Tax Files: The definition of a discretionary trust under the Land Tax Act - By Bernie Walrut

The definition of a discretionary trust under the Land Tax Act

BERNIE WALRUT, MURRAY CHAMBERS

Whilst the recent land tax changes 1 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 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

regarded as part of the parcel but in effect not included in the title and the land description? It is unlikely that where preexisting land the subject of a discretionary trust is the subject of a plan under the Community Titles Act 1996 (SA) that it remains the same land, at least based on some interstate Duties Act decisions. 19 However, there is a Goods and Services Tax decision, that appears to adopt the view that the land remains the same after subdivision by the community plan. 20

The other issue for consideration is whether a person should be nominated as a designated beneficiary prior to 30 June, 2021 notwithstanding such a nomination may not have any immediate benefit. A few examples highlight some situations that require consideration. A couple have their principal place of residence in one of their names and no land tax is paid. The beach house, where they intend to retire to in five or six years is in the name of a corporate trustee of a discretionary trust. If the trustee nominates one of them as a designated beneficiary prior to 30 June, 2021, then when the beach house becomes their principal place of residence, they should be able to claim the principal place of residence exemption. In the meantime, the beach house will be assessed at base rates.

If the principal place of residence was in their names as trustees of a discretionary trust, they most likely have already been receiving a principal place of residence exemption. 21 When they move to the beach house it is likely to be too late to nominate a designated beneficiary. So, unless they nominate a designated beneficiary prior to 30 June, 2021 on their residence ceasing to be their principal place of residence, assuming they retain it, they will be liable for land tax at surcharge rates.

Another example of where a nomination might be of benefit is where there is primary production land near a township that will be ripe for development in a few years. The title includes a number of existing lots. Currently the owner of the land is the trustee of a discretionary trust that share farms that land and so obtains the primary production exemption. At some point the owner is likely to ask for separate titles for those lots and proceed to subdivide each lot progressively. If, contrary to the Commissioner’s current view, it is accepted that the subdivision does not change the land from pre-existing land to non preexisting land and there is a nomination in place, then when that subdivision occurs and the primary production exemption ceases, the base rate should apply to the land and the designated beneficiary will be assessed in respect of it (who will also receive the benefit of a credit for the tax paid by the trustee).

There are no doubt other situations where land subject to a discretionary trust is currently exempt, but that exemption may be lost in the future and it is then no longer possible to nominate a designated beneficiary. They need to be identified prior to 30 June, 2021 and an appropriate nomination made. As Charles Darwin said in respect of variation under domestication and which may be apposite here “Many laws regulate variation, some few of which can be dimly seen…”. 22

Tax Files is contributed on behalf of the South Australian based members of the Taxation Committee of the Business Law Section of the Law Council of Australia. B

Endnotes 1 The amendments that came into effect on midnight of 30 June 2020. 2 An excluded trust is defined to mean any one of seven different types of trust that are further described and defined. 3 The fixed trust appears to be the default form of trust. The definition in section 2(1) provides that a fixed trust is not an excluded trust, discretionary trust or in effect a unit trust. There is a further exclusion in section 12(9) for public unit trusts. 4 Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4, 192 CLR 226 [8]; CPT Custodian

Pty Ltd v Commissioner of State Revenue of the State of

Victoria [2005] HCA 53; (2005) 224 CLR 98 [15]. 5

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21 22 In MSP Nominees Pty Ltd v Commissioner of Stamps (SA) [1999] HCA 51, (1999) 198 CLR 494 [7] the unit trust was described by the High Court as follows: “The significant provisions made by the Trust Deed for the exercise of powers and discretions by the Trustee with respect to distributions to Unit Holders support the description of the trusts established by the Trust Deed as discretionary trusts.” There is a further exclusion in section 12(9) for a public unit trusts. Section 13A(1). Sections 13A(1) and 13A(9)(a). Section 13A(13(a). Section 13A(13)(b). Section 13A(13)(c). Section 13A(13)(d). It is unclear whether in this situation the nominated trustee’s own land is aggregated with the discretionary trust’s land or not. There appears to be no reason, on the wording, for the discretionary trust land not to be aggregated with the trustee’s own land. See trust example 9 in the Commissioner’s Land Tax Overview of the Land Tax (Miscellaneous) Amendment Act 2019 (Overview) previously available at http://www.revenuesa.sa.gov.au/ taxes-and-duties/land-tax/land-tax-changes/ Overview-of-Land-Tax-Changes-2019.pdf (it appears no longer available at that site). Commissioner’s Land Tax Guide to Legislation Changes for Joint Owners, Land Held on Trust & Related Corporations dated 18 May 2020 (Guide) 9 and 16. As at the time of the preparation of this article the Commissioner has indicated that her view in respect of subdivided land remains, though it is still being reviewed. [1914] HCA 57, (1914) 19 CLR 593, 598, 607 and 619. Under section 16 of the Valuation of Land Act 1971 (SA) the Valuer-General may make separate valuations of portions of land forming part of a larger parcel. It is such valuations and designations from the valuation roll that the Commissioner uses under the LTA. Growing Wealth Pty Ltd v Commissioner of Stamp Duties (Qld) [2001] 2 Qd R 603; Commissioner of State Revenue (Vic) v Pattison [2001] VSC 113; [2001] 3 VR 520; and Sportscorp Australia Pty Ltd v Chief Commissioner of State Revenue (NSW) (2004) 213 ALR 795. Sterling Guardian Pty Limited v Commissioner of Taxation [2005] FCA 1166 [38]. Section 13A(10). Charles Darwin Origin of Species (H M Caldwell & Co 1900) 10.