Indirect Tax Bulletin - June 2017

What you need to know

 

New South Wales State Revenue and Other Legislation Amendment (Budget Measures) Bill 2017

The State Revenue and Other Legislation Amendment (Budget Measures) Bill 2017 is currently before the Legislative Council and makes amendments to NSW legislation to enact measures proposed in the 2017/18 state budget, including:

Increase in surcharge purchaser duty and surcharge land tax

The Bill proposes to increase the rate of surcharge purchaser duty from 4% to 8% and the rate of surcharge land tax from 0.75% to 2%. Broadly, surcharge purchaser duty and surcharge land tax are paid by foreign persons who acquire or own (respectively) residential land in New South Wales in addition to the general rates of duty and land tax.

Refund of surcharges for Australian-based property developers

The Bill also proposes to introduce a system for the refund of both surcharges for Australian-based property developers. The refunds will only be available where the developer is incorporated in Australia (ie is a foreign corporation because an individual not ordinarily resident in Australia, a foreign corporation, or a foreign government holds a substantial interest of 20% in the corporation, or two or more foreigners hold a combined interest of 40%).

A refund of purchaser duty surcharge paid on the acquisition of "residential-related property" (which includes residential land, options to acquire residential land and interests therein) will be available where the Chief Commissioner is satisfied that:

1. the developer or a related body corporate constructed a new home on the residential land to which the residential-related property relates after completion of the transfer of the property to the developer;
2. the developer has sold the new home to a person other than an associated person; and
3. the home was not occupied or used as a place of residence or for any other purpose at any time between completion of construction of the home and completion of its sale.

An application for refund must be made within 12 months after completion of the sale of the new home and no later than 5 years after completion of the transfer of the residential-related property to the developer.

An exemption or refund of surcharge land tax on residential land owned by the Australian developer at midnight on 31 December of the previous year will be available where the Chief Commissioner is satisfied that:

1. the developer or a related body corporate has constructed a new home on the residential land;
2. after the taxing date, the developer sold the new home to a person other than an associated person; and
3. the home was not occupied or used as a place of residence or for any other purpose at any time between completion of construction of the home and completion of its sale.

An application for exemption or refund must be made within 12 months after completion of the sale of the new home and no later than 5 years after completion of the transfer of the residential land to the developer, or if the residential land was transferred to the developer before 21 June 2016, no later than 21 June 2021. 

Abolition of insurance duties

The Bill abolishes duty for all taxpayers on lenders mortgage insurance (if the premium is paid on or after 1 July 2017), crop insurance and livestock insurance (if effected or renewed on or after 1 January 2018) for all taxpayers, and for small business taxpayers on commercial vehicle insurance, commercial aviation insurance, occupational indemnity insurance and product liability insurance (if effected or renewed on or after 1 January 2018). "Small business" has the same meaning as a CGT small business entity as defined in section 152-10 (1AA) of the Income Tax Assessment Act 1997 (generally, an aggregated turnover of less than $2m).

The small business exemption will apply where the insurer obtains from the person effecting or renewing the contract of insurance a small business declaration. If a person incorrectly claims a small business exemption, an insurer who is liable to pay the duty may require that person to pay the insurer an amount equal to the duty, together with any interest or penalty tax payable. If the amount is not paid, the insurer may recover it as a debt.

Queensland Revenue Legislation Amendment Act 2017

The Revenue Legislation Amendment Act 2017 received Royal Assent on 22 June 2017 and makes amendments to Queensland legislation to enact measures proposed in the 2017/18 State Budget.

Duties Act 2001 (Qld)

The Act amends the Duties Act 2001 (Qld) to amend provisions imposing additional foreign acquirer duty (AFAD) on foreign acquirers of residential land to impose AFAD on:

1. agency transactions;
2. pre-incorporation contracts; and
3. chattels included in the same dutiable transaction as an acquisition of AFAD residential land, provided that the use of the chattel can be directly linked to, or is incidental to, the use and occupation of the land.

Land Tax Act 2010 (Qld)

The Act introduces a 1.5% surcharge for absentee payers of land tax, as defined in the Land Tax Act 2010 (Qld), which will apply to land holdings of $350,000 or higher from 1 July 2017. The surcharge will only apply to absentee individuals and will not affect companies or trusts.

