Sejaca Pty Ltd v Chief Commissioner of State Revenue

[2010] NSWADT 95

CITATION:	Sejaca Pty Ltd v Chief Commissioner of State Revenue [2010] NSWADT 95
DIVISION:	Revenue Division
PARTIES:	APPLICANT Sejaca Pty Limited RESPONDENT Chief Commissioner of State Revenue
FILE NUMBER:	086131
HEARING DATES:	On the papers
SUBMISSIONS CLOSED:	9 December 2009
DATE OF DECISION:	15 April 2010
BEFORE:	Perrignon R - Judicial Member
CATCHWORDS:	Land tax – land subject to a trust – whether trust a fixed trust or special trust – whether sole beneficiary was ‘owner’ of landLand tax – land subject to a trust – re-assessment of trust as special trust – whether power to classify trust as special trust exercised
LEGISLATION CITED:	Land Tax Management Act 1956 Land Tax Act 1956 Taxation Administration Act 1996
CASES CITED:	Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 Sahab Holdings Pty Limited v Chief Commissioner of State Revenue [2010] NSWADTAP 4 CPT Custodian v Commissioner of State Revenue (Vic) [2005] 224 CLR 98 Federal Commissioner of Taxation v Whiting [1943] 68 CLR 199G TN Developments Pty Limited v Chief Commissioner of State Revenue [2007] NSWADT 168 Saunders v Vautier (1841) 4 Beav 115; 49 ER 282
REPRESENTATION:	APPLICANT M Llanes, solicitor RESPONDENT I Young, barrister
ORDERS:	The Chief Commissioner’s decision of 3 July 2008 to re-assess the Trustee’s liability to land tax, on the basis that the Sejaca Trust was a special trust, is confirmed.

REASONS FOR DECISION

1 The Applicant, Sejaca Pty Limited, is the trustee of a trust known as the ‘Sejaca Trust’, whose assets include land. The Chief Commissioner re-assessed it to land tax for the tax years 2007 and 2008, on the basis that the trust was a ‘special trust’, as defined in section 3A of the Land Tax Management Act 1956.

2 In those years, special trusts were taxed at a flat rate, whereas fixed trusts enjoyed a tax-free threshold: 3AJ and 3AK, Land Tax Act 1956. The Applicant submits that the trust was at all relevant times a fixed trust, entitled to the benefit of the threshold, and on that basis seeks review of the decision to re-assess its tax liability.

3 The facts are not in dispute. In 2000, the Applicant company (‘the Trustee’) was appointed trustee of the Sejaca Trust. On 20 May 2006, the Trustee acquired a half share in land at Ettalong in New South Wales, which became an asset of the Trust. The remaining half share was acquired by a co-owner. On 27 June 2007, that land was subdivided into three strata lots. The Trustee’s half share of each lot remains an asset of the trust.

4 At all relevant times, the sole shareholder and director of the Trustee was Ms Llanes. The Trust Deed provided that Ms Llanes was also:

a. the sole beneficiary of the corpus of the Trust,

b. the sole beneficiary of income from any real estate forming part of the Trust property,

c. one of a number of beneficiaries of other forms of Trust income, and

d. the Appointor under the Trust Deed.

5 On 24 September 2007, the Chief Commissioner of State Revenue assessed the liability of both co-owners to land tax in respect of the Ettalong land for the 2007 tax year. In doing so, he applied the tax threshold. On 3 July 2008, he assessed land tax for the 2008 tax year, similarly applying the tax threshold.

6 On 3 July 2008, he separately re-assessed the Trustee’s liability to land tax for each of those two tax years, treating the land as being subject to a ‘special trust’ – that is, without the benefit of the tax-free threshold.

Application for review

7 The Trustee seeks review of this re-assessment, on the basis that the Sejaca Trust was at all relevant times a fixed trust.

Jurisdiction

8 Objection to the re-assessment has been lodged under section 86 of the Taxation Administration Act 1996, and disallowed by the Chief Commissioner. It follows that the Tribunal enjoys jurisdiction under section 96 of the Act to review the re-assessment. The taxpayer bears the onus of proving its case: section 100(3).

