Indirect Tax Bulletin - April 2017

What you need to know

ACT Revenue Legislation Amendment Act 2017

Summary

The Revenue Legislation Amendment Bill 2016 (No 2) was enacted by notification in the Gazette on 22 February 2017 as the Revenue Legislation Amendment Act 2017 (ACT) (the Act) and makes extensive amendments to ACT taxation legislation.  The Act commences on the earlier of the date fixed by the Minister or on 1 January 2018. 

Details

The Revenue Legislation Amendment Act 2017 (ACT) (the Act) makes extensive amendments to ACT taxation legislation to effect the following changes:

1. "Barrier Free" Model – Under the "Barrier Free" model, duty must be paid within 14 days after settlement of the contract (rather than within 90 days of execution of the contract and before settlement).  The transaction must be registered under the Land Titles Act within 14 days of completion.  Transactions which do not cause of change in legal interest and therefore do not cause a change to the land titles register (eg declarations of trust over dutiable property, grants of commercial leases with premiums) are outside the "Barrier Free" model and may continue to be processed under the electronic lodgement and payment provisions of the Duties Act 1999 (ACT).
2. Exemptions – Exemptions from duty under the Duties Act 1999 (ACT) are consolidated.
3. Nominal duty – $20 and $200 nominal duty is abolished (eg change of trustees, transfers in conformity with an agreement).
4. Amounts under $20 – Certain amounts under $20 may be adjusted to zero to prevent accrual of small debts.  Penalty tax and interest under $20 will no longer be payable (NB this does not apply to interest imposed under the Land Rent Act 2008, Land Tax Act 2004 or Rates Act 2004).
5. Protecting the revenue base – Unpaid duty can be secured as a charge against the relevant property by extending the Sale of Land provisions in the Taxation Administration Act 1999 (ACT) to the Duties Act 1999 (ACT).  The Sale of Land provisions allow the Commissioner to sell property through an application to a court where tax is in arrears 90 days after a notice of tax in arrears has been provided.
6. Updating wording – The explanatory note provides that the updated wording "do[es] not affect the general meaning of the provisions". 

Transitional Provisions

1. Application to pre-commencement day transactions - Chapter 2 and chapter 12 (transactions concerning dutiable property and stamping provisions) will continue to apply to a dutiable transaction if a liability for duty charged by chapter 2 in relation to the transaction arose before the commencement day, and immediately before the commencement day, the duty had not been paid.
2. Application of chapter 12 (stamping provisions) to pre-commencement day instruments - Chapter 12 will continue to apply to an instrument that effects a dutiable transaction or an instrument chargeable with duty if: a liability for duty charged in relation to the instrument arose before the commencement day, and immediately before the commencement day, the duty had not been paid.

State Revenue Legislation Amendment Bill 2017

Summary

The State Revenue Legislation Amendment Bill 2017 (NSW) received royal assent on 11 April 2017 (Act).  The Act makes numerous amendments to the Duties Act 1997 (NSW) (Duties Act) and minor amendments to the Land Tax Management Act 1956 (NSW) and the Payroll Tax Act 2007 (NSW).

The focus of the amendments to the Duties Act is on improving the integrity of the landholder duty provisions and extending specific anti-avoidance measures. The amendments also revise the general anti-avoidance provisions and clarify the application of the Duties Act to electronic instruments.

Some of the specific amendments include:

