Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Chloe Adolphi Pty Ltd as trustee for The Chloe Adolphi Family Trust v Chief Commissioner of State Revenue [2024] NSWCATAD 48 Hearing dates: 11 May 2023 Date of orders: 22 February 2024 Decision date: 22 February 2024 Jurisdiction: Administrative and Equal Opportunity Division Before: J Gatland, Senior Member Decision: 1. The decision under review is affirmed. Catchwords: TAXES AND DUTIES — Land tax — Surcharge land tax — holds land on trust — discretionary trust — foreign persons not excluded as beneficiaries under the terms of the trust deed — effect of a deed of rectification Legislation Cited: Administrative Decisions Review Act 1997 (NSW) Land Tax Act 1956 (NSW) Land Tax Management Act 1956 (NSW) Taxation Administration Act 1996 (NSW) Cases Cited: Application of Walker Corporation Pty Ltd [2022] NSWSC 1609 Bailey v Federal Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214 Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 Barsoum v Chief Commissioner of State Revenue [2020] NSWCATAD 282 Bush v National Australia Bank (1992) 35 NSWLR 390 Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184 Chu v Chief Commissioner of State Revenue [2021] NSWCATAD 238 Commissioner of Stamp Duties (NSW) v Carlenka [1995] 41 NSWLR 329 Coolibah Pastoral Co v The Commonwealth (1966) 11 FLR 173 Davis v Federal Commissioner of Taxation (2000) 44 ATR 140 Federal Commissioner of Taxation v Trustee for the Michale Hayes Family Trust (2019) 273 FCR 567; [2019] FCAFC 226 Gilsan (International) Pty Ltd v Optus Network Pty Ltd (No 2) [2005] NSWSC 38 Issa v Berisha [1981] 1 NSWLR 261 Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 Muriti v Prendergast [2005] NSWSC 281 Public Trustee v Smith [2008] NSWSC 397 Pukallus v Cameron (1982) 180 CLR 447 Rowe v Federal Commissioner of Taxation (1982) 60 FLR 475; (1982) 13 ATR 110 Strathavon v Chief Commissioner of State Revenue [2017] NSWCATAD 200 Warriewood Pty Ltd v Commissioner of Taxation (Cth) (1993) 26 ATR 270 Zhang v Chief Commissioner of State Revenue [2023] NSWCATAP 283 Texts Cited: J D Heydon, M J Leeming and P G Turner, Meagher Gummow & Lehane's Equity: Doctrine and Remedies, (5th ed, LexisNexis Butterworths, 2015) Category: Principal judgment Parties: Chloe Adolphi Pty Ltd as trustee for The Chloe Adolphi Family Trust (Applicant) Chief Commissioner of State Revenue (Respondent) Representation: Solicitors: Crown Solicitor (Respondent) Other: A Guidera (Director) (Applicant) File Number(s): 2023/00028051 Publication restriction: Nil REASONS FOR DECISION Introduction 1. The Applicant, the corporate trustee of a discretionary trust (Trust), is the registered proprietor of land in New South Wales, which it purchased in about May 2021. 2. The Chief Commissioner determined that the Applicant was liable for land tax and also for surcharge land tax on the basis that, in the relevant period, the terms of the trust deed (Deed) did not preclude a foreign person from being a beneficiary of the Trust. As a consequence, the Applicant was to be deemed a "foreign person" in the relevant land tax year for assessment of liability to surcharge land tax under the Land Tax Act 1956 (NSW) with respect to that land. 3. The Applicant seeks review of a decision of the Chief Commissioner of State Revenue to assess it as liable to surcharge land tax. 4. In December 2022, after the Applicant had been assessed as liable to land tax and surcharge land tax and after the disallowance of the Applicant's objection to the assessment, the Applicant, the settlor and the appointor of the Trust executed a deed of rectification to the terms of the Deed. The reason recited in the deed of rectification was that the terms of the Deed needed amendment to give effect to the intention of the settlor, appointor and Applicant that no foreign person could benefit from the Trust. 5. The Applicant contends that the effect of the deed of rectification is to cause the basis for liability to surcharge land tax to be absent from the date on which the Trust was settled. The Chief Commissioner contends that the true intention of the parties to the trust deed has not been established and that, in any event, the Chief Commissioner is not bound by the terms of the deed of rectification since, as a third-party to the Deed; and as a collector of revenue, it must assess liability on the taxable facts at the time of assessment. The issue to be determined 1. The issue to be determined between the parties was whether the rectification of the Deed had the effect of changing the Trust's liability to surcharge land tax. 2. There was no controversy that the Deed, in its original form, permitted a foreign person to be a potential beneficiary of the Trust and, therefore, caused the Applicant to be deemed a foreign person for the purposes of surcharge land tax. The relevant law Jurisdiction and Onus 1. The Applicant, being dissatisfied with the Chief Commissioner's decision on objection, applied for administrative review under the Taxation Administration Act 1996 (NSW), s 96 and the Administrative Decisions Review Act 1997 (NSW), s 63. 2. The Applicant bears the onus of proving its case; Taxation Administration Act, s 100(3). In these proceedings, the Applicant addressed only the surcharge land tax particular of the assessment and not the calculation of land tax, which it had objected to originally. 