The Act reintroduces a former bar on provisions in leases requiring lessees to pay land tax in response to the decision of the Supreme Court of Queensland in Vikpro Pty Ltd v Wyuna Court Pty Ltd [2016] QCA 225. The new section 83A applies to "pre-existing leases" (generally, leases entered into on or after 1 January 1992 and before 30 June 2009) and renewals or transfers of pre-existing leases, and renders unenforceable "a provision in the lease requiring a lessee to pay land tax, or reimburse the lessor for land tax. The new section 83A is taken to have had effect on 30 June 2010, however if a lessee to which s 83A applies has already paid an amount of land tax, the amendments provide that they do not give the lessee a statutory right to recover the amount. However, there might be other grounds for the lessee to recover any amount paid.

South Australian Budget Measures Bill 2017

The Budget Measures Bill 2017 is currently before the House of Assembly and makes amendments to South Australian legislation to enact measures proposed in the 2017/18 State Budget.

Stamp Duties Act 1923 (Qld)

The Bill proposes to introduce a 4% duty surcharge on purchases of residential property by foreign buyers and temporary residents. The surcharge will apply to dutiable instruments executed on or after 1 January 2018 through which a foreign person or foreign trust acquires an interest in residential land. A similar surcharge applies in respect of landholder duty.

"Residential land" is:

• land used predominately for residential purposes;
• land not used for any particular purpose but which should be taken to be used for residential purposes due to improvements that are residential in character having been made to the land; and
• vacant land zoned for residential use (except where the land is zoned for either residential or non-residential use, it will not be taken to be used for residential use).

A "foreign person" is:

• in the case of a natural person, a person who is not an Australian citizen, a holder of a permanent visa, or a New Zealand citizen who is the holder of a special category visa; or
• in the case of a corporation, a corporation not incorporated in Australia, or a corporation with 50% or more of its shares or voting rights held by a foreign person or a trustee for a foreign trust.

A "foreign trust" is:

• in the case of a fixed trust, a trust where 50% or more of the capital of the trust property is held by one or more foreign persons; or
• in the case of a discretionary trust, a trust where any of the following is a foreign person: a trustee, appointor, identified object or person entitled to capital in default.

If a person (or trust) ceases to be a foreign person (or trust) within 12 months after acquiring an interest in respect of which foreign ownership surcharge was paid, and retains the interest at the time of ceasing to be a foreign person (or trust), that person (or trust) may apply for a refund of the foreign ownership surcharge.

If a person (or trust) becomes a foreign person (or trust) within 3 years after an acquisition of residential land to which the foreign ownership surcharge would have applied, that person (or trust) must notify the Commissioner in writing of that fact and the foreign ownership surcharge will be payable on the acquisition. If foreign ownership surcharge was paid on the transaction under which the person (or trust) became a foreign person (or trust), the foreign ownership surcharge under the reassessment will be reduced by the amount of any surcharge already paid.

Payroll Tax Act 2009

The Bill proposes to reduce the rate of payroll tax for employers with taxable payrolls of up to $1.0m from 4.95% to 2.5% (although a rebate previously applied for annual payrolls of up to $1.2m). The rate gradually increases for employers with taxable payrolls between $1.0m and $1.5m, with taxable payrolls above $1.5m being subject to the full rate of 4.95%.

Rakmy Pty Ltd v Commissioner of State Revenue [2017] VSC 237

Summary

Rakmy Pty Ltd v Commissioner of State Revenue [2017] VSC 63 concerned whether a change in beneficial ownership of dutiable property arose under the Duties Act 2000 (Vic) (Act) as a result of a change in the capacity in which Rakmy Pty Ltd (Rakmy) held certain land in Victoria.

Background

Rakmy initially held land located in Richmond, Victoria (Richmond Property) as trustee for the Rakmy Investment Trust (RIT), which was established in 1998 with three initial unitholders – Robert King (King), Maree Yann (Yann) & Rakmy as trustee for the Rakmy Superannuation Fund (RSF) (the only beneficiaries of whom are King and Yann).  

