NCAT affirms application of transfer duty to variation of trust deed

On 31 May 2024, Senior Member E.A. MacIntyre of the New South Wales Civil and Administrative Tribunal (‘NCAT’) decided the case of Baxter v Chief Commissioner of State Revenue [2024] NSWCATAD 153 (‘Baxter’). This represented the first-ever decision on the application of the ‘change in beneficial ownership’ provisions constituted by sections 8(1)(b)(ix) and 8(3) of the Duties Act 1997 (NSW) (‘Duties Act’), which were introduced in early 2022.

Facts

The facts of material relevance to the decision in Baxter were:

Windsmere Family Trust

• In January 2021, the Windsmere Family Trust (‘Trust’) was established by Parkdaill Pty Ltd (‘Trustee’) pursuant to a deed entitled ‘Discretionary Trust Deed’ (‘Trust Deed’);
• The Trust Deed afforded the Trustee absolute discretion as to the distribution of the Trust’s income and capital to both ‘named beneficiaries’ and ‘eligible beneficiaries’. A failure to exercise the discretion by 30 June in relation to income for that financial year, or a default of exercise of such discretion, would enliven clauses requiring the distribution of that financial year’s income in a prescribed manner; and
• Later in 2021, the Trustee in its capacity as trustee of the Trust acquired two properties situated in Surry Hills, Sydney – the Norton Street property and the Ridge Street property.

Ridge Street property

• In November 2022, the Ridge Street property was transferred to a ‘named beneficiary’ of the Trust (‘Antonio’), who was the son of two other ‘named beneficiaries’ – Cynthia Gana Baxter (‘Applicant’) and John Charles Baxter (‘John’);
• There was conjecture as to the circumstances of the transfer and, in response, the Applicant submitted documents that purported a transfer date of 21 November 2022. Those documents were either undated or referenced 28 November 2022, being the date on which the transfer was electronically registered through the PEXA platform; and
• On 21 November 2022, before the transfer was electronically registered through PEXA, a representative of the Chief Commissioner of State Revenue (‘Respondent’) issued a Duties Notice Assessment imposing ad valorem transfer duty, with the transfer described elsewhere by the Respondent as a ‘transfer of real property’.

Trust Deed variation

On 22 November 2022, a deed of variation to the Trust Deed was executed by the Trustee. The relevant changes effected, which were intended to change the Trust into a ‘fixed trust’ as defined by section 3A Land Tax Management Act 1956 (NSW), were:

• the Applicant became the only ‘beneficiary’ specified thereunder;
  consequently, the Applicant became ‘presently entitled’ to all income and capital of the Trust. This was subject only to the defrayment of property expenses incurred by the Trustee in relation to administration of the Trust, with all other income being held for the absolute benefit of
• the Applicant who had an immediate and indefeasible interest therein; and
• the ‘definitions’ clause of the Trust Deed was amended to refer solely to the Applicant, save for the ‘Named Beneficiaries’ clause, the title of which was amended to a singular reference, absent the deletion of references to other parties.

Assessment by the Respondent

• On 31 March 2023, and in response to the foregoing, the Respondent issued separate duties notices of assessment, imposing ad valorem duty in respect of both properties as separate ‘dutiable transactions’. This was on the basis that the deed of variation resulted in a ‘change in beneficial ownership’ of both properties. The duty was additional to that imposed a day earlier in relation to the transfer of the Ridge Street property to Antonio and was imposed on the Applicant as the person who obtained the beneficial ownership in the new ‘fixed trust’;
• On 9 May 2023, after disallowing the Applicant’s objection to the duties notices of assessment issued on 31 March 2023, the Respondent reassessed duty on a materially higher amount on the basis the two transactions constituted a single dutiable transaction; and
• An objection by the Applicant to the reassessment was substantially rejected by the Respondent. The Applicant sought an administrative review of that determination.

Statutory context

The Duties Act imposes ad valorem transfer duty on ‘dutiable transactions’, the definition of which is prescribed by section 8.

Section 8(1)(b)(ix), which was introduced 19 May 2022, specifies the following as a ‘dutiable transaction’:

• ‘another transaction that results in a change in beneficial ownership of dutiable property, other than an excluded transaction’.

Section 8(3), also introduced 19 May 2022, respectively defines the connected terms ‘beneficial ownership’, ‘change in beneficial ownership’ and ‘excluded transaction’. The definition of ‘excluded transaction’ includes, relevantly, ‘a change in a trustee’s right of indemnity’.

Decision

The principal issue in Baxter was whether the deed of variation dated 22 November 2022 resulted in a ‘change in beneficial ownership’ of ‘dutiable property’. Ancillary to this principal issue was consideration of, firstly, the relevance of the Trustee’s right of indemnity and, secondly, whether beneficial ownership of the Ridge Street property remained subject to the Trust on 22 November 2022.

Whether there was a change in beneficial ownership

The applicant submitted the deed of variation did not result in any change in beneficial ownership because:

• her interests in the Trust’s assets following the deed of variation were neither absolute, vested nor indefeasible and she therefore did not obtain any ownership interest as a result;
• the preceding was supported by the High Court decision of CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53 (‘CPT Custodian’), where it was held that beneficiaries of a unit trust did not own trust property, which ought to have equal application to a ‘fixed trust’; and
• without prejudice to the foregoing, the failure to amend the text of the ‘named beneficiaries’ clause in the drafting of the deed of variation must lead to the conclusion that the Applicant was not the sole beneficial owner of the Trust’s assets.

