NSW state taxes changes to commence shortly

Historically, transfer duty (particularly in NSW) has been concerned with imposing duty on certain dealings in land which amount to a change in legal interest. A new category of dutiable transaction is being introduced to extend the tax base to changes in “beneficial interest”. A change in beneficial interest is specifically defined to “include” the following:

• the creation of dutiable property;
• the extinguishment of dutiable property;
• a change in equitable interests in dutiable property;
• dutiable property becoming the subject of a trust; and
• dutiable property ceasing to be the subject of a trust.

Beneficial ownership is defined to “include” ownership by a person as trustee. The use of the word “includes” in both instances is particularly concerning. Duty is a specific tax. It is nearly the converse of other broad based transaction taxes like GST, as duty is only payable on a specifically defined transaction. Inherent uncertainty is created by not expressly and specifically defining each action which gives rise to duty, which is particularly concerning as this ambiguity is found in the charging provision itself.

A common reference to a “beneficial” interest, is to the interest in property as a beneficiary of a trust. By specifically including ownership as trustee as a beneficial interest, there will quite likely be two dutiable transactions, a transfer of the legal interest (as trustee) as well as the deemed change in beneficial ownership. We are hopeful that RevenueNSW will make it clear that there is no exposure to double duty in such a circumstance.

It has long been a duty practitioner’s greatest fear for documents to refer to a trust as though the trust is first being documented. It usually arises when the trustee cannot locate the signed version of the trust deed and a third party (typically a financial institution) requires proof that the trust exists, and its terms. Careful drafting has historically been the key method to mitigating that risk, particularly refraining from words such as “declaration of trust”. As transfer duty is a tax on transactions, as long as nothing happened (eg the trust is not being created for the first time), there should be no transaction in the form of a declaration, and no duty is payable. Typically, such a situation had nothing to do about duty avoidance, and everything to do with poor record keeping.

The changes introduce a new category of dutiable transaction which arises if a statement “purports” to be a declaration of trust which merely has the effect of “acknowledging”. The introduction of the new category (which will be unique to NSW) is in response to the decision in Chief Commissioner of State Revenue v. Benidorm Pty Ltd [2020] NSWCA 285 which was a recent case of the NSW Court of Appeal handed down against the Chief Commissioner. The provision necessarily adds complexity to determining whether the mere mention of a trust is dutiable. Careful drafting will continue to be at the forefront of mitigating the risk, however, we foresee some situations where an “acknowledgement” is simply unavoidable, typically in situations where a resulting or constructive trust is required to be documented.

An exemption will be available from surcharge where residential land is used wholly or predominantly for commercial or industrial purposes. This is a welcome move which acknowledges that only residential land used as such should attract surcharge. In order to qualify for the exemption, an application must be made within 12 months of the land being used wholly or predominantly for commercial or industrial purposes, which is no later than 10 years after the land was originally acquired. That is, the change of use must occur within 10 years of acquisition of the residential land.

While general anti-avoidance provisions have applied to duties legislation for some time now, they are rarely invoked, at least in judicial proceedings. There is an inherent difficulty in applying general avoidance measures to a very specific tax like duty. That is, if the taxpayer does not undertake a taxing event, which (but for the amendments described above) is very specific, no tax applies. As a general concept, a taxpayer is not required to undertake a transaction which is taxable if there is an ability to undertake a transaction which is not taxable. A classic example of this is a direct transfer of land with a value of less than $2m (which is dutiable) compared to the acquisition of shares in a company which hold land holdings with a value of less than $2m (which is not dutiable).

The amendments move the general anti-avoidance provisions from the Duties Act 1997 (NSW) to the Taxation Administration Act 1996 (NSW) which broadens their potential application. One key feature is the removal of the words “blatant, artificial or contrived”. Those words provided useful guidance to a taxpayer or adviser as to when a particular transaction “goes too far”. The removal of those words necessarily introduces comparisons to ordinary commercial transactions which happen to attract no (or less) duty. While a “sole or dominant purpose” test remains, taxpayers and advisers will need to be mindful of the broadened provisions when deciding the legal form of a particular transaction. In addition, promoter penalty provisions are also to be inserted which could create additional risk for advisers when advising on the tax implications of the structure of a transaction, particularly if it is for the benefit of multiple parties.

Significant global entities (as defined for income tax purposes) will face a larger exposure to penalties, even in circumstances of voluntary disclosure. While SGEs are not necessarily prone to non-compliance, circumstances where a transaction occurs completely off-shore, but involves the transfer of a “landholder” in NSW, would attract the higher penalties even though the off-shore advisers may not have been put on notice that a relevant nexus to NSW exists at all.