Legislation

9 At all relevant times, Section 7 of the Land Tax Management Act 1956 provided that land tax shall be ‘levied and paid on the taxable value of all land situated in New South Wales which is owned by taxpayers’. In respect of any tax year, tax was to be levied as owned at midnight on 31 December in the preceding year: section 8.

10 Section 24 provided that a trustee of land was liable for land tax as if it were the beneficial owner. Section 25(1) provided that a person with an equitable interest in land was liable for land tax as if he or she were the legal owner. Other provisions ensured that double taxation did not result.

11 ‘Owner’ was defined in section 3 of the Act relevantly to include:

‘in relation to land, every person who jointly or severally, whether at law or in equity:

(i) is entitled to the land for any estate of freehold in possession, or

(ii) is entitled to receive, or is in receipt of, or if the land were let to a tenant would be entitled to receive, the rents and profits thereof, whether as beneficial owner, trustee, mortgagee in possession, or otherwise,

...’

12 ‘Special trust’ was defined in section 3A(1) as follows.

‘3A Special trust—meaning

(1) For the purposes of this Act, a trust is a special trust if:

(a) the trust property includes land, and

(b) the trustee of the trust is the owner of the legal estate in the land, and

(c) the trust is not a fixed trust.’

13 The Chief Commissioner concedes that the Sejaca Trust satisfies paragraphs (a) and (b) above. He submits, however, that paragraph (c) is not satisfied, because the Sejaca Trust is not a fixed trust. That term is defined relevantly in the following provisions of section 3A:

‘(2) For the purposes of this section, a trust is a fixed trust if the equitable estate in all of the land that is the subject of the trust is owned by a person or persons who are owners of the land for land tax purposes (disregarding section 25 (3)).

(3) For the purpose of determining whether a trust is a fixed trust under this section, any equitable interest of the trustee as trustee of the trust is to be disregarded.

(3A) If a trust satisfies the relevant criteria, the persons who are beneficiaries of the trust under the trust deed are taken to be owners of an equitable estate in the land that is the subject of the trust and, accordingly, the trust is taken to be a fixed trust.
Note. Under section 25, owners of an equitable estate or interest in land are liable in respect of land tax as if they were legal owners of the land. Owners of an equitable estate in land are treated as secondary taxpayers.
(3B) For the purposes of this section, the relevant criteria are as follows:

(a) the trust deed specifically provides that the beneficiaries of the trust:


(i) are presently entitled to the income of the trust, subject only to payment of proper expenses by and of the trustee relating to the administration of the trust, and

(ii) are presently entitled to the capital of the trust, and may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property,

(b) the entitlements referred to in paragraph (a) cannot be removed, restricted or otherwise affected by the exercise of any discretion, or by a failure to exercise any discretion, conferred on a person by the trust deed.’

14 In the Chief Commissioner’s submission, the only question at issue is whether the Trust was a ‘fixed trust’ in terms of section 3A(1)(c). That, in turn, depends on whether the trust satisfies the requirements of section 3A(2), or the requirements of section 3A(3A). To constitute a fixed trust, it need only satisfy one of those provisions.

15 The Trustee does not rely on section 3A(3A) – nor could it do so, as the entitlements of Ms Llanes to income and capital referred to in section 3A(3B)(a) are ‘restricted or otherwise affected’ by various discretions of the Trustee under the Trust Deed, which are detailed below.

16 Instead, the Trustee relies on subsection 3A(2). It submits that the subsection is satisfied, because the equitable estate in the Ettalong property was ‘owned by a person or persons who are owners of the land for land tax purposes’ – namely, Ms Llanes - who was the sole beneficiary of real estate forming an asset of the Trust, and of any income derived from it.

17 In addition, the Trustee argues:

a.that, in re-assessing the land to land tax, the Commissioner exercised his power to classify the trust as a special trust under section 25A,

b.that the power of classification does not include the power to affect previous assessments of land tax liability, and

c.that, in purporting to increase the Trustee’s tax liability as previously assessed, the Chief Commissioner exceeded his power.

