AUTHORS

Mira Brewster
Mira Brewster
State Tax Specialist
Sam Mohammad
Sam Mohammad
Partner
Liam Telford
Liam Telford
National Tax Technical Director

A recent decision by the NSW Civil and Administrative Tribunal (NCAT) has highlighted the evidentiary burden faced by taxpayers seeking to rely on Deeds of Rectification, and the significantly adverse consequences that can result from a failure to discharge such burden.  

In Chloe Adolphi Pty Ltd as trustee for The Chloe Adolphi Family Trust v Chief Commissioner of State Revenue [2024] NSWCATAD 48 (Adolphi)1, Senior Member Gatland affirmed a decision by the Chief Commissioner of State Revenue to impose surcharge land tax on a trustee holding land on a discretionary trust in NSW on the basis they were deemed to be a ‘foreign person’, despite the execution of a deed of rectification which, if accepted, would result in no surcharge land tax being payable.

Background Facts 

The following background facts were relevant to the decision in Adolphi: 

  • A discretionary trust was established in April 2021, whereunder the daughter-in-law of the sole director and shareholder of the trustee company was identified as the ‘main beneficiary’ but broad discretionary authority was conferred on the trustee company ; 
  • In May 2021, the discretionary trust acquired ‘residential property’ in NSW; deeds ratification
  • In October 2022, the Chief Commissioner of State Revenue determined that the corporate trustee company was liable to both land tax as well as surcharge land tax for the 2021 land tax year on the basis that, in the relevant period, the terms of the trust/trust deed did not preclude a foreign person from being a beneficiary of the trust, thereby attracting the deeming provision contained in section 5D of the Land Tax Act 1956 (NSW) (Land Tax Act); and 
  • In December 2022, just over a week after an unsuccessful objection to the Chief Commissioner’s assessment of its liability to surcharge land tax, the trustee company’s sole director and shareholder, and the settlor of the trust, executed a deed of rectification, which purportedly gave effect to the former’s intention that no foreign person be entitled to be a beneficiary of the trust.  

‘Deeds of Rectification’ and the Land Tax Act explained 

Deeds of Rectification are a common business practice and are a written acknowledgment by the original  trustee and settlor that an original trust deed did not reflect their common intention at the time the original deed was settled.    
The Chief Commissioner is not bound by the terms of a 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 the assessment. NCAT land tax decision

With respect to the Land Tax Act, sections 5A and 5D, the latter of which was introduced in June 2020, are relevant. Subsection 5A(3) of that Act provides for the imposition of surcharge land tax in respect of ‘residential land’ owned by a ‘foreign person’, whereas subsection 5D(1) deems the trustee of a discretionary trust to be a foreign person for the purposes of section 5A if the trust does not prevent a ‘foreign person’ from being a beneficiary of the trust.  

The Decision 

Despite submissions by both the individual controller of the trustee company and the settlor of the trust that the Deed of rectification gave effect to their original intention, Senior Member Gatland affirmed the Chief Commissioner’s assessment of surcharge land tax of $18,883.34 for the 2021 land tax year. This decision was arrived at as a result of Senior Member Gatland dismissing the verbal submissions of the relevant parties, which were contradicted by contemporaneous evidence including email correspondence and the terms of the trust deed itself.  

The Deed of rectification was an attempt to convince the Chief Commissioner that the trust was not to be deemed a foreign person for NSW land tax purposes under the Land Tax Act 1956 (NSW). The Deed of rectification in this case was of evidentiary significance only, and it was given limited weight having been executed months after the Trust Deed was executed. surcharge land tax

The evidence before the Tribunal showed that there was no intention to exclude foreign beneficiaries under the Trust Deed at the time the Trust was settled [and it was irrelevant to rectify the position by way of a Deed of Rectification].  

Implications 

The decision in Adolphi clarifies that Deeds of Rectification can only be relied on to the extent that it can be objectively demonstrated that they give effect to the parties’ original common intention. That is, a deed of rectification will be ineffective where insufficient evidence exists to demonstrate its veracity, or indeed any evidence to the contrary exists. Caution should be exercised in this respect to minimise an outcome like that seen in Adolphi.    
 

FOR MORE INFORMATION

For further information regarding the foreign surcharge provisions whether in relation to surcharge purchaser duty or surcharge land tax, or for any Deed of Rectification, Variation or Confirmation queries, please contact Mira Brewster or Sam Mohammad.

  1. Chloe Adolphi Pty Ltd as trustee for The Chloe Adolphi Family Trust v Chief Commissioner of State Revenue [2024] NSWCATAD 48 
  2. Relevantly, there were no distributions to any beneficiary in the relevant land tax year.

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