Khalil and Associates Pty Ltd ATF The George Khalil Family Trust v Chief Commissioner of State Revenue [2024] NSWCATAD 23

Background

At the relevant time for each of the land tax years the applicant owned various properties in NSW as trustee for the George Khalil Family Trust (“Khalil Trust”). The Khalil Trust was a discretionary trust for the purposes of the Land Tax Act at all relevant times.

Clause 16 of the Trust Deed defined eligible beneficiaries as including, as well as some named beneficiaries, “any other eligible beneficiaries nominated by the nominator to the trustee”. Clause 3 of the Trust Deed defined persons as including individuals, bodies corporate and unincorporated associations.

An Amending Deed dated 3 June 2021 amended the Trust Deed by inserting the following clause:

18 Exclusion of Foreign Beneficiary

Any foreign beneficiary that may exist in this trust is irrevocably excluded from receiving any current, or future trust distributions. For the avoidance of doubt this clause will supersede any other clause under this deed.

On or about 31 August 2021, the Chief Commissioner assessed the applicant as not being liable for the surcharge land tax on the basis that the Amending Deed of 3 June 2021 satisfied s. 5D of the Land Tax Act. On 19 July 2022, the Chief Commissioner reassessed the applicant as liable for surcharge land tax on the basis that the Amending Deed did not satisfy s. 5D of the Land Tax Act.

The Statutory Framework

Section 5A of the Land Tax Act creates a levy of surcharge land tax payable in respect of residential land owned by “foreign persons”.

Section 5D of the Land Tax Act sets out how surcharge land tax is to be determined in circumstances where land is owned by a trustee under a discretionary trust, relevantly, as follows:

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-
   1. no potential beneficiary of the trust is a foreign person (the "no foreign beneficiary requirement"),
   2. 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").
4. A person is a "potential beneficiary" of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person.
5. For the removal of doubt, a person is not a potential beneficiary of a discretionary trust if the terms of the trust prevent any property of the trust from being distributed to or applied for the benefit of the person.

Section 2A of the Land Tax Act defines “foreign person” by referring to s. 2A of the Duties Act 1997 (NSW) (“Duties Act”) which itself refers to a definition in s. 4 of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (“FATA”), which relevantly includes the following:

1. an individual not ordinarily resident in Australia; or
2. a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
3. a corporation in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest; or
4. the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
5. the trustee of a trust in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;

Submissions

The Applicant submitted:

1. A combination of clauses 16 and 18 (as inserted by the Amending Deed of 3 June 2021) meant that no potential beneficiary of the trust was a foreign person, because:
   1. Neither s. 5D nor any Practice Note published by the Chief Commissioner required a definition of “foreign person” to be included.
   2. The term “foreign beneficiary” as used in the Amending Deed prevented all relevant foreign persons from being beneficiaries.
   3. There is no difference in the meaning between the term “foreign beneficiary” as used in the Amending Deed and the term “foreign person” as defined in the legislation.
2. That trust deeds are interpreted in the same way as contracts and the intention of the drafter is relevant to their construction.
3. That the Court can correct an “obvious mistake” in a trust document.

The Chief Commissioner submitted:

1. That the Tribunal could not be satisfied that the term “foreign beneficiary” had the same meaning as “foreign person” because the words are different. The term “foreign person” has an extended definition in s. 4 of the FATA but the word “foreign” has an ordinary meaning.
2. That it was relevant to consider that the Amending Deed was drafted by legal advisors familiar with taxation law.
3. That the reference to “irrevocably excluded” in the Amending Deed was to a foreign beneficiary receiving trust distributions. The Amending Deed does not disable any future amendment to the Trust Deed.

Decision

The Tribunal found that the terms of the Trust Deed and the Amending Deed did not satisfy the requirements of s. 5D of the Land Tax Act.

In making this finding the Tribunal:

1. Agreed with the Chief Commissioner that the Amending Deed did not satisfy s. 5D(3)(b) as it did not preclude the applicant from amending the Trust Deed in the future to make a foreign person a potential beneficiary of the trust.
2. Agreed with the Chief Commissioner that the Amending Deed did not satisfy s. 5D(3)(a) on the basis that:
   1. The regulatory context involved a complicated web of interacting and intersecting statutes in which words are often defined and are not given their ordinary dictionary meaning and, accordingly, it is critical to use precise words as defined.
   2. There was uncertainty about whether the words “foreign beneficiary” as used in the Amending Deed had the same meaning as “foreign person” as defined in the legislation.
   3. The state of the evidence was such that no inference could be drawn about the objective intention of the applicant in drafting the Amending Deed.
   4. The Applicant did not rely on any evidence that a mistake had been made in the drafting of the Amending Deed.

Orders

The Applicant’s application is refused.

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