Each of these submissions were rejected by Senior Member E.A. MacIntyre, who found:

• whether there has been a change in beneficial ownership turns on a comparison of the nature of the interests held before and after the variation, and consideration of what, if any, change occurred as a result of the variation (per Rakmy Pty Ltd v Commissioner of State Revenue [2017] VSC 237, which considered the application of an identical provision of the Duties Act 2000 (Vic));
• the features of the Trust before the deed of variation were those of a ‘discretionary trust’. The nature of beneficiaries’ interests in a discretionary trust were described by the High Court in Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4 (‘Buckle’) as ‘vested but subject to divesting’;
• before the deed of variation, the provisions of the Trust Deed were broadly comparable to those considered in Buckle – ‘vested but subject to divesting’. Following the deed of variation, the Applicant had a present entitlement to all income and capital of the Trust, subject only to the indemnification of the Trustee, and the conclusion reached on the Applicant’s third submission (see below);
• referring to the Applicant’s second submission, as a result of the Trust becoming a ‘fixed trust’, which was not in dispute, what were previously interests in default under a discretionary trust became the equitable estate of an ‘owner’ as a result of the deed of variation. The interests of the unitholders considered in CPT Custodian were something less so the case had no application; and
• in respect of the Applicant’s third submission, it was found that the change in the heading from ‘named beneficiaries’ (plural) to ‘named beneficiary’ (singular) as well as the consistent use of the singular form throughout the deed of variation, sufficiently evidenced the relevant intention.

The conclusion that the deed of variation resulted in a ‘change in beneficial ownership’ in ‘dutiable property’ was on the basis that there was a ‘change in equitable interests’ therein, rather than because the ‘dutiable property’ became the subject, or ceased to be the subject, of a trust. It was concluded, in obiter, that the land in question neither became the subject of a trust nor ceased to be the subject of a trust.

The relevance of the Trustee’s right of indemnity

Senior Member E.A. MacIntyre considered the appropriate construction of s 8(1)(b)(ix), which specifies ‘a change in a trustee’s right of indemnity’ as an ‘excluded transaction’, given any change in a trustee’s indemnity invariably effects a corresponding change to beneficiaries’ entitlement, it being well-established at law that a trustee’s right of indemnity constitutes a beneficial interest in trust property (cf. a ‘mere encumbrance’) (Buckle). The question at hand was, in essence, whether the specification of a ‘change in a trustee’s right of indemnity’ as an ‘excluded transaction’ affects the broader application of section 8(1)(b)(ix), i.e., the extent to which there is otherwise a ‘change in beneficial ownership’.

Taking into account the text of the provision and the relevant second reading speech, which disclosed a ‘broad intention of the Act’ to tax ‘changes in ownership property – be they changes in legal or beneficial ownership’, Senior Member E.A. MacIntyre concluded the relevant exclusion from section 8(1)(b)(ix) should inform only what constitutes a ‘change in beneficial ownership’, and that a trustee’s right of indemnity should not inform the extent of any ‘change in beneficial ownership’. It was noted that an alternative construction could deprive section 8(1)(b)(ix) of its efficacy and would run counter to legislative intent.

It was further noted that even if this construction was erroneous, no evidence as to the quantum of the Trustee’s right of indemnity was presented, meaning the same conclusion would be reached regardless (i.e., the Trustee’s indemnity did not affect the extent of the ‘change in beneficial ownership’).

Beneficial ownership of the Ridge Street property on 22 November 2022

The final question was whether beneficial ownership of the Ridge Street property remained subject to the Trust when the deed of variation was executed on 22 November 2022, or if it had already been transferred to Antonio a day prior. Determination of this question governed whether there had been a ‘change in beneficial ownership’ of the Ridge Street property on 22 November 2022, or of only the Norton Street property.

Senior Member E.A. MacIntyre’s ultimate conclusion, that the Ridge Street property was transferred to Antonio on 21 November 2022 and did not remain subject to the Trust when the deed of variation was executed on 22 November 2022, was predicated largely on the High Court decision of Barry v Heider [1914] HCA 79 (‘Heider’). In Heider, Griffith CJ held a legislative scheme requiring the registration of land transfers under a system of land titles to give effect to a dealing did not exclude equitable claims to land. Senior Member E.A. MacIntyre relied on this and the later confirmation by the High Court that such equitable claims amount to an equitable interest in property to the extent specific performance is available (K.L.D.E Pty Ltd v Commissioner of Stamp Duties (Q.) [1984] HCA 63). Together these principles meant the Ridge Street property had been transferred to Antonio on 21 November 2022 and did not remain subject to the Trust when the deed of variation was executed.

NSW duty implications

Numerous relevant implications arise from Baxter, including:

• the need to exercise caution in amending or varying a discretionary trust deed where the trust holds dutiable property (for example, land) in NSW (or Victoria or Tasmania) as a ‘change in beneficial ownership’ may otherwise unwittingly result, thereby attracting the imposition of ad valorem transfer duty;
• the construction that the ‘change in beneficial ownership’ provision, viz. section 8(1)(b)(ix), was intended by the legislature to operate as a ‘catch all’ provision reinforces the imperative that trustees of discretionary trusts exercise appropriate caution;
• clarity that the principles enunciated by the High Court in CPT Custodian cannot be extrapolated to cases involving a ‘fixed trust’; and
• NCAT’s willingness to adopt a ‘substance over form’ approach in its assessment and review of the deed or variation which, if followed, will afford relief to taxpayers in the event of any drafting errors.

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact Mira Brewster.

This article was first published at LSJ Online, Legal Updates, August 2024