1. In relation to transfers of dutiable trust property to a person as a consequence of the retirement of a trustee or the appointment of a new trustee, the Chief Commissioner must now be satisfied that the transfer is not part of a scheme to avoid duty that involves a change in the beneficial interest in the dutiable trust property.
2. A list of factors that the Chief Commissioner will take into account when determining whether acquisitions form, evidence, give effect to or arise from what is substantially one arrangement between acquirers have been included in the landholder duty provisions.
3. Express wording is now included to ensure that liabilities of a landholder are disregarded in determining whether a person has an interest in a landholder.  A number of landholder duty integrity measures have also been included such as preventing the avoidance of landholder duty by opting to defer registration of the purchase of an entity and through the use of put and call options.
4. The general anti-avoidance provisions have been amended to extend the test that must be applied when determining whether a taxpayer has avoided an amount of duty as a result of the entry into a tax avoidance scheme.  A taxpayer can be deemed to have avoided duty if it is reasonable to expect that duty would have been payable by the taxpayer if a "reasonable alternative" to entering into the scheme had been adopted, being an alternative that would have achieved the same economic or commercial result as the scheme, other than the result of avoiding duty.
5. The "associated person" rules have been extended to trace through to sub-trusts, where a common beneficiary has an interest of 50% or more.  For example, two trustees will be associated persons where any person is a common beneficiary of both trusts, of one trust and a sub-trust of the other trust or any sub-trusts of the trusts.

From a land tax perspective, the Act also includes new provisions requiring government entities to disclose to lessees of Crown land that the lessee may be liable for land tax as a result of the entry into the lease.  Failure by the government entity to comply with these provisions can result in the government entity being jointly and severally liable for any land tax payable, including interest and penalties.

Rojoda Pty Ltd v Commissioner of State Revenue [2017] WASAT 35

Summary

In Rojoda Pty Ltd v Commissioner of State Revenue [2017] WASAT 35, the WA State Administrative Tribunal (the Tribunal) upheld the distinction between the interest of a partner in the property of a partnership (both during the partnership and on its dissolution) and the specific beneficial interest of a beneficiary to a trust.  Accordingly the Tribunal found that deeds signed as agreements between former partners had created new specific beneficial interests in parcels of land (formerly partnership property) and were dutiable as declarations of trust.

Background

Anthony and Maria Scolaro were registered proprietors of 11 properties in Perth as joint tenants.  Six of those properties were the partnership property (as defined in s 30 of the Partnership Act 1895 (WA)) of a partnership between Anthony, Maria, and their three children, Rosana, John and David.  The remaining five properties were the partnership property of a partnership between Anthony and Maria.

Anthony Scolaro died in 2011.  Rosana, John and David were executors and beneficiaries of his estate under three separate trusts created by his will.  After Anthony's death, Maria, as surviving joint tenant, became the sole registered proprietor of all the properties.  Additionally, both the partnerships  dissolved.  None of the properties were sold, in accordance with the winding up provisions of the deeds of partnership.

In 2012 John Scolaro also died, without a will.  His wife and his four children were beneficiaries of his estate and Diana, one of his children, was the administrator of his estate.  Diana and Bianca, John's wife, replaced John as trustees of the trust created for John's benefit under Anthony's will (of which John's estate was now a beneficiary).

In 2013 Rojoda Pty Ltd (Rojoda) was registered with Rosana, David and Diana as shareholders and directors.  Later that year, Maria, Rosana, David, Bianca, Diana and Rojoda executed two deeds in their various capacities as former partners and as trustees of the relevant trusts and estates (the Deeds).  Broadly, the Deeds stated that Maria held legal title to the properties and since the dissolution of the partnerships had held them on trust for the former partners of the partnerships (or their estates, in the case of Anthony and John) in certain proportions.  The Deeds then provided that legal title was transferred to Rojoda and it now held those properties on trust for the former partners and their estates, in the relevant proportions.

The Commissioner issued an assessment imposing duty on the declarations of trust effected by the Deeds under sections 9, 10 and 11(1)(c) of the Duties Act 2008 (WA).  Rojoda applied to the Tribunal for a review of the Commissioner's decision, arguing that as the Deeds suggested, specific beneficial interests between the legal owners of the properties and the former partners (or their estates) had already existed either during or on dissolution of the partnerships.  This, Rojoda contended, meant the Deeds did not constitute declarations of trust and were therefore not dutiable transactions.

