The State of State Taxes in NSW

This episode discusses the assessment of stamp duty, land tax and payroll tax, as well as the process for objecting to assessments and seeking merits review in the Supreme Court or NCAT.  The process of obtaining private rulings is also considered. It also considers the effect of COVID-19 on tax policy, specifically concessions to land tax and payroll tax.

Commissioner’s practice note: Foreign surcharges and discretionary trusts (CPN-004 V2)

Section 70 of the Payroll Tax Act 2007 (NSW)

Section 50 of the Corporations Act 2001 (Cth)

Section 89, Part 10 of the Taxation Administration Act 1996 (NSW)

• CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98: the Court found that the entitlements of the unit holders in a trust did not confer proprietary interest in the underlying land and thus did not make the unit holders owners for land tax purposes.
• Sayden Pty Ltd v Chief Commissioner of State Revenue [2013] NSWCA 111: This case concerns a property unit trust where the units were held by a family trust. The trust deed was amended to mirror the text of s 3A(3B) of the Land Tax Management Act 1956 (NSW). The Commissioner issued a land tax assessment on the basis that the property unit trust was considered a special trust; whereas the taxpayer argued the amendment was sufficient to regard the trust as a fixed trust, and therefore it was entitled to the benefit of the tax-free threshold for land tax purposes. This Court of appeal found for the taxpayer.

The Chief Commissioner administers:

• land tax;
• transfer / stamp duty;
• first homeowner grants;
• unclaimed money;
• fines and fees, i.e. penalty, notices, penalty reminder notices;
• payroll tax; and
• miscellaneous, such as mineral royalties.

Land tax: is an annual tax levied at the end of the calendar year. It is based on the combined value of all taxable land held by the land owner. There are exemptions, including: (1) a land owner’s principal place of residence; (2) where the land is used for the dominant purpose of primary production; and (3) land with a taxable value below the land tax threshold. Any changes to land holdings in the current year will only affect how much is levied the following year.

Primary production land: under section 10AA of the Land Tax Management Act 1956 (NSW), rural land is exempt from taxation if it is used for primary production. Section 10AA(3) lists the instances when land is used for the dominant purpose of primary production which includes:

1. cultivation;
2. maintenance of animals for sale;
3. commercial fishing or farming of fish, molluscs, crustaceans or other aquatic animals; or
4. the keeping of bees for the purpose of selling their honey, or
5. a commercial plant nursery; or
6. the propagation for sale of mushrooms, orchids or flowers.

Foreign person surcharge; also known as surcharge purchaser duty, which is an additional duty applicable to foreign purchasers who must pay an additional 8% surcharge based on the value of the land.

‘Takers in default’ comes up in the context of a discretionary trust; it refers to a beneficiary identified in the trust deed for a discretionary trust to receive the income and capital of that trust if the trustee doesn’t exercise its powers to give that income and capital to anyone else. This is important in a discretionary trust because none of the beneficiaries have any right to anything, and distribution is entirely up to the trustee. A taker in default is designated to receive any income or capital that the trustee doesn’t decide to distribute to any other beneficiary.

Payroll tax: is a tax on wages in NSW; if taxable wages exceed $1 million, payroll tax will be payable. Companies can be grouped under section 70 of the Payroll Tax Act 2007 (NSW) where they are related bodies corporate.

Private rulings: can be issued by the Chief Commissioner in response to requests by taxpayers, clients, or their representatives, seeking clarification on the interpretation of the legislation for a specific situation encountered by a particular taxpayer. Unlike private rulings at Federal level which are published on the ATO Legal Database, Revenue NSW does not publish rulings.

• Land tax: Revenue NSW has implemented measures to provide relief to commercial and residential land owners with a leasing arrangement or a rental arrangement with a tenant who has an annual turnover of up to $50,000,000, that land holder may be entitled to a reduction or tax relief up to 25%. Regarding the relief measures, it’s only rent forgiveness that is relevant (i.e. the deferral is not relevant); and
• Payroll tax: payroll tax customers have the option of deferring their payroll tax payments until October 2020.

Land tax: be mindful that land tax is prospective; any changes to base documents, such as trust deeds, or the need for a private ruling must be done prior to 31 December.

