Esplanade Wollongong Unit Trust v Chief Commissioner of State Revenue [2017] NSWCATAD 157

Background

On 17 January 2002, a contract was entered into between Belmore Developments Pty Limited (“Belmore”) and Waterviews Development Pty Ltd (“Waterviews”) to purchase the Property as tenants in common for $11.5 million. There is no dispute that Belmore purchased this half share in its own right.

The Applicant asserted that on 11 February 2006, the Belmore Developments Unit Trust (“Belmore Trust”) was created by way of deed.

On 16 February 2006, a contract for the sale of the half share held by Waterviews (“2006 Half Interest”) was entered into between Waterviews as vendor, and Belmore as purchaser (“First Disputed Transfer”). This purchase was financed by Capital Finance.

On 15 December 2009, a company called Esplanade Wollongong Pty Ltd (“Esplanade”) was registered, and on 22 October 2010, deeds were entered into whereby the Belmore Trust was renamed the Esplanade Trust, and Belmore was replaced by Esplanade as the trustee of the newly renamed trust.

On 22 October 2010, a transfer was executed transferring the Property from Belmore to Esplanade (“Second Disputed Transfer”).

The Second Disputed Transfer was initially stamped for nominal duty on the basis that it merely reflected a change in trustee and nothing more. However, after the Office of State Revenue (“OSR”) conducted an investigation, it determined that the Second Disputed Transfer was for the whole of the Property, and so on 19 February 2013 the Applicant was assessed based on a transfer value of $20 million. On 10 December 2015, the Chief Commissioner then issued a revised assessment based on a transfer value of $18.5 million, and premium duty was applied.

Decision

First Issue – Whether Belmore purchased the 2006 Half Interest as trustee for the Belmore Trust or in its own right

In determining whether the 2006 Half Interest was purchased by Belmore as trustee, the Tribunal found that there must be a “sufficiently clear intention to create a trust in respect of the 2006 Half Interest and this can be demonstrated by the language or the conduct of the parties involved” [at 44].

Having regard to the totality of the evidence, the Tribunal found that it was “not possible to conclude that the Trust existed as at 16 February 2006 and it cannot be concluded that the 2006 half Interest was purchased by Belmore as trustee” [at 82]. The Tribunal relied on the following findings to reach its conclusion that the 2006 Half Interest was purchased by Belmore in its own right:

• The contemporaneous documents evidencing the financial arrangement with Capital Finance made no mention of the existence of a trust of any description.
• A letter was provided by the director of the Applicant, Mr Taranto, to the OSR stating that the Property was purchased by Belmore “in its own right”.
• The Contract for Sale of Land did not mention that Belmore was purchasing the Property on trust or as trustee.
• The Applicant contends that there was trust property in the form of a settled sum of $100. No evidence was provided to support that this sum came out of the settlor’s account, or that it was deposited in the Belmore account on or around 11 February 2006.
• There are no financial records for the Belmore Trust for the year ending 30 June 2006, and the financial statements suggest that the $100 settled sum was not paid until the 2007 financial year. The accountant, Mr Pickham, said he took care in recording these payments for each financial year, and that the failure to record the settled sum earlier was an error made by the previous accountant. The Tribunal did not accept this account, as Mr Pickham prepared the first set of financial records for the Belmore Trust.
• The stamping of the Belmore Unit Trust Deed occurred on 7 June 2007, almost 16 months after the deed is said to be executed. Mr Pickham could not provide an explanation as to this delay.
• The witnesses were equivocal about their recollections of the date the deed was signed, but under cross-examination it became apparent they had no independent means of verifying the date.
• The date the Applicant asserts the deed was signed, 11 February 2006, is a Saturday. None of the witnesses recalled that they had worked on Saturdays.
• The address of the Belmore Trust, recorded on the deed, was the former accountant’s address. This was not changed until 17 April 2007.

Second Issue – Whether the 2006 Half Interest became impressed with trust obligations sometime after the First Disputed Transfer but before the Second Disputed Transfer

Whether the 2006 Half Interest was impressed with trust obligations required the Tribunal to be satisfied that either formally, by way of writing, or less formally, by way of conduct, a declaration of trust had been established. The Tribunal considered the evidence provided by Mr Pickham, Mr Taranto and Mr Pupovac (another director of the Applicant), but determined that their evidence was merely subjective, and there was “no independent objective basis for suggesting the existence of such a trust” [at 88].

Accordingly, the Tribunal was not satisfied that the 2006 Half Interest became impressed with trust obligations after the First Disputed Transfer but before the Second Disputed Transfer.

