Land Tax - Related Companies as Trustees A PAPER BY PAUL ANDERSON JUNE 2010
Land Tax - Related Companies as Trustees
Summary A recent Tasmanian decision has questioned the ability of the Commissioner for Land Tax to aggregate the landholdings of separate trusts which have related companies as trustees.
Who Does This Impact? Trustees of trusts who are related companies.
What Action Should Be Taken? Trustees need to be aware of the decision pending an announcement by the NSW Commissioner as to whether or not he intends to adopt a similar approach.
Contents:
TURKSLEGAL
Overview of Legislation in New South Wales
2
Facts in Nekon
2
Argument
3
Decision
3
Comment
3
NSW Legislation
3
Conclusion
4
PAPER
Land Tax - Related Companies as Trustees by Paul Anderson
The recent Tasmanian Supreme Court decision of Nekon Pty Limited v Commissioner of State Revenue raises the interesting question: Can the Commissioner aggregate for land tax purposes land held by related companies as trustees of different trusts? The legislation in each State is different and a taxpayer in NSW will always need to be mindful of the differences.
Overview of Legislation in New South Wales An ‘owner’ of land in New South Wales is liable to pay land tax on the value of his aggregated land holdings at the rate of $100 plus 1.6% of the land value in excess of a standard threshold which, for the 2010 year, is $376,000. However, if the aggregated land value exceeds a premium rate threshold which, for the 2010 year is $2,299,000, then a premium rate of 2% is payable upon the land value in excess of the premium rate threshold. Many years ago, an astute taxpayer attempted to minimise land tax by having each parcel of land held by a separate company, each of which received the benefit of the standard threshold. The response of the NSW Government was provisions which can now be found in Section 29 of the Land Tax Management Act 1956. Under that Section, the land holdings of ‘related companies’ can be aggregated together and only one of them is entitled to the standard threshold. Since the introduction of the premium rate of land tax, if the taxable value of land exceeds the premium rate threshold, then only one company gets the benefit of that threshold. The other non-concessional companies will pay at the premium rate of 2% on the whole of the value of their respective land holdings. With the exception of ‘special trusts’, trusts are treated as if they were individuals. However, special trusts are denied the benefit of the standard threshold. In simple terms, a ‘special trust’ is a non-fixed trust. An example would be a discretionary family trust.
Facts in Nekon Nekon Pty Limited (‘Nekon’) owned land in Tasmania as the trustee of a trust but owned none as beneficial owner. Nekon was related to 23 other companies, all of which owned land in Tasmania as trustees of different trusts and none of which owned land in Tasmania beneficially. The Commissioner aggregated all of the land held together for assessment purposes. Section 10(1) is a pivotal provision which imposes liability for land tax upon the ‘owner’ of land. At the relevant time, ‘owner’ was not defined in the Tasmanian Act. However, Section 15(2) clearly recognised that where a trustee owns some land as its beneficial owner and holds other land as trustee, land tax has to be assessed as if the trust land and other land were owned by two different owners. Under Section 41(1), a taxpayer’s account in a representative capacity is to be kept separate from the account of land tax payable by the taxpayer as an individual. Under Section 40(3), a trustee liable for land tax is given a statutory right of reimbursement out of the trust. Section 24(4) provides that if land is held by a trustee on behalf of more than one trust, then the land held on behalf of one trust is not to be aggregated with land held on behalf of another trust if the trustee is a registered trustee company, an executor, administrator, guardian, committee, receiver or liquidator or appointed by the Court. This section did not apply in the present case. Section 24(2) of the Tasmanian Land Tax Act 2000 was in the following terms: ‘If a company or related companies own more than one parcel of land, land tax is to be levied on the aggregate assessed land value of those parcels of land as if they were a single parcel owned by a single company.’
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Land Tax - Related Companies as Trustees by Paul Anderson
The Act does not contain any express provision for the aggregation of trust land held by related trustees. Such a provision exists in the Tasmanian Payroll Tax Act 1971.
Argument Nekon argued that the interpretation sought by the Commissioner would give rise to various anomalies, namely: •
The aggregation provision in Section 24(2) only applies to companies and there is no similar provision for individuals. Therefore, if 24 related individuals held land on 24 different trusts for the same beneficiary, there would be no power to aggregate. The anomaly is even more striking if the beneficiaries of the trust were different.
•
If a registered trustee company were trustee of the same 24 trusts, aggregation would be precluded under Section 24(4).
Decision Blow, J of the Supreme Court, while admitting that he had scrutinised 100 years of land tax legislation with ‘an intensity more appropriate to ‘haruspication’’ (i.e. divination by reading the entrails of animal samples) found that ‘owner’ included ownership by trusts and upheld the assessment. ‘In my view, Section 24(2) was enacted in order to prevent the minimisation of land tax by the distribution of land holdings amongst related companies. An interpretation of Section 24(2) whereby it applies to related companies that hold land on trusts would promote the purpose or object of the sub-section and a contrary interpretation would not.’
Comment With all due respect to his Honour, such an interpretation seems a quantum leap without specific provisions in the legislation supporting such an interpretation. In addition to the anomalies pointed out by Nekon’s Counsel, other anomalies come to mind, namely: •
A trust will pay higher land tax because it has a trustee who is related to other corporate trustees.
•
How was the land tax to be allocated between different trusts and/or the trustee if it also holds land beneficially?
NSW Legislation Is there any significant difference in the NSW Legislation? ‘Owner’ is defined to expressly include a trustee. There is no express provision entitling the Commissioner to aggregate the holdings of separate trusts where the trustees are related companies.
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Land Tax - Related Companies as Trustees by Paul Anderson
Section 24 provides that, ‘where a trustee is the owner of different trusts in severalty, in trust for different persons who are not for any reason liable to be jointly assessed, the land tax so payable by the trustee shall be separately assessed in respect of each of those trusts.’ The section further provides that where the trustee is also the beneficial owner of other land, he shall be separately assessed for that land. Section 25 requires the beneficiary of a trust to also lodge a land tax return. The trustee is treated as the primary taxpayer and the beneficiary is treated as the secondary taxpayer. However, there is to be deducted from the land tax payable by the secondary taxpayer, the amount of land tax paid by the primary taxpayer to prevent double taxation. In summary, there does not appear to be any significant difference in the legislation. Again, it appears a quantum leap to aggregate trust holdings where related companies are acting as trustees without specific power in the legislation to do so. The general structure of the Act is to keep trusts separate and also to keep separate the beneficial holdings of a trustee from its holdings as trustee. It is also not clear that use of related companies as trustees has been a significant tax avoidance device. If it has, the Commissioner has always had the ability to seek an express amendment to the legislation.
Conclusion It will be interesting to see if the NSW Commissioner issues any land tax assessments aggregating holdings based on the Nekon decision, not strictly binding in NSW. Another alternative for the Commissioner is to first seek an amendment to the Act to expressly permit such an aggregation. If he goes down this path, one would hope that the power to aggregate would be limited to situations in which there was some relationship between the trusts involved as distinct from the corporate trustees.
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Land Tax - Related Companies as Trustees by Paul Anderson
For more information, please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au
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