Sevad Nominees Pty Ltd as trustee for Pammjel Family Trust v Chief Commissioner of State Revenue [2004] NSWADT 31

CITATION: Sevad Nominees Pty Ltd as trustee for Pammjel Family Trust v Chief Commissioner of State Revenue [2004] NSWADT 31 DIVISION: Revenue Division APPLICANT PARTIES: Sevad Nominees Pty Ltd as trustee for Pammjel Family Trust RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 036029 HEARING DATES: 6/11/2003 SUBMISSIONS CLOSED: 11/06/2003 DATE OF DECISION: 02/13/2004

BEFORE: Verick A - Judicial Member APPLICATION: Land tax exemption - principal place of residence MATTER FOR DECISION: Principal matter LEGISLATION CITED : Administrative Decisions Tribunal Act 1997 Land Tax Management Act 1956 CASES CITED: APPLICANT REPRESENTATION: P Kerrins, agent RESPONDENT S Benjamin, solicitor ORDERS: The objection decision of the Chief Commissioner under review is affirmed.

1 The applicant seeks a review of an objection decision made by the Chief Commissioner of State Revenue (the respondent) in relation to land tax assessments for the 2002 and 2003 land tax years. The applicant is a trustee company and has been assessed under section 3 of the Land Tax Management Act 1956 (LTM Act) as a Special Trust. 2 The issue in this case is whether the applicant is entitled to exemption from land tax under s 10(1)(r) of the LTM Act in respect of the land subject of the assessments on the grounds that it was a principal place of residence in the relevant years of assessments. Factual background 3 The applicant is a trustee of a family discretionary trust with investments in farming and real estate. In order to preserve the privacy of the directors and beneficiaries of the trust I shall refer to the principal director as K1, his wife as K2 and son as K3 with the relevant properties as being situated at 'Investment Road', Bondi Junction. 4 The family trust purchased at auction a house and adjoining land with a studio of rather temporary construction situated respectively at 19 and 17 Investment Road, Bondi Junction. K3's architectural firm, in which K3 is a director, purchased No 15 Investment Road, Bondi Junction at the same time. The trust had various development plans along with K3's acquisition. The plans included for K3's firm to occupy the studio situated on No 15 as an office and K3 to occupy the house situated on No 19 as a principal place of residence. As part of the development K3's firm would construct an office and dwelling on No 15. 5 When the office and house had been constructed on No 15, No 19 was sold. The trust remains owners of No 17. During the period of ownership of No 19 for some twenty-two months, K3 occupied it as a residence for three months. 6 The issue in this matter relates to No 19. The applicant seeks an exemption from land tax in respect of that property on the grounds that it was used and occupied as a principal place of residence and exempt under s 10(1)(r) of the LTM Act. Relevant legislative provisions 7 Under s 7 of the LTM Act, land tax is levied and paid upon the land value of all land holdings situated in New South Wales that are owned by taxpayers and are not exempt from land tax. Land tax is charged pursuant to s 8 of the LTM Act on land as owned at midnight on 31 December immediately preceding the year for which the land tax is levied. Land tax is payable under s 9 of the LTM Act by the owner of land upon the taxable value of all the land owned by the owner and not exempt from taxation. 8 The word 'owner' in relation to land is defined in s 3(1) of the LTM to include "every person who jointly or severally, whether at law or in equity: (i) is entitled to the land for any estate of freehold in possession, or (ii) is entitled to receive, or is in receipt of, or if the land were let to a tenant would be entitled to receive, the rents and profits thereof, whether as beneficial owner, trustee, mortgagee in possession, or otherwise." 9 The applicant as trustee of the family trust is taken to be the owner under s 3(1) for purposes of land tax. A discretionary trust under the LTM Act is treated under s 3(1) of the LTM Act as a special trust. 10 Under the LTM Act, an owner's principal place of residence is exempt subject to certain qualifying criteria. The exemption does not generally apply if a company has an interest in the land, with the exception in the case of company title schemes where the shareholders are entitled to occupy a particular unit by virtue of ownership of a particular parcel of shares. 11 The term "principal place of residence" is defined in s 3(1) of the LTM Act as follows: "principal place of residence" of a person means the one place of residence that is, among the one or more places of residences of the person within and outside Australia, the principal place of residence of the person. 12 The qualifying criterion for the exemption is set out in s 10(1)(r) of the LTM Act. Section 10 (1)(r) which states as follows: "with respect to taxation leviable or payable in respect of the year commencing on 1 January 1998 or any succeeding year, land that has a land value in respect of the year of less than the premium tax threshold and that is used and occupied as the principal place of residence of the owner of the land (or, if there are joint owners, as the principal place of residence of one or more of them) and for no other purpose (except as provided by subparagraph (iii), being: (i) a strata lot, or (ii) a parcel of residential land, or (iii) a parcel of residential land on which there is also one of the residential occupancies referred to in subsection (1D)(b)(ii) (A)-(F), unless the owner or all of the joint owners who so used and occupied the lot or parcel (as appropriate) is such an owner by reason only of being a trustee". 