NSW Supreme Court dismisses existence of trust relationship in project development arrangement

NSW’s Supreme Court has found the Chief Commissioner of State Revenue was over-reaching, when arguing that a development agreement – which acknowledged a developer had a beneficial and equitable interest in ‘Project Land’ – did not amount to a declaration of trust over dutiable property.  The Commissioner had issued an assessment for $27m.

The Court looked at the project’s broader context, and found there was not a manifest intention to create a trust. 

The case is Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue, and serves as a useful reminder of the need to obtain tailored stamp duty advice on land development documents. 

Joshua Green, Maddocks

Factual Background

In June 2008, Leppington Pastoral Co Pty Ltd (LPC), Greenfields Development Company Pty Ltd (GDC) and Landcom entered into various contractual arrangements with each other to develop agricultural land owned by LPC (Project).  

One of these contracts was a Call Option Deed under which GDC was granted:

  • the right to be the Project’s sole and exclusive developer; and 
  • a call option to acquire specified parcels of the Project land (Call Options). 

Further, in 2010, the parties amended various agreements.  They preserved the Call Options and granted further rights to GDC to issue notice which would require the landowner to deliver up possession of parcels of the land to allow GDC to exercise its development rights. Saliently, clause 16.1 of the Development Rights Agreement included an express acknowledgement and agreement by LPC that ‘GDC has a beneficial and equitable interest in the Project Land’. 

In November 2016, LPC lodged the Development Rights Agreement with the Commissioner for assessment in accordance with the Duties Act 1997 (NSW) (Duties Act). On 20 February 2017, the Commissioner issued a Duties Notice of Assessment to LPC in the amount of almost $27 million, comprising of duty, interest, and penalty taxes. 

The Commissioner determined that the Development Rights Agreement ‘effects or evidences a dutiable transaction…in the form of a declaration of trust over dutiable property (land in NSW)’.  

Main Issue: did the Development Rights Agreement effect or evidence a declaration of trust within the meaning of section 8(3) of the Duties Act? 

A declaration of trust is defined in section 8(3) of the Duties Act as being:

any declaration (other than by a will or testamentary instrument) that any identified property vested or to be vested in the person making the declaration is or is to be held in trust for the person or persons, or the purpose or purposes, mentioned in the declaration although the beneficial owner of the property, or the person entitled to appoint the property, may not have joined in or assented to the declaration’.

Any such declaration in respect of ‘dutiable property’, which is defined in s 11 as including land in New South Wales is a ‘dutiable transaction’ by reason of s 8(2) of the Duties Act and, therefore, liable to duty. 

Accordingly, it was noted by the Court (and accepted by both parties in the proceeding) that the critical question to be answered was: whether in substance a sufficient intention to create a trust has been manifested by the provisions of the Development Rights Agreement, construed in accordance with the ordinary principles of contractual interpretation (at [24]).  

The Courts Decision

The Court determined that the Development Rights Agreement did not effect or evidence a declaration of trust by LPC in favour of GDC in respect of the Project Land (at [109]). 

The core reasons for this determination were:

  • by adopting the ‘ordinary principles of contractual interpretation’ ([17]), the relevant Project documents, including the Development Rights Agreement did not impose an obligation on LPC to hold the Project Land for the benefit of GDC ([111]). As part of its reasoning, the Court confirmed that while a clause expressly disclaiming the existence of a trust relationship is not determinative, it is plainly relevant to the question of whether the contract as a whole, properly construed, evidences the requisite intention to form a trust ([32]);  
  • LPC owned the land for its own benefit, subject to the extensive contractual rights and corresponding obligations of the respective parties ([111]). The rights and benefits enjoyed by LPC which helped disclaim the existence of a trust relationship with GDC included that: 
    • LPC was entitled to payment by GDC under the Development Rights Agreement based off the value of each parcel of Project land ([120]);
    • LPC was entitled to continue its existing farming, dairy and grazing business on the Project land for its own benefit and profit, unless and until GDC acquired parts of the Project land by exercising its Call Options or by issuing notices ([121]);
    • LPC had a right to terminate the Development Rights Agreement if GDC committed an ‘event of default’ ([123]); 
    • Subject to prior notice requirements, nothing constrained LPC from exercising its termination or step-in rights in the event those rights were enlivened under the contractual arrangement; and
    • Ultimately, the above rights afforded to LPC ‘are fundamentally inconsistent with the fiduciary obligations that LPC would have owed to GDC’ as a trustee of the Project Land for GDC under a trust relationship ([125]). 
  • a complex security arrangement was agreed between the parties which provided a level of comfort to GDC’s commercial position and, as such, there was no rationale in construing clause 16.1 of the Development Rights Agreement as creating a trust in order to address the commercial risk for GDC and its financiers ([132]-[133]); and
  • with regard to the reasons set out above, a reasonable businessperson would not have understood the  words ‘beneficial and equitable interest in the Project Land’ in the Development Rights Agreement and Call Option Deed to mean that GDC had an interest in the Project land as a beneficiary under trust ([130]). Rather, it was an equitable interest obtained sourced upon entering into the Call Option Deed and Development Rights Agreement.  

Despite the fact this case resulted in a favourable tax outcome for LPC, it is an important reminder that stamp duty advice ought to be obtained in a comprehensive way, particularly for those who engage themselves in various stages of property development.  

More information from Maddocks
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Last revised on : 31-05-2023

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