New South Wales Land Tax - Chief Commissioner of State Revenue v Sayden Pty Ltd as trustee for the Griffin Property Unit Trust (RD)

A recent decision of the New South Wales Administrative Decisions Tribunal (ADT) highlights:

• that trust deeds containing unclear and conflicting clauses can be a risk to trustees and beneficiaries; and
• that the NSW Office of State Revenue's strict interpretation of the requirements of section 3A(3B) of the Land Tax Management Act 1956 (NSW) (LTMA) remains a risk to trustees and unit holders who establish fixed unit trusts to hold land.

The decision

This year, a decision of the Revenue Division of the ADT held that overriding words in a trust deed - that mirrored the provisions of section 3A(3B) of the LTMA - were sufficient to ensure that the trust was a 'fixed trust' for the purposes of section 3A(3B) (meaning the trust would have an additional land tax liability of $6,236, applying today's rate).

The decision was in Chief Commissioner of State Revenue v Sayden Pty Ltd as trustee for the Griffin Property Unit Trust (RD) NSWADTP 14 (Sayden case).

On appeal, the Appeal Panel held that the overriding words did not have that effect. The effect of the Appeal Panel's decision is that the trust will be assessed for land tax at the surcharge tax rate, and not the lower threshold tax rate.

The Appeal Panel:

• acknowledged the Commissioner's policy that the insertion of a clause which mirrors the provisions of section 3A(3B) of the LTMA is generally sufficient for a trust deed to meet the 'relevant criteria' set out in section 3A(3B). (Note that the Cleardocs NSW Fixed Unit Trust Deed contains 'overriding words consistent with section 3A(3B)' in accordance with the instructions Maddocks received from the OSR's Senior Technical Officer, Land Tax.)
• agreed in this case that, consistent with a decision of an Office of State Revenue internal reviewer, there were a number of issues with the drafting of this particular trust deed. Both the Appeal Panel and the internal reviewer considered that those problems were not rectified by the trust deed containing overriding words aimed at ensuring the trust deed was a fixed trust for land tax purposes.

Issues with the trust deed

Both the OSR internal reviewer and the Appeal Panel found that the trust did not meet the relevant criteria of section 3A(3B) because the trust deed contained a number of clauses that were expressly inconsistent with the overriding words.

Those clauses gave rise to the following issues:

1. The trustee retained the absolute discretion to determine when the trust would be wound up and the deed did not set out any mechanism by which the unit holders could initiate the termination (or 'winding-up') of the trust;
2. The unit holders did not have an absolute right to redeem units. The trustee could refuse a redemption request;
3. The unit holders had no power to demand the transfer of an asset to them;
4. The trustee had the power to issue 'special units';
5. The deed provided that the units did not confer any interest in any particular part of the fund or of any investment;
6. There was nothing to explain how the unit holders' interest in the capital of the trust was vested in possession because there was no clause that required the assets to be transferred in specie at the unit holders' request;
7. The deed did not include a clause setting out a mechanism by which unit holders could redeem their units; and
8. There was no process by which unit holders could require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property. The Appeal Panel held that the deed must spell out how this step is to be activated, and deal with such issues as whether all the registered holders, a majority of the registered holders or a sole registered holder can activate that process.

The Cleardocs fixed unit trust deed

Cleardocs and Maddocks have spent considerable time and effort in ensuring that the Cleardocs fixed unit trust deed is capable of being used to establish a trust that will qualify as a fixed trust for the purposes of the LTMA, including negotiating with three different Senior Technical Officers, Land Tax, on what the Commissioner requires of the deed.

The Cleardocs fixed unit trust deed does not give rise to most of the issues that the Appeal Panel had with the deed in the Sayden case. For example, the trustee is not conferred with the power to issue special units and the deed contains a mechanism that the unit holders can use to require the trustee to terminate the trust and distribute the net proceeds of the trust's assets to the unit holders.

However, under the Cleardocs fixed unit trust deed:

• the trustee does have a discretion to refuse a redemption request; and
• unit holders do not have a specific right to demand that specific assets be transferred to them.

Maddocks has gone to considerable lengths to design the Cleardocs fixed unit trust as one which can create a trust that will be considered by the Commissioner to be a fixed trust for the purposes of the LTMA, including engaging in protracted negotiations on Cleardocs' behalf with the OSR. Those negotiations culminated in the OSR's approval of that deed in August 2011. However, a risk remains that an individual OSR assessor will assess a fixed unit trust as a special trust for LTMA purposes on the basis of the guidance provided by the ADT in the Sayden case, which is later in time. Additionally, the LTMA provides that the Commissioner retains a discretion to treat any trust as a 'special trust', even if it meets the requirements of section 3A(3B).

Accordingly, Maddocks' recommendation remains that all fixed unit trust deeds must be submitted to the OSR for approval before land is settled into the trust. This enables the trustee to make any specific amendments requested by the individual OSR assessor, subject to proper legal advice about the efficacy of those amendments.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Cleardocs help desk team.