18 The issues for determination may be summarised as follows.

a.Whether, in re-assessing the Trustee’s liability to land tax, the Commissioner exercised his power to classify the trust as a special trust under section 25A.

b.If so, whether he exceeded his powers in purporting to affect a previous assessment, by increasing the Trustee’s liability to land tax under the initial assessments of 2007 and 2008.

c.Whether Ms Llanes owned an equitable estate in the Trustee’s share of the Ettalong property in terms of subsection 3A(2), satisfying the definition of ‘owner’ in section 3 of the Act.

19 Section 25A of the Act empowered the Chief Commissioner to classify a trust as a special trust, either on his own motion or on the application of a trustee. Subsection 25A(3) provided:

‘(3) A classification of a trust as a special trust has effect in respect of any assessment of land tax liability (being an initial assessment of land tax liability) that is made on or after the date on which the trust is classified as a special trust, and does not affect any assessment of land tax liability made before that classification .’ (emphasis added)

20 ‘Special trust’ is defined in section 3A. Subsection 3A(6) provides:

‘(6) Despite anything to the contrary in this section, a trust is taken to be a special trust in relation to a land tax year if the trust is classified as a special trust in respect of that land tax year under section 25A, and the classification has effect in respect of that land tax year.’

21 The effect of this subsection, when read together with section 25A and the power to assess liability to land tax, was to empower the Chief Commissioner to classify a trust as a special trust, and to assess tax liability accordingly in respect of a tax year, provided that the classification may not affect any previous assessment. In those circumstances, the trust is ‘taken to be a special trust’ for that tax year, whether or not the remaining provisions of section 3A are satisfied.

22 The power to ‘classify’ a trust under section 25A is distinct from the power to assess or re-assess a taxpayer’s tax liability. The latter powers are conferred by sections 8 and 9 of the Taxation Administration Act 1996.

23 An assessment or re-assessment of a trustee’s liability to land tax as if it were trustee of a special trust does not require classification of the trust under section 25A, nor does it imply that the Chief Commissioner has exercised his power of classification. He may assess a trustee’s tax liability on that basis, without classifying the trust, whenever the definition of ‘special trust’ in section 3A is satisfied.

24 In this case, the Chief Commissioner re-assessed the Trustee’s liability to land tax on 3 July 2008 in respect of the tax years 2007 and 2008, on the basis that the Sejaca Trust was a special trust. There is no evidence that he exercised his power of classification, or purported to do so.

25 It follows:

a.that the decision of 3 July 2008 to re-assess the Trustee’s tax liability did not constitute or imply an exercise of the power to ‘classify’ the trust under section 25A,

b.that the provision in subsection 25A(3) that previous assessments are not affected by the exercise of that power does not apply, and

c.that the re-assessment was within power, though subject to review in these proceedings.

Whether Sejaca Trust was a fixed trust

26 The Trust will not have been a ‘special trust’ if it was a ‘fixed trust’: section 3A(1)(c).

27 It can only have been a ‘fixed trust’ if it satisfied the requirements of section 3A(2), namely:

‘if the equitable estate in all of the land that is the subject of the trust is owned by a person or persons who are owners of the land for land tax purposes …’.

28 The term ‘owner’ is defined in section 3 relevantly to include:

‘a) in relation to land, every person who jointly or severally, whether at law or in equity:
(i) is entitled to the land for any estate of freehold in possession, or
(ii) is entitled to receive, or is in receipt of, or if the land were let to a tenant would be entitled to receive, the rents and profits thereof, whether as beneficial owner, trustee, mortgagee in possession, or otherwise,
……’

29 This part of the definition reproduces exactly section 3 of the Land Tax Assessment Act 1910 (Cth), as it stood when considered by High Court in Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490. In that case, the Commissioner for Land Tax assessed three brothers to land tax in respect of lands forming part of their deceased father’s residuary estate. By his will, the testator had directed that the income of the estate be accumulated and distributed to specific legatees, for a period of some years after his death. Only after that accumulation and satisfaction of the specific legacies were the sons entitled to a distribution of the lands, the proceeds of their sale, or of the income from them. Chief Justice Griffith found (at 495-6):

‘until the trust for accumulation (which has not even begun) has been carried out, the appellants have no right to any present perception of the fruits of any part of the testator’s estate, real or personal.’

