Cymtow Pty Ltd ATF v Commissioner of State Revenue [2022] NSWCATAD 314

Cymtow Pty Ltd as trustee for Stanavacs Trust; Lanlex No 127 Pty Ltd as trustee for TBH Family Trust; Cybir Pty Ltd v Chief Commissioner of State Revenue [2022] NSWCATAD 314

Background

Each of the Applicants was a company acting as trustee of a discretionary trust. On 4 February 2020, two directors of each of the Applicants signed instruments that purportedly amended each of the Applicants’ trust deeds to exclude non-Australian citizens from being beneficiaries (“4 February 2020 instruments”). Each of those instruments were in the form of communications which were expressed as amending the respective trust deeds “to exclude beneficiaries who [were] not Australian citizens effective immediately”.

The Statutory Framework

Section 5A of the LTA imposes surcharge land tax on residential land in New South Wales owned by “foreign persons”.  A “foreign person” has the same meaning as in the Duties Act 1997 (NSW) and, relevantly, includes a trustee of a trust in which one or more persons who hold a “substantial interest” in that trust is either an individual not ordinarily resident in Australia, a foreign corporation or a foreign government.¹

In relation to a trust, a person holds a “substantial interest” if it (or together with its associates) holds a beneficial interest in 20% or more of the income or property of the trust.² For discretionary trusts, each beneficiary is deemed to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary.³

Section 5D was inserted into the LTA and took effect on 24 June 2020, which means it applied for the 2021 and subsequent tax years.⁴ The effect of s. 5D is that a trustee of a discretionary trust is deemed to be a “foreign person”, and thus liable to surcharge land tax, if the trust does not prevent a foreign person from being a beneficiary of the trust.⁵ That condition is generally only satisfied if no potential beneficiary of the trust is a foreign person, and the terms of the trust are not capable of being amended to allow a potential beneficiary to be a foreign person.⁶ Under transitional arrangements, a trustee is exempt from surcharge land tax for the 2017 to 2020 land tax years if the terms of the trust have been amended so that the trust prevents a foreign person from being a beneficiary before midnight of 31 December 2020.

Section 127(3) of the Corporations Act 2001 (Cth) provides for the execution of deeds by Australian incorporated companies (such as the Applicants). Under that sub-section a company may execute a deed if that document is expressed to be a deed and is signed by the company’s directors, or a director or secretary or, alternatively, by the affixation of its common seal witnessed by the company’s directors, or a director and secretary.⁷

Under s. 100(3) of the Taxation Administration Act 1996 (NSW), the Applicants bear the onus of proving, on the balance of probabilities, their case before the Tribunal.

Applicant's submissions

The Applicants submitted that the 4 February 2020 instruments were effective at law in amending the respective trust deeds to exclude foreign beneficiaries.

The trust deed for the Stanavacs Trust provided that the deed was capable of amendment by way of deed.

In relation to the TBH Trust, a written or oral resolution by the trustee could suffice (as an alternative to a deed) to amend the deed.  The provisions of the trust deed prohibited any amendments that affected amounts already “set aside for” a beneficiary.

In relation to the Cybir Trust, the trustee was capable of amending the trust deed either orally or without the use of a deed, but the consent of the Appointor was first required. The provisions of the deed prohibited any amendments that affected amounts “appointed, paid or applied for the benefit of” a beneficiary.

The Applicants also contended that the Chief Commissioner had represented, in its communications with the Applicants’ accountant and bookkeeper on 16 December 2020, that it would extend the deadline for making the required amendments to the trust deeds from 31 December 2020 to 15 January 2021. In light of those representations, the Applicants submitted that the Chief Commissioner was either bound by that representation or should now be obligated to extend the timeframe for making the amendments.

With respect to Cybir specifically, the Applicants also contended that it was specifically disadvantaged, as the Chief Commissioner had failed to remind it to make the relevant amendments as it did with the other two trustee Applicants.

Chief Commissioner's submissions

The Chief Commissioner submitted that the 4 February 2020 instruments were not effective at law in amending the trust deeds, and in any case were not sufficient for the purposes of s. 5D of the LTA. In reply to the Applicants’ submission that the Chief Commissioner had made representations regarding the extension of time for making amendments, the Chief Commissioner tendered its Client Notes as evidence that such extensions of time were granted in relation to the lodgement of the relevant amendments only, as distinct from the actual making of the amendments.

