Milstern Nominees Pty Ltd v Chief Commissioner of State Revenue [2015] NSWSC 68

Summary

The taxpayer, Milstern Nominees Pty Ltd  (“the Taxpayer”), sought review of the Chief Commissioner’s decision not to exercise his discretion to grant the Taxpayer a partial exemption under s. 163H of the Duties Act 1997 (“Duties Act”) in relation to its acquisition of shares in Milstern Enterprises Pty Ltd (“Enterprises”) on 23 December 2010 and 8 March 2011 (“Acquisition”).

Justice White held that the “just and reasonable” discretion in s.163H of the Duties Act is not limited to avoiding the application of double or multiple impositions of duty by the same acquisition.

Justice White held it was not just and reasonable that Ch 4 apply to the acquisition by the Taxpayer of the shares in Enterprises where Enterprises as a matter of fact does not own or control the land, or have any expectation of receiving the land or any proceeds of sale of any part of the land, or any income from it.

Background

On 23 December 2010 and 8 March 2011, the Taxpayer acquired the shares in Enterprises. The sole director and shareholder of the Taxpayer was Millie Phillips.

At the dates of the Acquisition, the shares were held by Millie Phillips’ children, Robert and Sharonne, who together held eight of the nine ordinary shares in Enterprises. Mrs Philips deposed that the purpose of the Acquisition was to gain “100% effective control of the land and other assets held by Enterprises and its subsidiaries”. Enterprises was one of eight discretionary objects of a discretionary trust, established on 9 March 1982, known as the Landsell Trust (the “Trust”). The trustee of the Trust was Rebenta Pty Ltd (“Trustee”), who owned land holdings in New South Wales with a land value of more than $2 million. The trust deed provided that the beneficiaries of the Trust included: three charities; any person who made a relevant donation to those charities and, with the consent of the Guardian, the Trustee nominates as a general beneficiary; and any person the Appointor nominates as a beneficiary to the Trustee. The Guardian of the Trust was Inhage Pty Ltd and the Appointor was Mamark Holdings Pty Limited (“Mamark”).

The Trustee had not nominated any person to be a general beneficiary. However, Mamark had exercised its power to appoint five beneficiaries, namely Millie Phillips, Enterprises and three other related companies.

Statutory Framework

Chapter 4 of the Duties Act imposes duty where a person makes a “relevant acquisition”.

A “relevant acquisition” relevantly includes an acquisition of an “interest” in a landholder that, when aggregated with other interests in the landholder held by the person or an associated person, results in an aggregation that amounts to a “significant interest”. A “landholder” relevantly includes a private company that has land holdings in New South Wales with a threshold value of $2 million or more. A landholder is a “private landholder” if (relevantly) the landholder is a private company.

A person has an “interest” in a landholder if the person in the event of a distribution of all the property of the landholder would be entitled to any of the property distributed. A person has a “significant interest” if the person, in the event of a distribution of all the property of the landholder immediately after the interest was acquired, would be entitled to in the case of a private landholder – 50% or more of the property distributed.

Section 159 of the Duties Act provides that a beneficiary of a discretionary trust is taken to own or to be otherwise entitled to the property the subject of the trust. It was common ground between the parties that the Trust was a discretionary trust within the meaning of that phrase in the Dictionary to the Duties Act. The property the subject of the Trust is all of the property held by the Trustee. Hence, each of the beneficiaries, including Enterprises, was taken by s. 159 of the Duties Act “to own or to be otherwise entitled” to that property.

The Taxpayer did not seek an exemption from duty in respect of lands and goods held by Enterprises' subsidiaries; a partial exemption was only sought regarding the property that Enterprises was taken by s. 159 to own.

For the purposes of Chapter 4 of the Duties Act, when the Taxpayer acquired the shares in Enterprises, the Taxpayer made a “relevant acquisition” of a “significant interest” in Enterprises. This was because the eight ordinary shares held by Robert and Sharonne would have entitled them to eight-ninths of the property of Enterprises if its property were distributed, and their interest in Enterprises when aggregated with that of Millie Philips, was 100% of its ordinary shares. The result of this Acquisition was that duty was chargeable on eight-ninths of the unencumbered value of all landholdings and goods in New South Wales to which Enterprises was entitled.

