Pontiac Trading Co Pty Ltd v Chief Commissioner of State Revenue [2024] NSWCATAD 114

Background

1. Pontiac Trading Co Pty Ltd (“the applicant”) is a Trustee for the Karina Surjadi Family Trust (“the Trust”).
2. The Trust was settled as a discretionary trust on 21 July 1997 by means of the Deed of Trust (“the Trust Deed”). The applicant became the owner of a property at Kingsford NSW (“the Property”) on trust for the Trust on 5 September 1997.
3. Mr Surjadi is the sole director of the applicant.
4. Mr Surjadi first thought of amending the Trust Deed in early 2022 as his accountant informed him that he had received advice from a solicitor that amendments were needed to be made to the Trust Deed to remove foreign beneficiaries.
5. Mr Surjadi engaged solicitors in 2022 to amend the Trust Deed. Mr Surjadi explained to his solicitor, Mr Wojtasik, that his mother, Ms Hadisoebrata, had moved into the Property in February 2022 for ‘good’ (prior to this time, it was a rental property).
6. On 25 March 2022, the Trust Deed was amended by means of a Deed of Variation to:
   
   i. remove all Eligible Beneficiaries apart from Ms Hadisoebrata; and
   
   ii. to remove the applicant’s power to accumulate income of the Trust Fund.
7. Clause 24 of the Trust Deed was amended in the following terms:

“The Trustee may with the consent in writing of the Appointor Eligible Beneficiary from time to time by supplemental deed revoke, add to or vary all or any of the provisions of the Trust Deed…”

8. On 12 April 2022, the amended Trust Deed was sent to the Chief Commissioner.
9. On 11 May 2023, the Chief Commissioner responded that despite the amendments, the trust remained a ‘discretionary trust’ in the tax years 2019 to 2023 and was reassessed for surcharge land tax because foreign beneficiaries were not excluded in the Trust Deed
10. On 11 May 2023, the Chief Commissioner issued a Land Tax Assessment Notice for the 2019-2023 tax years for land tax, surcharge land tax and interest in relation to the Property.
11. The applicant raised an objection to the Land Tax Assessment Notice. On 10 August 2023 the respondent disallowed the objection. On 23 August 2023, the applicant sought review of the Land Tax Assessments.

Legislation

Section 5D of the Land Tax Act 1956 (“LT Act”) provides:

“5D – Surcharge land tax – discretionary trust

1. The trustee of a discretionary trust is taken to be a foreign person in that capacity for the purposes of section 5A if the trust does not prevent a foreign person from being a beneficiary of the trust.
2. If a discretionary trust prevents a foreign person from being a beneficiary of the trust, the trustee is not in that capacity a foreign person for the purposes of section 5A.
3. A discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if (and only if) both of the following requirements are satisfied:
   
   (a)  no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement),
   
   (b)  the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement).”

Issues for Determination

1. Whether the Deed of Variation ‘converted’ the Trust from a discretionary trust into a fixed trust as submitted by the applicant. If that is so, surcharge land tax would not be levied on the Property in the 2023 tax year.
   
   There was no dispute between the parties that, first, prior to the Deed of Variation, the Trust was a discretionary trust and secondly that the terms of the Trust Deed for the 2023 tax year failed to comply with s5D(3)(b) of the LT Act.
2. Whether interest charges assessed for 2019 to 2022 should be remitted; and
3. Whether surcharge land tax assessment for 2019 to 2023 should be ‘written off’.

Decision

1. Whether the trust is a discretionary trust?

In considering whether the Deed of Variation caused the discretionary trust to be converted into a fixed trust, the key issue is whether the Trust Deed satisfied the fixed trust criteria in s. 3A of the Land Tax Management Act 1956 (“LTM Act”). This requires the beneficiary of the Trust to be:

1. “presently entitled to the income of the trust” s. 3A(3B)(a)(i);
2. “presently entitled to the “capital of the trust” s. 3A(3B)(a)(ii); and
3. these entitlements cannot be removed, restricted or otherwise affected by the exercise/failure to exercise any discretion conferred on a person by the trust deed: s. 3A(3B)(b).

