Risk Watch: beware the Land tax

Beware the Land Tax changes

HARRY PATSIAS, WALLMANS LAWYERS AND GRANT FEARY, DEPUTY DIRECTOR, LAW CLAIMS

Most practitioners will be generally aware that there have been significant amendments 1 to the Land Tax Act 1936 (SA) (the Act) which take effect from midnight 30 June, 2020. An overview of the changes together with an unofficial version of the Act may be found on RevenueSA’s website. 2

In the main, these amendments: • Change the various threshold values upon which land tax applies; • Change the land tax rates in respect of the various thresholds; • To use the words of the Commissioner of State Taxation (Commissioner), introduce “improved aggregation of ownerships for land tax purposes”, 3 whereby actual or deemed interests in land are aggregated; and • Impose notification obligations on trustees and subject fixed, unit and discretionary trusts 4 to the higher trust rates of land tax unless certain qualifying notices are lodged with the Commissioner. 5

The amendments raise some interesting landlord / tenant issues including whether a trustee landlord is able to recover from their tenant the higher trust rates of land tax assuming no qualifying notices are lodged, or where, by virtue of such qualifying notices, tenants have some reason to complain that their payment of land tax is ultimately benefiting someone other than the landlord as a result of the way the credit system. Such matters are outside the scope of this article.

We expect most commercial landowners will have already sought advice as to how the amendments might apply to their circumstances and whether any action might be taken by them to manage any adverse financial outcomes of the same.

Actions that some landowners might take in managing any adverse financial outcomes may include: • Restructuring their interests in land and landowning entities; • In the case of fixed or unit trusts with interests in land, contemplating whether the trustee voluntarily lodges a notice of beneficial / unitholding interests with the Commissioner; In the case of discretionary trusts with interests in land at 16 October, 2019 (preexisting land), 6 contemplating whether the trustee voluntarily lodges a notice nominating a single designated (adult) beneficiary of the trust, which nominee consents by statutory declaration, with the Commissioner by 30 June, 2021.

RESTRUCTURING

In respect of advice involving the restructuring of interests in land and landowning entities, practitioners need to be mindful of various other matters arising from such restructure, including: • Tax consequences such as stamp duty, goods and services tax, income and capital gains tax; • Whether appointing a new trustee to a discretionary trust changes pre-existing land to non-pre-existing land (or is it measured by the trust rather than the trustee); 7 • Triggering pre-emptive rights or defaults under commercial documents; • Commercial risk exposure; • Impact on succession / estate planning; and • The possibility that the land tax avoidance provisions might apply. 8

FIXED OR UNIT TRUSTS

Where the trustee is to lodge a notice of beneficial or unit holding interests (in the case of a fixed or unit trust) the general effect of such notice will be: • The trustee will be liable to the general rates and not the higher trust rates of land tax on their aggregated land holdings; • Each beneficiary or unitholder of the trust will: • Be attributed with the value of land attributable to the trust in proportion to their interest in the trust, which value will be aggregated with any other

interest in land which that beneficiary or unitholder owns; and • Receive a credit for the land tax otherwise paid by the trustee in proportion to their interest in the trust (so as to avoid double taxation); • Once lodged, the trustee must inform the Commissioner of any changes to beneficial or unitholding interests within one month of such change; • Once lodged, may be withdrawn noting the trustee may not avail itself of lodging any new notice in future.

In respect of advice involving the provision by the trustee of a notice of beneficial or unitholding interests, practitioners need to be mindful of various matters, including: • Does the trustee have the power to make and lodge such notice? • Is the lodgement of such notice by the trustee in the interests of all beneficiaries/unitholders?

In relation to these questions, the first is answered by reviewing the relevant trust deed and amending if required. 9

The second is more fundamental, as there are likely to be situations whereby one or more beneficiaries or unitholders may be disadvantaged and others advantaged by the trustee’s lodgement of such notice.

In that regard, practitioners will be well placed to advise trustees of their obligations to their beneficiaries / unitholders. As stated in Cowan v Scargill: 10

“The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust; holding the scales impartially between the different classes of beneficiaries. This duty of the trustees towards beneficiaries is paramount. They must, of course, obey the law; but subject to that, they must put the interests of their beneficiaries first. When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests”.

The primary duty is to the beneficiaries as a whole, even where fulfilment of the duty disadvantages one beneficiary and favours another, however, as discussed in Jacobs, it is also a duty of a trustee to act fairly by/between all the beneficiaries.