3. To avoid liability for surcharge land tax, the Applicant will need to demonstrate that, in the relevant land tax year, it was not a 'foreign person' under the Land Tax Act, s 5D. 4. Surcharge land tax is charged on residential land owned by "foreign persons' under the Land Tax Act, s 5A. The Land Tax Act, s 1 provides it is to be read and construed with the Land Tax Management Act 1956 (NSW); accordingly, the reference to the 'Principal Act' in the Land Tax Act, s 5A, is to be read as a reference to the Land Tax Management Act. 5. The Land Tax Act, s 5A relevantly provides: 5A Levy of surcharge land tax on residential land owned by foreign persons—2017 and subsequent land tax years (1) Land tax is payable under this section in respect of residential land owned by a foreign person (surcharge land tax). (2) In respect of the taxable value of all the residential land owned by the foreign person at midnight on 31 December in any year (commencing with 2016), surcharge land tax is to be charged, levied, collected and paid under the provisions of the Principal Act and in the manner prescribed under that Act for the period of 12 months commencing on 1 January in the next succeeding year at the rate of— … (b) in the case of all residential land owned by the foreign person at midnight on 31 December in the years 2017–2021—2% of that taxable value as assessed under the Principal Act, and … (3) Surcharge land tax is payable in addition to any land tax payable in respect of the residential land under the other provisions of this Act, and is so payable even if no land tax is payable under those other provisions. … 1. In June 2020, Land Tax Act, s 5D was introduced. That section relevantly provides: 5D Surcharge land tax—discretionary trusts (1) The trustee of a discretionary trust is taken to be a foreign person in that capacity for the purposes of section 5A if the trust does not prevent a foreign person from being a beneficiary of the trust. (2) If a discretionary trust prevents a foreign person from being a beneficiary of the trust, the trustee is not in that capacity a foreign person for the purposes of section 5A. (3) A discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if (and only if) both of the following requirements are satisfied— (a) no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement), (b) the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement). Note— Under the transitional arrangements for this section in Schedule 2 to the Principal Act, the no amendment requirement does not apply to a trust that satisfies the no foreign beneficiary requirement immediately before the commencement of this section. (4) A person is a potential beneficiary of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person. Note— A potential beneficiary is not limited to persons named in the trust instrument and extends to the members of any class of persons to whom or for whose benefit trust property can be distributed or applied pursuant to the discretions of the trust. (5) For the removal of doubt, a person is not a potential beneficiary of a discretionary trust if the terms of the trust prevent any property of the trust from being distributed to or applied for the benefit of the person. … 1. The effect of these provisions is that the trustee of a discretionary trust is deemed to be a foreign person under the Land Tax Act, s 5D unless that trustee can show that the terms of the trust meet the "no foreign beneficiary" and the "no amendment" requirements. 2. One consequence of being unable to show that the terms of the trust meet those requirements is that the Trustee will be liable to be assessed for surcharge land tax in respect of land owned by it for the discretionary trust on 31 December in each year: Land Tax Act, s 5A. Rectification 1. A deed can be rectified by court order or by deed of rectification. Rectification is a remedy to correct the record of an agreement where that has failed, whether through mutual or unilateral mistake, has omitted a term or failed to express a term of an agreement; Muriti v Prendergast [2005] NSWSC 281 at [105]; Pukallus v Cameron (1982) 180 CLR 447 at 452, 456; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 350-351. 2. Having regard to its purpose, rectification of a document is considered to have retrospective effect; accordingly, the document to which the rectification applies is read as if it had been executed in the rectified form; Issa v Berisha [1981] 1 NSWLR 261; see also Coolibah Pastoral Co v The Commonwealth (1966) 11 FLR 173. 3. The remedy of rectification may also be afforded where the parties' mistake is as to the effect which the instrument would have, even where the parties were not mistaken as to the words which were included in it; Commissioner of Stamp Duties (NSW) v Carlenka [1995] 41 NSWLR 329 at 332, 340, 343, 345; Bush v National Australia Bank (1992) 35 NSWLR 390 at 406. 4. There is a distinction between rectification of the kind considered in Carlenka and Bush and rectification sought where the parties have adopted a word without understanding its meaning. As the learned authors of Meagher Gummow & Lehane's Equity: Doctrine and Remedies, (5th ed, LexisNexis Butterworths, 2015) at [27-115] note: Mistake as to the legal effect of the chosen words is not as such enough to engage the equitable doctrine of rectification. Mistakes as to the effect so the chosen words are only relevant to a narrower extent: if parties execute an instrument and thereby adopt words the legal or non-legal meaning of which they do not know, relief by rectification may be given if that involved a discrepancy between the meaning of the document, as construed, and the parties' common intention. Indeed, it stretches language to say that adopting a word without