PHARMOS NOMINEES PTY LTD v COMMISSIONER OF STATE TAXATION (SA)
Judges:Gray J
Court:
Supreme Court of South Australia
MEDIA NEUTRAL CITATION:
[2012] SASC 24
Civil
Gray J:
1. This is an appeal against an assessment of stamp duty.
2. On 20 December 2010, the Treasurer[1]
3. The appeal is brought pursuant to section 92 of the Taxation Administration Act 1996 (SA).[4]
4. The primary issues between the parties are whether there had been a conveyance of property within the meaning of the Stamp Duties Act, the value of the property conveyed and whether penalty tax was payable.
5. I propose to set out my conclusions at the outset. The appeal is to be dismissed. The Commissioner is to succeed in respect of each of the primary issues. Inter alia, I conclude that the 24 February 2006 agreement was an instrument chargeable as a conveyance. I also conclude that the value of the property conveyed may be treated as equal to the market value. Further, I am of the view that it was appropriate for the Commissioner to impose penalty tax at the rate imposed.
The facts
6. Before coming to discuss the respective contentions of the parties, it is convenient to trace the history of the matter and to set out the salient facts.
7. On 6 August 1979, the R J Trim Developments Trust was established. The trust may be described as a standard discretionary trust. The trust deed set up three classes of beneficiaries. The members of the first class were Russell John Trim and his wife, Elizabeth Margaret Trim. At the time of establishment, there was a second class but no beneficiaries were named and a third class with three charities as members. The appointor under the trust was Mr Trim. On 20 August 1979, R J Trim Developments Pty Ltd was appointed as the new trustee.
8. On 15 September 1993, the R J Trim Developments Trust deed was varied to provide that prior to the vesting date, no beneficiary shall require or be entitled to require the trustee to transfer or distribute any part of the fund unless that beneficiary shall be specifically and absolutely and beneficially entitled thereto or pursuant to any contract or agreement made by that beneficiary with the trustee.
9. On 8 January 1980, the appellant, Pharmos Nominees Pty Ltd, was incorporated in South Australia. At all relevant times, Pharmos was controlled by the Angelos interests.[5]
10. In late 2005, Mr Angelos entered into negotiations with Mr Trim. Mr Trim wished to realise the value of the assets held by the R J Trim Developments Trust and to distribute the proceeds of that realisation to beneficiaries of the trust. Mr Angelos was interested in taking control of those assets. The principal asset of the trust was a commercial property on Greenhill Road, Wayville in the State of South Australia. The negotiations, I infer, addressed the means by which a possible transfer of the property from the Trim interests[6]
11. On 23 December 2005, as a result of the negotiations, an agreement was reached between Mr Angelos, Mr Trim and R J Trim Developments Pty Ltd acting in its capacity as trustee of the R J Trim Developments Trust.
12. The agreement is complex. To understand the agreement and to place in context later events, it is of assistance to set out in full the recitals to the agreement before coming to address particular provisions:
"RECITALS
WHEREAS:
- A. The Trustee [R J Trim Developments Pty Ltd] is a company incorporated in South Australia and whose registered office is situate at 322 King William Road Adelaide South Australia 5000.
- B. The Trustee is the sole trustee for the time being of a Deed dated the 6th August 1979 made by R. J. TRIM HOLDINGS PTY. LTD. (formerly known as Falkirk Holdings Pty. Ltd.) (ACN 007 899 998) ('the Settlor') as Settlor as amended by a Deed of Variation dated the 15th September 1993 and known by the deed of trust (the 'Trust Deed') relating thereto as 'R. J. TRIM DEVELOPMENTS TRUST' (the 'Trust').
- C. The Beneficiaries of the Trust comprise Russell his wife children grandchildren and others including any trust in which Russell has an interest actual or contingent.
- D. Russell is the Appointor of the Trust with powers to appoint a new trustee of the trust and is a shareholder Chairman or the board of directors and acts as the Managing Director of the Trustee. Through such shareholding and offices Russell presently controls the operations of the Trustee.
- E. The Trustee in its capacity as trustee of the Trust is registered as the proprietor of an estate in fee simple in the whole of the land situated at 60 Greenhill Road Wayville in South Australia 5034 and comprised in Certificates of Title Register Books Volumes 5334 Folio 628, 5478 Folio 698 and 5511 Folio 888 (the 'Land') subject to Mortgages Nos 6532262 and 9408885 noted on the said Certificates of Title (the 'Mortgages');
- F. John and Russell have agreed arrangements under which the Trustee will make certain distributions of corpus and income to the beneficiaries of the Trust and then John will become the controller of the Trustee. Thereafter Russell will refrain from prevent and indemnify John against any claims being made by him or any person claiming a beneficial interest in the Trust by reason of their relationship or any other connection with him except as hereinafter provided.
- G. John and Russell desire to record the terms and conditions of their arrangements."
13. The 23 December 2005 agreement provided for R J Trim Developments Pty Ltd, the trustee, to make a new issue of shares in the capital of the trustee to enable control of the trustee to pass from Mr Trim to Mr Angelos. The agreement further provided that once this had occurred, the trustee would buy back the existing ordinary shares for their issue price, that Mr Trim[7]
14. The 23 December 2005 agreement provided that Mr Trim would cause the trustee to issue a "bond" giving priority to Pharmos as bondholder to the distribution of income and capital.
15. The 23 December 2005 agreement then provided that upon or immediately prior to Pharmos making payment of $6,975,250.00, the trustee would distribute the net value of the trust to the then beneficiaries. The agreement required that Mr Trim arrange for the discharge of the mortgages and all liabilities, including all guarantees of the trustee. As a consequence, at the time of the Angelos interests taking control of the trust and the assets of the trust, those assets would be free of any indebtedness. However, it appears that it was agreed that the lease over the commercial property would remain.
16. The 23 December 2005 agreement set out numerous warranties given by Mr Trim. Many of those warranties closely follow the form of warranties provided by a vendor on the sale of commercial real estate.
17. The 23 December 2005 agreement contained the following provision with respect to stamp duty:
"STAMP DUTY
Notwithstanding any of the foregoing it is acknowledged and agreed by John that Russell shall not be taken to have made representations or warranted to him with respect to the liability or non-liability to pay stamp duty in respect of any of the transactions or documents herein described. It is hereby agreed that any stamp duty assessed on any documents drawn to effect these transaction will be borne by the Trustee at the expense of the Trust but that no such liability need be provided for in the Settlement Accounts."
Finally, the following two further clauses addressed topics of "other documents" and "amendment":
"OTHER DOCUMENTS
The parties shall either before or after settlement do all such acts matters and things and shall sign or execute and deliver all such documents and writings as may be necessary or expedient to further and more effectually carry into full effect the provisions of this Agreement.
AMENDMENT
No amendment of this Agreement shall bind the parties unless made in writing expressed to be supplemental to or in substitution for the whole or a part of this Agreement."
18. The 23 December 2005 agreement foreshadowed settlement on 24 February 2006 at which time the Trim interests would be placed in funds to pay out all of the existing loans and to distribute the capital profit. As noted earlier, the existing loans totalled about $4,000,000.00, leaving about $2,975,250.00 to be distributed.
19. On 27 January 2006, in apparent anticipation of the settlement of the 23 December 2005 agreement, David John Tucker as settlor and Pharmos as trustee established the Jaslil Trust. The primary beneficiaries of the Jaslil Trust were Mr Angelos and Martha Angelos. It was intended that Pharmos would become a beneficiary of the R J Trim Developments Trust and Pharmos would hold its beneficial interest in that trust on behalf of the beneficiaries of the Jaslil Trust - Mr and Mrs Angelos. These matters were confirmed in recital D and clause 2.1 of the agreement subsequently entered into on 24 February 2006.
20. Following settlement on 24 February 2006, the Angelos interests took control of R J Trim Developments Pty Ltd. The name of that company was changed to Jaslil Investments Pty Ltd, and the name of the R J Trim Developments Trust was changed to the Jaslil Investments Trust. As a consequence, the structure of the holding following settlement was that Jaslil Investments Pty Ltd was the trustee of the Jaslil Investments Trust, the beneficiary of that trust was Pharmos, which in turn held that interest as trustee for the Jaslil Trust. As noted above, the beneficiaries of the Jaslil Trust were Mr and Mrs Angelos.[8]
21. On 23 February 2006, the Trim interests varied the deed of trust of the R J Trim Developments Trust in anticipation of the settlement of the agreement of 23 December 2005. The recitals to the deed of variation record that "the Trustee is desirous of changing the terms of the Trust to provide additional powers to the Trustee". In particular, the variation empowered the Trim interests to give effect to their obligations under the 23 December 2005 agreement.
22. The substance of the variation of the deed of trust was to include a power in the trust deed to issue to any beneficiary an "equity bond" conferring on the holder of the bond the entitlement to receive in priority to all other beneficiaries distributions of income and capital. The deed of variation defined "equity bond" in the most general of terms - "an agreement, bond or contract made between the Trustee and a Beneficiary in accordance with [a later clause of the] Deed". The substance of this later clause is referred to earlier in this paragraph. The variation went so far as to resolve any conflict between the provisions of the "equity bond" and of the deed in favour of the provisions of the "equity bond".
23. On 24 February 2006 a further deed of variation of the R J Trim Developments Trust deed was effected. The deed relevantly provided for the name of the trust to be changed to Jaslil Investments Trust and the appointor to be Mr Angelos in lieu of Mr Trim.[9]
24. The 23 December 2005 agreement foreshadowed a deed of indemnity. The deed of indemnity was entered into on 24 February 2006. Recitals D and E of the deed of indemnity recorded:
- "D On 23rd December 2005, the Company entered into an agreement ('the Agreement') recoding [sic] certain arrangements under which the Company is to make certain distributions of corpus and income to the beneficiaries of the Trust and then the Indemnified is to become the controller of the Company. Thereafter RJT is refrain from prevent and indemnify the Indemnified against any claims being made by him or any person claiming a beneficial interest in the Trust by reason of their relationship or any other connection with him.
- E The parties now wish to record the terms and conditions of the indemnity referred to in Recital D."