How then does a trustee deal with a situation whereby the actions of the trustee may result in a benefit to the financial interest of one or more beneficiaries and a corresponding detriment to other beneficiaries?

An answer may be found under a general power of management of property (to be read subject to its terms) or a more express power enabling the trustee to make such choice for the purposes of any tax or impost in the trustee’s uncontrolled and unfettered discretion (if it be stated in such terms), but otherwise such action would appear to require the consent of all beneficiaries / unitholders. Without such power or consent, the trustee may be found in certain circumstances to have failed in its duty to act impartially, for instance where it is in the interests of the majority but not the minority, to have the trustee lodge the relevant notice.

Further, where the power to amend the trust deed to provide for such action is held by the majority, query the ability to effect amendments to the trust deed to benefit that majority. There have, in some instances, been found to be duties owing as between beneficiaries themselves. Scott and Ascher on Trusts, a United States commentary often quoted favourably by the High Court, states:

“25.3 Beneficiary’s Duty to Other Beneficiaries In the preceding sections, we have seen that a beneficiary owes a duty to the other beneficiaries not to participate in a breach of trust. It would seem that a beneficiary also owes the other beneficiaries a duty not to attempt to obtain a priority over them. … Although there is not the same fiduciary relationship between trust beneficiaries as there is between them and the trustee, there is enough of a fiduciary element in their relationship to make it inequitable for one to seek to obtain an advantage over another. …”

DISCRETIONARY TRUSTS

Where the trustee is to lodge a notice nominating an adult designated beneficiary

(in the case of a discretionary trust) the general effect of such notice will be: • The trustee will be liable to the general rates and not the higher trust rates of land tax on their aggregated land holdings they owed at 16 October, 2019 (interests in land they acquire after 16 October, 2019 will be assessed at the higher trust rates of tax); 11 • The designated beneficiary will: ∘ Be attributed with the value of land attributable to the trust and assessed at the general rates, which value will be aggregated with any other land interest which that designated beneficiary owns; ∘ Receive a credit for the land tax otherwise paid by the trustee at the general rates (so as to avoid double taxation); • It will not be possible to substitute the designated beneficiary under the notice until such time as that designated beneficiary either dies, becomes incapacitated, suffers a relationship breakdown, or such other event as may be prescribed by regulation;

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• Once lodged, the notice remains in force until it is withdrawn by the trustee or until the designated beneficiary notifies the Commissioner in writing that they no longer consent to being a designated beneficiary, and thereafter no new notice may be lodged by the trustee.

With respect to advice involving the provision by the trustee of a notice nominating a single designated (adult) beneficiary of the trust, and the nominee accepting the same by statutory declaration, practitioners need to be mindful of various matters, including: • Does the trustee have the power to lodge such notice? • Is the provision of such notice by the trustee in the interests of all beneficiaries of the trust? • Is the acceptance of such notice by the proposed designated beneficiary in the best interests of that beneficiary, noting of course, that beneficiary needs to consent to that notice by statutory declaration? and • Is the designated beneficiary entitled to an income tax deduction for any land tax payable in surplus of any applicable credit?

In regards to these questions: • The first is answered by reviewing the relevant trust deed, as previously discussed; • The second is answered by observing that the trust fund would not be diminished by the trustee providing such a notice as the trust would not incur the higher trust rates. The provision of that notice would therefore be in the best interests of the objects of the trust (other than perhaps the designated beneficiary who would in any case be required to consent by statutory declaration under the notice); • The third is answered by the proposed designated beneficiary, after having received proper and independent advice, consenting to be the designated beneficiary by statutory declaration. That there is a “safe guard” in that the proposed designated beneficiary is able to withdraw their consent in future, however such withdrawal may leave the trust and other beneficiaries, and perhaps the trust’s tenants, worse off as a result of the higher trust rates to be incurred; • The fourth appears problematic in the context of a discretionary trust as any additional land tax payable by the designated beneficiary in respect of the trust’s land interest would appear to be non-deductable under the income tax law as such an expense would lack the necessary nexus to any income that the designated beneficiary may receive, whether that be by trust distribution or an indemnity by way of a reimbursement payment from the trust – on such aspect, the designated beneficiary would need to seek their own tax advice;

The answers to the third and fourth questions raise the critical risk management issue of acting in conflict of interest.

The effect of the nomination of beneficiary notice may in some cases be in the interests of some beneficiaries but not others if, for example, those other beneficiaries have other land holdings which may be the subject of aggregation. The possibility for there to be differing interests of differing beneficiaries is clearly apparent. This clearly raises the necessity for separate advice to be given, especially to the entity the subject of the nomination.