30 He said (at 498):

‘In my opinion, therefore, when the equitable rights created by a will, which may be as diverse as the testator thinks fit, are such that the beneficial enjoyment of property by a particular object of his bounty cannot begin until the expiration of a determinate or indeterminate period, there is no present estate in possession in that property in any person other than the trustees of the will. In one sense, perhaps, the persons who are for the time being entitled to share in the fruits of the land may collectively be called the equitable owners, but that point is not material to the present case.’

31 He found that the brothers were neither ‘entitled to the land for any estate of freehold in possession’, nor ‘entitled to receive … the rents and profits thereof’ in terms of the legislation. He explained (at 499):

‘… I am of opinion that until the trusts for accumulation of income have been carried out the whole equitable as well as the legal estate in the land is vested in the trustees. It would, indeed, be a solemn mockery to pronounce in such circumstances that an estate of freehold in possession is vested in the appellants.’

32 In that case, the residuary beneficiaries submitted successfully that they were not the owners of the land for tax purposes. In this case, the taxpayer submits the opposite: namely, that the sole beneficiary of real estate forming part of the Sejaca Trust and of income derived from it is the owner, for the purposes of identical NSW legislation.

33 In Glenn’s case, the trustees were obliged to accumulate the income from the trust lands before distribution to the taxpayers as residuary beneficiaries. In this case, though the Trustee was empowered by clause 5 of the Trust Deed ‘in its absolute discretion’ to accumulate income from the Ettalong property before making any distribution to Ms Llanes, it was not obliged to do so. To determine whether this distinction affects the application of the principle, it is necessary to refer to the legislative scheme.

34 Liability to taxation in any tax year depends on ownership as at 31 December in the previous year: section 8. That is the date on which the Trustee must establish that Ms Llanes was ‘entitled to the land for any estate of freehold in possession’, if it is to show that she was an ‘owner’ for the purposes of the Act. In Glenn’s case, Griffith CJ construed the phrase ‘entitled to the land for any estate of freehold in possession’ as one denoting a ‘present right of enjoyment’ (at 496). He said:

‘For the tax is an annual tax, and the ‘owner’ of the land is the person who is in the present enjoyment of the fruits which presumably afford the fund from which it is to be paid.’ (ibid)

35 As the Appeal Panel said recently in Sahab Holdings Pty Limited v Chief Commissioner of State Revenue [2010] NSWADTAP 4, when considering whether the sole unit holder in a unit trust was an ‘owner’ for the purposes of the Land Tax Management Act 1956:

‘… in a statutory scheme of the present kind where liability is fixed on a specified date (here, midnight, 31 December 2007), the question is whether there is a presently subsisting interest in the land at that date’. [para 13(7)].

36 And at para 29:

‘The critical component of the statutory definition is a requirement for a present right to beneficial or present enjoyment …’.

37 As at midnight on 31 December 2006, it could not be established that Ms Llanes was entitled to receive all the rents and profits of the Ettalong land for the 2007 tax year, because it was not known whether the Trustee would exercise its power of accumulation. That is so, even if – as the Trustee submits and the Chief Commissioner denies – the trust deed forbids the application of income accumulated from real estate to any beneficiary except Ms Llanes.

38 Nor was it known at the taxing date whether the Trustee would exercise its other powers affecting the income available for distribution to her, or affecting the capital. These included the following discretionary powers.

a.To determine that losses in one financial year should be ‘borne out of future income or out of Corpus’: clause 5(b).

b.To transfer ‘any property of the Trust’, which included real estate, in lieu of paying income to the Beneficiaries, who were defined in Schedules 2 and 4 to include Ms Llanes and the other Income Beneficiaries: clause 15(a).

c.To ‘apply, pay or credit the whole or any part of the Corpus of the Trust Fund or the Income of the Trust Fund to or for the maintenance, education, advancement in life to or for any one or more of the Corpus Beneficiaries [Ms Llanes] or Income Beneficiaries [Ms Llanes and others] respectively: clause 15(b).

d.To ‘pay or transfer the whole or any part of the Trust Fund’ to certain other defined trusts: clause 15(c).

39 ‘Trust Fund’ and ‘Corpus’ were defined in Schedule 4 so as to include, by necessary implication, the land at Ettalong.