25. The substantive effect of the deed of indemnity was that Mr Trim would indemnify Pharmos and R J Trim Developments Pty Ltd against any claims being made in respect of any earlier dealings by R J Trim Developments Pty Ltd in respect of the trust. In particular, clause 3 of the deed of indemnity provided:
"The Indemnifier HEREBY INDEMNIFIES the Indemnified and the Company and agrees to keep them so indemnified from and against all Claims threatened and made (or either) against either or both of them on or after the Completion Date arising directly or indirectly as a consequence of the exercise of the Company's discretion as trustee of the Trust in relation to the appointment of (or decision not to appoint) income or corpus to a Beneficiary in relation to the administration of the Trust by the Company or both AND subject to the provisions of Clause 5. of this Deed."
26. On 24 February 2006, an unaudited balance sheet purporting to show the assets and liabilities of the R J Trim Developments Trust as at that date was prepared. Reference will be made to this balance sheet later in these reasons.
27. On 24 February 2006, an agreement was entered into between R J Trim Developments Pty Ltd as trustee of the R J Trim Developments Trust and Pharmos. This agreement is referred to hereafter as the 24 February 2006 agreement. The terms of this agreement required Pharmos to pay an amount of $2,969,059.02 to R J Trim Developments Pty Ltd. In return Pharmos would be entitled to receive distributions of income and capital in priority to all other beneficiaries. This was to give effect to the terms of the 23 December 2005 agreement albeit with significant variation.
28. It is to be noted that the amount to be paid by Pharmos in the 23 December 2005 agreement was $6,975,250.00. The amount to be paid pursuant to the 24 February 2006 agreement is the lesser amount of $2,969,059.02. It is evident that at some time Mr Trim and Mr Angelos amended the 23 December 2005 agreement. It is to be recalled that the 23 December 2005 agreement required any such amendment to be in writing. For reasons that are unexplained, no documents evidencing the amendment have been produced by the Angelos interests in this proceeding.
29. A form of discharge of mortgage was received as evidence on the appeal. That document discloses that on 13 February 2006 a discharge of mortgages numbered 6532262 and 9408885 over certificates of title 5478/698, 5511/888 and 5334/628 in favour of National Australia Bank Ltd was executed, and registered on 12 April 2006.
30. On 12 April 2006, two mortgages in favour of the Commonwealth Bank of Australia were registered over certificates of title 5478/698, 5511/888 and 5955/609.[10]
"So you'll see there's a discharge of two mortgages granted to the National Australia Bank and that document was signed on 13 February, so preceding the 24th which was the effective settlement date. … And registered, according to the stamp on the back sheet, on 12 April 2006. And then there are two mortgages in favour of the Commonwealth Bank of Australia as mortgagee dated 3 March 2006. So, postdating the effective settlement date, and registered with the Registrar-General on the same day, 12 April 2006. So the refinancing of the National Australia Bank mortgages followed fairly soon after the settlement date."
31. During the course of the hearing, I expressed concern that the Court was not in possession of all documents relating to the overall transaction. Counsel for Pharmos advised the Court that his client did not propose to place any further material before the Court. As a consequence, some aspects of the overall transaction remain unknown to the Court. However, some inferences may be drawn as to what occurred.
32. The 24 February 2006 agreement included the following recitals:
- "E. The Trustee is pursuant to a Deed of Appointment of New Trustee made on 20th August 1979 the duly constituted trustee of the settlement made on 6th August 1979 and known by the instrument recording the terms of that trust as varied by Deed of Variation made on 15th September 1993 and Deed of Variation made on or before the date hereof bearing footer JT191A.964.48[11]
A document bearing this footer was not in evidence. ('the Trust Deed') as the 'R J TRIM DEVELOPMENTS TRUST' ('the Trust').- F. The Trustee is desirous of making a distribution of capital of the Trust and to avoid having to realise any assets of the Trust is desirous of procuring funds to enable it to make that distribution by the payment of cash.
- G. In its capacity as trustee of the Trust the Trustee has power to issue to a beneficiary of the Trust an Equity Bond on such terms as the Trustee thinks fit including entitling a beneficiary who is the holder of the Equity Bond to be paid net income or capital of the Trust in priority to other beneficiaries.
- H. The Beneficiary is a beneficiary of the Trust (being a person within the meaning of Beneficiary in the Trust Deed).
- I. The Beneficiary has indicated that it is willing to provide funds to the Trustee (to enable it make the distribution of capital) on the terms and conditions provided for in this instrument as an Equity Bond for the purpose of the Trust Deed.
- J. The Trustee, having regard to, amongst other things:
- (i) the benefit that would flow to the beneficiary whom the Trustee proposes will receive the distribution of capital,
- (ii) the impact of the funding being provided by the Beneficiary on the cash flow of the Trust, and
- (iii) the fact that benefits provided in consideration for the funding would be flowing to the Beneficiary as a beneficiary,
considers it appropriate to accept the funding from the Beneficiary in return for the issue of an Equity Bond on the terms and conditions of this instrument."
The bond amount was defined as follows:
"Bond Amount" means the amount of $2,969,059.02 payable by the Beneficiary pursuant to Sub-clause 3.2.1 below;
33. Under the terms of the 24 February 2006 agreement, the trustee entered into the following covenants:
- "3.1 the undertakings in sub-clause 3.2 below the Trustee HEREBY:
- 3.1.1 confirms and declares that:
- 3.1.1.1 this instrument and the rights and entitlements hereunder constitute an Equity Bond for the purpose of clause 1.7 of the Trust Deed; and
- 3.1.1.2 the entry into this instrument by the Trustee and the Beneficiary constitutes the issue of an Equity Bond to the Beneficiary for the purpose of clauses 4.6 and 13.2 of the Trust Deed;
- 3.1.2 declares that upon payment of the Bond Amount being made to the Trustee by the Beneficiary the rights and entitlements provided for in clause 4 below accrue to and will be held by the Beneficiary as a beneficiary to whom has been issued, and who holds, the Equity Bond referred to in Sub-clause 3.1.1 above;
- 3.1.3 undertakes to the Beneficiary that the Trustee shall not:
- 3.1.3.1 do any act or fail to do any act which would defeat, or adversely affect, the rights and entitlements of the Beneficiary hereunder; and
- 3.1.3.2 without limiting Sub-clause 3.1.3.1 above or being limited by it:
- 3.1.3.2.1 amend the trust deed if the result of effect would or could directly or indirectly defeat, or adversely affect, the rights and entitlements of the Beneficiary hereunder;
- 3.1.3.2.2 create permit suffer or agree to any interest or Encumbrance in or over any of the Trust Fund other than in the ordinary course of business for full consideration;
- 3.1.3.2.3 (other than in making the distribution of corpus referred to in Recital B in an amount not exceeding the Bond Amount) deal with or dispose of any of the Trust Fund except in the ordinary course of business for full consideration; or
- 3.1.3.2.4 create any Equity Bond or other rights or entitlements in any beneficiary in priority to or which would or could directly or indirectly defeat, or adversely affect, the rights and entitlements of the Beneficiary hereunder;
WITHOUT the prior written consent of the Beneficiary."
Pharmos entered into the following covenants:
- "3.2 the undertakings in Sub-clause 3.1 above the Beneficiary HEREBY:
- 3.2.1 agrees to pay on demand by the Trustee to the Trustee or as it directs and in such form as the Trustee directs an amount equal to the Bond Amount;
- 3.2.2 agrees to accept this Equity Bond as full consideration for the payment provided for in Sub-clause 3.2.1 above; and
- 3.2.3 acknowledges that:
- 3.2.3.1 it is not entitled to repayment of, or to demand to claim repayment of, the amount so paid by it; and
- 3.2.3.2 all its right and entitlements in respect of that payment are those provided for in this Equity Bond."
The 24 February 2006 agreement further provided:
- "4. The Beneficiary shall be entitled to and the Trustee shall:
- 4.1 distribute to the Beneficiary, in each year or accounting period of the Trust, pursuant to clauses 5.6 or 5.7 of the Trust Deed, the lesser of:
- 4.1.1 the nett income of the Trust for that income year; and
- 4.1.2 the greater of:
- 4.1.2.1 an amount not less than the Estimated Interest Payment for the financial year immediately following that year of income; and
- 4.1.2.2 the amount of the nett income, in excess of (and in addition to) that in sub-clause 4.1.2.1 above that the Trustee determines pursuant to clause 5.6 or 5.7 of the Trust Deed to distribute to the Beneficiary for that income year;
- 4.2 distribute from the proceeds of sale of any asset or realisation of any property of the Trust Fund (including on a vesting of the Trust),:
- 4.2.1 (if the aggregate of the amount or amounts the subject of sub-clause 4.2.2 below is, after deducting therefrom any amount that is a distribution of nett income pursuant to clauses 5.6 or 5.7, less than the Bond Amount) - an amount (in aggregate from all sales and realisations), after deducting therefrom any amount that is a distribution of nett income pursuant to clauses 5.6 or 5.7, equal to the Bond Amount; and
- 4.2.2 either as a distribution of nett income pursuant to clauses 5.6 or 5.7 or as a distribution of corpus pursuant to clause 2.8 (as the case may require) all amounts in excess of the current value of the current property of the Trust;
in priority to, and to the extent of the amount or amounts provided for above to the exclusion of, any other beneficiary of the Trust.
- 5. For the purpose of clause 4 above:
- 5.1 if the amount distributed to the Beneficiary pursuant to clause 4.1 above in any year is less than the Estimated Interest Payment for the financial year immediately following that year, for any subsequent year clause 4.1.2.1 above shall be construed as also including the quantum of any such shortfall until a distribution has been made (in addition to the normal entitlement of the Beneficiary under clause 4.1 above for that year) to the extent of that shortfall; and
- 5.2 where the proceeds of sale of any asset or realisation of any property of the Trust Fund would also result in an amount (being all or part of those proceeds) forming part of the nett income of the Trust, only the excess over the amount payable under Sub-clause 4.1.2.1 above (including as affected by Sub-clause 5.1 above) shall be taken into account for the purpose of Sub-clause 4.2.1 above."