Any short-cuts where advice is given by the same lawyer to trustees / beneficiaries with differing interests, are dangerous and will be likely be productive of claims where the interests of a nominee are adversely affected. Further, if a claim arises out of a transaction where an insured practice acts for more than one party whose interests are or may be in conflict, the PII Scheme Document provides that the excess payable by the insured practice in respect of the claim will be double the usual excess. Short cuts can therefore not only be dangerous, they can also be expensive.

CONCLUSION

In advising on the above matters, practitioners need to be mindful of the various issues which may arise, as well as managing conflicts between trustees and their beneficiaries, between beneficiaries, together with tenants’ competing interests.

Endnotes 1 As effected by The Land Tax (Miscellaneous)

Amendment Act 2019 (SA) and Statutes Amendment and Repeal (Budget Measures) Act 2018 (SA). 2 See https://www.revenuesa.sa.gov.au/taxes-andduties/land-tax/land-tax-changes. 3 See page 3 of Land Tax Overview of the Land Tax (Miscellaneous) Amendment Act 2019 (SA) available at https://www.revenuesa.sa.gov.au/taxes-andduties/land-tax/land-tax-changes/Overview-ofLand-Tax-Changes-2019.pdf as at current date being Version 1 Released 16 December 2019. 4 The amendments provide definitions for different categories of trusts. 5 Superannuation funds and some special purpose type trusts are generally excluded from the higher trust rates. 6 This was introduced as a transitional measure. 7 A technical issue is understood to have been raised in that regard. 8 See section 18 of the Act. 9 There does not appear to be any power under the Trustee Act 1936 to make such choice. 10 Cowan v Scargill [1985] Ch 270 at 287-7 as quoted in Law of Trusts in Australia, 8 th edition, JD

Heydon & MJ Leeming (Jacobs) at [17-11]. 11 There is apparently an issue as to whether section 13B(1)(b) of the Act deems the unitholder the owner of land or an owner of pre-existing land. If the trustee is not deemed an owner of pre-existing land then the application of the nomination is limited. It is even more complicated if it is a fixed trust.

SACAT’s response to Burns v Corbett provides new pathways to access justice

DR SARAH MOULDS, SENIOR LECTURER, UNIVERSITY OF SOUTH AUSTRALIA

Since the High Court handed down its landmark administrative law decision Burns v Corbett 1 in April, 2018 administrative tribunals around the country have been grappling with the challenge of how to effectively respond to the ruling, which effectively bars state tribunals from exercising judicial power to determine a dispute between parties who are residents of different states (quarantining the resolution of such disputes to Chapter III courts).

In South Australia, the role of the South Australian Civil and Administrative Tribunal (SACAT) in resolving disputes between residents of different states was further clarified in the case of AttorneyGeneral (SA) v Raschke 2 . In Raschke, the Full Court of the South Australian Supreme Court held that when exercising certain powers under the Residential Tenancies Act 1995 (SA) to enforce its orders or findings, SACAT was exercising judicial power, and SACAT was not a court. This meant that SACAT could not exercise these powers with respect to residential tenancies disputes involving parties who are residents of different states (typically, a local tenant and an interstate landlord).

The decisions in Burns v Corbett and Raschke had immediate practical implications for how SACAT goes about resolving the 13,000 housing relating disputes it hears every year, roughly 10% of which involve local tenants renting houses owned by interstate landlords. The South Australian Parliament responded quickly by amending the Magistrates Court Act 1991 and the South Australian Civil and Administrative Tribunal Act 2013 to allow SACAT to transfer any implicated residential tenancy disputes to the Magistrates Court for determination and enforcement, thereby getting around the constitutional restrictions set out in Burns v Corbett and Raschke. It was then up to the members of SACAT to implement the process in practice, under the leadership of SACAT President Justice Judy Hughes and Executive Senior Member Barbara Johns, who has also since been appointed an Auxiliary Magistrate and has taken carriage of many of the implicated residential tenancies disputes arising since these decisions.

At first blush, it may seem that the response of the South Australian Parliament was to artificially “legalise” the process for resolving residential tenancies disputes between residents of different states. Concerns were raised that such a change could leave applicants exposed to more complex and costly legal procedures, and in greater need of legal advice. However, in practice this has not be the result in South Australia, primarily due to the practices and procedures adopted by SACAT, which offer important new opportunities to improve access to justice in other areas currently within the bailiwick of the Magistrates Court, such as small civil claims.

