TECH 1 Pty Ltd ATF ROVI Investments Unit Trust v The Chief Commissioner of State Revenue  NSWCATAD 123
|Date of judgement||18 June 2015||Proceeding No.||1410582|
|Judge(s)||A Verick, Senior Member|
|Court or Tribunal||NSW Civil and Administrative Tribunal|
|Legislation cited||Land Tax Act 1956
Land Tax Management Act 1956
|Catchwords||STATE REVENUE – Land Tax – Liability of trustee - Whether a fixed trust or a special trust – No present entitlement to income or capital of the Trust – Requirements for fixed trust not satisfied – Land Tax Management Act, s 3A|
|Cases cited||Byrnes v Kendle  HCA 26; (2011) 243 CLR 253
Commissioner of Taxation v Bamford  HCA 10; (2010) 240 CLR 481
Harmer v Commissioner of Taxation (1991) 173 CLR 264
Sayden Pty Ltd v Chief Commissioner of State Revenue  NSWCA 111
The principle question for determination in the proceedings was whether the TECH 1 Pty Ltd ATF ROVI Investments Unit Trust (“the Trust”) was a “fixed” or “special” trust as defined in the Land Tax Management Act 1956 (“the Act”). The Chief Commissioner had reassessed the Trust from a “fixed” to a “special” trust on 24 April 2014. This resulted in the Trust no longer being entitled to a tax free threshold in respect of a property held by the Trust, and being charged land tax under the Land Tax Act 1956 on the full value of the property.
In order to determine whether the Trust was a “fixed” or “special” Trust, the Tribunal had to determine three issues:
Firstly, as required by s 3A(3B)(a)(i) of the the Act, whether the beneficiaries of the Trust were in the relevant years "presently entitled to the income of the Trust", subject to payment of proper expenses by the Trustee relating to the administration of the Trust;
Secondly, as required by s 3A(3B)(a)(ii) of the Act, whether the Unit Holders were in the relevant years "presently entitled to the capital of the Trust Fund and had the power to require the Trustee to wind up the Trust Fund and distribute the Trust property or the net proceeds of the Trust property"; and
Thirdly, as required by s 3A(3B)(b) of the Act, whether or not the entitlements referred to in the first and second issues could be removed, restricted or otherwise affected by the exercise of any discretion, or by a failure to exercise any discretion, conferred on a person by the Trust Deed in the relevant years.
Issue 1 - Present Entitlement To Trust Income
Senior Member Verick relied on the High Court’s enunciation of the meaning of the concept “present entitlement to income” in Harmer v Commissioner of Taxation , which was relied upon by His Honour Gzell J in Sayden Pty Ltd v Chief commissioner of State Revenue  (“Sayden’s case”):
“a beneficiary is 'presently entitled' to a share of the income of the Trust estate if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the Trustee has the funds available for immediate payment."
The Tribunal held that the unit holders of the Trust did not have an interest in the income of the Trust which was both vested in interest and vested in possession in the relevant land tax years as required by the criteria set out in s. 3A(3B)(a)(i) of the Act. The Tribunal held this on two grounds, as advanced by the Chief Commissioner, namely:
While cl. 8.3 of the Deed provided for the payment of the net income of the Trust Fund to Unit holders, it was "subject to any special rights or restrictions provided in the Second Schedule in relation to Units of any class". Under cl. 3.1.2 of the Second Schedule, the Trustee had the discretion to pay all or part of the net income of the Trust Fund to holders of Income Units. Thus the Ordinary Unit Holders in those circumstances could not be said to "have an interest in the income of the Trust which was both vested in interest and vested in possession;" and
Clause 8.4 of the Deed allowed the Trustee, with consent of holders of a majority of the issued voting units, to accumulate all or any part of the net income of the Trust Fund arising during an Accounting Period. If a determination had been made by the Trustee under cl. 8.4 of the Deed it would have clearly precluded a Unit Holder from having a vested interest in the income for that particular period and with no right to demand a distribution of the accumulated income which would then have become capital of the Trust Fund.
Issue 2 - Present Entitlement To Trust Capital
The Tribunal relied upon the definition of present entitlement to Trust capital as enunciated by Gzell J in Sayden’s case :
"By contrast, present entitlement to capital is novel. Presumably it means an interest in the Trust property vested in interest and in possession in that there is no other interest in the property that precedes it, together with a present legal right to demand division of the Trust property or its proceeds among the beneficiaries.
Any interest of the Trustee under its right to indemnity is not relevant in this context because s 3A(3) of the Management Act requires any equitable interest of the Trustee to be disregarded."
The Tribunal accepted the Chief Commissioner’s submissions that the Trust Deed did not specifically provide the Unit Holders with a present entitlement to the capital of the Trust for the following reasons:
There were two ways that would have permitted Unit Holders to gain access to the capital of the Trust Fund, but neither option was available "at the request of an individual Unit Holder":
The Unit Holders could have sought to terminate the Trust under cl. 7.3 of the Deed prior to the Vesting Date, but this was only possible by the special resolution of a 75% majority of the Unit Holders present and entitled to vote; or
The Unit Holders could redeem their units by retiring from the Trust Fund under cl. 7.7 of the Trust Deed, but redemption was only permitted "with the unanimous consent of the Unit Holders".
In addition, the Tribunal agreed with the Chief Commissioner’s submissions that there were two further impediments to establishing a present entitlement to the capital of the Trust:
The Trustee had power to issue Equity Units under cl. 3.8 of the Deed and cl. 2 of the Second Schedule. If such units were issued, the Trustee had discretion to pay to the Equity Unit Holders all or such part of the Trust capital as the Trustee in its discretion determined; and
The Income and Equity Unit Holders could not have on their own terminated the Trust:
The Deed permitted classes of units to be issued with restricted voting rights and the Second Schedule to the Deed made it clear that Income Units and Equity Unit Holders did not have any right to vote or move or second any motion or to speak at any general meeting of the Unit Holders; and
Whilst cl. 7.3 of the Deed the Trust allowed a Special Resolution of the Unit Holders to terminate the Trust before the Vesting Date, cl. 1.1 of the Deed provided that a Special Resolution required the approval of 75% of the Unit Holders present and entitled to vote at a duly convened general meeting of the Unit Holders. As Income and Equity Unit Holders could not have participated in this vote, it could not be said that the beneficiaries of the Trust were "presently entitled to the capital of the Trust" in the relevant land tax years.
Issue 3 – s. 3A(3B)(b)
As the Tribunal found that the Trust failed to satisfy the relevant criteria as set out in s.3A(3B)(a)(i) and (ii) of the Act, it became unnecessary in this matter for the Tribunal to consider the issue required by s. 3A(3B)(b).
As the Trust failed to satisfy the relevant criteria as set out in s. 3A(3B)(a)(i) and (ii) of the Act, the Trust was held to be a special trust and the reassessments of the Chief Commissioner of State Revenue were affirmed.
Link to decision
- (1991) 173 CLR 264 at 271 [with whom Meagher J A and Tobias AJA agreed].
-  NSWCA 111 at .
- Cited at  per Verick SM.