations which may be called ownership.
The alleged hallmark [of any unit trust according to the Commissioner] is that, unlike shareholders with respect to the property of the company, unit holders do have beneficial interests in the assets of the trust; no other person or class of persons has such an interest and, if not with the unit holders, where else rests the beneficial interest?
…
Similar reasoning is manifest in what was said in Duppe … The issue in Duppe was whether each unit holder had an estate or interest in land within the meaning of s 89(1) of the Transfer of Land Act 1958 (Vic), which was necessary to support a caveat. Brooking J, in answering that question in the affirmative, said:
“If there is a proprietary interest in the entirety, there must be a proprietary interest in each of the assets of which the entirety is composed.” (Emphasis added.)
However, in Gartside, Lord Wilberforce had said:
“It can be accepted that ‘interest’ is capable of a very wide and general meaning. But the wide spectrum that it covers makes it all the more necessary, if precise conclusions are to be founded upon its use, to place it in a setting …”
It is unnecessary for the instant appeals to determine whether Duppe correctly decided the requirements in Victoria for a caveatable interest. But what was said there provides … no authority of the general significance assumed for it by the submissions here by the Commissioner.
…
[T]he units are discrete bundles of rights; each unit is not held in joint ownership with the totality of issued units. It appeared to be conceded in argument by the Commissioner that unit holders did not hold any land as joint tenants. However, they were said necessarily to own together the whole of the beneficial ownership which, on the Commissioner’s case, must subsist. …
There are two answers to these submissions. … Secondly, as already demonstrated, the assumption respecting beneficial ownership is misplaced.[17]
(Citations omitted)
[17] (2005) 224 CLR 98 at [25], [30]-[32], [39]-[40] per Gleeson CJ, McHugh, Gummow, Callinan and Heydon JJ.

The High Court did not hold in that case that the unit holders did not have any interest in property. Rather, it held that the unit holders did not hold the beneficial ownership of the real estate (shopping centres) the subject of the trusts.
Section 2 of the Act defines “property” to include an “interest in property” and in turn defines the latter to include a “potential, contingent, expectant or inchoate interest”. The decision of the High Court in Buckle establishes, and the decision in CPT Custodian does not deny, that Pharmos obtained an interest in property (within the meaning of section 2 of the Act) by virtue of the Instrument. Accordingly, Pharmos’ challenge to the trial Judge’s conclusion that the Instrument vested an interest in property in Pharmos fails. However, the interest vested was a lesser interest than the entire beneficial interest as held by the trial Judge.
Conveyance within the meaning of section 60
Pharmos contends that the trial Judge erred in the third step in his reasoning in holding that the Instrument was a conveyance within the meaning of section 60 of the Act.
Section 4 of the Act charges stamp duties specified in Schedule 2 in respect of the instruments specified in that Schedule. In turn, items 3 and 4 of Schedule 2 comprise conveyances (or transfers) on sale of any property and conveyances operating as voluntary dispositions inter vivos of any property. All conveyances are either conveyances on sale or conveyances operating as voluntary dispositions.[18] Such conveyances are charged with ad volorem duty calculated on the value of the property conveyed.
[18] See section 71(3)(b)) as construed by this Court in Dadeeton Pty Ltd v Commissioner of State Taxation[2004] SASC 88 at [23] per Debelle J (Mullighan J agreeing) and [72]-[74] per Gray J.
.
Section 60 contains the principal definition of “conveyance”. It provides:
In this Act –
“conveyance” includes—
(a)     every conveyance, assignment, transfer or declaration of trust …; and
(b)     …
(c)     …
(d)     every other assurance or instrument of any kind,
by which or by virtue of which or by the operation of which … any real or personal property or any estate or interest in any such property is assured to, or vested in, any person …
“Property” is defined by section 2(1) as follows:
“property” means real or personal property and includes—
(a)intellectual property (except know-how and confidential information); and
(b)an interest in property
and in turn, “interest in property” is defined as follows:
“interest” in property means a legal or equitable interest and includes a potential, contingent, expectant or inchoate interest
The trial Judge concluded that the February Instrument vested (or assured) an interest in property in Pharmos within the meaning of section 60.