This is because the approach authorised by the 2018 amendments to the Magistrates Court Act 1991 and the South Australian Civil and Administrative Tribunal Act 2013 and implemented by SACAT, effectively allow for proceedings transferred from SACAT to the Magistrates Court to be determined and enforced with the powers of a “court”, whilst continuing to provide applicants with a “tribunal experience”. The “court” is conveniently located at SACAT’s premises, and Auxiliary Magistrates provide the same fast, fair, low cost, informal and supported environment in resolving residential tenancy disputes as provided by Tribunal Members. “Fact sheet” information, 3 developed in consultation with experts in this area including the Tenant’s Information and Advice Service (TIAS), is provided to applicants. Tenants involved in these disputes can continue to seek free support and assistance from TIAS or other support services without having to pay for legal advice or representation.

To assist in this smooth transition, SACAT staff have been tasked with identifying housing matters that may involve interstate parties, although online application forms may not yet collect the full range of information necessary to quickly identify parties’ residential addresses, particularly when applications or responses are lodged by local real-estate agents on behalf of interstate landlords. Similarly, changes could be made to the Hearing Notices issued to parties to make it clear that although the matter has been transferred to the Magistrate’s Court, the hearing will be conducted at the SACAT premises rather than in Victoria Square. This could avoid any potential confusion on behalf of unrepresented parties.

Currently, this type of hybrid model - where Auxiliary Magistrates are housed within SACAT and utilise tribunal-type processes - extends only to those disputes implicated by the Burns v Corbett decision. However, given the smooth transition SACAT has been able to provide housing dispute applicants, it could be used as a model to extend to other disputes currently heard in the Magistrates Court. An alternative option would be to more closely align the powers and member appointments of SACAT with the South Australian Employment Tribunal, for example by explicitly conferring judicial power on the tribunal in court session, and making it clear that the tribunal is exercising non-judicial power in other proceedings. In Queensland 4 and Victoria, 5 small claims applicants already have the option to pursue a range of proceedings through the Tribunal process, with clear benefits particularly for vulnerable and selfrepresented parties. The effective response to the constitutional challenges arising from Burns v Corbett and Raschke indicates SACAT could - with the right resourcing - take a leadership role in facilitating access to justice in new areas, giving more South Australians the chance to access justice in a low cost, fair, fast and informal way. B

Endnotes 1 [2018] HCA 15. 2 [2019] SASCFC 83. 3 South Australian Civil and Administrative

Appeals Tribunal Fact Sheet, Disputes where one party is interstate <http://www.sacat.sa.gov. au/upload/Disputes%20where%20one%20 party%20is%20interstate.pdf>. 4 Queensland Civil and Administrative Tribunal Act 2009 (Qld) 2009, s 164. 5 Australian Consumer Law and Fair Trading Act 2012 (Vic) s188

Delivering Accessible Justice through innovation

ALICE ROLLS, PRINCIPAL, LIPMAN KARAS

The Law Council of Australia’s 2018

‘Justice Project’ found that the Australian justice system is under-resourced and under extreme pressure. Consequently, many people are missing out on timely and effective help, increasing their risk and vulnerability.

In particular, the Justice Project found that 14% of Australia’s population live below the poverty line, yet legal aid representation is only available to 8% of Australians. It also found there is almost no legal aid available for representation in civil matters, which accounted for just 2.3% of all legal aid grants in 2016-17. 1 Add to this the fact that community legal centres were unable to help nearly 170,000 people in 2015-2016 because of a lack of resources. 2

THE MISSING MIDDLE

The result is a sizeable group of ordinary Australians – the ‘missing middle’ – who are unable to access publicly funded legal assistance but cannot afford private legal services. How many people comprise this group is yet to be the subject of a comprehensive study. As a rough guide, it is estimated that on an annual basis, more than 490,000 Australians face this dilemma. 3

The phrase ‘missing middle’ comes from a 2014 Productivity Commission Report into Access to Justice Arrangements. A significant focus of that report was the justice gap that exists ‘where people who have a meritorious case that warrants the services of a lawyer are not eligible for legal assistance or able to afford legal advice or representation’. 4

Since then, addressing the lack of accessible justice for the ‘missing middle’ has been a focus of successive Presidents of the Law Council of Australia, 5 but the plight of this growing cohort remains largely unaddressed.

However, affordable justice will be within reach of the ‘missing middle’ when an innovative new South Australian law firm opens in August 2020.

