|Date||5 March 2020|
|Judge(s)||S Higgins, Senior Member|
|Court or Tribunal||NSW Civil and Administrative Tribunal|
TAXES AND DUTIES – Part 4 of the Duties Act 1997 – exemption under s 163B of the Duties Act 1997 (NSW) – discretion in s 163H of the Duties Act 1997 – Taxation Administration Act - penalty and interest – increased penalty for concealment
Chief Commissioner of State Revenue v Incise Technologies Pty Ltd  NSWADTAP 19
The Applicants sought review of the Duties Notice of Assessment issued on 23 April 2018 by the Chief Commissioner on the basis that the Transfer was a “dutiable transaction” under Chapter 4 of the Duties Act 1997 (NSW) (the “Act”).
Mr Gu and his business partner, David Chen (“Mr Chen”) commenced a property development company, DAPG, in which they were each issued 100 ordinary shares. DAPG acquired two blocks of land in Crows Nest, New South Wales, for a redevelopment project with each block of land being valued at over $2,000,000.
In September 2013, Mr Gu instructed his accountant, Robert Kam (“Mr Kam”) to prepare a family trust deed. A trust deed was prepared but not executed. In early 2014, Mr Gu instructed Mr Kam to amend the Gu Family Trust to include Ms Zhang as a trustee and nominator. On 18 March 2014, Mr Gu and Ms Zhang signed the Gu Family Trust Deed.
In the period February 2013 to early 2014, Mr Gu continued to pursue property development opportunities with a range of business partners. During this time, the marital relationship between Mr Gu and Ms Zhang began to deteriorate. Sometime between 4 and 9 May 2014, Mr Gu and Ms Zhang signed a Memorandum of Transfer of Shares in DAPG, transferring 99 of Mr Gu’s 100 shares in DAPG (being 49.5% of the total shareholding in DAPG) to himself and Ms Zhang as trustees of the Gu Family Trust.
On 19 February 2016, Ms Zhang filed an initiating application in the Family Court of Australia seeking financial (property and/or maintenance) orders. In that application, the date of final separation was recorded as 6 August 2014. Mr Gu and Ms Zhang lodged an application for divorce in the Federal Circuit Court of Australia on 14 September 2016.
The case concerned the application of:
1. Application of Duties Act Chapter 4
a. Was the marriage broken down irretrievably?
The Applicants submitted that at the date of the Transfer, the marriage of Mr Gu and Ms Zhang had broken down irretrievably. Ms Zhang highlighted the factors of: the 14-month period of separation from January 2013 to March 2014, the failed attempt at reconciliation between April and May 2014, and the subsequent divorce and property settlement in September 2016 as matters that were evidence of this breakdown.
The Applicants also submitted that the agreement to transfer the shares in DAPG to the Gu Family Trust was for the purpose of dividing matrimonial property as a consequence of the breakdown of the marriage. It was submitted that the Applicants relied on the advice of Mr Kam to transfer the shares to the Gu Family Trust. As both Ms Zhang and Mr Gu were co-trustees and each had to give consent before the disposition of the shares, the agreement to transfer Mr Gu’s shares in DAPG to the Gu Family Trust was for the purpose of dividing matrimonial property as a consequence of the breakdown of their marriage.
The Chief Commissioner submitted that the exemption under s. 163B did not apply to the Transfer as the Applicants’ marriage had not broken down irretrievably at the time of the Transfer.
The Chief Commissioner also submitted that there was no agreement for division of matrimonial property, but rather the purpose of the Family Trust was to collectively pool matrimonial property as opposed to a division of matrimonial property.
b. Was the application of Chapter 4 of the Act to the Transfer not just and reasonable?
The Applicants submitted that the application of Chapter 4 to the Transfer would not be just and reasonable as the Transfer was an unusual transaction where following a marital breakdown, the parties adopted a certain course, on the advice of their accountant, with the purpose of preserving assets pending divorce. The Applicants argued that although the exemption under s. 163B was found by the Chief Commissioner not to apply, that did not mean those same circumstances could not be relied upon for the purposes of s. 163H.
The Applicants further submitted that there had been no real change in the ownership of the shares in that Ms Zhang effectively only acquired a 25% interest in DAPG for a finite period. As the office of co-trustees of a private trust is a joint one, the shares were effectively “frozen” until the property settlement.
Finally, the Applicants submitted that there was no intention to avoid duty and that Mr Gu had only committed to the Transfer upon the advice of Mr Kam. As such, the Chief Commissioner should have used his discretion to grant exemption under s. 163H.
2. Penalty tax and interest
The Applicants submitted that no penalty tax was payable as they took reasonable care to comply with the taxation law in accordance with s. 27(3) of the TAA. Mr Gu relied on the fact that he received advice from Mr Kam and Ms Zhang said she had no reason to doubt what she was told by Mr Gu.
Alternatively, the Applicants contended that they “disclosed sufficient information” during the investigation to warrant a reduction in penalty tax by 20% pursuant to s. 29 TAA.
Further, the Applicants said they did not take any steps to prevent or hinder the Chief Commissioner from becoming aware of the nature and extent of the tax default, and consequently s. 30 TAA (which increases the penalty tax by 20%) should not apply.
1. Duties Act chapter 4
The Tribunal found that the Applicants failed to establish the exemption under s. 163B applied.
a. Was there an irretrievable breakdown of marriage?