Section 163H of the Duties Act confers upon the Chief Commissioner the discretion to grant a full or partial exemption in respect of an acquisition if the Chief Commissioner is satisfied that to impose the duty in relation to the particular acquisition would not be just and reasonable. The issue in this case was whether the Chief Commissioner should have exercised his discretion to grant a partial exemption with respect to the land held by the Trustee that Enterprises was deemed by s.159 to own.

Submissions

The Taxpayer submitted that the purpose of Chapter 4 of the Duties Act is to charge duty on the acquisition of beneficial or economic ownership of land through acquisitions of marketable securities at the general rate applicable for transfers of interests in land under Chapter 2, rather than to charge a lesser amount of duty, or no duty at all.

The Taxpayer submitted that the discretionary power bestowed upon the Chief Commissioner under s.163H should be exercised when there is no intent to avoid duty and where the relevant acquisition of shares would have no practical consequence to the way in which the land held by the trustee would be appointed or distributed. Mrs Phillips controlled the Trustee, the Appointor and the Guardian before and after the Acquisition. As such, Millie Phillips did not need to control Enterprises in order to control the disposition of trust assets and in any event she already had control of Enterprises.

The Taxpayer submitted that s.159 of the Duties Act was an anti-avoidance measure to deal with a situation whereby a person, without acquiring any interest in the land might, by acquiring a “significant interest” in a discretionary object, achieve the economic benefits of ownership of land held by the trustee. No such issue arose in the present case.

The Chief Commissioner submitted that an inquiry into matters of “control” over the landholder or its subsidiaries was a distraction, as was an inquiry into “beneficial ownership” or “economic ownership”. Rather, the scope and purpose of the provisions concern the acquisition of “interests”; there are no references in Chapter 4 to “control”, “beneficial ownership” or “economic ownership”.

The Chief Commissioner also submitted that it would not be a sufficient basis for exercising the discretion in s.163H that there was no avoidance of duty that would be payable on a transfer of the land. This was because Chapter 4 did not operate only as support to the separate transfer duty provisions in Chapter 2; rather, Chapter 4 is a separate taxing regime.

The Chief Commissioner further submitted that s.159 overrides and reverses the general law position that a discretionary object has no entitlement to specific assets the subject of the trust by deeming the object to own or otherwise be entitled to the property the subject of the trust. The Chief Commissioner submitted that in enacting s.159 the legislature must have intended that landholder duty be paid on the value of the land and other property the subject of a discretionary trust upon a relevant acquisition in a landholder that is a discretionary object despite the fact that an acquirer of such a landholder would never, in the normal course, acquire control of the discretionary trust by virtue of the acquisition alone.

The Chief Commissioner also submitted that the discretion in s.163H was provided to avoid the imposition of double or multiple duty.

Primary Decision

White J observed that no express judicial guidance has been given as to when it might be considered just and reasonable for such exemptions to be granted in respect of an acquisition.

White J held that s.159 of the Duties Act is an anti-avoidance measure. His Honour stated that no doubt it is a measure that broadens the tax base, but the extent to which the tax base is intended to be broadened is itself subject to the discretion now found in s.163H of the Duties Act. His Honour held that this discretion is not limited to avoiding the application of double or multiple impositions of duty by the same acquisition.

White J held that the main question to be considered in this matter is whether it is not just and reasonable that Chapter 4 apply to the Acquisition, having regard to the purposes of Chapter 4, where:

1. Enterprises as a matter of fact does not own or control the land, or have any expectation of receiving the land or any proceeds of sale of any part of the land, or any income from it; and
2. Enterprises’ position as a discretionary object of the Trust was irrelevant to the Taxpayer’s acquisition of the shares in Enterprises;

In consideration of these circumstances, White J found that it is not just and reasonable that Chapter 4 apply.

For these reasons, White J held that:

1. The decision of the Chief Commissioner not to grant a partial exemption under s.163H of the Duties Act in respect of the acquisition of shares in Enterprises by the Taxpayer should be revoked;
2. In its place a decision should be made granting a partial exemption under s.163H of the Duties Act reducing the duty chargeable on the acquisition by the Taxpayer by an amount corresponding to the duty chargeable in respect of the property which Enterprises is deemed to be entitled to own or be otherwise entitled to.
3. The excess duty paid by the Taxpayer should be refunded, with interest.
4. The Chief Commissioner should pay the Taxpayers costs.

Orders

The proceedings are stood over to a convenient time to make orders in accordance with the decision.

Link to decision

Milstern Nominees Pty Ltd v Chief Commissioner of State Revenue [2015] NSWSC 68