Decision

The Tribunal considered the relevant authorities and found that the nature of a partner's interest in partnership property is not equivalent to the equitable estate created by a trust.  Partners of a partnership have a right to have partnership property distributed in accordance with the partnership agreement, after the payment of partnership debts.  This does not amount to a specific beneficial interest in the partnership property, in distinction to a beneficiary's interest in the assets of a trust.  This right continues to exist upon and after dissolution of a partnership, until the realisation of assets occurs, and it can be abrogated or varied by agreement between partners, or former partners.  The Tribunal pointed out that such an agreement was effected here by the Deeds executed by the former partners and, in relation to Anthony and John, the trustees of their estates.

The other effect of the Deeds was to declare trusts whereby the legal owners of the properties (Maria, and then Rojoda) held them on trust for the persons as named in the Deeds.  This meant that contrary to Rojoda's contention, the Deeds did not "confirm" a previous state of affairs in which the partners or their estates had beneficial interests in the partnership property from the outset.  Rather, they supplanted, by agreement, the rights of the former partners or their estates in the partnership property by replacing those rights with freshly created specific beneficial interests, as beneficiaries of a trust.

The Tribunal also declined to grant Rojoda's alternative relief under section 78(2) of the Duties Act (WA), which provides for reductions in the dutiable value of partnership property transferred to former partners.  This was because the execution of the Deeds had extinguished the rights of the former partners (or their estates) and replaced them with new equitable interests in the property, rather than effecting a transfer of partnership property.

This decision makes clear that it is difficult to "reverse engineer" specific beneficial interests through the language of a deed.  Simply asserting a state of affairs in an agreement or a deed does not make that state of affairs so.  It also highlights the fact that careful consideration must be given to the terms of an agreement to vary the rights of a partner on the dissolution of a partnership, so as to effect a "transfer" for the purposes of relief under section 78 of the Duties Act (WA), rather than extinguishing and replacing those rights.

Balcaskie Investments Pty Limited v Chief Commissioner of State Revenue [2017] NSWCATAD 19

Summary

The central issue in this case was whether Applications to Record New Registered Proprietor recognising a change of trustee were subject to nominal duty under s 54(3) of the Duties Act 1997 (NSW) (the Act) or ad valorem duty.  Applying the principles of contractual interpretation to the Trust Deed, the Tribunal found that the specificity of clause 22 which prohibited trustees past present or future from becoming Beneficiaries under the Trust was such that it prevailed over the more general authority conferred on the trustee to make amendments (including amendments to the definition of Beneficiary) under clause 14.  Accordingly, the Tribunal held that s 54(3) of the Act applied and that the Commissioner was incorrect in assessing Lots 15 and 16 with ad valorem duty.

Background

Prior to 12 January 2011, Ms Shirley Wall (Ms Wall) was the trustee of the Shirley Wall Family Trust (the Trust).  Ms Wall, as trustee of the Trust, acquired interests in real property represented by Folio Identifiers 1/72308 and B/437895.  Redevelopment took place and a Deed of Partition was executed on 8 January 2010 under which those interests became interests in real property represented by Folio Identifiers 15/SP83350 (Lot 15) and 16/SP83350 (Lot 16).

On 12 January 2011, Ms Wall and Balcaskie Investments Pty Limited (the Applicant) executed a Deed Appointing a New Trustee under which Ms Wall removed herself as trustee and appointed the Applicant as trustee in her place.  Subsequently, Applications to Record New Registered Proprietor (the Applications) were executed and lodged with the Chief Commissioner of State Revenue (the Commissioner) for stamping on 26 June 2014 (in respect of Lot 16) and 13 March 2015 (in respect of Lot 15).