The initial unitholders were each allotted a one third interest in the RIT, which although had initially been allotted as partly paid, had over the course of time fluctuated between being almost fully paid to almost fully unpaid. The paid-up status of these units was relevant in determining the proportion of the net assets in the RIT represented by RSF's unitholdings for the purposes of applying the exemption/concession under section 36B of the Act (discussed further below).

The relevant transactions the subject of the appeal occurred at a meeting of the unitholders of the RIT held on 25 June 2014, for purposes that appeared to relate to a contract of sale that King and Yann had entered into in 2013 to purchase the Richmond Property for $825,000. At that meeting, Rakmy as trustee for the RIT made calls on King and Yann for payment of all amounts remaining unpaid on their units – which calls were not met. As a consequence, two special resolutions were passed by the unitholders of the RIT:

• that the units held by King and Yann be redeemed in accordance with the trust deed of the RIT (RIT Deed); and
• that the Richmond Property be forthwith vested in Rakmy as trustee for the RSF.

Rakmy as trustee for the RIT executed a deed poll that day, redeeming King and Yann's units (Redemption) and declaring that the Richmond Property was henceforth held by Rakmy as trustee for the RSF (Vesting). The effect of the Redemption and Vesting was that the Richmond Property ceased to be an asset forming part of the trust fund of the RIT and became an asset forming part of the RSF.

The two issues that arose for determination in the appeal were:

1. whether the vesting of the Richmond Property in Rakmy as trustee for the RSF was a dutiable transaction under section 7(1)(b)(vi) of the Act; and
2. if so, whether Rakmy was entitled to an exemption or concession under section 36B of the Act.

At the heart of Rakmy's arguments in respect of the first issue was that while there had been a "change in beneficial ownership" of the Richmond Property, as defined under had section 7(4) of the Act, Rakmy did not obtain or increase its beneficial ownership. This absence, it was argued, meant that Rakmy could not be deemed to be a transferee under section 8(2) of the Act. Further, it was argued that as Rakmy had beneficial ownership of the Richmond Property before and after the change in capacity, there had been no change in the "underlying equitable interests" in the Richmond Property.

In relation to the second issue, Rakmy contended that if the Vesting did result in a change in beneficial ownership of the Richmond Property, Rakmy was entitled to a full exemption from duty under section 36B of the Act on the basis that all the conditions for exemption were satisfied. Specifically, section 36B(1)(d) (being the only condition in dispute between the parties) has been satisfied on the basis that the dutiable value of the Richmond Property as a proportion of the net assets of the RIT (ie 64%) did not exceed that proportion of the net assets of the RIT represented by the unitholding of RSF at the time the Richmond Property first became subject of the RIT (ie 99.98%). According to Rakmy, this calculation was correct as it recognised the different rights of fully paid unitholders and partly paid unitholders under the RIT Deed.

Decision

The Court dismissed the appeal and found in favour of the Commissioner on both issues.  

1. The Vesting of the Richmond Property was a dutiable transaction under section 7(1)(b)(vi) of the Act: the Court held that while a change in equitable interests in dutiable property can result in a change in beneficial ownership under section 7(4) of the Act, it is not the only event that can trigger a change in beneficial ownership. The definition separately identifies other events, including relevantly, if dutiable property ceases to be the subject of a trust – which was the effect of the Vesting. In rejecting Rakmy's central premise that "nothing had changed" before and after the Vesting, the Court concluded that the interests to which the Richmond Property was subject were markedly different under the terms of the RIT Deed and the RSF Deed. Prior to the Vesting, the Richmond Property was an asset of the RIT, and Rakmy had no power qua the unitholders (ie Rakmy had no power to demand and require any property forming part of the trust fund to be conveyed to it). However, after the Vesting, the Richmond Property became an asset of the RSF, in which 2 persons were interested (ie King and Yann), and the RSF Deed conferred on Rakmy a full range of powers in respect of the Richmond Property.  
2. Rakmy was only entitled to a concession rather than an exemption as section 36B(1)(d) was not satisfied: The Court rejected Rakmy's contention that under the terms of the RIT Deed, fully paid units conferred different rights to partly paid units, and concluded that the units held by RSF did not represent any proportionately greater interest in the assets of the RIT than the partly paid units held by King and Yann. The Court accepted the Commissioner's approach – that is, to simply compare the dutiable value of the Richmond Property as a proportion of the net assets of the RIT at the date of the Vesting (being 64%), against the proportion of net assets of the RIT represented by the unitholding of Rakmy (as trustee for RSF) at the time the Richmond Property became subject of the RIT (being 1/3). The Court noted that section 36B uses the concept of "representation" – that is, the proportion of net assets represented by the unitholding – and Rakmy's focus on each unitholder's "interest" in the net assets of the RIT was not the right enquiry.

