Talking Tax – Issue 73

Case law

Tay v Chief Commissioner of State Revenue [2017] NSWSC 338

In Tay v Chief Commissioner of State Revenue [2017] NSWSC 338, the plaintiff was assessed by the Chief Commissioner of the State Revenue for transfer duty and landholder duty on the transfer of ordinary shares in his late father’s company (Memocorp) which was registered in Australia as a real estate investment vehicle. Under the Will, the children were entitled to the residue of the estate from the net proceeds of sale of the assets.

It was decided between the siblings that instead of selling all of the property in the estate, the siblings would carry on the legacy of the businesses and requested that the executors distribute the shares in the companies amongst the beneficiaries to preserve their father’s legacy. A Deed of Family Agreement (DoFA) was entered into that provided what shares would be distributed and transferred to each sibling and for each sibling to transfer additional shares amongst themselves. In effect, Mr Tay was reliant on his mother and siblings surrendering their shares in Memocorp together with shares from the executors of the deceased’s interest in Memocorp which collectively formed his entitlement under the estate. On 28 May 2014 Mr Tay was assessed $25,988,568 in landholder duty and $1,960,940.70 in interest for acquiring a significant interest in a private landholder as a consequence of his acquisition of shares in Memocorp.

Mr Tay relied on section 163A(d) of the Duties Act 1997 (NSW) to argue that the acquisition was exempt from landholder duty on the basis that the interest was acquired solely as the result of the distribution of the estate of a deceased person, whether effected in the ordinary course of execution of a will or codicil or administration of an intestate estate or the result of a court order.

The Chief Commissioner argued that the share transfer was not solely acquired under the authority of the Will and not made pursuant to a trust, given the residue clause was to share in the net proceeds from sale. The Chief Commissioner said the transfer was made pursuant to the DoFA and not out of the ordinary course in the administration of an estate.

Justice White accepted that in substance the share transfer was a distribution from the estate. However, Justice White accepted the Chief Commissioner’s argument that the share transfer did not arise “solely” from the Will. Mr Tay’s acquisition of the shares was not solely as a result of the distribution of the estate of his late father as it was reliant on other residuary beneficiaries’ surrendering their shares and consenting to the transfer. The shares were acquired as part of a wider transaction than what could be said to be derived from the Will. As such, the exemption failed and the assessment was confirmed.

This case demonstrates the importance of business owners putting in place succession plans and provisions in their Will for their children to inherit shares in a business. It would be prudent for any beneficiaries wanting to enter into arrangements between themselves for the transfer of property to seek legal advice on the stamp duty implications arising from transaction. Taxpayers should be wary that if this same transaction were to occur now, it is highly likely that a taxpayer would also be liable for an additional 4% of duty for foreign purchaser surcharge.

ATO updates

Product Ruling: PR 2017/2

Income tax: deductibility of interest in relation to investment in units in the Macquarie Flexi 100 Trust issued on or before 30 June 2020

The ATO released Product Ruling PR 2017/2 (Ruling) which sets out the Commissioner’s opinion about the way in which various tax provisions apply to a particular investment. There is not anything particularly surprising or controversial in the Ruling, however there is an interesting analysis of an important but forgotten provision, section 51AAA of the Income Tax Assessment Act 1936 (ITAA 1936) which operates to deny deductions in certain circumstances.

Section 51AAA is a little known but potentially damaging provision. The irony is that it was originally connected with section 51(1) of the ITAA 1936, the general deduction provision. When the Income Tax Assessment Act 1997 (ITAA 1997) was introduced and section 8-1 replaced section 51(1) of the ITAA 1936 as the general deduction provision, section 51AAA remained in place.

The investment

The Ruling relates to an investment in the Macquarie Flexi 100 Trust (Fund) using a limited recourse loan (Investment Loan) made by Macquarie Specialist Investments Lending Limited (Loan Provider) and the grant of put options (Put Options) over the investment by the Loan Provider. It also covers any further loan that is used to fund the payment of interest on the Investment Loan (Interest Loan).

The Ruling applies to entities that invest in the scheme and intend to remain in the scheme until its completion (Investors).

Deductibility of interest

The Ruling allows the Investors to deduct interest charged on the Investment Loan under the general deduction provision in section 8-1 of the ITAA 1997 except to the extent that the interest is a cost of capital protection.

Section 51AAA

Section 51AAA of the ITAA 1936 will deny a deduction under section 8-1 of the ITAA 1997 broadly, where the only income you are going to earn is a net capital gain.