understanding its meaning is a mistake as to 'effect'; it is only a mistake as to 'effect' in the peculiar sense that the effect of using words is to convey their meaning. In contracts, the doctrine apparently applied in Burroughes v Abbott and Jervis v Howle & Talke Colliery Co Ltd would permit rectification simply because by using certain words the parties had failed to appreciate what, legally, would follow. Whether or not that doctrine was in truth applied in those decisions, that doctrine does not reflect the law of Australia. The Australian position is best seen from the decision of the Victorian Court of Appeal in The Club Cape Schank Resort Co Ltd v Cape Country Club Pty Ltd. The parties in that case agreed that disputes between them would be resolved by the Administrative Appeals Tribunal, a body having no general jurisdiction over the parties. It was not possible to reform the instrument at all, as the instrument perfectly reflected an erroneous assumption of their agreement. … A wider exception to the traditional conception of rectification for common mistake as a remedy could be highly undesirable – especially if rectification were to be allowed for mere failure to appreciate the legal consequences of choosing particular words. … [citations and quotations omitted] 1. A document is not capable of being rectified, in the legal or equitable sense, in circumstances where the parties never considered a matter that has then been brought to their attention subsequently. If there is no actual intention at the time of creation of the document, then there has been no mistake. That is why, in a rectification suit, the substance and the precise variation to be made is required to be pleaded; Application of Walker Corporation Pty Ltd [2022] NSWSC 1609, Public Trustee v Smith [2008] NSWSC 397. 2. Nor is rectification effective to correct an error about the legal or factual consequences of a document; Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 at 384 and Carlenka at 345, where McLelland AJA observed: In general the remedy of rectification of an instrument is available where it is established by clear and convincing proof that at the time of execution of the instrument the relevant party or parties as the case may be had an actual intention (if more than one party, a common intention) as to the effect which the instrument would have which was inconsistent with the effect which the instrument as executed did have in some clearly identified way. In this content, "effect" means the legal and factual operation of the instrument according to its true construction, but does not include legal or factual consequences of the operation of the instrument of a more remote, or collateral, kind (for example, its liability to stamp duty). 1. The rectification of a document is enforceable against the parties to the contract or deed. However, as the Chief Commissioner correctly noted in submissions, the retrospective alteration of the parties' rights or obligations under a rectified instrument may be resisted by third parties to whom rights have accrued; Gilsan (International) Pty Ltd v Optus Network Pty Ltd (No 2) [2005] NSWSC 38, or where the rectification affects the obligations of parties under statute; Chief Commissioner of State Revenue v Smeaton Grange Holdings Pty Ltd [2017] NSWCA 184 at [146], Rowe v Federal Commissioner of Taxation (1982) 60 FLR 475; (1982) 13 ATR 110 at 113. This principle applies with force when considering the position of revenue collectors who are bound to determine liability to taxation on the so-called "taxable facts", being the facts known to and accepted by (in this case) the Chief Commissioner when undertaking the process of assessment; Bailey v Federal Commissioner of Taxation [1977] HCA 11; (1977) 136 CLR 214 at 217. 2. A deed of rectification may, however, be capable of evidencing the true intention or taxable facts; Davis v Federal Commissioner of Taxation (2000) 44 ATR 140 at 151 [57], and the obiter dicta of Steward J in Federal Commissioner of Taxation v Trustee for the Michale Hayes Family Trust (2019) 273 FCR 567; [2019] FCAFC 226, at [47]-[52]. Facts Uncontroversial Facts 1. There was no controversy that the Trust was established on 16 April 2021, when the Deed was executed by Mr Palyga as the first contributor and the Applicant as trustee. Anthony Guidera was made the Appointor under the trust deed. Mr Guidera, who is also the sole director and shareholder of the Applicant, appeared for the Applicant at the hearing in the Tribunal, provided a witness statement and made written and oral submissions. 2. The Applicant relied upon the written statements of Mr Guidera and Mr Palyga, both of whom were briefly cross-examined by Ms Morgan, the solicitor-advocate from the Crown Solicitor's Office, who appeared for the Chief Commissioner at the hearing. 3. The following transactional facts were also not in dispute: 1. In May 2021, Mr Guidera directed the Trustee to purchase a residential property in New South Wales. 2. No distributions were made to any beneficiary in the relevant land tax year. 1. On 23 July 2022, the Chief Commissioner wrote to the Applicant advising that it may have incurred a liability to surcharge land tax as a trustee of a discretionary trust unless the trust deed prevents a foreign person from being a beneficiary. 2. On 8 August 2022, the Applicant lodged a land tax registration return in which it stated that the Trust was not a foreign entity. 