REPAYMENT OF THE BOND AMOUNT
- 6. Purported repayment by the Trustee of the Bond Amount or payment to the Beneficiary of an amount equal to the Bond Amount shall not:
- 6.1 affect the continued rights and entitlements of the Beneficiary hereunder; or
- 6.2 affect the continued operation of this Equity Bond.
TERMINATION OF THIS EQUITY BOND
- 7. This Equity Bond shall:
- 7.1 not cease or be terminated by purported repayment by the Trustee of the Bond Amount or payment to the Beneficiary of an amount equal to the Bond Amount; and
- 7.2 only cease upon vesting of the Trust (but subject to clause 4.2 above and to clause 4.1 above in respect of any net income derived up to or and including the vesting).
34. It was intended that the Angelos interests would take control of R J Trim Developments Pty Ltd and of the R J Trim Developments Trust. Recital F in the 23 December 2005 agreement provides:
- "F. John and Russell have agreed arrangements under which the Trustee will make certain distributions of corpus and income to the beneficiaries of the Trust and then John will become the controller of the Trustee. Thereafter Russell will refrain from prevent and indemnify John against any claims being made by him or any person claiming a beneficial interest in the Trust by reason of their relationship or any other connection with him except as hereinafter provided."
Clause 3 of the 23 December 2005 agreement addressed the transfer of shares in R J Trim Developments Pty Ltd as follows:
"SHARES IN TRUSTEE
- 3. Subject to and upon the Bondholder subscribing for the Bond and paying for it an amount equal to the Bond Value on or before the Settlement Date Russell will:
- 3.1 cause the Trustee to immediately make a new issue of such shares in the capital of the Trustee as John may require to pass control of the Trustee to John and such other person or persons (if any) as he may in writing nominate to Russell and on the following terms;
- 3.1.1 a new separate class of shares to the existing ordinary shares;
- 3.1.2 issue price not to exceed $1.00 each;
- 3.1.3 the existing shareholders must waive any pre-emptive rights to the issue;
- 3.1.4 the shares are to have full voting and participating rights to dividends and capital including capital surpluses pari passu with all other shares on issue;
- 3.2 cause the Trustee to immediately:
- 3.2.1 buy back the existing ordinary shares for their issue price; and
- 3.2.2 procure the consent of the existing shareholders to such buy back.
- 3.3 appoint John and any other person that he shall in writing nominate to Russell prior to the Settlement Date as a director, secretary or public officer of the Trustee such appointments to be in conformity with the Articles of Association of the Trustee;
- 3.4 cause the resignations in writing of the existing directors, secretary and public officer of the Trustee which resignations shall be effective on the Settlement Date and shall each contain an acknowledgement that each such person is not entitled to any compensation for loss of office or as consideration for or in connection with resignation from office and that the Trustee is not in any way obliged or indebted or under any other obligation to such person;"
35. The evidence before the Court does not disclose when the change of control was effected. On 3 March 2006, R J Trim Developments Pty Ltd changed its name to Jaslil Investments Pty Ltd. It may be inferred that the Angelos interests took control of R J Trim Developments Pty Ltd on or about 24 February 2006.
36. It would appear that Pharmos became a beneficiary of the R J Trim Developments Trust at sometime between 23 December 2005 and 24 February 2006. Recital D and clause 2.1 of the 24 February 2006 agreement make it clear that as at 24 February 2006 this had occurred.[12]
37. As discussed above, it is evident that Mr Angelos and Mr Trim at some time after 23 December 2005 decided to vary their agreement. The amount to be paid directly by the Angelos interests was reduced from $6,975,250.00 to $2,969,059.02. It may be inferred that the explanation was that the debt owing by the Trim interests in respect of the property and the refinancing of property was addressed by a side arrangement. The unaudited balance sheet of 24 February 2006 and title documents tendered during the hearing suggest that the Trim financier was paid out. It may be inferred that an Angelos financier, the Commonwealth Bank of Australia, provided the monies to enable this to take place as evidenced by the discharge of the National Australia Bank mortgages and the registration of the Commonwealth Bank of Australia mortgages. This accords with the earlier referred to submission of counsel for the Commissioner.
38. On 24 February 2006, the assets of the R J Trim Developments Trust consisted primarily of land and buildings at 60 Greenhill Road, Wayville with a value of $6,975,250.00, liabilities of $4,006,190.98 and a net equity of $2,969,059.02 as described in the unaudited balance sheet as at that day. It would appear that on the same date, Pharmos advanced to R J Trim Developments Pty Ltd as trustee of the R J Trim Developments Trust the sum of $2,969,059.02 which appears to have been applied by the trustee in the making of distributions to beneficiaries under the trust.[13]
39. The unaudited balance sheet of the R J Trim Developments Trust purportedly dated 24 February 2006 discloses indebtednesses to the National Bank of Australia of $2,095,500.00, a loan from Mr Trim of $934,588.08 and a loan from the R J Trim Family Trust[14]
40. As noted above, no explanation has been offered by Pharmos for the incompleteness of the documentation and the absence of evidence that would allow the entire arrangements and transactions to be fully understood. As is evident from these reasons, I have attempted to make findings about the substantive effect of the transaction and I have done so by drawing what I consider to be reasonable inferences. However, insofar as uncertainties or gaps remain, it is to be borne in mind that Pharmos bears the onus of proof in making out its case that the assessment of duty should be set aside.
41. To my mind, the overall effect of the arrangement is clear. The Angelos interests took control of the commercial property and the other assets of the R J Trim Developments Trust, arranging for the Angelos financier to payout the Trim financier and provide funds for the payment of the equity in the property held by the Trim interests.
42. The 23 December 2005 agreement, various deeds, an unaudited balance sheet and the 24 February 2006 agreement were prepared by Rankines Solicitors acting on behalf of the Angelos interests. Pharmos obtained oral advice during December 2005 from Rankines Solicitors as to the stamp duty consequences of the proposed arrangements. That advice has not been disclosed. It is claimed by Pharmos that it relied on that legal advice. I will discuss these matters further when dealing with the complaint about the imposition of penalty tax.
43. The 24 February 2006 agreement was not submitted to the Commissioner for an opinion as to its dutiability under the Stamp Duties Act. The Commissioner did not became aware of the existence of this agreement until some years later on 10 July 2008 as a result of routine compliance activity.
44. On 14 April 2009, the Commissioner in accordance with the Taxation Administration Act assessed the agreement to duty under the Stamp Duties Act in the sum of $377,471.50 together with interest and penalty tax under the Taxation Administration Act. It is to be noted that section 3 of the Stamp Duties Act provides that the statute should be read in conjunction with the Taxation Administration Act. Section 2 of the Stamp Duties Act defines an assessment to be as defined in the Taxation Administration Act.[15]
45. Penalty tax of five per cent of the unpaid tax was assessed by the Commissioner pursuant to Division 2 of Part 5 of the Taxation Administration Act. This assessment of penalty at the rate of only five per cent proceeded on the basis that the Commissioner was satisfied that the tax default was not a deliberate tax default.
46. The Commissioner assessed interest at the rate prescribed in section 26 of the Taxation Administration Act pursuant to Division 2 of Part 5 of the Taxation Administration Act for the period from 25 April 2006 until 18 December 2008, the latter being the date on which the Commissioner informed Pharmos of its intention to assess the agreement.
47. On 12 June 2009, Pharmos objected to the assessment of stamp duty, interest and penalty tax. On 13 July 2010, Pharmos paid the stamp duty, the penalty tax and interest to the Commissioner.
Preliminary matters
Taxing statutes
48. The approach to the interpretation of taxing or fiscal statutory provisions has been the subject of extensive judicial comment. In
Cooper Brooks (Wollongong) Pty Ltd v Federal Commissioner of Taxation,[16]
"… The fundamental object of statutory construction in every case is to ascertain the legislative intention by reference to the language of the instrument viewed as a whole. But in performing that task the courts look to the operation of the statute according to its terms and to legitimate aids to construction.
The rules, as D. C. Pearce says in Statutory Interpretation, p. 14, are no more than rules of common sense, designed to achieve this object. They are not rules of law. If the judge applies the literal rule it is because it gives emphasis to the factor which in the particular case he thinks is decisive. When he considers that the statute admits of no reasonable alternative construction it is because (a) the language is intractable or (b) although the language is not intractable, the operation of the statute, read literally, is not such as to indicate that it could not have been intended by the legislature.
On the other hand, when the judge labels the operation of the statute as "absurd", "extraordinary", "capricious", "irrational" or "obscure" he assigns a ground for concluding that the legislature could not have intended such an operation and that an alternative interpretation must be preferred. But the propriety of departing from the literal interpretation is not confined to situations described by these labels. It extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions."
49. The fact that an Act is a taxing statute does not make it immune to the general principles governing the interpretation of statutes. The courts are as much concerned in the interpretation of revenue statutes as in the case of other statutes to ascertain the legislative intention from the terms of the instrument viewed as a whole.
50. The statutory interpretation principles generally applicable, where revenue statutes and in particular stamp duty statutes are under consideration, were recently stated by French CJ in
Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (Northern Territory):[18]
"The starting point in consideration of the first question is the ordinary and grammatical sense of the statutory words to be interpreted having regard to their context and the legislative purpose. That proposition accords with the approach to construction characterised by Gaudron J in
Corporate Affairs Commission (NSW) v Yuill as: "dictated by elementary considerations of fairness, for, after all, those who are subject to the law's commands are entitled to conduct themselves on the basis that those commands have meaning and effect according to ordinary grammar and usage." In so saying, it must be accepted that context and legislative purpose will cast light upon the sense in which the words of the statute are to be read. Context is here used in a wide sense referable, inter alia, to the existing state of the law and the mischief which the statute was intended to remedy.[Footnotes omitted.]"
The other members of the High Court in that decision made the following observations in relation to the task of interpreting revenue statutes:[19]
Fixing upon the general legislative purpose of raising revenue carried with it the danger that the text did not receive the attention it deserves. This danger was adverted to by Gleeson CJ in
Carr v Western Australia when he said:"[I]t may be said that the underlying purpose of an Income Tax Assessment Act is to raise revenue for government. No one would seriously suggest that s 15AA of the Acts Interpretation Act has the result that all federal income tax legislation is to be construed so as to advance that purpose. Interpretation of income tax legislation commonly raises questions as to how far the legislation goes in pursuit of the purpose of raising revenue. In some cases, there may be found in the text, or in relevant extrinsic materials, an indication of a more specific purpose which helps to answer the question. In other cases, there may be no available indication of a more specific purpose. Ultimately, it is the text, construed according to such principles of interpretation as provide rational assistance in the circumstances of the particular case, that is controlling."