Primary production exemption: The exemption applies on a yearly basis which means that it could change over time. The landowner bears the onus of proving that the dominant use is primary production.  The activities of third parties will be relevant.

Objections: a taxpayer can object to a notice of assessment, but under Section 89 of the Taxation Administration Act 1996 (NSW) must do so no later than 60 days after service of the notice of assessment. Once the objection has been lodged, the Chief Commissioner has 90 days to finalise that objection. Once finalised, the objection is either allowed, partly allowed, or disallowed. If it’s disallowed or partly allowed, the taxpayer has the option of seeking external review at NCAT or the Supreme Court.

NCAT or Supreme Court?: Generally, NCAT will receive objections in regards to smaller size claims regarding land tax, stamp duty (on the lower end) and first home owner grants, whereas objections related to complex stamp duty and payroll tax are usually pursued in the Supreme Court.

Commissioner’s Practice Note: Foreign surcharges and discretionary trusts (CPN-004v2)

National Code of Conduct on Commercial Tenancies – Leasing Principles

As the old saying goes there are two certainties in life: death and taxes, and in our federal system of government one of those certainties is two-fold in the form of taxes, state and Commonwealth. But there are just as many pitfalls to look out for in state revenue as there are in Commonwealth taxes. Joining us today on Hearsay to talk about some of those pitfalls and how to avoid them is Oliver Berkmann from 6 St. James Hall Chambers. Oliver thanks so much for joining us today on Hearsay.

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TIP: Land tax is an annual tax levied at the end of the calendar year. It’ s based on the combined value of all taxable land held by the taxpayer, not on each individual property. There are exemptions however, including where the land is the taxpayer’s principal place of residence, and where the land is a farm, which is often referred to as primary production land. Also exempt is land with a taxable value below the land tax threshold, which is published in the Government Gazette annually and which in 2020 is $734,000.  Any changes to the taxpayer’s land holdings in the current year will only affect how much is levied the following year. Revenue NSW offers a land tax calculator on their website, and we’ll include a link to this calculator in the show notes.

So a lot of people don’t understand land tax, how it works, how it operates, whether you’re liable or not, in particularly some of the areas that we find there’s quite a bit of need for advice is if it’s a discretionary trust and how to structure your trust in a particular way where you’re fixed trust, what it means if you’re not a fixed trust, how superannuation trusts are treated, how unit trusts are treated, and in particularly the classification of your trust within the context of the foreign surcharge provisions which is an additional land tax or an additional duty depending on whether that entity is a foreign person or not.

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TIP: That case Oliver just mentioned is the case of CPT Custodian Pty Ltd v The Commissioner of State Revenue, a 2005 High Court case. In that case, the court found that the entitlements of the unit holders in a trust didn’t confer proprietary interest in the underlying land and thus did not make the unit holders owners of the land for land tax purposes. The medium neutral citation to the case will be included in our episode summary.

And the reason why they’re special trust is because the unit holders don’t have that equitable ownership of the land itself. However, there’s an amendment that needs to be inserted into a unit trust deed whereby if you insert what the chief commissioner refers to as the relevant criteria, so if you have a present entitlement to income subject to the payment of proper expenses by the trustee, and you have a present entitlement to capital, and you can wind up the trust, then those entitlements can’t be removed or restricted by the exercise of discretion, then that trust will be deemed to be a fixed trust for the purposes of land tax. And it’s a simple process you can usually put in the clause ‘notwithstanding any other clause within this deed’ and then basically mirror the legislation, which is under section 3A, 3B of the Land Tax Management Act, and by inserting that, that overrides any conflicting clauses within the trust deed and there’s a Court of Appeal decision of that called Sayden and Chief Commissioner if anyone wants to read.[2]

TIP: That case is Sayden Pty Ltd v The Chief Commissioner of State Revenue – that case concerned a land-owning unit trust where the units were held by a family trust. The trust deed was amended, as Oliver has explained, to closely mirror the text of s 3A(3B) of the Land Tax Management Act 1956 (NSW). The Commissioner issued a land tax assessment on the basis that the property unit trust was considered a special trust. The taxpayer essentially argued that the amendment to the trust deed was sufficient to regard the trust as a fixed trust, and therefore it was entitled to the benefit of the tax-free threshold for land tax purposes. This Court of appeal found for the taxpayer. The medium neutral citation Sayden Pty Ltd v Chief Commissioner of State Revenue will be included in our episode summary.

