Land Tax: The Commissioner’s Views on Trust Beneficiaries

Land tax is imposed at progressive rates on the aggregate taxable value of the taxable real property owned by a taxpayer. Where land is held in trust, however, section 13(3)(b) of the Land Tax Act 1936 (SA)provides an exception to the aggregation principle unless the land and other land are held in trust for the same beneficiary.

Occasionally land and other land are each held by separate trustees on the terms of a separate discretionary trust but with commonly described beneficiaries. In this case the Commissioner of State Taxation takes the position that the words ‘the same beneficiary’ can apply to a collective group of objects of a discretionary trust and section 13(3)(b) does not apply.

In doing so, the Commissioner has rejected arguments that the words “the same beneficiary” require the identification of a particular common beneficiary entitled to the land held in each trust and cannot be applied where the beneficiary can only be identified as a commonly described class of objects among whom the trustee may, subject to the powers conferred on it, distribute the land held in trust.

The ordinary meaning of the words “the same beneficiary” would appear, however, to require the Commissioner to identify the exact same beneficiary in each of the trusts in which land is held so the Commissioner’s position is questionable.

The objects of a discretionary trust have a right to due administration of the trust, but there is support for the proposition that no object has an interest in the trust fund or any proprietary interest in any asset of the trust.^[1] This is consistent with the decision in Lygon Nominees Pty Ltd v Commissioner of State Revenue [2007] VSCA 140 where the Victorian Commissioner of State Revenue successfully argued that, because the trusts which held land were wholly discretionary, and as such there was no person or class with a vested or even contingent interest in the income of the trust, there was no beneficial owner for whom any of the lands were held.

The Court of Appeal of the Supreme Court of Victoria held for the Commissioner that beneficiaries of a discretionary trust did not have any estate or interest in land held by the discretionary trustee and as such were not beneficial owners.

Similarly, in Commissioner of State Revenue v Famajohn Nominees Pty Ltd [1999] VSC 383 it was held that 2 parcels of land were not held for “different beneficial owners” because, even though one parcel of land was accepted by all parties to have a beneficial owner, the other parcel of land was held by the owner in its capacity as trustee of a discretionary trust and, therefore, had no beneficial owner.

If the various potential objects comprising the class of objects of each discretionary trust do not have any estate or interest in property held by the trustee, there are no beneficiaries for whom any of the property is held. It then follows that the trust property cannot be held in trust for the same beneficiary because there is no identifiable beneficiary for whom the property is held. This is true for all objects of such a trust including takers in default.

In the alternative, the Commissioner has a second prospective argument for aggregation. If two trusts have similarly described objects the Commissioner may seek to argue that the holding of land separately under each trust is a scheme to which Section 40B of the Taxation Administration Act 1996 (TAA) will apply.

From 1 July 2011, a new Part 6 general anti-avoidance provision applying to all state taxes was included in the TAA. Broadly, the object of the provisions is to deter artificial, blatant or contrived schemes to reduce or avoid liability for any state tax.

The provisions operate by making a person liable to pay an amount of tax avoided by the person as a result of a tax avoidance scheme.^[2] A tax avoidance scheme is any scheme that a person enters into for the sole or dominant purpose of enabling liability for tax to be avoided or reduced.^[3] In determining the sole or dominant purpose, any purpose relating to avoiding, reducing or postponing a liability for Foreign Tax is disregarded.^[4] Foreign Tax in this context includes any tax of another state or territory or of the Commonwealth besides taxes imposed by overseas jurisdictions.^[5]

Part 6A would recognise the ownership of the land as being under separate trusts and not for ‘the same beneficiary’, but alter the tax consequences of the holdings. To apply the Part the Commissioner is required to issue a notice of assessment, or reassessment on the basis that a transaction constitutes a scheme that is a tax avoidance scheme of an artificial, blatant or contrived nature.

In determining whether a scheme has a sole or dominant purpose of enabling liability for tax to be avoided or reduced and is of an artificial, blatant or contrived nature, eight matters are listed which should be taken into account. Part 6A requires consideration of the purpose of the relevant taxation law or any provision of the relevant law.^[6] Prima facie, the purpose of any taxation law is to raise revenue, but a more specific analysis shows that the purpose of subsection 13(3)(b) is to except a trustee from the effects of aggregation.

Even if the purchase of property in two or more separate trusts were to constitute a scheme, it will not be sufficient to enliven the section unless that scheme is also found to be blatant, artificial or contrived.

The disjunctive should be noted; the scheme need only meet one of the three criteria to trigger the provision. Further, however, the scheme identified must be found to have a sole or dominant purpose of enabling liability for tax to be avoided or reduced.

The establishment of discretionary trusts to hold land may well be attributable to significant family or commercial purposes. A dispute with the Commissioner under Part 6A will require evidence to be addressed of any such purposes relied upon by a trustee. If land is to be acquired and held by a trustee in such trusts, a careful record of these purposes ought best be made by the trustee at the time of the acquisition.