While the Tribunal accepted the Applicants’ evidence that from early 2013 their marriage was strained, it was not persuaded that at the time of the Transfer, their marriage had broken down irretrievably. The Tribunal did not regard the couple arguing and sleeping in separate rooms as meaning they had separated and there was no likelihood of cohabitation being resumed: .
Factors tending against an irretrievable breakdown were that the couple had a short reconciliation in April to May 2014, they continued to present as a couple to friends and family, Ms Zhang gave a personal guarantee for Mr Gu’s loan (during a period of alleged breakdown) and went on to support the creation of the Gu Family Trust and the incorporation of a new corporate entity for another new development project: –.
b. Was the interest acquired as a result of a transfer made in accordance with an agreement for the purpose of dividing matrimonial property as a consequence of the breakdown of marriage?
The Tribunal did not accept the purpose of the Transfer to the Family Trust was to divide matrimonial property: ,  – . On the evidence before the Tribunal, it found that the purpose of creating the Trust was to ensure the assets of any future property development project by Mr Gu would be jointly held by him and Ms Zhang as trustees of the Trust so that Ms Zhang would have an interest in and some control over the assets that belonged to such ventures: .
Was the application of Chapter 4 of the Act to the Transfer not just and reasonable?
The Tribunal held, consistently with the judgment of Emmett AJA in Winston-Smith v Chief Commissioner of State Revenue  NSWSC 773, that where there is a transfer within a family alleged to be in consequence of a marriage breakup but found not to satisfy the requirements of s. 163B, it is not open to argue those same circumstances warrant an exemption under s. 163H. To do so would expand the operation of s. 163B, which the legislation clearly does not permit: .
The Tribunal disagreed with the Applicants’ contention that the transaction was unusual. The fact that they acted on the professional advice of Mr Kam did not make the transaction unusual. The Tribunal accepted that Mr Gu acted on advice he received but made no finding that it was Mr Kam who gave that advice, or that the advice was in the terms asserted by Mr Gu. The Tribunal was of the view that whether such advice was incorrect, or incorrectly understood, did not give rise to a finding that an application of Chapter 4 to the transaction was not just or reasonable: .
As to the Applicants’ contention that there was no real change in ownership, the Tribunal held there was an effective change in ownership of the shares in DAPG. Applying Winston-Smith, the Tribunal observed that a change in the underlying practical or economic interest is a relevant consideration in determining whether the application of Chapter 4 to the relevant transaction is not just or reasonable. In this case, the Tribunal agreed with the Chief Commissioner that the Trust added another layer of ownership in regard to the shares in DAPG, and thereby materially altered the legal structure of that ownership: .
In respect of the Applicants’ submission that there was no intention to avoid duty, the Tribunal noted that no intent to avoid duty is insufficient, on its own, to enliven the discretion in s. 163H, following Milstern Nominees Pty Ltd v Chief Commissioner of State Revenue  NSWSC 68 at -. SM Higgins observed that the second part of the proposition by White J in Milstern Nominees was not satisfied in this case. That is, even if there was no intent to avoid duty (which the Member stopped short of finding), the relevant acquisition did have a practical consequence to the way in which the land held on trust (that is, the Crows Nest development) would be appointed and enjoyed: -.
Further in relation to this submission, SM Higgins indicated that while she did not find that the Applicants intended to avoid tax, this did not mean she was satisfied there was no intention to avoid tax: . In this regard, she took into account that between them, the Applicants had considerable experience in business, property development and accounting and therefore should have made further enquiries or sought expert advice or obtained confirmation in writing of the duty consequences of the proposed transfer: -.
In conclusion, the Tribunal held that the Applicants failed to prove the discretion under s. 163H applies to their case.
2. Penalty tax and interest
In relation to whether both components of interest should be reduced or remitted due to a delay in the investigation, the Tribunal agreed with the Chief Commissioner that there was no basis for doing so. The Tribunal noted that the Applicants failed to provide an acquisition statement within three months of the Transfer (or at all) and failed to provide a historical valuation for the property owned by DAPG, despite numerous requests. Accordingly, any delay in the commencement of the investigation was of the Applicants’ making: .
As to whether penalty tax was payable, the Tribunal found that the Applicants failed to take reasonable care to comply with the taxation law and therefore there was no basis to exempt them from penalty under s. 27(3) of the TAA. In this regard, the Tribunal considered it relevant that Mr Gu and Ms Zhang had considerable commercial experience, and that to act on the oral advice of Mr Kam demonstrated a failure to take reasonable care: -.
The Tribunal disagreed that a reduction in penalty tax should apply under s. 29(1) of the TAA. As the Applicants failed to lodge an acquisition statement within three months of the Transfer, as required under s. 152 of the Act, it could not be said that the Applicants disclosed sufficient information during the investigation to enable the nature and extent of the tax default to be determined: -.
With regard to the penalty imposed under s. 30(1) of the TAA, the Tribunal acknowledged the failure of the Applicants to provide an acquisition statement and an historical valuation as required, however, it was not persuaded that their conduct was intentional so as to prevent or hinder the Chief Commissioner from becoming aware of the nature and extent of the tax default. Accordingly, the Tribunal held that the penalty amount assessed by the Chief Commissioner should be varied by a reduction of the 20% increase in penalty that had been applied under s. 30(1): -.