40 For the same reasons, it was not possible as at midnight on 31 December 2007 to determine what part of the real estate income, if any, would be distributed to Ms Llanes in the 2008 tax year.

41 The Trustee argued that, read in context, and adopting the canons of contractual interpretation approved by the High Court in Carr v Berriman Pty Limited (1953) 89 CLR 327, the discretionary powers described above did not authorise the Trustee to transfer any interest in the Ettalong land, or any income derived from it, to or for the benefit of any beneficiary other than Ms Llanes. Having regard to those principles, and to the width of the powers ascribed to the Trustee in each of the clauses conferring discretionary power referred to above, the Tribunal is not satisfied that the powers of the Trustee are so circumscribed. Even if they were, the conclusion remains the same: it would not be possible as at either of the taxing dates to predict with certainty whether all or any - and if any, what part – of the income from real estate would be distributed, or available for distribution to Ms Llanes, in the relevant tax year. It could not be said that she enjoyed a present right of enjoyment at either of those dates.

42 The Trustee also placed reliance on the fact that Ms Llanes controlled the Trustee as its sole director and shareholder, and could thereby control how much of the relevant income was distributed to her. However, the Trustee was a separate legal entity from Ms Llanes. As at either of the taxing dates, it could not be predicted with certainty that she would continue to be the sole shareholder and director throughout the ensuing tax year. At best, she could form an intention as at a taxing date to distribute income and corpus in a particular way, and it could be argued that her intention would be the intention of the Trustee. The mere forming of an intention on a taxing date, however, could not restrict the Trustee’s subsequent conduct, even if it remained within her control. For those reasons, it would remain impossible to ascertain with certainty the amount of income which would be available for distribution to Ms Llanes in the relevant tax year.

43 The principle in Glenn’s case was affirmed by the High Court in CPT Custodian v Commissioner of State Revenue (Vic) [2005] 224 CLR 98. In that case, the High Court again considered the phrase, ‘entitled to the land for any estate of freehold in possession’, this time as used in Victorian land tax legislation. It affirmed the decision of Nettle J in the Supreme Court of Victoria that two companies which held units in unit trusts were not liable to land tax as ‘owners’ of lands comprised in the unit trusts, even if they held 100% of the units, because, inter alia, their entitlements to income could not be ascertained until the Trustee and Manager of each trust had applied the income as they were authorised to do by the trust deed – for instance, by taking significant fees from the Fund for themselves, and by reimbursing themselves on a monthly basis for their costs, charges and expenses from the Fund.

44 It was also relevant that, though the beneficial interest in the trust fund was divided into units, ‘each said to confer an equal interest in all property for the time being held by the Trustee upon the trusts of the Deed, … no unit conferred “any interest in any particular part of the Trust Fund or any investment”’ (at 111).

45 The High Court distinguished between a proprietary interest and ‘ownership’ for the purposes of the statute (at 110):

‘To approach the case … by asking first whether … the holder of a unit ‘in a unit trust’ has ‘a proprietary interest in each of the assets which comprise the entirely of the trust fund’ and answering it in the affirmative, did not immediately assist in construing the definition of ‘owner’ in the Act. That definition does not speak of ownership of proprietary interests at large, but of entitlement to any estate of freehold in possession.’

46 Similarly, in Federal Commissioner of Taxation v Whiting [1943] 68 CLR 199, the High Court distinguished between the vested interest of a beneficiary in the assets of an estate and a present entitlement to a share of the income of a trust estate. The Court was there construing the terms of section 97(1) of the Income Tax Assessment Act 1983-1940, which were slightly different from those under consideration here.

47 It follows from Glenn’s case and CPT Custodian that the mere existence of a proprietary or beneficial interest in lands forming part of the trust assets does not necessarily satisfy the definition of ‘owner’ in the Land Tax Management Act 1956.

48 The principles in those two decisions were applied by the Appeal Panel of this Tribunal in Sahab Holdings. In that case as in this, the taxpayer was a trustee of land, whose liability to land tax had been assessed on the basis that the trust was a special trust. It submitted that the trust satisfied the requirements of a fixed trust in section 3A(2) of the Act because, among other things, the trust deed provided that the beneficial interest in the trust property was vested in the sole unit holder.