THE ACCESSIBLE JUSTICE PROJECT

The not-for-profit ‘low bono’ legal practice – The Accessible Justice Project – will aim to provide legal services at no more than a quarter of the cost of private lawyers.

The project is the initiative of Lipman Karas and the University of Adelaide who, together, want to relieve pressure on Australia’s justice system and improve access to legal services.

The new firm will be staffed by qualified lawyers enrolled in a new Access to Justice Master of Laws (LLM) program at the University of Adelaide. They will be managed by senior lawyers seconded from Lipman Karas. This collaboration between the private profession and a law school is an Australian first.

Initially, the firm will focus on civil disputes, including debt recovery, consumer protection, property, tenancy, employment and estate disputes. Clients will pay an initial consultation fee of $80 and, if further advice is required, it will be priced transparently on a case by case basis. The new firm will endeavour to help anyone of limited means who has a civil legal problem and meets the eligibility criteria but will give priority to those in the greatest need.

The new firm is registered as a charity with the Australian Charities and Notfor-profits Commission. Initial start-up costs will be met by Lipman Karas but the aim is for the not-for-profit firm to be self-sustaining over time. The ‘low bono’ fees collected will go toward meeting its operating costs, including the salaries of the LLM lawyers.

An exciting aspect of the project is the research component of the new LLM program, which will require students to complete a dissertation with a focus on innovation and access to justice.

Lipman Karas and the University of Adelaide see the project as being an incubator for ideas to address factors inhibiting access to justice, a place where innovation and emerging technologies are part of the everyday conversation. Like most industries, technology is driving significant changes in law, helping lawyers to achieve substantive advantages for their clients and to do tasks more efficiently. The hope is that through innovation, collaboration and technology, justice will be more accessible to all Australians. B

Endnotes 1 Law Council of Australia, The Justice Project:

Overarching Themes (Final Report, August 2018) 10. 2 National Association of Community Legal

Centres, Submission to the Australian Government: Federal Budget 2018-2019 (21 December 2017) <http://www.naclc.orgn.au/cb_pages/ submissions.php>. 3 Richard Denniss, Josh Fear and Emily Millane,

‘Justice for all: Giving Australians greater access to the legal system’ (Institute Paper No 8, The Australia Institute, March 2012) 1-2: ‘Around 10% of Australians, or 1.7 million people, can expect to encounter a legal problem in any given year. In 29% of cases, or for 490,000 people each year, legal needs are likely to be unmet.’ 4 Productivity Commission, Access to Justice

Arrangements (Inquiry Report No 72, 5

September 2014) Volume 2 640. 5 Morry Bailes, ‘Justice State of the Nation’ (Speech, Law Council of Australia, 14 March 2018) 3; Arthur Moses SC, ‘The hard-fought arc to justice: Opening Address to the National Access to Justice and Pro Bono Conference’ (Speech, Law Council of Australia, 14 March 2019); Michael Pelly, ‘Justice by postcode lets down the bush, says new Law Council chief ’, Australian Financial Review (online, 31 January 2020) <https://www.afr.com/politics/federal/ justice-by-postcode-lets-down-the-bush-saysnew-law-council-chief-20200130-p53vtr>.

Photo finish for Legal Services Commission

The Legal Services Commission of

South Australia has been awarded first prize at this year’s national iTnews Awards ceremony in Sydney. The award was given to the Commission’s new PhotoLegal service. PhotoLegal defeated digital initiatives from New South Wales and Victoria when it won the category for Best State Government Project.

PhotoLegal is a secure, on demand service for transmission of legal documents. It enables clients to securely send photos and short documents from their phones to the Commission’s Help Line staff.

The development of PhotoLegal was funded by a grant from the Law Foundation and is the brainchild of the Commission’s Access Services Branch which provides legal information and advice to members of the South Australian public.

“PhotoLegal is available from any device including mobile phones. It is deliberately not an app, but a customised, encrypted, secure file transfer protocol which provides the option of preserving the anonymity of the client who is using the service,” said Mr Chris Boundy, Manager of Access Services. “Clients are guided in the use of PhotoLegal by Advisers on the telephone or in face to face appointments.”

The new service has been embraced by Commission staff and clients alike, and enhances the Commission’s ability to provide immediate and directed legal information and advice to clients.

Commission lawyer Ms Diana Thomas

Chris Boundy (centre) and Diana Thomas (right) after receiving the iTnews Award

has been delighted by the uptake of the service.

“This original, smart digital product is designed with ease of use by clients and the protection of confidential material as the primary objectives,” she said. B