…
… The general purpose of the Act to raise revenue is insufficient to support an intention to exclude a clearly expressed definition and to substitute a quite different meaning. …
[Footnote omitted.]
The right of appeal
51. Division 2 of Part 10 of the Taxation Administration Act governs appeals to the Supreme Court. That Division includes the following provisions:
- "92-Right of appeal
A person who has made an objection may appeal to the Supreme Court if-
- (a) the person is dissatisfied with the Minister's determination of the objection;
…
- 96-Grounds of appeal
- (1) The appellant's and respondent's cases on an appeal are not limited to the grounds of the objection or the reasons for the determination of the objection or the facts on which the determination was made.
- (2) However, if the objection was to a reassessment, any limitation of the matters to which the objection could relate under Division 1 applies also to the appeal.
…
- 98-Determination of appeal
On an appeal, the Supreme Court may do one or more of the following:
- (a) confirm or revoke the assessment or decision to which the appeal relates;
- (b) make an assessment or decision in place of the assessment or decision to which the appeal relates;
- (c) make an order for payment to the Commissioner of any amount of tax that is assessed as being payable but has not been paid;
- (d) make any further order as to costs or otherwise as it thinks just."
52. Pharmos lodged a notice of objection. The Treasurer made a determination. An appeal to this Court from the Treasurer's determination lies as of right pursuant to section 92 of the Taxation Administration Act which is set out above. This Court is empowered to confirm or revoke the assessment, make a new assessment, make an order for payment of tax or any further order as to costs or otherwise as it thinks fit.[20]
The onus on appeal
53. Section 97 of the Taxation Administration Act provides:
On an appeal, the appellant has the onus of proving the appellant's case.
54. The effect of section 97 is that Pharmos must prove that the amount assessed in fact exceeds its true liability to duty. A similar provision was considered by the High Court in
Federal Commissioner of Taxation v Dalco, where Brennan J observed:[21]
"… [T]he purpose of the procedure of assessment, objection and appeal or review is to ascertain the true tax liability of the taxpayer under the substantive provisions of the Act. Oftentimes, the grounds of an objection and the Commissioner's notice of decision thereon will define the issues for determination by a court entertaining an appeal against the assessment; but not necessarily so. It is not the grounds of the objection against an assessment but the objection itself which is treated as an appeal and forwarded to a Supreme Court for hearing and determination: ss. 187(1)(b), 197, 199. It would be inappropriate for a court determining an appeal to make an order altering the tax liability assessed (s. 199) unless the court were satisfied that the amount to which it proposed to alter the assessment represented the true tax liability of the taxpayer. Although the grounds of objection limit the grounds of appeal, the ultimate question for the court hearing the appeal is not whether the grounds have been made out but whether the amount assessed as taxable income is wrong. The burden which rests on a taxpayer is to prove that the assessment is excessive and that burden is not necessarily discharged by showing an error by the Commissioner in forming a judgment as to the amount of the assessment.
…
The ground of objection on which the taxpayer here relies is error in the formation of a judgment as to the amount on which tax ought to be levied. But mere error in the formation of that judgment by the Commissioner does not warrant the setting aside of the amount assessed. Given the validity of the exercise of the power to make an assessment under s. 167(b), the ultimate question is whether the amount of the assessment is excessive. The amount of the assessment might not be excessive in fact, though the reasons which led to the assessment were erroneous. In George's Case the Full Court said:
'the law has always been taken to be that in an appeal from an assessment the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income.'
Kitto J., from whose judgment the appeal in George's Case was brought, said:
'[Section] 190 (b) places the burden of proving that the assessment is excessive upon the appellant; and in order to carry that burden he must necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source taxable income to the amount of the assessment.'
…
The manner in which a taxpayer can discharge that burden varies with the circumstances. If the Commissioner and a taxpayer agree to confine an appeal to a specific point of law or fact on which the amount of the assessment depends, it will suffice for the taxpayer to show that he is entitled to succeed on that point. …
[Footnotes omitted. Emphasis added.]"
The fundamentals of stamp of duties legislation
55. In
Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd, Gleeson CJ and Gummow, Kirby and Hayne JJ restated certain fundamental principles concerning stamp duties legislation:[22]
In considering the true construction of [Stamp Duties Legislation] two principles must be kept in mind. First, the statutory provisions in question in this case impose a duty on instruments, not on transactions. Secondly, liability to duty arises because the dutiable instrument transfers an estate or interest in real property, and it is by reference to the value of that which is transferred that duty is imposed.
56. The Court in Pioneer Concrete relied on the following observations from
DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW), where Mason J observed:[23]
"It is a fundamental principle of the law relating to stamp duties that duty is levied on instruments, not on the underlying transactions to which they give effect … [I]n the case of a conveyance the statutory command is that it attracts duty on the property conveyed; in the case of the declaration it attracts duty on "the property comprised therein". Consequently the issues are: (1) What was the property conveyed by the transfer?; and (2) What was the property comprised in the declaration? The decision on these issues hinges on the interpretation of the two instruments, that is, on the description given by them of the relevant estate or interest as applied to the facts of the case. It is a matter of ascertaining what is the property with which each instrument deals, according to its terms.
We cannot substitute for the issues prescribed by the statute a different issue having no foundation in the statutory provisions. Nor can we substitute for the property which the parties have chosen by their instruments to convey and make the subject of a declaration of trust the interest in property which in a practical sense represents the alteration in [the transferor's] position brought about by the combined operation of the two instruments.
[Footnote omitted.]"
The legislative scheme
57. Section 4(1) of the Stamp Duties Act provides that:
Subject to the exemptions contained in Schedule 2 and the other provisions of this Act, the stamp duties specified in that Schedule are charged in respect of the instruments specified in that Schedule.
58. Schedule 2, Part 1, clause 3 of the Stamp Duties Act provides for duty to be paid in relation to the conveyance or transfer on sale of any property. Clause 4 provides for duty to be paid in relation to a conveyance operating as a voluntary disposition inter vivos of any property.[24]
59. Section 60 of the Stamp Duties Act defines conveyance, inter alia, to include "every other assurance or instrument of any kind":
"by which or by virtue of which or by the operation of which, whether upon registration or otherwise, or by the issue of a certificate of title in pursuance of which, any real or personal property or any estate or interest in any such property is assured to, or vested in, any person, and to convey has a meaning coextensive with the meaning of conveyance, as extended by this section".
60. Property is defined in section 2(1) to mean "real or personal property and includes … an interest in property". Interest in property is defined by section 2(1) to mean "a legal or equitable interest and includes a potential, contingent, expectant or inchoate interest". Further, section 2(2) provides that "[a]n interest of a particular kind in the proceeds of the sale of property is, until the property is sold, taken to be an interest of the same kind in the property".
61. The within proceeding also calls for the consideration of the terms of sections 71(3)(a)(iii) and 71(3)(b) of the Stamp Duties Act as the determination of the Treasurer to disallow the objection was made on the basis that the 24 February 2006 agreement was liable for stamp duty under either or both of those provisions. Sections 71(3) and 71(4) relevantly provide:
- "(3) For the purposes of this Act, the following instruments shall, subject to this section, be deemed to be conveyances operating as voluntary dispositions inter vivos:
- (a) an instrument to which subsection (4) applies effecting or acknowledging, evidencing or recording, any of the following transactions:
- (i) a transfer of property to a person who takes as trustee; or
- (ii) a declaration of trust; or
- (iii) the creation of an interest in property subject to a trust; or
- (iv) a transfer of an interest in property subject to a trust; or
- (v) the surrender or renunciation of an interest in property subject to a trust; or
- (vi) the redemption, cancellation or extinguishment of an interest in property subject to a trust,
whether or not any consideration is given for the transaction; or
- (b) an instrument to which paragraph (a) does not apply, being a conveyance that is not chargeable with duty as a conveyance on sale.
- (4) This subsection applies to any instrument that relates to land, a financial product or a unit under a unit trust scheme, or an interest in land, a financial product or a unit under a unit trust scheme."
The appeal
Pharmos
62. It is to be recalled that the 24 February 2006 agreement described itself as an "equity bond". As noted above, "equity bond" is defined in the deed of variation that permitted the trustee to issue the equity bond to mean "an agreement bond or contract made between the Trustee and the Beneficiary in accordance with … this Deed". Counsel for Pharmos accepted that the term "equity bond" has no settled meaning known to the law.
63. At its broadest, the Pharmos submission was that the 24 February 2006 agreement does "not transfer anything, it does not transfer existing property, it does not assure or vest any property in anybody, it creates contractual rights" and as such, there was no conveyance and no other basis on which stamp duty could be levied.
64. It was a further submission of Pharmos that the 24 February 2006 agreement could be characterised as a loan arrangement or financial accommodation. Under the agreement, the trustee was said to be provided with certain money with a corresponding obligation on the trustee to distribute an amount on an annual basis by way of compensation for the use of that money. It was contended that the document insofar as it was an agreement requiring the distribution of money did not create or give rise to a disposition of property. It was said that the agreement created certain contractual rights but no more. It assured or vested no property rights in any person.
65. Further, Pharmos contended that the agreement did not charge anything to secure the performance of the trustee's obligations. It was said that the agreement perfected the right to distribution of a sum of money but did not create any right or interest in property or a fund. It was submitted that whether viewed as a loan arrangement or a financial accommodation, the agreement was not dutiable as a mortgage, bond, debenture or covenant as it did not charge any property nor did it create, acknowledge, evidence or record a legal or equitable interest in any real or personal property as security.
66. Pharmos asserted that as the 24 February 2006 agreement was not under seal, it did not constitute a bond or a covenant, nor was it in the nature of a debenture.
67. In any event, however it was to be characterised, it was submitted that the 24 February 2006 agreement did not create a charge over property in South Australia. In the alternative, it was contended that if the 24 February 2006 agreement did create an interest in property, at most it did so merely as security and in that event was stampable as a mortgage.