13 For purposes of the exemptions found in paragraphs 10(1)(r)(ii) and (iii), "residential land" is defined in s 10(1D) to mean "land that is used and occupied for residential purposes and for no other purpose, that use and occupation being use and occupation of a building or buildings designed, constructed or adapted for residential purposes". Section 10(1D)(a)(i) excludes land owned by a company from being "residential land". Chief Commissioner's basis for assessments 14 The respondent's basis for the relevant tax assessments is found in his letter dated 12 June 2003 addressed to K1 informing him that the applicant's objection on the grounds that No 19 should be exempt in terms of s 10(1)(r) of the LTM Act has been disallowed. The short reasons for the decision to disallow the objection stated in that letter are as follows: "There are no provisions under the Act whereby an exemption can be given for residential property, when it is owned by a company, as in the current situation." 15 The respondent has unfortunately not provided, as required by s 58 of the Administrative Decisions Tribunal Act 1997 (the ADT Act), any detailed statement of reasons in respect of his objection decision. The Applicant's case 16 The applicant's claim is that No 19 is a residential property and that it was acquired by the trust for K3's use as his principal place of residence. The property was owned by the trust for a period of only twenty-two months and it was occupied by K3 for about three months. In these circumstances the applicant claims that it is entitled to an exemption on the grounds that it was in the relevant period a principal place of residence. 17 The applicant also claims that the properties, Nos 17 and 19 were purchased at an auction to benefit K3 and that it "is evidently clear the spirit of a principal place of residence is the prime consideration throughout the various transactions" and that for "the property to attract land tax it must be well-established contingent there was intention for substantial monetary gain of a business/rental nature on an enduring time basis". 18 The applicant has further expanded these reasons in written submissions provided to the Tribunal. Essentially, the applicant submits that it is a mere trustee of the family trust and holds property for the benefit of one or more of the beneficiaries. The funds used for the property investment, it submits, are provided by K1 and K2 who are also "responsible for any business or legal default". Reasons and decision 19 The first matter that I need to explain is that the applicant is the owner for purposes of the LTM Act and not the directors of the applicant or the beneficiaries. There is a great deal of confusion in the mind of the directors, in particular with K1. A trust is not a separate legal entity and has no legal status. It merely refers to an obligation attaching to the property the subject of the trust. Professor Keeton in his study, The Law of Trusts (9th ed.) at p.5 defines a trust as: "the relationship which arises wherever a person called the trustee is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons (of whom he may be one and who are termed cestuis que trust ) or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustee, but to the beneficiaries or other object of the trust." 20 Discretionary trusts have been enormously popular with tax planners. But the use of a trust to hold property shifts the legal ownership to the trustee who that capacity controls the property. Section 3(1) of the LTM Act definition of an "owner" for purposes of land tax includes a trustee. In the present matter, the land at No 19 was purchased by the trust but held by the applicant as a trustee and as an "owner" for purposes of the LTM Act. Although the directors of the applicant are the "minds" which have made decisions for investment in relation to real estate, the ownership in law is with the trustee, here the applicant. 21 For purposes of the exemption found in paragraphs 10(1)(r)(ii) and (iii), "residential land" is defined in s 10(1D) of the LTM Act to mean "land that is used and occupied for residential purposes and for no other purpose, that use and occupation being use and occupation of a building or buildings designed, constructed or adapted for residential purposes". But paragraph 10(1D)(a)(i) excludes land owned by a company from being "residential land". 22 Accordingly, the exemption in paragraph 10(1)(r) of the LTM Act does not apply to "owners" that are companies, with one exception. The exception is found in s 21A of the LTM Act. The relevant provisions of s 21A are as follows: "(1) This section applies to land if: (a) the land is owned by a company in which all the shares are owned by persons each of whom, because of that share ownership, has an exclusive right to occupy a part of a building on the land or one of 2 or more buildings on the land, and (b) the Chief Commissioner is satisfied that the whole of the land is reasonably used in connection with the occupation of the building or buildings. (2) For the purpose of assessing land tax in respect of land to which this section applies: (a) each shareholder is deemed to be owner of that part of the building or that building that the shareholder is entitled to occupy because of that share ownership, and (b) each part of the building, or each such buildings, is deemed to be a strata lot under the Strata Schemes (Freehold Development) Act 1973, and (c) the company is not to be regarded as the owner of the land." 23 Section 21A only applies if the following two conditions are satisfied: (a) the land is owned by a company in which all the issued shares are owned by persons each of whom, because of that share ownership, has an exclusive right to occupy a part of a building on the land or one or more buildings on the land, and (b) the Chief Commissioner is satisfied that the whole of the land is reasonably used in connection with occupation of the building or buildings. 24 In the present matter, on the facts, none of the directors were in a position to satisfy condition (a) because the directors were only entitled to any benefit from the trust property as beneficiaries of a discretionary trust and not as shareholders. 25 Although it is not necessary for me to decide in this matter, the facts also fail to establish that No19 was "used and occupied" as a residence during the relevant period as required by both s 10(1)(r) and s 21A. It was only occupied for some three months by K3 during the period of twenty-two months of ownership of No 19. 26 Accordingly, I affirm the objection decision under review.