Pharmos contends that it acquired no proprietary interest of any kind by reason of the Instrument. I have already rejected that contention.
Pharmos also contends that the Instrument did not “assure to” or “vest in” Pharmos an interest in property. I reject that contention also. It is clear that the Instrument did vest a proprietary interest in the trust fund in Pharmos, regardless of whether or not it vested an interest in the underlying assets of the Trust.[19]
[19] Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at [10], [23]-[24], [26], [34], [40] per Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ; Chief Commissioner of State Taxation of the State of South Australia v Cyril Henschke Pty Ltd [2010] HCA 43; (2010) 242 CLR 508 at [25] and [27]-[28] per French CJ, Gummow, Hayne, Heydon and Kiefel JJ.
It follows that the trial Judge was correct in concluding that the Instrument was a conveyance within the meaning of section 60 and was charged with stamp duty to be calculated on the value of the property conveyed pursuant to section 4 and items 3 or 4 of Schedule 2.
Alternative contention by the Commissioner
Given my conclusion, it is not strictly necessary to decide whether the trial Judge was correct in concluding in the alternative that the Instrument was deemed to be a conveyance pursuant to section 71(3)(a) )(iii) or (iv) and section 71(4). However, for completeness, I express my conclusion concerning section 71.
The relevant provisions of section 71 are as follows:
(3) For the purposes of this Act, the following instruments shall, subject to this section, be deemed to be conveyances operating as voluntary dispositions inter vivos:
(a) an instrument to which subsection (4) applies effecting or acknowledging, evidencing or recording, any of the following transactions:
…
(iii) the creation of an interest in property subject to a trust; or
(iv) a transfer of an interest in property subject to a trust; or
…
whether or not any consideration is given for the transaction;
…
(4) This subsection applies to any instrument that relates to land, a financial product or a unit under a unit trust scheme, or an interest in land, a financial product or a unit under a unit trust scheme.
The question of the application of section 71 only arises if I am wrong in my conclusion that the Instrument was a conveyance within the meaning of section 60. The premise for the purposes of considering section 71 is therefore that the Instrument did not “vest” or “assure” an interest in property in Pharmos within the meaning of section 60. If that premise is correct, it follows logically that the Instrument did not “create” or “transfer” an interest in property in favour of Pharmos within the meaning of section 71(3)(a)(iii) or (iv). Accordingly, on this premise, section 71 would have no application.
In summary, if I am wrong in my conclusion that the Instrument was a conveyance within the meaning of section 60, reliance upon section 71 will not avail the Commissioner.
The Commissioner also contends that section 3A(2) of the Act deems a “potential, expectant or other inchoate interest” to be an “interest in property” if the realisation of the potentiality, contingency or expectancy could result in an interest in property. This section does not assist the Commissioner. Its effect is essentially a mirror of the definition of “interest in property” in section 2(1) to include a “potential, contingent, expectant or inchoate interest”. If, as I have concluded, the Instrument was a conveyance within the meaning of section 60 of an actual or potential, contingent, expectant or inchoate interest, any resort to section 3A is otiose. If it was not a conveyance within the meaning of section 60, section 3A (which was enacted to determine territorial relationships) would have no different effect.
Market value of property conveyed
The trial Judge assessed the value of the property conveyed on the basis that the Instrument vested in Pharmos the right to the net income, any capital profit and the proceeds of sale of the Greenhill Road property the subject of the Trust.
For reasons identified earlier, the interest vested by the Instrument in Pharmos was something less than an entitlement to the full income or the full capital profits or proceeds of sale of the assets of the Trust. It follows that the value of the interest vested by the Instrument in Pharmos was something less than the full market value of the Greenhill Road property itself, namely $6,975,250.
It is true that the arrangement as a whole, and in particular, performance of the terms of the December Agreement, resulted in the Angelos receiving the full benefit and control of the underlying Greenhill Road property and that such benefit and control was valued by the parties at $6,975,250. However, the December Agreement also provided for the effective transfer by the Trims to the Angelos of control of the Trust through the change of appointor and change in the director and shareholders of the Trustee company. The December Agreement was not assessed by the Commissioner to be subject to stamp duty.