1.1 Presently entitled to the income and capital?
The Tribunal found from reading the Trust Deed as a whole, Ms Hadisoebrata is presently entitled to the income of the Trust consistent with s3A(3B)(a)(i), LTM Act.

Ms Hadisoebrata would be presently entitled to the capital of the Trust if she had a right to require the applicant to wind up the Trust and distribute the trust property or the net proceeds of the trust property. However, based on a fair reading of the Trust Deed, Ms Hadisoebrata did not have such a right and therefore the Trust was not a fixed trust as it was inconsistent with s. 3A(3B)(a)(ii), LTM Act.

Amendment of Trust Terms?

The Tribunal agreed with the respondent’s submission that the Trust Deed must, but did not, explicitly contain terms consistent with sections 3A(3B)(b), LTM Act.

In this case the Trust Deed permitted amendment where the Trustee had the written consent of the beneficiary. It followed that the beneficiary’s entitlement to income of the trust and the capital of the trust can be removed, restricted or otherwise affected contrary to s. 3A(3B)(b),  LTM Act and for this second reason the Trust was not a fixed trust.

The term “discretionary trust” is a term that has “no fixed meaning and is used to describe particular features of certain express trusts.” Chief of Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226 at 234 [8]. The Deed of Variation did not change the character of the features of the Trust to such extent that it ceased being able to be described as a discretionary trust. The Tribunal rejected the applicant’s inherent submission that a trust cannot be described as a discretionary trust simply because there is a single beneficiary.

Consequently, the Trust following the Deed of Variation was still a discretionary trust which did not meet the requirements under 5D(3)(b) of the LT Act for the 2023 tax year, and therefore was subject to surcharge land tax.

2. Remission of interest?

The respondent agreed to remit interest (consisting of market rate and premium rate components) between 13 April 2022 and 20 June 2023 and an order to such effect was made.

Section 25 of the Taxation Administration Act 1996 (“TA Act”) is a discretionary provision, permitting the Chief Commissioner to remit interest to the taxpayer. Both parties agreed that the reference to the four non-cumulative ‘criteria’ set out in Incise were relevant to remission of the premium component of interest. The four criteria are set out in [62]:

1. all principal tax that is owing and not in dispute has been fully paid;
2. there has been co-operation by the taxpayer in providing relevant information to the Commissioner so as to enable the Commissioner to issue assessments;
3. such co-operation by the taxpayer has occurred prior to any investigation being commenced by the Commissioner (voluntary disclosure) or, at the very least, within reasonable time after requests for information have been made by the Commissioner – i.e. the taxpayer has taken reasonable care; and
4. there has been no wilful default by the taxpayer in not paying tax on time.
   These four criteria are not exhaustive and other relevant matters may be taken into account: Antegra Pty Ltd v Chief Commissioner of State Revenue [2021] NSWSC 107 at [178].

3. Writing off unpaid tax?

The Tribunal held s. 110, TA Act permits the Chief Commissioner and, on this application, the Tribunal to write off unpaid tax if it is satisfied that recovery of the tax is impractical and unwarranted.

The applicant submitted that payment of the tax would cause Ms Hadisoebrata hardship as her son would have to sell the Property and he could not purchase another home for her.

Whilst unfortunate, the Tribunal found these conclusions are highly speculative and even if the Tribunal were to accept that this would follow if the tax were recovered, s110, TA Act does not address financial hardship or fairness.

Additionally, there is no evidence or material before the Tribunal that would support a finding that the recovery of the tax is “impractical or unwarranted.”

The Tribunal declined to make an order that the whole or any part of the applicant’s unpaid tax be written off.

Orders

The Tribunal held:

1. The applicant failed to discharge the onus it bore and therefore the assessments for 2019 to 2023 tax years should be affirmed.
2. The Trust Deed for the tax year 2023 is a ‘discretionary trust’ and does not satisfy the requirements of s5D(3)(b) of the LT Act.
3. Interest should not be remitted prior to 13 April 2022 or that the unpaid tax be written off.

The following orders were made:

1. The decision on objection is varied to the extent the interest charged to the applicant between 13 April 2022 and 20 June 2023 is remitted.
2. The respondent’s decision is otherwise affirmed.

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