3. Contrary to the information stated in the Applicant's land tax registration return, the Chief Commissioner assessed the Applicant as liable for land tax and surcharge land tax with respect to its ownership of the property in New South Wales. 4. By notice dated 12 October 2022, the Chief Commissioner informed the Applicant that: 1. It had been assessed under the Land Tax Management Act 1956 (NSW), s 3A as a special trust for land owned by it in New South Wales as at 31 December 2021. 2. That land tax was payable by the Applicant calculated at 1.6% of the aggregated taxable land value in the sum of $15,066.65. With regard to this particular of the assessment, I note the Applicant did not seek to challenge its liability for land tax. 3. It has also been assessed as liable for surcharge land tax under the Land Tax Act 1956 (NSW), s 5A, concerning the same property and for the same land tax year. The Applicant's surcharge land tax liability was calculated at 2% of the aggregated taxable land value in the sum of $18,833.34; and it is this particular of the assessment that is the subject of the proceedings. 1. On 14 October 2022, the Applicant objected to the Chief Commissioner's assessment of its liability to land tax and surcharge land tax with respect to the 2021 land tax year. The Applicant was entitled to object to that assessment under the Taxation Administration Act 1996 (NSW), s 86. 2. On 14 December 2022, the Chief Commissioner disallowed the Applicant's objection for the 2021 year. The determination of the objection was undertaken under the Taxation Administration Act, s 91. In determining the objection, the Chief Commissioner advised the Applicant: To avoid surcharge land tax from the 2023 year, it is recommended that the Taxpayer seek professional advice to assist in amending their trust deed to meet the requirements under [the Land Tax Act, s 5D(3)] and such deed is executed on or before 31 December 2022. The Taxpayer may submit their amending deed by lodging a return or using our land tax online services … 1. On 22 December 2022, Mr Guidera, as the Applicant's sole director and Mr Palyga as the first contributor of the Trust, executed a deed of rectification, which Mr Guidera says gave effect to his intention that no foreign person be entitled to be a beneficiary of the Trust. 2. The Applicant then notified the Chief Commissioner of the rectification of the Deed. Still, the Chief Commissioner advised the Applicant on 16 January 2023 that the rectification did not have a retrospective effect for the purposes of the Applicant's liability to taxation. Evidence of Mr Guidera 1. By his witness statement, Mr Guidera informed the Tribunal that he had intended, by establishing the Trust, to benefit Ms Adolphi alone. However, he also conceded that the terms of the Trust did not preclude other beneficiaries. 2. Mr Guidera's evidence concerning the circumstances in which the Trust was established was that: 1. He had previously established a discretionary trust for one of his sons, Jake Guidera. In setting up that trust, Mr Guidera had asked his cousin, Mr Palyga, a legal practitioner in practice in South Australia, to draft a trust deed for that trust (Jake Trust Deed). Having established the first trust for Jake Guidera, Mr Guidera later decided to use an existing trust for another of his children and establish trusts for some of his children and step-children, including Ms Adolphi. 2. To set up the Trust, Mr Guidera took the Jake Trust Deed as prepared by Mr Palyga and made amendments to it. Mr Guidera then sent a draft of the proposed new trust deed to Mr Palyga for his comments and review. There were some emails exchanged between Mr Guidera and Mr Palyga – the emails themselves were annexed to Mr Palyga's witness statement and, to the extent they are relevant, are set out below. 3. On 16 April 2021, and after considering Mr Palyga's suggested changes, Mr Guidera made some further changes; and 4. Then, Mr Guidera, as the sole director of the Applicant, and Mr Palyga (who were attending a conference together for another company of which they were both directors) met and executed the Deed which established the Trust. 1. It was Mr Guidera's evidence concerning his, and therefore, the Applicant's, intentions in establishing the Trust that the capital of the Trust would be "from inception and forever, be fully and completely" solely for Ms Adolphi's benefit – a matter which he again stated under cross-examination. Further, Mr Guidera intended that the Applicant acquire assets in trust for that purpose using monies that he or his family trust would provide to it for that purpose. However, since the New South Wales land tax issue arose, he had considered making the trust a fixed trust, though he had rejected that option since it could mean that Ms Adolphi might have rights and access to the trust's assets before Mr Guidera was ready for such access to occur. 2. Though Mr Guidera, in his written evidence, says he did not think about it at the time the Trust was settled, he also accepted there was a possibility that if the Trust ever made a distribution of profit, such distribution may not be "fully distributed" to Ms Adolphi. On this point, Mr Guidera stated "had I thought about it as I now have, the only candidate to receive any such profit … would be my own family trust". However, that evidence was then contradicted by email correspondence between Mr Guidera and Mr Palyga that was tendered in the Applicant's case and which is described in paragraph 50 below. 