Changes to equitable interests in partnerships may trigger ad valorem duty

On 28 February 2023, the ACT Civil & Administrative Tribunal (ACAT) decided in favour of the Commissioner for ACT Revenue (the Commissioner) in relation to a matter described by Senior Member Professor Foley as “one of some complexity”.

The decision in Leemhuis Investments Mitchell Pty Ltd v Commissioner for ACT Revenue (Administrative Review) [2023] ACAT 12 (Leemhuis) affirms that an increase or change to a partner’s equitable interest in partnership property (in this case land) to be held on trust by the agent of the partnership can constitute a ‘declaration of trust’ for the purposes of the Duties Act 1999 (ACT) and thereby trigger ad valorem duty.  

THE FACTS

The critical facts of Leemhuis can be summarised as follows:

A. On 16 March 2010, the corporate trustees of each of the AUL Mitchell Trust (AUL) and the PSL Mitchell Trust (PSL) formed a partnership for the purposes of acquiring and holding for investment commercial properties or businesses (the Partnership Agreement);

B.    On the same day, a Commercial Management Agreement (the Management Agreement) was executed between the partners and Leemhuis Investments Mitchell Pty Ltd (LIM) providing, inter alia, for the appointment of LIM as manager and authorised agent of the partners. The shares in LIM were held equally between the controlling individuals of AUL and PSL;

C.    On 20 July 2010, LIM, as agent of the partners, acquired land. It was not disputed that this acquisition created a trust for the benefit of the partners, although the parties to the proceedings disagreed as to whether this trust was a fixed trust;

D.    On 19 May 2017 the land was registered dividing it into four separate lots – Units 1, 2, 3 and 4. On 1 September 2017, LIM entered into a contract for the sale of Units 3 and 4 that was settled on 19 September 2017 with net proceeds of sale of approximately $1.7 million;

E.    The net proceeds of sale were paid either to PSL or its controlling individual, whereafter the controlling individual of PSL transferred his shares in LIM to the other controlling individual and took other administrative steps to dissolve the partnership; and

Following these steps, the remaining assets (Units 1 and 2) were held by LIM solely for AUL.

THE DECISION

Notwithstanding submissions by LIM as applicant to the ACAT that there was no ‘declaration of trust’ in connection with steps (e) and (f), which is a prerequisite to a liability for ad valorem duty¹, the ACAT held that, as a result of steps (e) and (f), there had been an alteration to AUL’s equitable rights in partnership interests from 50% to 100%,  which constituted a declaration of trust on which ad valorem duty is payable pursuant to section 8 of the Duties Act 1999 (ACT). Specifically, AUL’s equitable share in the fixed trust created jointly by the Partnership Agreement and Management Agreement increased by 50%.  Refer to point 63 of the judgment.

LIM was liable to pay ad valorem duty on 50% of the unimproved value of Units 1-2, being the 50% equitable interest increase.

In reaching its decision, the ACAT relied significantly on the NSW Court of Appeal decision in Chief Commissioner of State Revenue v Benidorm Pty Ltd [2020] NSWCA 285 wherein it was held that the meaning of a ‘declaration of trust’ for the purposes of section 8 of the Duties Act 1999 (ACT) is broader than the general law meaning of the term in equity.

OBSERVATIONS

Leemhuis affirms that, notwithstanding the finding of the High Court in Commissioner of State Revenue v Rojoda Pty Ltd (2020) 376 CLR 246 that the interest of a partner is effectively a chose in action, an alteration to an equitable share in a fixed trust created by a partnership or management agreement can constitute a declaration of trust and thereby trigger liability to ad valorem duty. Partners should therefore be cautious when considering any changes to partnership interests in land.

Other key observations in respect of Leemhuis include that, for the purposes of the Duties Act 1999 (ACT):

•    A declaration of trust does not need to be in writing and can instead be created by circumstance; and
•    There need not be a new trust created or an express declaration in order for there to be a ‘declaration of trust.

For more information

If you are concerned that the decision in Leemhuis may apply to you, or have any other duty-related questions, please contact Mira Brewster, Sam Mohammad or contact your local adviser.