Third Issue – Whether the Second Disputed Transfer was a mistake in that it was intended that Belmore only transfer the 2006 Half Interest to the Applicant, as it was this interest which was the subject of the Belmore Trust

The Applicant asserted there was a mistake, and in fact one half interest in the Property should be held by Belmore in its own right (being the interest acquired in 2002), and the second half interest should be held by the Applicant.

The Tribunal found “such a proposition to be fanciful having regard to all the contemporaneous documentation that exists…” [at 95]. In this regard the Applicant’s financial records were deemed as unreliable by the Tribunal as they “belatedly” supported the assertion that Belmore held only a half interest.

Further, the Tribunal did not accept Mr Taranto’s evidence in relation to the dealings with CBA, as his evidence was found to be “inconsistent with the facts, lacks credibility and reflects very poorly on Mr Taranto in connection with his dealings with the bank” [at 104].

Accordingly, the Tribunal determined there was no mistake in relation to the Second Disputed Transfer.

Fourth Issue –the dutiable value of the Property as at 22 October 2010

The Applicant submitted that the Respondent should not depart from Revenue Ruling DUT 102 on the basis that it requires the Chief Commissioner to accept the Valuer-General’s valuation of the Property. The Tribunal determined that this would only be the case if there were no other valuations available and the Property satisfied all the relevant criteria referred to in the Ruling. This was not the case in these proceedings, as a total of 8 valuations were provided to the Tribunal, including two from the Valuer-General which valued the property at $11.4 million.

The Tribunal considered each valuation, including the valuations provided by two valuers who were retained as expert witnesses by each party (Mr Adlington as an expert witness retained by the Chief Commissioner and Mr Staltari as an expert witness retained by the Applicant). The Tribunal determined that reliance should be placed on the direct comparison method of valuation, but the hypothetical development method should be used as a check on the direct comparison method. The Tribunal preferred Mr Adlington’s valuation (which valued the Property at $18.5 million), as it found that MrStaltari’s approach (of applying an average realisation figure for all like units without having regard to their different sizes and locations) was less accurate and less reliable. However, the Tribunal did not ignore the relevance of the Valuer-General valuations, and ultimately determined that the dutiable value of the Property as at 22 October 2010 was $16,130,000, which it found to be a “fair and reasonable” figure taking into account the Adlington and Valuer-General valuations [at 167].

Fifth Issue – Whether s.32B applies such that the premium rate of duty is not payable or is to be reduced

The Applicant contended that the premium rate of duty did not apply because the Property was not used for residential purposes but was used as stock in trade for the business conducted by Belmore. The issue was therefore whether the Property was treated as stock in trade as at 22 October 2010.

The Tribunal found no evidence to support the Applicant’s contention. The evidence demonstrated that there was no activity occurring on the Property on or around 22 October 2010. Further, the Property was only treated as stock in trade in financial records from 30 April 2011. The Tribunal also referred to the decision in Metricon Qld Pty Ltd v Chief Commissioner of State Revenue [2016] NSWSC 332 to support the principle that trading stock is used when it is sold, not merely when it is held pending sale.

The Tribunal concluded that the Property was not used as stock in trade by Belmore as at 22 October 2010. Accordingly, the premium rate of duty applied to the whole of the unencumbered value of the Property.

Sixth Issue – Whether interest should be applied in whole or in part

The Tribunal identified two features of this matter which would affect the interest as assessed by the Chief Commissioner. Firstly, the Tribunal found that there were significant delays in the preparation and progress of the case from both sides. Secondly, the Chief Commissioner changed his position in December 2015 by adjusting down the transfer value from $20 million to $18.5 million, and also by applying the premium rate of duty.

In light of these two findings, the Tribunal determined that the imposition of interest (without any remission) was unfair and unwarranted, and should be varied in accordance with the Tribunal’s orders.

Orders

1. The decision under review is set aside.
2. In respect of the Second Disputed Transfer, ad valorem duty is payable based on a transfer value of $16,130,000 at the premium rate of duty and interest is payable by the Applicant based on the following factors:
   1. only the market rate component of interest is to be charged for the period from 23 January 2011 to the date of payment on a transfer value of $ 16,130,000; and
   2. interest is only to be applied to the amount being the duty that would have been payable on 22 January 2011 if the duty had been calculated at ordinary rates (ie not at the premium rates arising as a result of the application of s. 32A of the Duties Act 1997).

Link to decision

Esplanade Wollongong Unit Trust v Chief Commissioner of State Revenue [2017] NSWCATAD 157