Decision

Ground 1 - Whether the 4 February 2020 instruments were effective for the purposes of s. 5D of the LTA

The Tribunal firstly considered whether the 4 February 2020 instruments were effective in amending the respective trust deeds.

In relation to the Stanavacs Trust, the Tribunal noted that the trust deed required amendments to be in the form of a deed;  for the document to have been a deed at general law, there must be at a minimum some evidence of an intention that document is to be signed, sealed and delivered as a deed.⁸ Furthermore, s. 127 of the Corporations Act 2001 (Cth) sets out a process for Australian incorporated companies, which requires a document to be expressed to be executed as a deed. Cymtow, as trustee, did not meet either the general law or legislative requirements for executing documents by  deed.⁹ Therefore, the Tribunal found that the relevant instrument was not effective in amending the trust deed, with the result that the trustee was deemed to be a “foreign person” pursuant to s. 5D of the LTA.

In relation to the TBH Trust and Cybir Trust, the Tribunal noted that amendments to the respective trust deeds were not required to be in deed form. Although a “resolution” was required for any amendments to the TBH Trust, the Tribunal was prepared to characterise the 4 February 2020 instruments as such.¹⁰ However, amendments to the Cybir Trust Deed required the consent of the Appointor of the Trust, and there was no evidence of the Appointor’s consent in the 4 February 2020 instrument, nor was there any other evidence of such consent. As such, Cybir had not discharged its onus in demonstrating that the 4 February 2020 instrument operated to effectively exclude foreign beneficiaries from the Cybir Trust.

Furthermore, the Tribunal considered the relevant clauses in the TBH Trust and Cybir Trust deeds prohibiting amendments that affected existing entitlements of beneficiaries to capital or income.¹¹

It noted that such prohibitions meant that either any amendments to these trusts were entirely ineffective, having failed to protect the entitlements of the beneficiaries as required, or were generally effective save for a limited class of non-citizens. In any event, the Tribunal found that, in both cases, foreign beneficiaries would remain as beneficiaries,¹² and the Applicants had not discharged their onus in relation to the effect of these prohibitions on the purported amendments by the 4 February 2020 instruments.¹³

Ground 2 - Whether dealings between the Applicants and Chief Commissioner limited the Chief Commissioner’s right to impose surcharge land tax

The Tribunal considered the conflicting evidence tendered by the Applicants and the Chief Commissioner, and ultimately preferred the Chief Commissioner’s evidence. In coming to this view, the Tribunal noted that the contemporaneity of the Client Notes meant that it was more likely to be an accurate account of events, especially as compared to the statutory declaration relied on by the Applicants, which was made 16 months after the fact.¹⁴

It followed that the Applicants had not discharged their onus to the civil standard of proof in showing that the Chief Commissioner had made the representation that it would extend the deadline for the making of the amendments.

In any event, the Tribunal noted that the legislation clearly provided that the deadline for the relevant amendments was “before midnight on 31 December 2020”. The legislation did not provide any scope for discretion to the Chief Commissioner (or its officers) to extend that deadline, and any such extension, if made, would not have been effective at law.¹⁵

The Tribunal addressed the Applicants’ submission that it was entitled to procedural fairness and found that the “combined effect” of the review applications meant that the Applicants were afforded sufficient procedural fairness.¹⁶ In relation to Cybir, the Tribunal found that it was not particularly disadvantaged as its trustee should have been well aware of the consequences of the proposed amendments to the LTA in relation to the Cybir Trust.¹⁷

Orders

(1) The Decisions under review are confirmed.

Link to the decision

Footnotes

1. ^ Duties Act 1997 (NSW) (“Duties Act”), s. 104J, read with Foreign Acquisitions and Takeovers Act 1975 (Cth) (“FATA”), s. 4(d)-(e).
2. ^ Duties Act, s. 104J, read with FATA, s. 4 (definition of “substantial interest”).
3. ^ Duties Act, s. 104J, read with FATA, s. 8(3).
4. ^ State Revenue Legislation Further Amendment Act 2020 (NSW), s. 2.
5. ^ LTA, s. 5D(1).
6. ^ LTA, s. 5D(3), but see Land Tax Management Act 1956 (NSW), Sch. 2 Pt. 34 cl. 66(3).
7. ^Corporations Act 2001 (Cth), s. 127(1)-(3).
8. ^ At [31](2).
9. ^ At [31](5).
10. ^ At [33].
11. ^ At [35].
12. ^ Act [35].
13. ^ Act [36].
14. ^ Act [43].
15. ^ Act [40].
16. ^ Act [48].
17. ^ Act [50].