The decision is interesting for a number of reasons. First, a consequence of the Redemption was that Rakmy as trustee for the RSF became the sole unitholder in the RIT. The question of whether this gave rise to a merger of the legal interest in the Richmond Property (held by Rakmy as trustee for the RIT) and the beneficial interest in the Richmond Property (held by Rakmy as trustee for the RSF) perhaps warranted some discussion as it could have been a change in beneficial interest resulting from an excluded transaction under section 7(1)(b)(vi) (ie the redemption of units) – in which case, no transfer duty would have been payable. However, this point was not raised by the parties nor addressed by the Court.

Second, the terms of the RIT Deed provide that for the purposes of distribution of income (and similarly capital) an adjustment is to be made in calculating the interest held by a holder of partly paid units. It appears somewhat contradictory that holders of fully paid units and partly paid units would have different entitlements to income and capital, yet hold an equal interest in the trust fund. In any event, section 36B(1)(d) of the Act requires an assessment of the proportion of the net assets of the RIT represented by the unitholdings of the RSF in the RIT at the time that the Richmond Property first became subject of the RIT. Therefore, the relevant date of enquiry should have been 5 May 1998 (when the RIT was established), and not 24 January 2014 (the date of the Redemption and Vesting). As all unitholders had been issued with partly paid units on 5 May 1998, they each held an equal 1/3 interest in the RIT and the arguments concerning the rights of holders of fully paid units and partly paid units should have been irrelevant.

Esplanade Wollongong Unit Trust v Chief Commissioner of State Revenue [2017] NSWCATAD 157

Summary

The central issue in this case was whether the transfer of property from the Belmore Developments Pty Limited (Belmore) to Esplanade Wollongong Pty Ltd (Esplanade) was subject to nominal duty under section 54(3) of the Duties Act 1997 (NSW) (the Act). Based on the evidence, the Tribunal found that Belmore purchased and subsequently held its interests in the property in its own right at all relevant times, rather than as trustee for the Belmore Developments Unit Trust (later renamed the Esplanade Wollongong Unit Trust). Accordingly, when the property was transferred to Esplanade as trustee of the Esplanade Wollongong Unit Trust, s 54(3) did not apply as the transfer of the relevant property did not reflect a change in trustees for the purposes of that section. The transfer was therefore subject to ad valorem duty and the premium rate of duty applied under section 32A of the Act.  

Background

On 17 January 2002, Belmore and Waterviews Developments Pty Ltd (Waterviews) purchased a large parcel of real property as tenants in common in equal shares (the 2002 Half Interest) for the purposes of developing the land under a joint venture. After settlement, the land was subdivided, creating the land the subject of the dispute in this case (the Property).  

Belmore asserted that on 11 February 2006, the Belmore Developments Unit Trust Deed was executed creating a trust (the Belmore Trust).  

On 16 February 2006, a contract was entered into under which Waterviews (as Vendor) sold its half share interest in the Property to Belmore (as Purchaser) (the 2006 Half Interest) (the First Disputed Transfer). The purchase was financed by means of a facility provided by Capital Finance, secured by a mortgage over the Property, a charge over Belmore and guarantees provided by Mr Taranto and Mr Pupovec (the two main individuals connected to Belmore). The facility was subsequently refinanced by St George Bank Limited (St George) through another one of Mr Taranto and Mr Pupovec's companies. The mortgage to Capital Finance was then discharged and a new mortgage over the Property was registered to St George.  

