Revenue NSW Bill passed – Extending Duty on Trusts, Foreign Surcharges & Tax Integrity

The State Revenue and Fines Legislation Amendment (Miscellaneous) Bill 2022 was passed by the New South Wales Legislative Council on Wednesday 11 May 2022. Whilst the Bill makes numerous ‘miscellaneous amendments’ to state revenue legislation, of particular concern are:

• significant amendments to the Duties Act 1997 (NSW) (Duties Act), which widen the duty base to cover changes in beneficial ownership and acknowledgements of trusts;

• amendments to the Land Tax Act 1956 (NSW) (Land Tax Act) which tighten the ‘use and occupy’ requirement for the principal place of residence (PPR) exemption from surcharge land tax for permanent residents; and

• amendments to the Taxation Administration Act 1996 (NSW) (TAA) to enhance integrity of NSW tax compliance, including:

  • new general provisions relating to tax avoidance schemes;

  • penalties to deter the promotion of tax avoidance schemes; and

  • new penalty tax provisions.

These amendments will commence on the date of assent.

Revenue NSW has released a media statement (Media Statement).

A comprehensive Legislative Amendment Bill 2022 Technical Guide will be available on the Revenue NSW website once the bill receives assent.

Change of beneficial ownership

Under the current provisions of the Duties Act, duty is chargeable on certain transactions of dutiable property in New South Wales.

The amendments, which are based on similar provisions in Victoria, make any other transaction 'that results in a change in beneficial ownership’ (other than an ‘excluded transaction') dutiable.

The person obtaining the beneficial ownership, or whose beneficial ownership is increased, will be liable to pay duty on the dutiable value of the property held.

The broad range of transactions (now contained in section 8(3)) that are caught by this amendment, include the creation or extinguishment of dutiable property, a change in equitable interests in dutiable property or dutiable property becoming, or ceasing to be, the subject of a trust.

The Minister, in his second reading speech, advised that the purpose of the amendments is to address arrangements which avoid duty “by structuring affairs such that, while there is no change in the legal ownership of dutiable property, the beneficial ownership changes”.

Hence, previously non-dutiable transactions, such as a change of entitlements of beneficiaries of a fixed non-unitised trust will be dutiable.

Advisors and clients should take care and seek advice when effecting changes of entitlements to trusts.

In the Media Statement, Revenue NSW have indicated a Commissioner’s Practice Note (CPN) will be published soon.

Acknowledgement of Trust

The Bill has inserted the definition of ‘acknowledgement of trust’ under section 8AA, being the making of any statement that:

• purports to be a declaration of trust, but

• merely has the effect of acknowledging that identified property vested, or to be vested, in the person making the statement is already held, or to be held, in trust for a person or purpose mentioned in the statement.

This amendment is made in direct response to the decision in Chief Commissioner of State Revenue v Benidorm Pty Ltd [2020] NSWCA 285. In Benidorm, the New South Wales Court of Appeal held that a document which did not effect a transaction, but merely acknowledged an existing trust over an Apartment in Sydney, was not liable to duty under the Duties Act.

Emphasising the focus of the Duties Act towards “transactions” rather than “instruments”, the Court held an instrument is not dutiable if it does not have any operative effect and does not otherwise amount to a ‘transaction’ within the meaning of section 8(1)(b) of the Duties Act.

As suggested by the Minister in the second reading speech, the policy objective for the amendment is to effectively overcome the decision in Benidorm and “ensure that a declaration of trust continues to be taxed in the same way that it was taxed prior to the decision”.

A declaration of trust can arise by a deed of trust or a statement of some kind that gives rise to trust obligations. A common example of such a statement, includes a description of a purchaser on a contract of sale, A as trustee for B.

Subject to the release of the regulations following assent of the Bill, care should be taken to ensure double duty does not arise since section 18 does not provide any specific relief.

Revenue NSW have indicated in the Media Statement that a revenue ruling will be released shortly.

Changes to ‘use and occupy’ for PPR exemption for surcharge land tax

Section 5B of the Land Tax Act allows a PPR exemption from surcharge land tax for permanent residents. The PPR exemption applies to residential land that they "use and occupy" as their PPR for a continuous period of 200 days in the land tax year.

The amendments require that permanent residents be physically in Australia for the 200‑days, except in limited circumstances where a brief period of absence may be permitted at the discretion of the Chief Commissioner (such as attending a funeral overseas). The Chief Commissioner is set to issue guidelines outlining the limited circumstances where a period of absence may be allowed.

Tax Integrity Measures - TAA

The new amendments replace the existing general anti-avoidance regime which have historically been focused on duties transactions and inserts a new regime into the TAA applying to all NSW state taxes. These rules aim ‘to deter schemes to avoid tax liability’.

Provisions to prohibit the promotion of tax avoidance schemes, based on the Federal Government’s promoter penalty laws introduced in 2006, have also been introduced. These are aimed at a person who ‘markets’ a tax avoidance scheme or ‘otherwise encourages the growth of the scheme or interest in it’. 

The amendments also provide that the Chief Commissioner will publish tax relief guidelines on when no penalty tax is payable for a tax default. The Media Statement indicates that a CPN will be available soon.

Other Amendments

A welcome amendment brought about under the Bill is the extension of the duty exemption on primary production land transfers between family members. This exemption was previously only available for transfers to individuals, but now applies to land transferred to a company, trust, superannuation fund or other entity controlled by a family member.

If you have concerns about how these changes might affect you, please contact us for advice or assistance:

Authors - Lisa To & Hayley Constantine