68. It was finally submitted that if the 24 February 2006 agreement was stampable in any way, Pharmos had acted with reasonable care and that in those circumstances, no penalty should have been imposed.
The Commissioner
69. The Commissioner submitted that the instrument, the 24 February 2006 agreement, comprised a voluntary disposition inter vivos, being an instrument relating to an interest in land[25]
70. The 24 February 2006 agreement gave rise to binding obligations on R J Trim Developments Pty Ltd, the trustee, in favour of Pharmos as a beneficiary in priority to and to the exclusion of any other beneficiary. It was contended that the interest in proceeds of sale were an "interest" in property within the meaning of sections 2(1) and 3A(2) of the Stamp Duties Act, comprising a potential, contingent, expectant or inchoate interest. The Commissioner placed particular emphasis on the words "contingent" and "expectant".
71. The Commissioner further submitted that the 24 February 2006 agreement was a conveyance under section 71(3)(b) of the Act, being an assurance or instrument by which or by virtue of which or operation of which an interest in property is assured or vested in Pharmos. Pharmos has an exclusive right to receive distributions of net income, sale proceeds and any capital profits in priority to any other beneficiary. It was said that the 24 February 2006 agreement comprised a vesting or assurance to Pharmos in that interest.
72. Finally, the Commissioner maintained that it was appropriate to impose penalty tax pursuant to Division 2 of Part 5 of the Taxation Administration Act on the basis that a tax default had occurred and that Pharmos failed to take reasonable care to comply with the requirements of the taxation law.
Consideration of the issues arising
73. The 24 February 2006 agreement formed one part of a broader transaction constituted and evidenced by a number of agreements and documents. It was accepted by both parties that the 24 February 2006 agreement was the relevant instrument to be considered for stamp duty purposes. It was also accepted that it was appropriate to consider the entire transaction to understand the context in which the agreement came to be executed.
74. Latham CJ in
Commissioner of Stamp Duties (Q) v Hopkins discussed the need to ascertain the legal operation of the instrument and determine the nature of the transaction which the instrument accomplishes:[26]
"…It is true that, as has often been said, the Stamp Duty Acts impose duties upon instruments and not upon transactions. It is obvious that you can stick a stamp or impress a stamp upon an instrument, but not upon a transaction. But, in order to determine whether an instrument is dutiable, it is nevertheless necessary to ascertain the legal operation of the instrument, i.e., to determine the nature of the transaction which it accomplishes. …"
In the same decision, Rich J discussed the circumstances in which extrinsic evidence may be admitted when the Court addresses the nature of a particular transaction:[27]
"But the document does not stand by itself, and to treat it as doing so would give a wrong idea of the nature and course of the transaction of which it formed only a part. To understand the transaction, it is necessary to take into account certain matters extrinsic to the document. … Regarded in the light of these matters, the document is seen to be one factor in a process of settlement …"
75. Gleeson CJ, when a member of the New South Wales Supreme Court, made the following relevant observations in
Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (NSW):[28]
"A stamp duty is a tax upon instruments, not upon transactions:
Minister of Stamps v Townend [1909] AC 633 at 639. The characterisation of an instrument for the purpose of the Stamp Duties Act may require an understanding of the transaction from which the instrument emanates. Nevertheless, what is to be determined is the legal nature and effect of the instrument in question. The principal criticism which the appellants make of the reasoning of Dunford J is that he appears to have allowed irrelevant considerations of economic equivalence to affect his reasoning.…
We are here concerned with a tax upon an instrument, and it is the legal effect and character of the instrument which is to be examined. …"
76. It is to be observed that the transaction in question was constituted by a complex set of arrangements with the apparent ultimate objective of the trustee entering into an agreement with Pharmos to transfer the economic benefit of the trust, that is the underlying property of the trust, to Pharmos by means other than through a conventional sale and purchase followed by a memorandum of transfer.
77. As earlier mentioned, on 23 December 2005, an agreement was entered into between Mr Angelos, Mr Trim and R J Trim Developments Pty Ltd in which Mr Angelos and Mr Trim agreed to transfer control of a trust then known as the R J Trim Developments Trust of which R J Trim Developments Pty Ltd was trustee. It was agreed that there would be a new issue of shares in the trustee to pass control of the trustee to the Angelos interests.
78. Before the change of control was to occur, Mr Trim agreed to cause the trustee to amend the trust deed to empower the trustee to issue a bond to a beneficiary of the trust to give a right to receive distributions both of income and capital to the bondholder in priority to all other beneficiaries.
79. The 23 December 2005 agreement defined the "bondholder" to be Pharmos and the "bond value" to be $6,975,250.00. The agreement further provided that upon or immediately prior to Pharmos paying the full amount of the bond to the trustee, Mr Trim would cause the trustee to make immediate distributions to existing beneficiaries of the trust so as to pass the full benefit of the bond amount to those beneficiaries.
80. The 23 December 2005 agreement then set out warranties provided by Mr Trim. These warranties, in many respects, are comparable to those found in an agreement for the sale and purchase of real property.
81. One effect of the arrangements was that Pharmos obtained the entire economic benefit of the trust assets through control of the trustee and pursuant to the rights and obligations set out in what eventuated as the 24 February 2006 agreement. These rights included the right to receive distributions of all of the income and the net sale proceeds derived from the exploitation and disposal of the assets of the trust. Pharmos thereby was placed in the same substantive position as a person to whom a transfer of property in fee simple is made but without a memorandum of transfer being executed and registered. Following settlement on 24 February 2006, the Angelos interests had total control of the assets of what had now become the Jaslil Investments Trust. The Trim interests had been paid out in full, their indebtedness discharged and the capital profits distributed. The Angelos interests were protected by the indemnity given by Mr Trim. Pharmos had an absolute priority entitlement to distributions of income and capital.
82. The 24 February 2006 agreement is in some respects a curious document. As noted above, Pharmos acknowledged that it was not entitled to demand repayment and was not entitled to repayment of the monies paid. Rather it received consideration immediately for the monies, being an acceptance of "this equity bond as full consideration". Later in the agreement, there is reference to a purported repayment by the trustee "of the bond amount" or payment to the beneficiary "of an amount equal to the bond amount". It is entirely unclear as to what a purported repayment could be. It is not possible to give any meaning to the phrase "purported repayment". No repayment was intended. The agreement had the purpose of giving Pharmos an entitlement. Pharmos could require the trustee to make payments. Those payments were to be made in priority to any distribution to any other beneficiary. Further, the agreement provides that in the event of purported repayment, the "equity bond … shall not cease or be terminated".
83. As noted, the pivotal section of the Stamp Duties Act is section 4 when read with Schedule 2. Section 4 sets out that stamp duty is imposed on instruments, being those instruments specified in Schedule 2. Schedule 2 provides for duty to be paid, inter alia, on the conveyance or transfer on sale of any property. Further, the Schedule provides for duty to be paid in relation to a conveyance operating as a voluntary disposition inter vivos of any property. The Schedule identifies the rate at which duty is levied.
84. It is to be further noted that there are provisions in the Stamp Duties Act that provide a broad definition of "conveyance". In particular, relevant to the present matter, conveyance is defined to include an "assurance or instrument of any kind by which or by virtue of which or by the operation of which … any real or personal property or any estate or interest in any such property is assured to, or vested in, any person …". The definition provides a coextensive meaning to the words "to convey" and "conveyance".
85. The breadth of the definition of conveyance is further expanded by the definition of property. Section 2(1) defines property to mean "real or personal property and includes … an interest in property".
86. The breadth of the definition of conveyance is expanded yet further by the definition of "interest in property", also to be found in section 2(1). That definition is that interest in property is to mean "a legal or equitable interest and includes a potential, contingent, expectant or inchoate interest". The definition of interest in property is then further extended by section 2(2) by the following words: "[a]n interest of a particular kind in the proceeds of the sale of property is, until the property is sold, taken to be an interest of the same kind in the property".
87. The breadth of the definition of conveyance is again extended by the terms of section 71(3). That section has the effect of deeming certain instruments to be conveyances operating as voluntary dispositions inter vivos. Section 71(3)(a) then sets out criteria which would lead an instrument to be deemed to be a conveyance operating as a voluntary disposition inter vivos. Relevantly to the within proceeding, that criteria may be summarised as follows: an instrument which effects or acknowledges, evidences or records "a declaration of trust" or "the creation of an interest in property subject to a trust" or "a transfer of an interest in property subject to a trust". The deeming takes place "whether or not any consideration is given for the transaction". Section 71(3)(a) has the qualification that the deeming only relates to an instrument to which subsection 4 applies. Relevantly the qualification is that the instrument relates to land or an interest in land.
88. There is yet a further extension to the meaning of an interest in property. The parties were in dispute as to whether this further extended definition could have application. The extended definition is to be found in section 3A of the Stamp Duties Act. Section 3A provides that an instrument relates to property if it "creates, transfers, redeems, renounces, surrenders, cancels or extinguishes an interest in property; or, deals with an interest in property … in any other way; or, acknowledges, evidences or records a transaction to which either of the above apply". The section further provides that a potential, contingent, expectant or other inchoate interest is to be regarded as an interest in property if the realisation of the potentiality, contingency or expectancy, or the occurrence of any act or event necessary to perfect the interest could result in an interest in property or an interest in the proceeds of the sale of property.
The application of the statute to the instrument - the 24 February 2006 agreement
89. As earlier mentioned, a primary issue between the parties is whether the 24 February 2006 agreement is a conveyance of property within the meaning of the Stamp Duties Act. It was accepted by both parties that the 24 February 2006 agreement is an instrument within the meaning the Stamp Duties Act.[29]
90. Against the background of the application of the definitions found within the Stamp Duties Act, I now turn to the terms of the 24 February 2006 agreement. The 24 February 2006 agreement was an instrument which created, vested or transferred a beneficial interest in the trust assets in favour of Pharmos. The relevant provisions of the trust deed as amended together with the terms of the 24 February 2006 agreement operated so as to remove any discretion that the trustee formerly had as to distribution of the income and capital of the trust and vested the beneficial interest of the trust fund in favour of Pharmos. Under the terms of the agreement, the trustee was obligated to exercise its discretion concerning distribution in favour of Pharmos as beneficiary in relation to both the annual income of the trust up to the amount of the estimated interest payment and the capital derived from any sale proceeds of the trust fund. As a consequence, Pharmos was no longer a potential beneficiary of a standard discretionary family trust, but was the holder of a vested actual beneficial interest in the trust.