On 19 August 2015, the Commissioner informed the Applicant that he was not satisfied that s 54(3) of the Act applied so as to allow the Applications to be charged with nominal duty.  Section 54(3)(b) of the Act provides that "none of the trustees of the trust after the appointment of a new trustee is or can become a beneficiary under the trust".  Subsequently, the Commissioner issued Notices of Assessment imposing ad valorem duty on 24 August 2015 (in respect of Lot 15) and 4 September 2015 (in respect of Lot 16).  The Applicant paid the amounts and lodged objections to the assessments.  The Commissioner responded on 17 February 2016 that the relationship between clauses 22 and 14 of the relevant trust deed (the Trust Deed) were such that the condition in s 54(3)(b) of the Act was not satisfied.

Clause 14 provides that:

"[t]he Trustee may at any time and from time to time by written or oral resolution or Deed revoke add to or vary all or any of the provisions contained in this Deed (including this clause), as varied altered or added to by any previous variation alteration or addition, provided always that:

(a) no such variation alteration or addition may be in favour of or for the benefit of the Ineligible Beneficiaries or result in any benefit to the Ineligible Beneficiaries; and

(b) no such variation alteration or amendment shall affect the beneficial entitlement to any amount set aside for any beneficiary prior to the date of the variation alteration or addition;

subject always to paragraphs (a) and (b) of this clause, nothing in this clause or any other provision of this Deed shall prevent the Trustee from changing the persons or legal entities who are within the definition of ‘Beneficiary’ or ‘Beneficiaries’ pursuant to this Deed."

Clause 22 provides that "[t]he Original Trustee and the New Trustee and any future and past trustees are absolutely prohibited from being a beneficiary under the Trust Deed or from otherwise directly or indirectly benefiting under the Trust Deed and this clause will not be capable of amendment or revocation."

The Applicant applied to the Civil and Administrative Tribunal of New South Wales for a review of the Commissioner's determination on 8 March 2016.

It was common ground between the parties that the principles of contractual interpretation, including the principle that a more general provision should be read as subject to a more specific provision, applied to the interpretation of trust deeds.  The Applicant argued that clause 22 was the dominant provision as it dealt with a specific circumstance, being the establishment and entrenchment of a prohibition against the trustee becoming a Beneficiary, while clause 14 dealt with the more general topic of amendments to the Trust Deed, including amendments to the definition of Beneficiary.

The Commissioner argued that it remained open under clause 14 for the Applicant (as a new trustee) to become a Beneficiary under the Trust and to include an express provision that clause 14 should prevail over clause 22.

Decision

The Tribunal agreed with the Applicant and found that the concluding words of clause 14 were merely a restatement of the general powers of amendment conferred on the trustee in more specific terms with respect to the definition of Beneficiary.  On the other hand, clause 22 was a provision which expressly and specifically prohibited any trustee, present past or future, from being a Beneficiary, and expressly prohibited its own amendment or revocation.

The Tribunal found that the specificity of clause 22 which prohibited trustees past present or future from becoming Beneficiaries under the Trust was such that it prevailed over the more general authority conferred on the trustee to make amendments, including amendments to the definition of Beneficiary, under clause 14. Accordingly, it was held that s 54(3) of the Act applied and that the Commissioner was incorrect in assessing Lots 15 and 16 with ad valorem duty.

McEwans Australia Pty Ltd v Brisbane City Council [2016] QDC 347

Summary

McEwans Australia Pty Ltd v Brisbane City Council [2016] QDC 347 provides yet another example of some of the pitfalls that contracting parties could have avoided if careful consideration had been given to the adequacy of GST clauses at the time of contract drafting.

McEwans Australia Pty Ltd (McEwans) contended that, under the terms of an agreement between the parties – referred to as the "amended infrastructure agreement" (Amended IA) – an amount was payable by the Brisbane City Council (Council) on account of GST, as defined under the A New Tax System (Goods and Services Act) 1999 (Cth) (GST Act).

The District Court of Brisbane dismissed the proceeding and concluded, in relation to clause 6 of the Amended IA (the clause in dispute), that:

1. "GST" was to be given its natural and ordinary meaning; and
2. consequently, an increasing adjustment for McEwans was not "GST" under clause 6; and
3. clause 6 did not make the Council liable for payment of the increasing adjustment amount.

