TAX FILES
The definition of a discretionary trust under the Land Tax Act BERNIE WALRUT, MURRAY CHAMBERS
W
hilst the recent land tax changes1 have fixed on some trusts for the imposition of a surcharge, they have singled out for even harsher treatment those trusts that are defined in the Land Tax Act 1936 (SA) (LTA) as discretionary trusts. The definitions that have been adopted are in the main, different from those that have been used in this State in the Stamp Duties Act 1923 (SA). The LTA did not, prior to the recent amendments have any definitions of a trust. Though there was a definition of a special disability trust, it was the only type of trust that was expressly identified. Now there are many definitions of different types of trusts, including excluded trusts,2 unit trusts, discretionary trusts and fixed trusts.3 It must also be recognised that the definition of a discretionary trust that has been adopted is extremely broad. A discretionary trust is one under which the vesting of the whole or any part of the trust property may occur in either of two situations. The first is where the vesting is determined by a person either in respect of the identity of the beneficiaries or in respect of the quantum of the interest or both. The second is where the vesting will occur in the event that a discretion is not exercised. The reference to property appears to apply to both capital and income of the trust. This will require a close examination of each trust deed to identify whether there are any such powers vested in the trustee. As the High Court has stated on a few occasions, the expressions discretionary trust and unit trust are descriptive and not normative. Whether a particular trust satisfies one of those descriptions is dependent on the definition to be found in the particular legislation.4 The problem is further compounded by the structure of the LTA in classifying the different forms of trusts for the purposes of the Act. In the case of discretionary trusts and unit trusts there is a potential to satisfy both definitions. In the case of both definitions there is an express exclusion for an excluded trust but
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no tiebreaker for a trust that satisfies both definitions.5 If the trust does not satisfy either of those definitions and is not an excluded trust, then it is deemed to be a fixed trust.6 Discretionary trusts are then singled out in a number of ways. The first is that only one person may be nominated as a designated beneficiary.7 A designated person is in effect deemed to be the owner of a 100% of the land subject to the discretionary trust as at the prescribed time (i.e. 16 October 2019).8 The second is that the nomination of a designated person can only be made up to 30 June, 2021. The third is that the designated person must be a natural person.9 Subject to the exception for the trustee of a discretionary with no natural person beneficiaries, having regard to the scheme of the LTA, the natural person requirement most likely means that a natural person as trustee of a trust cannot be the designated person. The fourth requires that the designated person was a beneficiary at the prescribed time (i.e. 16 October 2019).10 The fifth requirement is that the designated person over 18 years at the time of designation.11 The sixth requirement is that the designated person consents to being designated and such consent is verified by statutory declaration.12 If there is no beneficiaries over 18 years of age the trustee, if a natural person, can be nominated as the designated beneficiary.13 The following discussion focuses on two aspects of the operation of those provisions. As mentioned, the nomination of a person as a designated beneficiary only applies to land that was subject to the trust at the prescribed time (pre-existing land). In effect any non pre-existing land the subject of the discretionary trust will be the subject to the surcharge. Initially, the Commissioner indicated that preexisting land would include land of which the trustee of the discretionary trust was deemed to be the owner under one of the other provisions, if that land was held as at the prescribed time (i.e. land held by a trustee of a fixed trust or the trustee
of a discretionary trust the subject of a nomination).14 However, more recently the Commissioner has indicated that is no longer her position, so a trustee of a discretionary trust holding units in a unit trust, where the unit trustee makes a nomination, will not be able to include the deemed landholding in the pre-existing land of the discretionary trust on any nomination.15 The Commissioner has also indicated that pre-existing land will cease to be pre-existing land if it is subdivided.16 This view appeared to encompass not simply a subdivision but even a request for new titles where two existing lots are in the one title and a simple request for new titles is lodged. Obviously, the position taken by the Commissioner has been questioned. Where there are two existing lots in the one title there is not even a subdivision on a request for new titles, the lots already exist. Even in the case of a simple subdivision the land does not alter, simply the description and titles alter. As mentioned by Griffith CJ and Gavan Duffy and Rich JJ in Clifford v The Deputy Commissioner of Land Tax 17 in a Federal land tax context, land is a portion of the earth’s surface. This would suggest that a simple subdivision should have no effect on the status of land as pre-existing land. Even if on a subdivision some land is vested in a local government authority one may query why the remaining land is still not pre-existing land. The lots that are created remain the same portions of the earth’s surface subject to the same trust as at the prescribed date. The title and description may simply be different. Obviously, the situation becomes much more complicated if, say, adjoining land is added to pre-existing land. Is that the same land to the extent of the portion of the earth’s surface that was held at the prescribed time or is it now different?18 Does it make any difference if it is an encroachment that is added to the title under the Encroachments Act 1944 (SA) where the land the subject of the encroachment has long been