3. In written submissions on behalf of the Applicant, Mr Guidera, referring to his witness statement, described the preparation of the Deed in the following terms; The Trust Deed was drafted from a pro forma precedent document with an expansionary clause (clause 26.3) calling up a wide range of beneficiaries, by reason of which the common intention of the Settlor and the Applicant has been usurped. 1. Mr Guidera also gave evidence that he is an Australian citizen, as are all members of his immediate family, but some distant members of Mr Guidera's family are foreign persons. Mr Guidera's evidence on this point assumed that his familial relationships were relevant – but under the relevant terms of the trust deed, the relevant relationships are tied to Ms Adolphi, not Mr Guidera. 2. Though Ms Adolphi is an Australian citizen, at the time the Trust was established, Mr Guidera stated that he had not turned his mind to the fact of Ms Adolphi's citizenship or anything else. Aside from asserting Ms Adolphi's nationality and that of her mother and father, there was no evidence before the Tribunal of the citizenship of Ms Adolphi's relatives. 3. In his written evidence, Mr Guidera stated that were a foreign person to be assisted by him, that assistance would be provided from his personal resources and not from any of the trusts he had established for his children and step-children. This evidence was given in support of his subjective intention that the Trust would not benefit a foreign person. 4. Mr Guidera's written evidence stated that in late 2022, that is to say, after the assessment and objection, he discovered that the terms of the trust deed were contrary to his intention that the terms of the trust deed did not exclude foreign persons as beneficiaries for the purposes of the Land Tax Act 1956 (NSW), s 5D and that he had "no knowledge" of that provision before late 2022. Mr Guidera then stated: Accordingly, in late 2022, I discovered that the terms of the Trust Deed resulted in tax consequences which were unintended and which would amount to a usurpation of my true intention. [set out herein in paragraph 43] 1. Mr Guidera stated that his reason for executing, on behalf of the Applicant, a deed of rectification was recorded in the true recitals of that deed to the extent that: I only ever intended that Australian citizens and Australian corporations, partnerships and trusts which are wholly owned and controlled by Australian citizens would ever benefit under the Trust and I had an intention that no foreign person would ever receive or become entitled to such benefit. 1. Mr Guidera further stated that the Deed did not "authentically document" his true intention; had it done so, it would also have prevented a foreign person from being a beneficiary. And that, by causing the Applicant to execute a deed of rectification, he had attempted to ensure the original intention in establishing the Trust, including that no foreign person would be entitled to benefit from the Trust, was correctly reflected in the Deed. Evidence of Mr Palyga 1. In his written evidence, Mr Palyga stated that he was well acquainted with Mr Guidera's family and was in regular contact with Mr Guidera as a family member, a director of two companies of which Mr Guidera is also a director and as a solicitor who had acted for Mr Guidera from time to time on commercial matters. 2. Mr Palyga stated that he received an email from Mr Guidera on 2 April 2021, from which he was informed of Mr Guidera's intention to establish a new trust for each of his children and stepdaughters. In fact, from the correspondence, it was apparent that two trusts already in existence were to be used for Mr Guidera's son, Jake Guidera, and daughter, Elise Guidera and that four new discretionary trusts would be created, each of which would nominate a different son or step-daughter of Mr Guidera as the primary beneficiary. With regard to the draft trust deed for the Trust and the draft deeds for two other trusts, Mr Guidera asked Mr Palyga the following questions: I'm planning some changes to existing trusts and some new trusts so that I end up with one trust for each of the kids. I have drafted new trust deeds the same as the one we did for Jake. Please confirm a few things: … New Trust Deeds for Dean, Chloe, and Josephine: ● Do they look OK? ● Who should be nominated as the "Main Beneficiary"? ● With Chloe – should the appointor be as I have worded it or "[Ms Adolphi's mother] and [Ms Adolphi]"? 1. There were several documents attached to the email of 2 April 2021. Among them was a draft trust deed for the Trust. The draft trust deed featured some highlighted text on both the first and last substantive pages; it recorded the Applicant as the primary beneficiary of the Trust and also the default income and capital beneficiaries. In the draft, Ms Adolphi was not listed as a beneficiary at all; she was referred to only as an appointor on the death of Mr Guidera and the subsequent death of Ms Adolphi's mother. Mr Palyga stated that he recognised the draft trust deed as having been adapted from a previous deed prepared by him in late 2017 when Mr Guidera had established a trust for Jake Guidera and that the only parts that had changed from the Jake Trust Deed to the current deed for the Trust were the name of the Trust and the highlighted text. 2. From reading the draft, Mr Palyga says he inferred that Mr Guidera wished him to be the settlor for the new trust, or, as it is called in the deed, the 'first contributor'. 