91. In the event of default by the trustee, the agreement provided an indemnity in favour of Pharmos in respect of expenses and losses suffered as a consequence of not receiving the benefits that should have flowed or accrued.
92. These conclusions are supported by the following. The 24 February 2006 agreement provides that Pharmos "shall be entitled to" distributions and that "the trustee shall" distribute specified amounts and that such distributions are "to be in priority to" and "to the exclusion of" any other beneficiary. The agreement provides an indemnity in favour of Pharmos in the event of breach by the trustee. The 1993 deed of variation of the trust provided that no beneficiary was entitled to require the trustee to transfer or distribute any part of the fund unless pursuant to a contract or agreement between the beneficiary and the trustee. The 24 February 2006 agreement is such a contract or agreement. It is the contractual exception contemplated by the trust deed. Furthermore, the 2006 deed of variation makes the trustee's powers to distribute income and capital subject to its obligations under the 24 February 2006 agreement. Finally, as noted above, the February 2006 deed of variation makes the terms of the trust deed subject to any inconsistent terms in the 24 February 2006 agreement, in particular, in relation to the "entitlements rights and priorities with respect to the fund". This provision evidences an intention to create rights or entitlements in favour of Pharmos. In short, the trustee can only distribute income or capital to Pharmos.
93. An analogous circumstance arose with stamp duty in
Chief Commissioner of Stamp Duties (NSW) v Buckle, where the High Court concluded that an amendment to a trust deed that provided a gift over to two named beneficiaries subject to prior divestment by the trustee amounted to a vested conveyance:[30]
"The effect of cl 2.22 of the Deed of Settlement as it stood in its original form was that there was a gift over to such of the second and third respondents who were alive at the distribution date in 2071 or at such earlier date as was appointed by the trustee, and to the children (taking per stirpes) of such of these respondents who were not alive at the distribution date. The interests of the second and third respondents were contingent upon their being alive at the distribution date. Their interests also were liable to displacement by exercise on or before the distribution date by the trustee of the power of appointment in cl 2.21.
The Supplemental Deed deleted from cl 2.22 the portion we have emphasised and inserted the following:
"Provided that if the Trustee fails to make any appointment under paragraph 2.21 then the Trustee shall hold the Trust Fund on trust for the children in the following shares as tenants in common:
Jane Margaret Jory - one third
William John Buckle - two thirds
provided that:"
The result was to require the trustee, as from the distribution date, to hold the Trust Fund as to two-thirds for the second respondent and one-third for the third respondent. The interest of each respondent was vested but subject to divesting upon death before the distribution date. The interest was also liable to divestment by the exercise of the power of appointment in cl 2.21.
Moreover, the extensive powers given the trustee, exercisable at discretion and from time to time, rendered unstable the content of those interests. For example, at any time the whole of the Trust Fund might be resettled under cl 15, the terms of the Deed of Settlement might be further varied, added to or revoked under cl 14, and the Trust Fund depleted or exhausted by the making of advancements under cl 5.1.
The position was summed up as follows by Sheller JA:
'Before the amendment the interests in corpus were contingent. After the amendment the two named children took vested interests. That apart, [the Deed of Settlement] enables the trustee to make determinations in any year which will affect and may absorb the disposition of income and to make an appointment which will create new interests and destroy the existing interests in corpus. Finally pursuant to [cl] 2.23 if the trustee fails to make any appointment and there are no children or other issue alive at the distribution date the trustee may determine the charitable institution or institutions for which the trustee shall hold the trust fund.'
[Footnotes omitted. Emphasis added.]"
94. The terms of the amended trust deed and of the 24 February 2006 agreement operate so as to remove any discretion that the trustee formerly had as to the distribution of income or capital. The effect of those documents was to appoint or vest a beneficial interest in the trust fund in favour of Pharmos. The primary effect of the trustee entering into the 24 February 2006 agreement was that the trustee became obligated to exercise its discretion to distribute both income and capital in favour of Pharmos. Consequently, Pharmos was no longer merely a potential beneficiary under a standard discretionary family trust. Pharmos had become the holder of a vested actual beneficial interest in the trust. In substance, the entry into the 24 February 2006 agreement was an appointment or vesting of the trust fund in favour of Pharmos.
95. As noted earlier, property is defined by section 2(1) of the Stamp Duties Act to mean real or personal property and includes … an interest in property. Interest in property is further defined to mean a legal or equitable interest and includes a potential, contingent, expectant or inchoate interest. Finally, by section 2(2), an interest of a particular kind in the proceeds of the sale of property is, until the property is sold, taken to be an interest of the same kind in the property. The assets of the trust were primarily interests in real property. In my view, the effect of these definitions allow the conclusion that Pharmos had a vested interest in property.
96. It is to be recalled that "conveyance" as defined in section 60 includes "every other assurance or instrument of any kind by which or by virtue of which or by the operation of which … any real or personal property or any estate or interest in any such property is assured to, or vested in, any person …". To my mind, it may well be concluded that the 24 February 2006 agreement is an instrument that has vested an interest in real property in Pharmos. If there be any doubt in this conclusion, I am satisfied that the agreement was an assurance within the meaning of the section 60 definition of conveyance.
97. In summary, it is my view that the 24 February 2006 agreement, being an agreement entered into by the trustee pursuant to its powers under the amended deed of trust, effected a vesting of the trust property in Pharmos. Pharmos was entitled to priority over all other beneficiaries, both as to distributions of income and capital. The purpose of the overall transaction was for the Angelos interests to take total control of the assets of the trust to the exclusion of the Trim interests. The Trim interests received the agreed consideration. It is to be accepted that one part of the transaction involved the transfer of the control of the trustee of the R J Trim Developments Trust. However, the overall transaction went much further. The obvious commercial purpose was to ensure that distributions from the trust went to the Angelos interests and no others, and the means to ensure this occurred were the terms giving Pharmos absolute priority. This was, to my mind, the substance and effect of the agreement.
98. The effect of the terms of the amended trust deed and the 24 February 2006 agreement were to create an interest in property subject to a trust, or alternatively to transfer an interest in property subject to a trust. As earlier mentioned, section 71(3) provides for a deeming of certain instruments to be conveyances operating as voluntary dispositions inter vivos.
99. As noted above, the trust deed was amended on 23 February 2006 specifically to allow for the trustee to deal with a beneficiary by the issue of an "equity bond" and to provide the beneficiary with a priority to distributions of income and capital to the exclusion of all other beneficiaries. The trustee exercised this power by entering into the 24 February 2006 agreement and by carrying into effect that agreement. The effect of the agreement as I have concluded above was to vest an interest in Pharmos in the assets of the trust. That vesting was, to my mind, a transfer of that interest to Pharmos or alternatively the creation of an interest in property the subject of the trust.
100. There remains the further consideration that the deeming only comes into effect when the instrument relates to land or an interest in land as discussed above.[31]
101. Earlier in these reasons, I drew attention to the extended definition of an interest in property and in particular that interest in property means "a legal or equitable interest and includes a potential, contingent, expectant or inchoate interest". At the very least, I am satisfied that the 24 February 2006 agreement provided Pharmos with "a potential, contingent, expectant or inchoate interest". More particularly, I emphasise the words "contingent" and "expectant".
102. It is my view that the 24 February 2006 agreement was an instrument chargeable as a conveyance within the meaning of sections 71(3)(a) of the Stamp Duties Act. The agreement is an instrument which creates, vests or transfers to Pharmos an interest in the trust assets. The terms of the trust deed, on their proper construction, remove any relevant discretion that the trustee formerly had as to the distribution of the income or capital of the trust. The effect of the agreement was to appoint or vest an interest in the trust fund in favour of Pharmos. The primary effect of the trustee entering into the 24 February 2006 agreement is the creation of an obligation on the trustee to exercise its discretion to distribute in favour of Pharmos as a beneficiary in relation to both the annual income of the trust - up to the amount of the estimated interest payment - and the capital derived from any sale proceeds of the trust fund. It may also be added that the agreement had the effect of extinguishing any interest that any other beneficiary had in the property the subject of the trust.
103. As a consequence, Pharmos as a beneficiary of the trust was no longer merely a potential beneficiary of a standard discretionary trust, but it became the holder of a vested, actual beneficial interest in the trust. The agreement created or transferred a present and vested beneficial entitlement to the income and capital of the trust to the exclusion of all other beneficiaries. The entry into the agreement was tantamount to an appointment or vesting of the trust fund in favour of Pharmos.
104. It is to be noted that section 71(3)(a) concludes with the words "whether or not any consideration is given for the transaction". In the present case, I am of the opinion that consideration was provided by Pharmos.
105. In the event that section 71(3)(a) does not have application, it was the Commissioner's submission that the 24 February 2006 agreement was chargeable with duty under section 71(3)(b). This subsection has application in the event that one reaches two conclusions: first, that section 71(3)(a) does not have application and secondly, that the instrument is not chargeable with duty as a conveyance on sale. As discussed above, it is my view that the 24 February 2006 agreement vested an interest in property the subject of a trust and, in this way, either created that interest in Pharmos or transferred that interest to Pharmos. It is further my conclusion that the vested interest is an interest in property within the meaning of the Stamp Duties Act. It was the Commissioner's submission that if there be any doubt in regard to those propositions or the application of section 71(3)(a), then it necessarily followed as there was a vested interest in property that section 71(3)(b) would have application. If contrary to the conclusions expressed above, the 24 February 2006 agreement is not an instrument within the meaning of section 71(3)(a) and is not a conveyance on sale, then in my view, it is an instrument that falls within section 71(3)(b).
Section 3A
106. The Commissioner in the further alternative relied on the provisions of section 3A of the Stamp Duties Act. Pharmos contended that section 3A was of no assistance and was a section that was directed only to the territorial reach of the Stamp Duties legislation.