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Tell me a bit about the foreign person surcharge? Because that’s come up now in the context of both land tax and transfer duty, what is a foreign person for that purpose?

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TIP: Now the term ‘takers in default’ comes up a couple of times throughout this episode in the context of a discretionary trust. In simple terms, it refers to a beneficiary identified in the trust deed for the discretionary trust to receive the income of that trust if the trustee doesn’t exercise its powers to give that income to anyone else. This is important in a discretionary trust because the trust is, well, discretionary – none of the beneficiaries have any right to anything, and it’s entirely up to the trustee who gets what.  But if the trustee doesn’t distribute the income of the trust, it’s taxed at a much higher rate, and depending on the terms of the trust deed, it might even be a breach of trust – so a taker in default is designated to receive any income that the trustee doesn’t decide to distribute to any other beneficiary.

So for example, if you had a discretionary trust where the terms were Joe Blow as trustee and then Joe Blow’s spouse and children and any charity or any other trust that Joe Blow or his family is involved with or controls, then that in itself could trigger the provisions for foreign surcharge. To the extent that if you have a beneficiary for example which is a corporation, it would need to be an Australian corporation or incorporated in Australia. Or if you have a charitable institution as a taker in default or as a beneficiary, it would need to be an Australian charity to that extent which is why Revenue NSW implemented some legislation recently to, for people to amend their discretionary trust deeds in order to cater for these circumstances, in order to negate the operation of the foreign surcharge provisions.

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TIP: CPN-004 is a reference to the Commissioner’s Practice Note on Foreign Surcharges and Discretionary Trusts, which was issued in July 2020. That Practice Note outlines how surcharge purchaser duty and surcharge land tax will be applied in certain situations where land is held by a discretionary trust. We’ll include a link to the Practice Note in the show notes.

If you have any takers in default, then you also need to have a clause within there that prevents any distribution to occur to any such persons who are foreign persons. So one of the ways people have been doing this is somewhat like the unit trust provisions and the relevant criteria in inserting an overriding clause, or I mean it gets a bit complicated, but generally speaking if you’ve got a main beneficiary you might want to look at removing them if they’re a main beneficiary, and for the takers in default you want to have an exclusion clause which makes them as an exclusive beneficiary or prevents under no uncertain terms that no distribution can be made to those beneficiaries. And moving forward, those amendments have to be essentially locked in. So once you exclude such persons as being a beneficiary, the trust deed must provide that you can’t then go and change that. So for example for land tax purposes it’s as at midnight 31st December so you can’t have a clause with that trust deed which says as at midnight 31st December these people aren’t foreign persons and then the 1st of January it changes and goes back and forth. So it really has to be irrevocable in terms of preventing any distributions to any foreign persons now and in the future.

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TIP: Oliver is referring here to section 10AA of the Land Tax Management Act 1956 NSW which provides at subparagraph (1) that rural land is exempt from taxation if it is used for primary production. Subparagraph 3 of that section defines land used for primary production as land where the dominant purpose for which it is used is one of a number of specified primary production uses such as (a) cultivation of crops; or (b) maintenance of animals for sale.

So it’s an exercise whereby you have to weigh up all the physical uses of the land and determine which one is most dominant. And this often pops up as an area of dispute because you might have a situation where you’ll have a block of land being used as farm for many many many years, but because of the rezoning of the land and because the landowner wishes to develop part of that land into residential blocks or houses or what have you, then the exemption is lost. Because the nature and the intensity of the residential use, the commercial use, the development use, exceeds that of the primary production use.

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TIP: Corporations can be grouped together under section 70 of the Payroll Tax Act 2007 where they are related bodies corporate, which is defined by section 50 in the Corporations Act 2001 (Cth). A corporation will be grouped with another corporation where it either: holds more that 50% of the issued share capital of that other corporation, if it controls the board of that corporation, or if it controls more than 50% of the voting shares in that corporation.

