Another case has confirmed the importance of amending a discretionary trust deed prior to the purchase of a property so that foreign owner stamp duty or land tax surcharges are not incurred.
On 22 February 2024, in Chloe Adolphi Pty Ltd as trustee for The Chloe Adolphi Family Trust v Chief Commissioner of State Revenue [2024] NSWCATAD 48 the New South Wales Administrative Tribunal (Tribunal) held that a “deed of rectification” to vary a trust deed after a land tax assessment had already been issued was not sufficient in the circumstances to prevent foreign land tax surcharges as it could not be said to have objectively demonstrated that it gave effect to the parties’ original common intention.
This follows a similar case - Khalil & Associates Pty Ltd ATF The George Khalil Family Trust v Chief Commissioner of State Revenue [2024] NSWCATAD 23 – which we reported on earlier this year here – illustrating yet again how the strict requirements in New South Wales for discretionary trusts are proving onerous for taxpayers.
Foreign Surcharges
Most States have introduced foreign surcharges for stamp duty and land tax on the purchase and holding of residential or other land by foreign persons.
For New South Wales purposes, an individual is generally considered to be a foreign person, unless they:
are an Australian citizen, or
have lived in Australia for 200 days or more in the 12 months prior to the taxing date of 31 December, and they are a permanent resident of Australia.
Foreign corporations, corporations with substantial foreign ownership or trustees of trusts where there are substantial interests held by foreign persons are also caught.
In New South Wales, Victoria and Tasmania, discretionary trusts deeds must include exclusionary language to ensure that a trustee is not permitted to make certain distributions to a foreign person (as defined). Other jurisdictions only look to named beneficiaries, takers in default and/or the trustee – which can be easier to monitor.
Foreign Surcharge Land Tax Rates
The rules in New South Wales are particularly onerous as exclusionary clauses must also be irrevocable. A trust will therefore forever be restricted from making distributions, regardless of whether it holds land in New South Wales or not.
Legislation
Under section 5A of the Land Tax Act 1956 (NSW) (Land Tax Act), any foreign persons owning residential land in New South Wales will be subject to the 4% foreign land tax surcharge. Section 5D of the Act provides that any trust which does not prevent a foreign beneficiary from being a beneficiary of the trust will be treated as a foreign person.
In summary a two-limb test applies to assess whether a trust is a foreign person:
the ‘no foreign beneficiary’ requirement - the trust deed must explicitly preclude any foreign beneficiaries; and
the ‘no amendment’ requirement - the trust deed must stipulate that it cannot be amended to allow foreign beneficiaries, i.e. the exclusion is completely irrevocable.
Background Facts
On 16 April 2021, a discretionary trust was established. A company called Chloe Adolphi Pty Ltd was made the corporate trustee. Its director was Anthony Guidera. In May 2021, the taxpayer company acquired residential property in New South Wales in its capacity as trustee.
In the trust deed, Anthony Guidera’s daughter-in-law, Chloe Adolphi, was identified as the ‘main beneficiary’. In addition to Chloe, the persons entitled to benefit from the trust included all relatives of Chloe and the spouses of those relatives and corporations and trusts associated with Chloe.
On 23 July 2022, the New South Wales Chief Commissioner of State Revenue (Chief Commissioner) wrote to the company advising that it may have incurred a liability for the foreign surcharge land tax. The taxpayer company then lodged a land tax registration return in which it stated that the trust was not a foreign person.
On 12 October 2022, the Chief Commissioner assessed the taxpayer company for land tax as well as additional foreign surcharge land tax (totalling $18,883.34) for the 2021 land tax year on the basis that the terms of the trust deed did not explicitly prevent a foreign person from being a beneficiary of the trust and the trust was therefore a ‘foreign person’. The taxpayer company objected.
In December 2022, a deed of rectification was executed, which Anthony Guidera as director of the taxpayer company, said gave effect to the intention that no foreign person would be entitled to be a beneficiary of the Trust. Despite this the Chief Commissioner disallowed the objection as the deed of rectification did not have a retrospective effect and as at the relevant taxing date, the trust did not exclude foreign persons from benefiting. The taxpayer company applied to the Tribunal for review of the objection decision.
Issue and Opposing Arguments
The issue was whether the deed of rectification effectively altered the liability for surcharge land tax.
In his witness statement, Anthony Guidera position was that he had intended, by establishing the trust, to benefit his daughter-in-law alone and that there were no potential foreign persons who could benefit from the trust. However, he also conceded that the terms of the trust did not preclude other beneficiaries.
The Chief Commissioner contended that Anthony Guidera’s evidence concerning the citizenship status of his family members, was not sufficient to establish that there was no potential beneficiary of the trust who was a foreign person.
Decision
Having regard to the express terms of the deed, the Tribunal held that its terms did not meet the “no foreign beneficiary requirement” nor the “no amendment requirement” for the purposes of section 5D of the Act.
The taxpayer company was surprised by the assessment of the trust to surcharge land tax and subsequently steps were taken to rectify the deed by Anthony Guidera. While it appears that there was an intention to have Chloe be the primary beneficiary, there was also an intention for the trustee to have broad discretion in determining beneficiaries, including natural persons other than Chloe. There was also no specific intention to exclude foreign beneficiaries from the trust, aside from clauses allowing foreign entities to benefit at the trustee's discretion. Furthermore, critically, the trust deed was also not capable of being ‘rectified’.
The Tribunal relied on a case involving a trust disclaimer (Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184) to conclude that, even if the deed of rectification had been effective, the retrospective effect of the rectification would not have changed the ‘taxable facts’ that existed at the time of the taxing date for land tax.
In paragraph 67 the Tribunal noted the ‘distinction between the effect of a deed of rectification in the regulation of rights … and the taxable facts upon which the Chief Commissioner must assess liability to taxation’, further emphasising that retrospective measures may not be sufficient to alter the facts upon which tax is imposed.
Key Observations
The case supports a position that the Tribunal may hold that deeds of rectification can only be relied on to the extent that it can be objectively demonstrated that they give effect to the parties’ original common intention. That is, the Tribunal may find that a deed of rectification will be ineffective where insufficient evidence exists to demonstrate its veracity, or indeed any evidence to the contrary exists.
The key takeaway is that irrespective of whether there is an intention to make distributions to foreign persons, foreign surcharges can capture ordinary Australian discretionary trusts, unless the appropriate amendments to the trust deed are made.
The case reinforces that we need to be proactive as new legislation is released to avoid paying preventable taxes. With a consistently shifting landscape of state taxes, all taxpayers must be alert and able to institute measures to avoid being caught by legal complexities and paying more tax than required.
Action Required
All trust deeds should be reviewed and potentially amended prior to buying any residential property.
Taxpayers that intend to use a trust to acquire land in different States and Territories should consider the rules across multiple jurisdictions.
If a trust deed contains an exclusionary clause, then trustees should ensure they are operating within the confines of their discretion and that a distribution is not made to a beneficiary who is, or has become, an excluded beneficiary.
Navigating the complexities of setting up or managing a trust can be difficult. We are well placed to guide taxpayers in this area.
Please contact us with any questions or any other State Tax issues.
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Nicholas Clifton
Principal Lawyer
T +61 3 9611 0154 | M +61 401 150 955
E nclifton@sladen.com.au
Meera Pillai
Associate
T +61 3 9611 0179
E mpillai@sladen.com.au