107. Section 3A of the Stamp Duties Act was introduced into the Act in 2000 and is in the following terms:
"Principles for determining territorial relationship
- (1) An instrument relates to property situated in a particular jurisdiction if it-
- (a) creates, transfers, redeems, renounces, surrenders, cancels or extinguishes an interest in property situated in the relevant jurisdiction; or
- (b) deals with an interest in property situated in the relevant jurisdiction in any other way; or
- (c) acknowledges, evidences or records a transaction to which paragraph (a) or (b) refers.
- (2) A potential, contingent, expectant or other inchoate interest is to be regarded as an interest in property in a particular jurisdiction if the realisation of the potentiality, contingency or expectancy, or the occurrence of any act or event necessary to perfect the interest could result in-
- (a) an interest in property situated in that jurisdiction; or
- (b) an interest in the proceeds of the sale of property situated in that jurisdiction.
- (3) For the purpose of calculating duty on an instrument that relates to a potential, contingent, expectant or other inchoate interest-
- (a) the interest is to be treated as an actual interest ie as if the potentiality, contingency or expectancy had been realised or anything necessary to perfect the interest had occurred; and
- (b) if the interest is dependent in any way on the exercise of a discretion or any other contingency, it will be presumed that the discretion has been exercised, or the contingency has been realised, so as to give rise to the greatest possible liability to duty in this State.
- (4) An interest in property is taken to be situated in the jurisdiction in which the property to which the interest relates is situated."
108. The Commissioner challenged Pharmos's contention that section 3A is exclusively concerned with matters of territorial jurisdiction. The Commissioner submitted that, on its face, section 3A clearly goes beyond this narrow matter. Rather, section 3A seeks to bring to duty a range of "potential, contingent, expectant or other inchoate" interests by regarding them as "interests in property" and, therefore, as "property" for the purposes of the Act.
109. The Commissioner contended that section 3A(1) applies to the 24 February 2006 agreement as that agreement at least creates or transfers a beneficial interest in the assets of the trust. Those assets included the property at Greenhill Road, Wayville in the State of South Australia. Therefore, it was said that the agreement "relates to property situated" in South Australia.
110. The Commissioner further contended that section 3A(2) applies to the rights created by the 24 February 2006 agreement so as to create an interest in the property comprising the trust. It was said that the agreement gives to Pharmos a right to receive the sale proceeds from a sale of the trust property and, therefore, it was said, "could result in" an interest in these sale proceeds. This right or interest granted by the agreement can be described as being contingent, expectant or otherwise inchoate in nature for the purpose of section 3A(2). The Commissioner argued that these expressions could all connote some form of conditional beneficial interest in a trust, where the antecedent of the conditional may require either a trustee exercising a power or discretion in favour of the beneficial or any other fact or event to "perfect" that conditional interest provided that the realisation or perfecting of the antecedent to the conditional "could result in" one of the effects specified in sections 3A(2)(a) or 3A(2)(b).
111. Given how the word "potential" is used in the Stamp Duties Act to describe the nature of the interest of a beneficiary of a "discretionary trust", and further given the Commissioner's submission that the beneficial interest of Pharmos is "vested" and no longer "potential", the Commissioner contended that it was arguable as to whether it is also a "potential" interest for the purpose of section 3A(2).
112. It was said that "contingent" is also used to describe this type of "potential" beneficial interest in comparison to a "vested" interest. Further, it was said that the term "contingent" in the context of section 3A(2) could also mean a vested beneficial interest, but which is itself conditional on the occurrence of some event before the beneficiary becomes actually entitled to receive a payment or property. The Commissioner submitted that this wider construction of "contingent" is necessary because otherwise its meaning would be synonymous with "potential".
113. The Commissioner contended that the interest in the trust fund assigned by the 24 February 2006 agreement could also be described as "expectant". The Commissioner said that "expectant" may describe a right or vested interest, but not possession, such as the right in a fee simple of a lessor of land. The Commissioner suggested that rights to future income are typically described as expectant. Interests will be described as expectant because they depend on future possibilities that may or may not occur.
114. Pharmos argued that a right to receive income is not property. However, as the Commissioner submitted, this is not the case in equity as equity recognises such future property and will enforce assignments of future property if the assignee gives valuable consideration for the assignment. Such a right would be caught by the operation of section 3A(2).
115. It is to be accepted that section 3A and for that matter, section 3B, do affect the territorial reach of the Act. However, I see no reason why they should not apply to an instrument that relates to property in South Australia. In the present proceeding, there is no suggestion that the agreement of 24 February 2006 or the surrounding agreements were not entered into in South Australia or that the property of the trust was not situated in South Australia.
116. Having regard to the definition and to the extended definition in sections 3A(1) and 3A(2), it is my view that the 24 February 2006 agreement creates a contingent, expectant or inchoate interest in property such that the future interest is taken to be an interest of the same kind in the property.
Section 3B
117. Section 3B within Division 3 of Part 1 of the Stamp Duties Act provides that the Act applies in respect of an instrument that relates to property situated in South Australia or relates to a matter or thing to be done in South Australia irrespective of whether the instrument is within or outside South Australia or was executed within or outside South Australia. Section 3B is in the following terms:
""Territorial application of Act
- (1) This Act applies in respect of an instrument that relates to property situated, or a matter or thing to be done, in South Australia irrespective of whether-
- (a) the instrument is within or outside South Australia; or
- (b) the instrument was executed within or outside South Australia.
- (2) If an instrument relates to property situated in part in South Australia and in part outside South Australia, duty is to be calculated as if the instrument related only to the property situated in South Australia.
- (3) This section operates subject to any other specific provision dealing with how duty is to be calculated on an instrument that relates to property within and outside South Australia.
Note-
- 1. Section 81B deals with the duty payable on a mortgage over property within and outside the State.
118. The 24 February 2006 agreement was an instrument that related to property situated in South Australia and created obligations to do matters or things in South Australia. Further, the agreement was executed within South Australia. Accordingly, the agreement was an instrument to which section 3B applies.
119. The 24 February 2006 agreement, properly understood, is an instrument relating to property as it creates an interest in property within the extended definitions and further as it deals with an interest in property and acknowledges, evidences and records a transaction within those extended definitions.
An alternative submission
120. The Commissioner contended that in the event that his primary submissions were rejected, the 24 February 2006 agreement was dutiable as a consequence of the terms of section 3A(3) of the Stamp Duties Act. This submission is built on the Commissioner's earlier contentions concerning the proper construction of section 3A. The Commissioner pointed out that if an interest in property is within section 3A(2), then this interest is brought to duty by section 3A(3). Section 3A(3) provides:
- "(3) For the purpose of calculating duty on an instrument that relates to a potential, contingent, expectant or other inchoate interest-
- (a) the interest is to be treated as an actual interest ie as if the potentiality, contingency or expectancy had been realised or anything necessary to perfect the interest had occurred; and
- (b) if the interest is dependent in any way on the exercise of a discretion or any other contingency, it will be presumed that the discretion has been exercised, or the contingency has been realised, so as to give rise to the greatest possible liability to duty in this State."
121. The Commissioner contended that section 3A(3) changes the "conditional" interest under section 3A(2) into an "actual" interest and requires that it be presumed that any discretion is exercised or contingency realised "so as to give rise to the greatest possible liability to duty". The Commissioner submitted that, in any event, the 24 February 2006 agreement has this effect on its own terms. Pursuant to section 3A(3), Pharmos should be considered to have an interest in the trust property under, or by virtue of, the 24 February 2006 agreement. That contingent or expectant right or interest created by the agreement should be valued on the basis that it is an actual interest to all of the income, sale proceeds and capital profits of the trust property. It was submitted that, properly considered, this value was the market value for the reasons discussed below.
122. Although it is unnecessary to resolve this issue having regard to my earlier conclusions, it is appropriate that I express my conclusions on this question. As discussed above, it is my opinion that at the very least, the 24 February 2006 agreement gave rise to a contingent or expectant right or interest in the assets of the trust within the meaning of those words as they appear in section 3A(2). In these circumstances, section 3A(3) operates and those interests are to be deemed to be an actual interest. As a consequence, the instrument relates to property in the South Australian jurisdiction. The property concerned is real property and having regard to the definitions discussed earlier, a conveyance of that property is effected by the instrument. This allows the conclusion that the instrument - the 24 February 2006 agreement - is dutiable.
Should the 24 February 2006 agreement be characterised as a mortgage
123. Counsel for Pharmos submitted that if the conclusion was reached that the 24 February 2006 agreement was dutiable that it should be characterised as a mortgage with duty levied at the applicable rate. Having regard to my earlier findings, it is strictly unnecessary to address this submission. However, it is convenient to shortly state my reasons for the rejection of this submission.
124. The short answer is that having found the instrument to be dutiable, I have done so on the basis that it is a conveyance through the vesting of an interest in the assets of the trust in Pharmos. This finding necessarily precludes a finding that the interest was in the nature of a mortgage. As pointed out above, the terms of the 24 February 2006 agreement excluded any entitlement on the part of Pharmos to seek repayment and any attempt by the trustee to repay was characterised to be a purported repayment and a purported repayment that would not relieve the trustee from its obligations under the agreement. I repeat my earlier observation that there is an air of artificiality about the agreement. In substance, it was never intended to be a loan. To the contrary, it was the payment of a sum of money in exchange for the obtaining of an interest in property and in particular, a vested interest in real property.
Market value of property conveyed
125. It is relevant to record the terms of section 60A(1)(b) of the Stamp Duties Act which provides that duty is levied on a conveyance at the market value of the property conveyed or transferred as at the date of conveyance free from encumbrances. The terms of the section relevantly provide:
- "(1) Subject to subsection (2), a reference in this Act (other than in Part 4) to the value of property conveyed or transferred is a reference to the market value of the property-
- (a) in the case of a conveyance on sale-as at the date of the sale; or
- (b) in any other case-as at the date of the conveyance,
assuming, in either case, that the property had, at that date, been free from any encumbrances.