And it’s not possible to ungroup those. The Chief Commissioner has discretion to ungroup certain groups. Entities can be grouped for example, through trusts, they can be grouped with common employees. So for example if you’re a company and I’m a company but we have a common employee, so we have an employee or employees that provide services to both of us, some circumstances we can be grouped. In other circumstances it could be controlling the interest of companies, it could also be relationships between certain businesses as well. So there’s a whole range of provisions that come into play where certain entities can be grouped and you only get a threshold per group.

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Now we’re recording this in August 2020 as I said earlier and we couldn’t talk about this area without talking about the effect of the COVID-19 pandemic on tax policy settings because COVID-19 has had an unprecedented and sudden impact on the Australian economy and tax settings both at the Commonwealth and state level are one of those levers that government can pull to kind of ameliorate the effect of that. Can you tell me a bit about some of the concessions or temporary measures that have been made at the state level as a result of COVID-19?

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TIP: A quick aside now about commercial rent relief. I’m referring here to the National Code of Conduct on Commercial Tenancies. The National Code applies to tenants with a turnover less than $50 million and who are entitled to receive payments under the JobKeeper program. The code gives direction to landlords on considering requests for rent relief by commercial tenants who are experiencing financial stress as a result of the COVID-19 pandemic. The Code restricts landlords from taking some types of enforcement action under leases against these affected tenants. It also prevents landlords from terminating leases or drawing on a tenant’s security, like their bond, during the pandemic period (which is the period during which the JobKeeper payment regime is available), or any reasonable recovery period following the pandemic. For eligible tenants, landlords are required to reduce the rent payable under the lease, in the form of either a waiver or a deferral, on a case by case basis, in proportion to the reduction of the tenant’s turnover. So, if a business has suffered a 30% reduction in turnover, which would entitle it to participate in the JobKeeper scheme, then the rent will be reduced by the same proportion – 30%. And at least 50% of the rent reduction, or 15% of the rent in our present case, has to be in the form of a waiver, in order words, that it’s not repayable later with the balance being deferred until after the end of the COVID-19 pandemic period.

And so I suppose those of our listeners who are advising commercial landlords on those rent relief arrangements need to be aware that although as far as the mandatory code is concerned, part of that rent relief can be made by way of deferral and part of it can be made by way of forgiveness, it’s only that part made by way of forgiveness that’s relevant so far is that land tax concession is concerned.

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TIP: Private rulings can be sought from the ATO at the Commonwealth level and from Revenue NSW at the state level. A private ruling is issued by the Chief Commissioner of State Revenue in response to requests by taxpayers, clients, or their representatives, seeking clarification on the interpretation of legislation for a specific situation encountered by that particular taxpayer. These rulings do not have the force of law, but they’re issued to assist taxpayers in determining their tax liability or clarify the interpretation of tax laws.

As someone who’s had quite a bit to do with the private ruling process from both sides of the table I suppose, tell me a little bit about how that process gets started. When is it most appropriate to seek a private ruling?

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TIP: These timeframes come from section 89 of the Taxation Administration Act 1996 which states that an objection must be lodged with the Chief Commissioner of State Revenue no later than 60 days after the date of service of the notice of assessment.

There is a provision involved whereby you can ask for an extension of time in order to lodge an objection late, but that’s subject to the discretion of the Chief Commissioner. So you may or may not convince the Chief Commissioner to accept an objection late. There’s a variety of factors that come into play; in particular what comes into play is the length of the delay. So whether you’re just outside the 60 days or alternatively whether you’re years outside of the 60 days. And in particular whether or not you have an arguable case. So whether on the face of it, the assessment is issued incorrectly or the decision was made incorrectly. Once you’ve lodged an objection, the chief commissioner has 90 days to finalise that objection. If it’s not finalised within 90 days, you can then seek a review at NCAT or the Supreme Court but you need to give them 14 days’ notice before doing so. Once the objection is finalised, it’s either allowed, partly allowed, or disallowed. If it’s disallowed or partly allowed, you then have the option of seeking an external review at NCAT or the Supreme Court.

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