3. On 11 April 2021, Mr Palyga responded to Mr Guidera by email. Mr Palyga's email addressed each of Mr Guidera's questions regarding the existing trusts and the new trusts in the following terms: So, given that it's best never to make any change to beneficiaries, there is no need to remove Lisa and run a re-settlement risk for the Guidera-Redman Family Trust or change the principal beneficiary from you to Elise with the TGuidera Trust. Also in the case of all deeds, the definitions of beneficiary and spouse are wide enough to capture anybody in your or Lindy's family (see clauses 26.3 and 26.9 of my deeds and pages 1 and 4 of TGuidera Trust deed). So there is no need to name Elise specifically as a beneficiary of the TGuidera Trust. … Not sure why you have put the company that is the trustee as the main beneficiary of the trusts for Dean, Chloe and Josephine. It means 26.9 has no work to do, the sole effective beneficiary is the company. Don't you mean the individuals? Also, with Chloe's and Josie's, change the appointor to – … Everything else looks OK. 1. On 14 April 2021, Mr Guidera informed Mr Palyga that he had updated the draft trust deeds and would bring hard copies of the updated documents to a meeting they were attending soon after. Accordingly, when he and Mr Palyga met together on 16 April 2021, they were able to execute the Deed establishing the Trust in its original form. 2. The Deed, tendered by the Chief Commissioner, contained various terms. Relevantly, those terms provided: 1. The Applicant, as trustee of the Trust, had broad discretionary authority concerning the accumulation and distribution of income and capital of the Trust, including the discretionary power to distribute income or capital of the Trust in favour of one or more beneficiaries in such proportions as it sees fit and to the exclusion of one beneficiary over any other. 2. The beneficiaries of the Trust, as provided by clause 26 of the Deed, were set out in clause 26 and were: 1. The "main beneficiary" is identified in the deed's schedule as Chloe Adolphi; cl 26.3.1. 2. Aside from Ms Adolphi, the definition of a beneficiary under the Deed was defined across sixteen sub-clauses in the broadest possible terms; the definition of beneficiary included all relatives of Ms Adolphi as well as the spouses of those relatives: charitable, religious, service and sporting organisations; corporations and trusts associated with Ms Adolphi or any other natural person within the class of beneficiaries; any person having an interest in land within 100 metres of any land in which the Trust has a legal or beneficial interest, joint owners and joint venturers of the Trust: Deed, cll 26.3.1 – 26.3.16. 3. With regard to a trust, corporation or fund mentioned by cl 26 of the Deed, it was expressly provided that such entity 'may be formed or incorporated anywhere in the world, and may be formed or incorporated now, or at any time in the future.' 4. The sole restriction on the definition of beneficiaries under cl 26.3 concerned insolvency, whether by way of bankruptcy or external administration of a non-natural person. 1. Mr Palyga stated that it was his understanding that the trust he was settling was a trust for the benefit of Ms Adolphi and that this understanding arose from reading from Mr Guidera's email of 2 April 2021 in which Mr Guidera stated an intention to establish a trust for "each of the kids" and his awareness that Mr Guidera had previously established a similar trust for his son Jake using the Jake Trust Deed. Specifically, it was My Palyga's evidence that: I therefore understood that his intention in establishing further trusts, one for each of his other children and for each of Lindy's children was to acquire assets in each of those trusts which would essentially "belong" to only one of his "kids", and that those assets would be siloed from, and not available to, the other "kids". 1. However, that evidence of understanding is contradicted by three matters; 1. Firstly, Mr Palyga drafted the Jake Trust Deed and was, therefore, aware of the terms and broad definition of beneficiary under that original deed. He was also aware that the Deed for the Trust did not differ from the terms of the Jake Trust Deed, and there was no suggestion that Mr Palyga, as an experienced legal practitioner who had drafted the document, did not know of the effect of the words so drafted; 2. Secondly, having regard to the definition of 'beneficiary' under the Deed in its original and rectified forms, the assets held by the Trust are not siloed from Ms Adolphi's step-brothers and sister, nor her sister Josephine (each of whom comprised "the kids" as Mr Palyga understood that term to be used in Mr Guidera's correspondence); 3. Thirdly, having reviewed the draft trust deed, Mr Palyga had clearly and specifically considered the operation of clause 26 of the draft trust deed as was evidenced by the fact that he warned Mr Guidera against nominating "the company", including the Applicant, as the primary beneficiary and default beneficiary on the basis that, if this occurred "[i]t means [clause] 26.9 has no work to do, and the sole effective beneficiary is that company." 1. At many points in his written evidence, Mr Palyga gave evidence that appeared to be based on assumptions concerning Mr Guidera's intentions. For example, Mr Palyga stated that he had assumed there was no possibility that Mr Guidera would allocate the assets of the Trust to any person other than Ms Adolphi. This may have been a natural assumption to make of Mr Guidera's intention, but it was not a correct one; as Mr Guidera's evidence showed, he had not, in fact, thought about who, other than Ms Adolphi, might benefit. That is a material difference. 