Background

McEwans is a property developer which, in developing certain land in Queensland, was required to subdivide two parcels of land known as the "Ross Road land" (Ross Road) and the "Levitt Road land" (Levitt Road).  It is relevant to note that Ross Road had been acquired by McEwans as a taxable supply (for which acquisition McEwans had claimed an input tax credit (ITC)).  No ITC was claimed by McEwans for its acquisition of Levitt Road as that land was acquired under the margin scheme.

McEwans sought approval for subdivision from the Council.  Under the Amended IA, the parties had agreed to, among other things, the transfer of part of Ross Road and part of Levitt Road to the Council, to be used as a sports park (Sports Park) within the development.  The consideration payable by the Council to McEwans for the transfer of the Sports Park was to be offset by a financial contribution (for infrastructure and other community purposes relating to the development) that was payable by McEwans to the Council.  The net amount (circa $7m) was referred to as the "Infrastructure Offset", and its treatment in respect of GST, was the subject of clause 6 of the Amended IA.

In essence, clause 6 stated that the parties agreed that GST was not to apply to the Infrastructure Offset or any amount payable for the provision of the Sports Park.  If however, the Commissioner did not accept that the Infrastructure Offset and any amount payable for the provision of the Sports Park is not a GST-free payment of infrastructure charges, the parties agreed that the margin scheme applied to the provision of the Sports Park.  The Council was to pay McEwans an amount equal to the GST payable by McEwans "associated with the receipt of the Agreed Balance".  The Agreed Balance was effectively the Infrastructure Offset subject to certain adjustments.

McEwans was subsequently audited and the Commissioner did not accept that the transfer of the Sports Park was a GST-free payment of infrastructure charges. McEwans was assessed for GST on the supply of Ross Road and Levitt Road of $250,881 (on the basis that the margin scheme applied), an increasing adjustment of $161,116 was also made (on the basis that part of the Sports Park, comprising part of Ross Road, had been acquired by McEwans in a transaction for which McEwans had claimed an ITC), and a general interest charge (GIC) was imposed.  McEwans sought payment from the Council for the increasing adjustment and the GIC (the Council had paid the amount of GST assessable on the supply of Ross Road and Levitt Road without dispute), and made arguments addressing, relevantly, 2 key questions:

1. Whether the increasing adjustment was "GST" for the purpose of clause 6.
   
   Notwithstanding that only clause 4 (which provided for GST gross-up and adjustments) expressly stated that "GST" had a defined meaning under the GST Act, McEwans submitted that this defined meaning extended equally to clause 6.  As the increasing adjustment affects the net amount payable to the Commonwealth under the GST Act, the increasing adjustment was therefore "GST" as defined in the GST Act.
2. If the increasing adjustment was GST, whether it was "associated with the receipt of the Agreed Balance".
   
   McEwans contended that the increasing adjustment flowed automatically from the application of the margin scheme to the transaction by which the Sports Park was transferred under the Amended IA in return for the payment by the Council of the Agreed Balance.

Decision

The Court rejected McEwans' arguments and accepted the Council's submissions on both questions:

1. "GST" had its ordinary meaning in clause 6 – that is, 1/11th of the consideration for a taxable supply, or 1/11th of the value of the margin in this instance.  Accordingly, what was payable by the Council under clause 6 was the GST imposed on the transfer of the Sports Park and calculated by reference to the receipt of the Agreed Balance under the margin scheme (which amount had been paid by the Council).
2. Not only was the increasing adjustment not "GST", it was not " associated with the receipt of the Agreed Balance.  The increasing adjustment was an amount payable in relation to a different transaction (ie McEwans' acquisition of Ross Road) between McEwans and that supplier.  Clause 6 dealt specifically with the transaction between McEwans and the Council and did not extend to capture an amount payable on a repayment of a deduction previously obtained.

Interestingly, the Court offered suggestions on how the agreement could have been drafted to give McEwans' arguments more force.