Paragraph 15(g) of the Ruling provides that section 51AAA of the ITAA 1936 will not apply to deny the Investors a deduction for the interest expense allowable under section 8-1 of the ITAA 1997.

The dominant purpose of the Investor is to derive an amount of assessable income other than capital gains from the investment that exceeds the total expenses incurred in connection with this investment.

An Investor expects that there will be assessable income derived by way of distributions of the net income of the Fund during the period of an Investor’s involvement. Under section 8-1 of the ITAA 1997, interest will be deductible despite the inclusion of any net capital gain in the Investor’s assessable income. Therefore, section 51AAA of the ITAA1936 does not apply to the Investors.

That is all fine, however, the Ruling appears to be inconsistent as to whether the Investor is expected to derive assessable income (other than net capital gains) or net assessable income (other than net capital gains).  In other words, it is unclear whether it is enough to prevent the application of section 51AAA of the ITAA 1936 if the Investor expects to receive assessable distributions over the expected term of the investment, even if these distributions are less than the total interest expenses likely to be incurred.  In our view, and based on the decision of the High Court in Fletcher v Federal Commissioner of Taxation (1991) 103 ALR 97, the taxpayer needs to show an intention and expectation to earn assessable income (other than net capital gains) in excess of deductible expenses to be incurred over the expected term of the investment.

Legislation and government policy

State Revenue Legislation Amendment Bill 2017

The State Revenue Legislation Amendment Bill 2017 (NSW) (Bill) passed Parliament without amendment on 4 April 2017. The Bill has been previously discussed in Talking Tax – Issue 67. It is an omnibus-style amendment Bill that makes a range of amendments to the Duties Act 1997 (Duties Act), Land Tax Management Act 1956 and the Payroll Tax Act 2007 including:

• amendments impacting SMSFs, Superannuation Funds and property
• amendments impacting trusts and property
• landholder duty amendments and
• general exemption amendments.

According to the Explanatory Note, the Bill proposes to amend the Duties Act to:

SMSFs, super funds and property

• provide for the charging of nominal duty (rather than ad valorem duty) on certain transfers of property to the custodian of a trustee of a SMSF where duty on an agreement for the sale or transfer of the property has been paid and the purchaser is the trustee
• extend existing exemptions for primary production land from duty when it is connected with transfers between family members of land used for primary production to (among other things) cover transfers from a SMSF where a member of the fund and the person to whom the land is transferred are family members
• provide for an exemption from duty connected with transfers of property between superannuation funds that are required to  be made under transitional arrangements relating to the Commonwealth’s MySuper reforms

Trusts and property

• clarify the matters for which the Chief Commissioner must be satisfied for nominal duty (rather than ad valorem duty) to be charged on transfers of trust property that are a consequence of the retirement or appointment of a trustee

Landholder duty amendments

• make further provision in relation to the aggregation of interests acquired by a person in a landholder for the purposes of liability for landholder duty
• ensure that the liabilities of a landholder are disregarded in determining whether a person has an interest in a landholder that makes the person liable for landholder duty
• make further provision in relation to the tracing of interests through linked entities of a unit trust scheme or company for the purposes of determining whether the scheme or company is a landholder
• extend an existing anti-avoidance measure, which ensures that certain land holdings transferred from a unit trust scheme or company within 12 months of a person acquiring an interest in the scheme or company are counted when determining whether the scheme or company is a landholder, so that the measure covers agreements for the sale or transfer of land holdings
• prevent the avoidance of liability for landholder duty by the use of arrangements that include combined put and call options (as an alternative to an agreement for sale or transfer)
• make further provision to prevent a person who enters into an agreement to purchase shares or units in a landholder avoiding landholder duty by opting to defer registration of the purchase
• extend the circumstances in which a trustee and another trustee, a natural person and a trustee, and a private company and a trustee are treated as being “associated” for the purposes of liability for duty, by tracing through to sub-trusts

General exemption amendments

• provide for an exemption from duty for the vesting of land occurring as a consequence of the merger of credit unions or of authorised deposit-taking institutions with mutual structures
• extend existing exemptions from duty on transfers following the break-up of marriages and de facto relationships to cover such transfers to trustees under the Bankruptcy Act 1966 (Cth) and

Other miscellaneous amendments

• make further provision for the test to be applied in determining the amount of duty that  a  person  is  liable  to  pay  as  a  result  of  a  tax  avoidance  scheme  that  is  of  an artificial, blatant or contrived nature.