…"
126. The Commissioner submitted that one appropriate way to value the beneficial interest conveyed would be to estimate the present value of the income stream and capital profits flowing from the ownership and the investment of the trust assets. A capitalisation or present value approach would appear to be consistent with the approach adopted in
Chief Commissioner of Stamp Duties (NSW) v Buckle.[32]
127. The owner of property is subject to all residual risk in relation to that property and is concomitantly entitled to all residual income, profits or other returns. This may be said to equate to the income, profits and sale proceeds from a property. Rights to such an income stream are customarily valued by reference to the net present value of that income stream. The 24 February 2006 agreement gives rise to all of these rights. Its value may be treated as equal to the estimated value of the capitalisation of this income stream; that is, the market value.
128. The trustee has at least agreed to pay the net income and any capital profits from the trust property. The usual valuation methodology for the market value of commercial property is the present value of the sum of these amounts. Net income and profit necessarily imply that any relevant liabilities, costs and expenses that the trustee may have incurred to derive any income or profit are satisfied. The trustee has also agreed to distribute sale proceeds. In this context, sale proceeds can be seen as a crystallisation or realisation into a lump sum of the future income and capital profit streams.
129. The parties agreed that the assets of the R J Trim Developments Trust as at 24 February 2006 were $6,975,250.00. Earlier in these reasons I have expressed my conclusion that Pharmos obtained a vested interest in those assets. In accordance with the terms of section 60A(1)(b), duty is to be levied on the value of the property conveyed at the market value of the property free from encumbrances. The Commissioner was correct in his assessment of duty.
Imposition of penalty tax
130. The basic premise for the imposition of penalty tax is the existence of a "tax default". A tax default is defined in section 3 of the Taxation Administration Act to mean "failure by a taxpayer to pay, in accordance with a taxation law, the whole or part of tax that the taxpayer is liable to pay".
131. Section 30 of the Taxation Administration Act provides:
- "(1) If a tax default occurs, the taxpayer is liable to pay penalty tax in addition to the amount of the tax unpaid.
- (2) Penalty tax is not payable in respect of a tax default if the Commissioner is satisfied that the tax default was not a deliberate tax default and did not result, wholly or partly, from any failure by the taxpayer, or a person acting on the taxpayer's behalf, to take reasonable care to comply with the requirements of a taxation law.
- (3) Penalty tax imposed under this Division is in addition to interest.
- (4) Penalty tax is not payable in respect of a tax default that consists of a failure to pay interest under Division 1 or a failure to pay penalty tax previously imposed under this Division."
132. The issue relevant to penalty tax in the present proceeding is whether the exception in section 30(2) of the Taxation Administration Act applies. It was agreed that the tax default was not a deliberate tax default. Accordingly, the dispute was whether Pharmos took reasonable care to comply with the requirements of taxation law. As earlier mentioned, the 24 February 2006 agreement was not submitted to the Commissioner for an opinion as to its dutiability under the Stamp Duties Act and its existence became known to the Commissioner as a result of routine compliance activity.
133. In imposing penalty tax of $18,873.58 on the basis that a tax default had occurred, the Commissioner was of the view that Pharmos had not taken reasonable care to comply with the requirements of taxation law. The amount of penalty tax was calculated at 25 per cent of the amount of tax unpaid as the tax default was not deliberate.[33]
134. Pharmos contended that there had been no tax default because it obtained legal advice as to the consequences of the transaction, that difficult questions of characterisation were involved and that views on the construction of the Act may differ. To the contrary, the Commissioner submitted that Pharmos's legal advice was not independent, that the admitted complexity of the transaction and its contentiousness from a stamp duty perspective required the 24 February 2006 agreement to be submitted to the Commissioner for opinion and that the failure to do so showed a lack of reasonable care and amounted to a tax default.
135. Pharmos elected not to disclose the legal advice that it had obtained with respect to the transaction. It is entirely possible that Pharmos had been advised of a real risk that the instrument would be assessed by the Commissioner as dutiable and chose to run this risk. It is not possible from the evidence before the Court to reach any conclusion as to the nature, content and extent of the legal advice obtained. It is against this background that consideration can be given to the decisions of the Victorian Supreme Court referred to in the course of the hearing. In the first of those decisions,
Snowy Hydro Ltd v Commissioner of State Revenue, Davies J observed:[35]
In my view, the State Revenue Office erred in law in not reducing penalty to nil under s 30(3)(a) of the Taxation Administration Act 1997 (Vic). It was a relevant consideration that the taxpayer had obtained legal advice as to the duty consequences of the transaction. It was also a relevant consideration that the liability to pay the tax involved difficult questions of characterisation of the units as fixtures and chattels and of construction of the Act about which other minds may differ from the view of the State Revenue Office.
The State Revenue Office should have taken these matters into account in determining whether it was satisfied that the taxpayer had taken reasonable care.
However, the judgment does not reveal whether the content of the solicitors' advice had been disclosed. In the second of the cases,
Challenger Listed Investments Ltd (as Trustee for Challenger Diversified Trust 1) v Commissioner of State Revenue,[36]
"The application of taxing provisions has become increasingly complicated, and at times uncertain, with the inevitable consequence that taxpayers must rely upon expert legal advisors to navigate their way through complex and difficult provisions. The taxpayer in this case did precisely that. The duty cast upon the lawyers by the retainer and the law was to consider provisions which were likely to apply to the transactions in question. Whatever fault may be found with the legal advisors, the taxpayers took reasonable care to comply with the law by seeking advice and acting upon it. The Commissioner was in error in not considering that CLIL had taken reasonable care to comply with the taxation law. The evidence available to me would appear to satisfy the condition stipulated in s 30(3)(a) to permit the Commissioner to determine that no penalty tax was payable.
[Footnote omitted.]"
136. Circulars No. 243[38]
137. The Commissioner conceded that it is evident from Circular No. 243 that the Commissioner wishes to encourage straightforward documents to be stamped through RevNet and that there is no point in having the RevNet system if documents are still needlessly submitted for assessment. However, the Commissioner contended that the Circular makes it clear that if the taxpayer is in doubt as to whether a document should be submitted, then the taxpayer should submit that document for assessment.
138. Pharmos argued that the 24 February 2006 agreement was within the category of documents which must be processed using RevNet. The Commissioner categorised the document differently. The Commissioner argued that the 24 February 2006 agreement could be characterised as both a conveyance of property from a trustee to a beneficiary or as a declaration of trust. Both of these categories of documents are those which must be submitted to the Commissioner for assessment of duty. In any event, the Commissioner submitted that the 24 February 2006 agreement was a complex document created against the background of a complex transaction and that in those circumstances, Pharmos was under an obligation to submit the agreement and all related documents to the Commissioner under section 11 of the Taxation Administration Act. It was further argued by the Commissioner that had Pharmos truly believed that the agreement was exempt, it should have used RevNet to stamp the document as exempt. That did not occur.
139. I am satisfied that it was appropriate for the Commissioner to impose penalty tax. The 24 February 2006 agreement is a complex document which could fall within at least two of the categories of documents which must be submitted to the Commissioner for assessment. This, at the least, should have raised doubt as to Pharmos's alleged belief that the document was not required to be submitted for assessment. It is evident from Circular No. 243 that if in doubt, the taxpayer should submit the document for assessment. The Circular relevantly provides:[40]
"While this is a comprehensive list it is not possible to anticipate and describe every document that will be required to be submitted for assessment of duty by the Commissioner. If a document is not included in the list of approved documents for processing on RevNet, it must be submitted for the assessment of duty by the Commissioner."
Pharmos has not established that it took reasonable care to comply with the requirements of taxation law. No basis has been shown to suggest that the Commissioner's ruling on penalty tax was inappropriate.
Conclusion
140. This appeal is dismissed.
Footnotes
[1][2]
[3]
[4]
A person who has made an objection may appeal to the Supreme Court if—
- (a) the person is dissatisfied with the Minister’s determination of the objection;
…
[5]
[6]
[7]
[8]
[9]
[10]
[11]
[12]
[13]
[14]
[15]
An interest of a particular kind in the proceeds of the sale of property is, until the property is sold, taken to be an interest of the same kind in the property. Example— A beneficial interest in the proceeds of the sale of property is, until the property is sold, taken to be a beneficial interest in the property.
[16]
[17]
[18]
[19]
[20]
[21]
[22]
[23]
[24]
- 3—Conveyance or transfer on sale of property not otherwise charged
- (1) Conveyance or transfer on sale of any property (not otherwise charged), including contract or agreement for sale—
… (ix) exceeds $500 000 $21 330 plus $5.50 for every $100 or fractional part of $100 of the excess over $500 000 of that value
- (1) Conveyance or transfer on sale of any property (not otherwise charged), including contract or agreement for sale—
- 4—Conveyance operating as voluntary disposition
inter vivos - (1) Conveyance operating as a voluntary disposition
inter vivos of any property (including a statement under Part 4)—…(ix) exceeds $500 000 $21 330 plus $5.50 for every $100 or fractional part of $100 of the excess over $500 000 of that value
- (1) Conveyance operating as a voluntary disposition
[25]
[26]
[27]
“To the objection that this view involves looking outside the instrument, it may be answered that to ascertain the operation of the instrument some facts must always be taken into account, as, for instance, the existence and identity of the parties, and of the objects and subjects referred to. The very sweeping statements on this matter in go too far. Some years ago I had occasion to examine the subject with which that case deals, and I adhere to what I then said: Gatty v.Fry . Edwards, Dunlop & Co. Ltd. v.Harvey The rule is very carefully stated in par. 955 of the second edition of Halsbury’s Laws of England , vol. 28, p. 447, as follows:—” The question whether an instrument is duly stamped, or as to what stamp is required, is in general determined by what appears upon the face of it to be its legal operation when first executed so as to be capable of that operation, but the Court is not bound by the apparent tenour of an instrument, and will decide according to the real nature of the transaction, receiving, if necessary, extrinsic evidence.”Examples will be found in the authorities referred to in the notes. But, in any event, it seems to follow inevitably from the authorities to which I have referred that it is proper to look outside the instrument assessed as a settlement to ascertain whether the trust property has been vested in the trustee. [Footnotes omitted.]”
[28]
[29]
[30]
[31]
[32]
[33]
[34]
[35]
[36]
[37]
[38]
[39]
[40]
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