49 The Appeal Panel found that the unit holder (a company) was not an ‘owner’ for the purposes of the legislation, despite having a beneficial interest in the trust fund, because it had no present right of enjoyment of the fruits of the land as at the taxing date. It did not enjoy that right, because the Trustee had discretionary powers which could affect the amount of income payable to the unit holder. These included [at paras 27-28]:

a.powers of indemnification out of the trust assets,

b.powers to create and issue additional units,

c.powers to redeem units,

d.powers to deduct moneys owing by a unit holder from amounts payable on redemption of its units; and

e.powers to realise investments and property and to pay from the proceeds all debts and liabilities of the trust, and all proper costs, disbursements, fees and other outgoings, and to make provision for future liabilities.

50 The Appeal Panel considered that the cumulative effect of these provisions was ‘the same as was the case in CPT’ [at para 32].

51 In GTN Developments Pty Limited v Chief Commissioner of State Revenue [2007] NSWADT 168, the Tribunal held that a unit holder in a unit trust was not an owner for the purposes of the legislation because, among other things, the unit holders did not have a proprietary interest in the land the subject of the trust, and their entitlement to income could not be determined as at midnight on 31 December, because it was subject to the exercise of discretionary powers by the trustee: [paras 60-63].

52 In the present case, as in Sahab Holdings and GTN Developments, as at each taxing date, the Trustee enjoyed discretionary powers which could affect whether the beneficiary received any income from the lands in question in the subsequent tax year, and the amount of that income. Those powers are enumerated above. The existence of those powers negates any present entitlement ‘to the land for any estate of freehold in possession’, or ‘to receive … the rents and profits thereof’, necessary to satisfy the definition of ‘owner’ in section 3.

53 It follows:

a.that Ms Llanes was not the ‘owner’ of the land at Ettalong for the purposes of section 3 of the Act, and

b.that the trust did not satisfy the requirements for a fixed trust in section 3A(2).

54 Reliance was also placed by the Trustee on Ms Llanes’ right to call in the trust estate and terminate the trust, under the rule in Saunders v Vautier (1841) 4 Beav 115; 49 ER 282. The following formulation of the rule in Thomas on Powers (1998) at 176 was approved in CPT Custodian (at 119):

‘Under the rule in Saunders v Vautier , an adult beneficiary (or a number of adult beneficiaries acting together) who has (or between them have) an absolute, vested and indefeasible interest in the capital and income of property may at any time require the transfer of the property to him (or them) and may terminate any accumulation.’

55 The High Court found in CPT Custodian that the requirement of an ‘absolute, vested and indefeasible interest’ in capital and income was not met where ‘the unit holders were not the person in whose favour alone the trust property might be applied by the trustee’ (at 120).

56 In that case, the trustee was empowered to apply income to its own fees and those of the manager, and to reimburse and indemnify itself from the trust assets. Until those rights were exercised, it was not possible to ascertain what the trust fund was, and the power to call in the trust estate could not arise (at 121).

57 Similarly, in Sahab Holdings, the Appeal Panel found that the rule in Saunders v Vautier did not apply because of the trustee’s right to indemnity from the trust fund.

58 In this case, the Trustee enjoys a right of indemnity under clause 21 of the Deed of Trust, and a right to remuneration agreed or nominated by the Appointor under clause 16. For the reasons expressed in CPT Custodian and Sahab Holdings, the rule in Saunders v Vautier does not apply.

59 For the reasons given, the Tribunal determines the issues as follows:

a.In re-assessing the Trustee’s liability to land tax, the Chief Commissioner did not exercise his power to classify the Trust as a special trust under section 25A.

b.He was empowered by section 9 of the Taxation Administration Act 1996 to make the re-assessment of 3 July 2008, subject to review by the Tribunal.

c.Because Ms Llanes did not satisfy the definition of ‘owner’ of the land at Ettalong in section 3 of the Land Tax Management Act 1956 , the trust did not satisfy the requirements for a fixed trust in section 3(2) of the Act.

Order

60 The Chief Commissioner’s decision of 3 July 2008 to re-assess the Trustee’s liability to land tax, on the basis that the Sejaca Trust was a special trust, is confirmed.