On 15 December 2009, Esplanade was registered and on 22 October 2010, a series of Deeds were entered into whereby:

1. the Belmore Trust was renamed the Esplanade Trust;
2. the Esplanade Trust was amended to ensure the trustee of the trust could not be a beneficiary of the Trust; and
3. Belmore was replaced by Esplanade as the trustee of the Esplanade Trust.

On 22 October 2010, a transfer was executed transferring the Property from Belmore to Esplanade (the Second Disputed Transfer) and Esplanade became the registered owner of the Property as trustee for the Esplanade Wollongong Unit Trust (EWUT). In December 2010, FGC Investments (Aust) Pty Limited (FCG) and Commonwealth Bank of Australia (CBA) provided loans to Esplanade, with the FCG loan being subordinated to the CBA loan. Subsequently, the St George mortgage was discharged, the Second Disputed Transfer was registered and the CBA mortgage was registered.  

Issues

Twelve discrete issues arose from this set of facts which can be broadly categorised as follows: 

1. In what capacity did Belmore purchase and hold the 2006 Half Interest;  
2. What was sold under the Second Disputed Transfer; and
3. Calculation of the duty payable and interest.    

Decision

Based on the documents and evidence available, the Tribunal found that there was no objective intention on the part of Belmore to purchase the 2006 Half Interest as trustee of the Belmore Trust rather than in its own right. The Tribunal had regard to communications with Capital Finance, correspondence and associated documents between Belmore and the OSR and the contract for sale for the 2006 Half Interest. In each of those documents, it was clear that Belmore purchased the 2006 Half Interest in its own right. In particular, Mr Taranto had written a letter to the OSR dated 31 March 2007 that "…Belmore Developments P/L…Has in its own right purchased 72 Cliff Road, Wollongong in December 2006." Further, attached to the letter was an OSR statutory form containing the question "Is this land owned by a Trust?", to which the response was "No". The Tribunal then considered the issue of whether the 2006 Half Interest became impressed with trust obligations sometime after the First Disputed Transfer but before the Second Disputed Transfer. The Tribunal found the evidence led by Belmore only provided "subjective evidence designed to support the conclusion they now argue."  

Another issue to note which arose was whether the Second Disputed Transfer was a mistake in that it was intended only that Belmore transfer the 2006 Half Interest as it believed it held that interest as trustee. Relying on the evidence available, the Tribunal found "such a proposition to be fanciful having regard to all the contemporaneous documentation that exists."  

In respect of determining the dutiable value of the Property as at 22 October 2010, the Tribunal relied on a valuation which adopted a direct comparison method with relevant discounts and the Valuer-General's valuation in order to arrive at a fair and reasonable figure of $16,130,000. The Tribunal then held that the premium rate of duty for residential land applied under section 32A of the Duties Act 1997 (NSW) (the Act). Belmore argued that section 32B of the Act applied so as to preclude the application of the premium rate of duty on the basis that the land was used as trading stock, not for residential purposes. Applying ordinary principles and White J's decision in Metricon QLD Pty Ltd v Chief Commissioner of State Revenue (No 2) [2016] NSWSC 332, the Tribunal found that while the Property was treated as a "land bank", it was not used as trading stock. Accordingly, section 32B did not apply.  

Finally, the Tribunal considered that interest should start accruing from 23 January 2011 (ie the day following three months after the date of the Second Disputed Transfer). However, the Tribunal held that the imposition of interest as envisaged by the Chief Commissioner of State Revenue (CCSR) was unfair and unwarranted, given there were significant, and at times inexplicable, delays in the preparation and progress of the case on both sides, and the CCSR changed his position in 2 material respects as late as 10 December 2015. Accordingly, the Tribunal decided that the imposition of interest should be varied such that:

1. only the market rate component of interest is charged for the period from 23 January 2011 to the date of payment on a transfer value of $16,130,000; and
2. interest is only applied to the amount being the duty that would have been payable on 22 January 2011 if the duty had been calculated at ordinary rates (ie not at the premium rates arising as a result of the application of section 32A of the Act).