Tribunal clarifies meaning of 'declaration of trust' in a duties context

On 19 December 2023, the ACT Civil & Administrative Tribunal (ACAT) decided the appeal in Commissioner for ACT Revenue v Leemhuis Investments Mitchell Pty Ltd [2023] ACAT 83 (Leemhuis), dismissing the Commissioner for ACT Revenue’s (Commissioner) appeal in favour of the taxpayer’s cross-appeal. 

The decision, which reversed ACAT’s original position regarding the relevant meaning of ‘declaration of trust’ under section 6 of the Duties Act 1999 (Duties Act)^[1], resulted in the assessment of duty to a different entity, for a materially lesser amount, than had been posited by the Commissioner.

Summary of Facts

The background facts of material relevance to the decision in Leemhuis can be summarised as follows:

• On 16 March 2010, AUL Investments Pty Ltd as trustee for the AUL Mitchell Trust (AUL) and PSL Investments Mitchell Pty Ltd as trustee for The PSL Mitchell Trust (PSL) entered into a commercial partnership by way of written instrument (Partnership Agreement);
• Two natural persons (who were father and son) owned and controlled the respective trusts:
  • AUL was owned and controlled by Alex Peter Leemhuis (Alex), the father; and
  • PSL by Peter John Leemhuis (Peter), his son.
• On the same day, an agreement was made in writing whereunder AUL and PSL appointed Leemhuis Investments Mitchell Pty Ltd (LIM)^[2] as Manager to manage the partnership and act as their agent for the purposes of the Partnership Agreement (Management Agreement);
• Sometime in July 2010, LIM acquired a property in the Canberra suburb of Mitchell. The partnership subsequently carried out a development on the property and, in May 2017, the property was subdivided into four units;
•  In early 2017, David Leemhuis, Peter’s brother, expressed an interest in purchasing Units 3 and 4. Whereas Peter was willing to sell his interest in the partnership, Alex wished to retain his. Peter and Alex agreed to sell Units 3 and 4 to a company controlled by David, and the following steps were undertaken in connection with the sale.
  • It was agreed between Alex and Peter that Peter, through PSL, would receive the majority of the cash proceeds (amounting to 50% of the net Partnership assets) and Alex, through AUL, would become beneficially entitled to Units 1 & 2;
  • On 1 September 2017, LIM entered into contracts to sell Unit 3 for $594,300 and Unit 4 for $1,394,400 to AHB Property Holdings Pty Ltd, a company controlled by David. Pursuant to an agreement reached between Alex and Peter, the net proceeds of sale – approximately $1.7 million – were paid to either PSL or Peter; and
  • On 8 August 2018, Peter transferred his shares in LIM to Alex, whereupon the partnership was dissolved. Peter remained a director of LIM alongside Alex until 18 March 2020.
• Characterising the preceding steps as a declaration of trust by LIM over Units 1 & 2 in favour of AUL, the Commissioner assessed LIM^[3] with duty, penalty and interest totalling $156,248.17^[4], which was assessed on the basis of 100% of the unimproved value of the two units; and
• LIM objected to the Commissioner’s assessment, which the Commissioner disallowed. LIM subsequently appealed to ACAT for a review of the Commissioner’s objection decision.

Original Decision

On 28 February 2023, Senior Member Foley decided partly in favour of the Commissioner, finding that there had been a declaration of trust on which ad valorem duty was payable pursuant to section 6 of the Duties Act. Specifically, AUL’s equitable share in the fixed trust created jointly by the Partnership Agreement and Management Agreement increased by 50%, rendering LIM liable to pay ad valorem duty on 50% of the unimproved value of Units 1 and 2, corresponding to the 50% increase to its equitable interest^[5].

In reaching his decision, Senior Member Foley placed considerable weight on the NSW Court of Appeal judgment in Chief Commissioner of State Revenue v Benidorm Pty Ltd [2020] NSWCA 285 (Benidorm), wherein it was held that the scope of the meaning of a ‘declaration of trust’ in a duties context may differ considerably from its general law meaning in equity, particularly in terms of its greater breadth.

For further information regarding the Original Decision, please refer to RSM Australia’s Tax Insight dated 11 April, 2023.

Appellate Decision

The Original Decision was appealed to a reconstituted tribunal comprising Presidential Member McCarthy and Senior Member Orlov.

In the Appellate Decision, having regard to the relevant facts, and adopting an alternative construction of Benidorm, it was held that there was no ‘declaration of trust’ because the statutory test prescribed by section 6 of the Duties Act was not satisfied. Specifically:

• LIM was unable to make a ‘declaration of trust’ as the beneficial interest in Units 1 and 2 was not property vested or to be vested in LIM at any time before, on, or after, the relevant date. LIM could not divest itself of a beneficial interest in land that it did not have^[6]; and
• Neither Peter nor Alex, as the only directors of LIM, used language at any point in time which explicitly or implicitly expressed an intention that LIM held or would hold the beneficial interest in Units 1 and 2 on trust for AUL.

Instead, it was held that the effect of the transfer of the sale proceeds from Units 3 and 4 to PSL (or at PSL’s direction) and the dissolution of the partnership was that Units 1 and 2 continued to be held by LIM as manager of the partnership as trustee on a bare trust for the extant partner absolutely under the existing trust and that no new trust came into existence.

The end result was that ad valorem duty of $15,691.95 for the transfer of a partnership interest was payable by AUL and the Commissioner’s duty assessment of $156,248.17 to LIM was set aside.

Implications

This duties case is a careful reminder for taxpayers to check the duty provision under which a duties assessment is issued. In this case, the Commissioner incorrectly assessed the ‘dutiable transaction’ as a ‘declaration of trust’^[7] and not as a ‘transfer of a partnership interest’. The difference in the ad valorem transfer duty over assessed was $69,833.05.

FOR MORE INFORMATION

If you would like to discuss the potential implications of Leemhuis, or have any other trusts or change in beneficial ownership questions, please contact Mira Brewster, Sam Mohammad, or your local adviser.

[1] Leemhuis Investments Mitchell Pty Ltd v Commissioner for ACT Revenue (Administrative Review) [2023] ACAT 12.

[2] Alex and Peter each owned half the shares in, and were the directors of, LIM.

[3] Pursuant to section 12 of the Duties Act, duty assessed under Chapter 2 thereof is payable by the transferee, whereas pursuant to section 6, in the case of a declaration of trust, the transferee is taken to be the person declaring the trust.

[4] This aggregate amount comprised duty of $85,525, 50% penalty tax of $42,762.50 and interest of $27,960.67.

[5] As noted above, the Commissioner’s assessment had been computed on the basis of 100% of the unimproved value of the two units.

[6] Garrett v L’Estrange [1911] HCA 67.

[7] On the basis that the transaction resulted in an alteration to AUL’s equitable interest in partnership interests from 50% to 100% in the two unsold units