While the present value of the income stream and entitlement to capital profits and sale proceeds vested by the Instrument in Pharmos is constrained by the upper limits contained in the Instrument, nevertheless, that present value would comprise a substantial portion of the present value of the unconstrained profits and proceeds. In other words, it would comprise a substantial portion of the total value of $6,975,250.
No evidence has been adduced as to the valuation of the interest vested by the Instrument in Pharmos on the basis that it vests something less than the full income and capital profits or sale proceeds of the Trust. The parties made limited and generalised submissions concerning the approach to value in such circumstances, but detailed argument was not developed. In these circumstances, I would hear the parties as to the determination of any remaining issue or issues of valuation.
On appeal, the Commissioner contends that section 60A(4)(a) of the Act applies so as to require the valuation to ignore the loans. That contention potentially raises a number of legal and factual issues. I say nothing further about that contention pending further argument.
Penalty tax
Pharmos challenges the trial Judge’s conclusion in relation to penalty tax.
Section 30(2) of the Taxation Administration Act 1996 (SA) provides:
Penalty tax is not payable in respect of a tax default if the Commissioner is satisfied that the tax default was not a deliberate tax default and did not result, wholly or partly, from any failure by the taxpayer, or a person acting on the taxpayer’s behalf, to take reasonable care to comply with the requirements of a taxation law.
The Commissioner was satisfied that the tax default was not deliberate but was not satisfied that it did not result from failure by the taxpayer or a person acting on the taxpayer’s behalf to take reasonable care to comply with the requirements of the Act. The Commissioner imposed penalty tax at the rate of five per cent of the primary tax.
Pharmos argued before the trial Judge that it had acted reasonably because it had obtained legal advice before entering into the transaction, difficult questions of construction were involved and views on the construction of the Act may differ. The trial Judge observed that Pharmos elected not to disclose the legal advice it had obtained and it was entirely possible that Pharmos had been advised that there was a real risk that the Instrument was dutiable. The trial Judge also observed that, while the Commissioner had issued circulars encouraging taxpayers to lodge straightforward documents for stamping through RevNet and not submit them for assessment, the transactions in question were particularly complex and the circulars made it plain that in cases of doubt documents should be submitted for assessment. In these circumstances, the trial Judge was not satisfied that Pharmos had taken reasonable care to comply with the requirements of the Act and upheld the imposition of penalty tax.
On appeal, Pharmos agitates the same arguments put to the trial Judge. I reject those arguments for the reasons articulated by the trial Judge. While Pharmos was not obliged to disclose the content of its legal advice, it could not rely on the fact that it obtained legal advice on the issue of reasonable care unless it elected to disclose the content of that advice. Pharmos relies upon Challenger Listed Invested Ltd v Commissioner of State Revenue,[20] in which the taxpayer acted in accordance with solicitor’s advice. However, in that case, the taxpayer disclosed the content of the advice and in any event the circumstances attracting stamp duty liability were quite different to those in the present case. Pharmos also relies upon Snowy Hydro Ltd v CSR (Vic) Ltd,[21] in which the Court found there was no primary stamp duty liability and went on to find that the taxpayer acted reasonably in relying on legal advise. While the reasons for judgment do not make it clear, there is no suggestion in the reasons that the content of the advice was not disclosed and in any event the circumstances attracting stamp duty liability were quite different to those in the present case.
[20] [2010] VSC 464.
[21] [2010] VSC 221.
While Pharmos did not necessarily need to have obtained legal advice in order to have taken reasonable care, the objective circumstances (including the complexity of the transactions negotiated between the parties and of the Instrument itself and the decision not to submit the Instrument for opinion) point to a lack of reasonable care by Pharmos.
Conclusion
The trial Judge was correct in holding that the Instrument vested an interest in property in Pharmos and was therefore a conveyance within the meaning of Section 60 of the Act and in upholding the imposition of penalty tax.
The Instrument did not convey the entire beneficial interest in the assets of the Trust and the value of the property conveyed was something less than the value of the assets of the Trust. I would hear the parties on issues involving the valuation of the property which was conveyed to Pharmos by the Instrument before disposing of the appeal.
STANLEY J: I have had the advantage of reading the reasons for judgment of Blue J. I agree with his Honour’s conclusion and his reasons. I would hear the parties on the question of valuation of the property and the orders that should follow.