2. Mr Palyga's evidence concerning his assumption also sits at odds with the fact that Mr Guidera was, at the time the Trust was settled, establishing several trusts "for the kids," which could have equally meant that each child or step-child would be the primary beneficiary of a trust with their siblings and step-siblings also capable of benefitting from each of the trusts being established. 3. In his witness statement, Mr Palyga gave evidence that, by executing a deed of rectification, he had intended to ensure that his original intention in settling the Trust, in particular that no foreign person would be entitled to benefit from it, was correctly reflected in the Deed. However, for the reasons set out above, there was no clear evidence that Mr Palyga had such a precise intention at the time the Deed was executed. Findings What did the parties intend? 1. With reference to the authorities considered above, the intention of the parties needs to be determined at the time of the execution of the document sought to be rectified. Such intention may be identified or proven by reference to later conduct. In any case, what is required to be established is that the parties held a specific or relevant intention and that that intention has not been reflected in the document, which is sought to be rectified. 2. Here, the evidence rises no higher than this: 1. Mr Guidera is a person with some experience in the establishment and operation of discretionary trusts who sought to establish a discretionary trust that would, or might, ultimately benefit Ms Adolphi. 2. Mr Guidera took specific steps to establish a discretionary trust and prepare a deed that he believed would ensure the broadest possible discretion would be conferred upon the Applicant, which he controls, as the trustee. Mr Guidera prepared the trust deed for the Trust by using a deed for another discretionary trust that Mr Palyga had drafted and used identically as a template and simply amending the information on the front and final pages. 3. In the event that Mr Guidera died, Ms Adolphi and her mother jointly were to become the Appointer for the Trust. 4. In seeking Mr Palyga's advice, Mr Guidera specifically engaged on the question of the extent and effect of clause 26 of the Deed. Nothing in that correspondence gave any clue that Mr Guidera or Mr Palyga turned their minds to the question of whether a foreign person (as defined) might be able to benefit from the trust other than to confirm that companies and individuals associated with Ms Adolphi, including foreign individuals and companies, were capable of being beneficiaries under the Trust. 1. While the Tribunal accepts that Mr Guidera took steps to establish the Trust with the intention that it might ultimately and principally benefit Ms Adolphi, it is equally clear from the evidence that both Mr Guidera and Mr Palyga, intended the Applicant, as trustee of the Trust to have expansive powers over the distribution of the trust's income and assets, including the power to benefit foreign persons. 2. The evidence establishes that Mr Guidera and Mr Palyga were familiar with the terms of the Deed and in particular the beneficiary clause. In Mr Palyga's case, he drafted Jake Trust Deed, and in Mr Guidera's case, he received correspondence from Mr Palyga that drew his attention specifically to the beneficiary clause. 3. The Applicant's evidence showed that, when the Trust was settled, neither Mr Palyga nor Mr Guidera, in fact, turned their minds to whether the trust should be restricted in such a manner as to exclude, permanently, distributions to a foreign person. 4. Accordingly, I have found that the Applicant has not demonstrated that the settlor and the trustee of the Trust had an intention that was either not recorded or recorded incorrectly. Is the trust a foreign person? 1. The Chief Commissioner submitted that the effect of the Land Tax Act, s 5D is to deem a discretionary trust to be a foreign person for the purposes of the Land Tax Act, s 5A unless the terms of the trust operate to prevent a foreign person (as defined, somewhat circuitously in the Duties Act 1997 (NSW), Ch 2A. 2. The Chief Commissioner also contended that the Applicant's evidence, and in particular Mr Guidera's evidence concerning the citizenship status of his family members, was not sufficient to establish that there was no potential beneficiary of the Trust who was a foreign person. However, the Tribunal does not need to decide that matter; given the basis upon which the trustee is deemed to be a foreign person under the terms of the Land Tax Act, s 5D, a discretionary trustee must show that it has met the "no foreign beneficiary" and the "no amendment" requirements. 3. Having regard to the express terms of the Deed, in its original form, I have found that its terms did not meet the "no foreign beneficiary requirement" nor the "no amendment requirement" for the purposes of the Land Tax Act, s 5D. What is the effect of the deed of rectification? 1. That leaves the issue of whether the trust deed, as rectified, applies to avoid the Applicant's liability to surcharge land tax. Generally, the rectification of a deed has a retrospective effect. That is because the rectification is designed to correctly record the original intention of the party or parties to a deed or agreement – to record the agreement or position that always was. However, there is a distinction between the effect of a deed of rectification in the regulation of the rights of the parties to that deed (and the rectified instrument) and the taxable facts upon which the Chief Commissioner must assess liability to taxation; Smeaton Grange, Rowe. 2. The deed of rectification executed by the Applicant, Mr Palyga and Mr Guidera to amend the Deed in this case is of evidentiary significance only in these proceedings; Davis, FCT v Michael Hayes Family Trust. While I am entitled to accept the deed of rectification as evidence of the parties intentions at the time the trust was settled, I give that evidence limited weight having regard to the timing and circumstances in which the deed of rectification was executed – being months after the parties were alerted to the consequences of the trust deed in its original form and having taken all other steps to attempt to convince the Chief Commissioner that the Trust was not to be deemed a foreign person for the purposes of the Land Tax Act, s 5A. 3. Taking into account the guidance provided in FCT v Michael Hayes Family Trust, I have also taken into account the evidence of intention from Mr Palyga as the settlor of the Trust and from Mr Guidera as the director of the Applicant. However, I have given that evidence limited weight also for the reason that, as the Chief Commissioner pointed out in submissions, statements of a self-serving nature that the ultimate issue may have shaped should be treated with caution and weighed against objective facts and inferences to be drawn from the taxpayer's activities generally; Warriewood Pty Ltd v Commissioner of Taxation (Cth) (1993) 26 ATR 270 at 281. 4. The overall impression to be gained from Mr Guidera and Mr Palyga's evidence is that they were taken by surprise by the assessment of the Applicant to surcharge land tax and that they subsequently took steps to avoid the consequences that had arisen from the manner in which the deed had been drafted. 1. First, the statements concerning intention from Mr Guidera either contradict or do not explain the contemporaneous documentary evidence, which points to considered drafting of the Deed, in particular, consideration of the beneficiary clause; 2. Second, from the statements concerning intention from Mr Palyga, it appears that Mr Palyga merely adopted the inferred intentions of Mr Guidera and that intention was a general one, that Ms Adolphi should be the primary beneficiary of the Trust; and 3. Third, the statement evidence of Mr Guidera and Mr Palyga tends to suggest that there was no actual or precise intention concerning the beneficiaries of the Trust other than that Ms Adolphi would be the primary beneficiary. 1. I have also taken into account the contemporaneous documentary evidence, which shows there had been some consideration of the beneficiaries clause by both Mr Guidera and Mr Palyga. That evidence shows that there was no intention to exclude foreign beneficiaries under the Deed. 2. The documentary evidence shows that both Mr Guidera and Mr Palyga intended that Ms Adolphi be the primary beneficiary of the Trust, equally however, the evidence discloses an intention that the Applicant should have broad discretion including to determine that natural persons other than Ms Adolphi and other entities may benefit from the Trust. That finding is supported by the evidence that each of Mr Guidera and Mr Palyga had considered the beneficiary clause and its operation and were, and, it would seem, satisfied that the words recorded in the Deed would give effect to their intentions. 3. The contemporary documentary records in this case reflect my finding that Mr Guidera and Mr Palyga did not turn their minds, and thus had no actual intention concerning the question of whether foreign persons might benefit from the Trust, aside from the fact that some clauses expressly allowed for foreign incorporated companies and trusts to become beneficiaries at the discretion of the Applicant. 4. For those reasons, I have concluded that the Applicant, by reference to the contemporary documentary evidence and the written and oral evidence of Mr Guidera and Mr Palyga, did not establish an actual intention at the time the Trust was settled to exclude any foreign person from being a beneficiary of the Trust. Conclusion 1. Having regard to my findings and the applicable statutory provisions, I have concluded that the Applicant was a foreign person for the purposes of the Land Tax Act, s 5A for the 2022 land tax year since the Deed in force on 31 December 2021 did meet the requirements under the Land Tax Act, ss 5D(3)(a) and 5D(3)(b). 2. The regulatory framework for surcharge land tax was observed by the Appeal Panel of this Tribunal in Zhang v Chief Commissioner of State Revenue [2023] NSWCATAP 283 at [11], as "complex". I respectfully agree with that observation. 3. There will always be negative outcomes for some taxpayers, including trustees, when new legislation is imposed, particularly revenue legislation. The fact of a negative or unfortunate outcome does not enliven any power to remit or reduce the liability; Strathavon v Chief Commissioner of State Revenue [2017] NSWCATAD 200 at [22]. 4. Nor, in the circumstances of this case, can such outcomes be ameliorated by the Tribunal having regard to particular individual circumstances. There is no discretion available to the Chief Commissioner or the Tribunal where the statutory criteria are met giving rise to a liability of this kind; Barsoum v Chief Commissioner of State Revenue [2020] NSWCATAD 282 and Chu v Chief Commissioner of State Revenue [2021] NSWCATAD 238. Orders 1. As the Applicant has not discharged its onus to demonstrate that the assessment is excessive; I make the following order: 1. The decision under review is affirmed. ********** I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 February 2024