On 23 March 2022, the State Revenue and Fines Legislation Amendment (Miscellaneous) Bill 2022 (NSW) was introduced into the New South Wales Legislative Assembly. The Bill operates to broaden the existing duty base and anti-avoidance and penalty regime in NSW.

Whilst there is some good news with respect to refunds of foreign purchaser duty and land tax in certain circumstances and broadening duty relief for primary production land transfers between family members, other amendments will increase both the scope and administration of NSW state taxes. These include:

• imposition of duty on transactions which result in a change of beneficial ownership of dutiable property
• imposition of duty on acknowledgment of trusts whereby the statement of acknowledgment of a trust over dutiable property is deemed a declaration of trust over dutiable property
• insertion of a new anti-avoidance regime within the Taxation Administration Act (TAA) applying broadly to all NSW state taxes, including the introduction of promoter penalties
• doubling of the penalty tax payable from 25% to 50% for a tax default by a significant global entity (SGE) as that term is defined by the Income Tax Assessment Act 1997 of the Commonwealth.

Change of Beneficial Ownership

The proposed amendments, which have been modelled on provisions contained within the Duties Act 2000 (Vic), broaden the tax base from transactions that are currently dutiable (i.e. a declaration of trust, transfer or sale) to capture transactions involving a change in beneficial ownership and include:

• the creation of dutiable property
• the extinguishment of dutiable property
• a change in equitable interest in dutiable property
• dutiable property becoming the subject of a trust
• dutiable property ceasing to be the subject of a trust.

The provisions have broad application and may apply to impose duty on:

• transactions involving bare trusts
• changes in beneficial interest in dutiable property held by a nominee
• change of entitlements of beneficiaries of a fixed trust

The person who obtains beneficial ownership, or whose beneficial ownership is increased, will be liable for duty on the dutiable value of the property held.

Certain transactions which are not intended to be captured under these provisions comprise of:

• the purchase, gift, allotment or issue of a unit in a unit trust scheme
• the cancellation, redemption or surrender of a unit in a unit trust scheme
• the grant, renewal or variation of a lease for no consideration
• the grant of an easement or profit a prendre for no consideration
• a change in a trustee’s right of indemnity.

The amended provisions will only apply to transactions that occur after the proposed provisions commence. Furthermore, the provisions will not extend to transactions arising after the commencement date if the transaction occurs in accordance with an agreement or arrangement entered into before the commencement date.  

Acknowledgement of Trust

The Bill also proposes charging duty on any statement that:

• purports to be a declaration of trust, but
• merely acknowledges that identified property is already held, or to be held, in trust.

Effectively, this amendment will overcome the decision in Chief Commissioner of State Revenue v Benidorm Pty Ltd[1].The Court held that a declaration of a trust over dutiable property must have a causal effect on the transaction for duty to arise. Merely acknowledging the existing state of affairs in place was not sufficient.

The provision refers to a statement that purports to be a declaration of trust. Presumably an amendment and / or restatement of trust that declares that it does not amount to a new declaration of trust is not captured. However, trustees should be careful executing documents that contain wording capable of being considered as a declaration of trust.

Foreign surcharge purchaser and land tax surcharge refund

The Bill proposes to introduce a refund for an Australian corporation, where the land acquired is used by the transferee, after the completion of the transfer, wholly or predominantly for commercial or industrial purposes.

Currently the Duties Act and Land Tax Act provide for refunds of surcharge purchaser duty and land tax for an Australian corporation where the land is applied to the construction of new homes or the subdivision of land into lots for new residential homes.

Duty and land tax may be refunded only if an application for the refund is made:

• within 12 months after the start of the use of the land wholly or predominantly for commercial or industrial purposes, and
• no later than 10 years after competition of the transfer of the residential-related property to the Australian corporation.

Intergenerational transfers of primary production land

At present, an exemption from duty on primary production land transfers between family members applies if the transferee is an individual. The amendments extend the exemption to apply to certain transfers to entities including a superannuation fund, a family discretionary trust, a private unit trust scheme or a proprietary limited company. 

For the exemption to apply, the family member must be the individual directing the transferee. In addition, if the transferee is a proprietary limited company or a trustee of a discretionary trust or of a private unit trust scheme, the family member must maintain a minimum 25% interest in the transferee for 3 years after the transfer. 

Introduction of a new anti-avoidance regime and promoter penalties

The current anti-avoidance provisions, focusing on tax avoidance schemes of an “artificial, blatant or contrived nature” under Chapter 11 of the Duties Act are to be removed. In its place, a new regime will be inserted into the TAA.

The proposed amendment will have broader application as the statement of object of the Chapter no longer refers to ‘artificial, blatant or contrived schemes’. The object is now merely to ‘deter schemes to avoid tax liability’. “Avoid” is broadly defined and can include the postponement of tax.

Additionally, provisions to prohibit the promotion of tax avoidance schemes will also be introduced. This aims to capture persons promoting a tax avoidance scheme if that person “markets the scheme or otherwise encourages the growth of the scheme or interest in it”.  A person will not be considered a promoter under the provisions if they are merely:

• providing advice about the scheme; or
• distributing information or material about the scheme prepared by another person

In contravening the provision, a person may be issued with an order by the Supreme Court, upon application by the Chief Commissioner, to pay the State a civil penalty up to:

• 10,090 penalty units or $1,109,900 for individuals
• 50,450 penalty units or $5,549,500 for corporations

Penalty Tax

The penalty tax rate for significant global entities (SGEs) within the meaning of the Income Tax Assessment Act 1997 is set to double from 25% to 50% for tax defaults.

How can SW help?

SW provides a range of expert services to private individuals and businesses for specialist taxes such as stamp duty. Reach out to our team to explore how we can help your individual circumstances such as:

• advice on the NSW duty implications of proposed transactions
• assist with seeking refunds for foreign purchaser duty or land tax if the land is predominantly used for commercial or industrial purposes
• assist with transfers of primary production land between family structures.

Contributors

Robert Parker

Carmelin De Francesco

Mitchell Kenny

[1]Chief Commissioner of State Revenue v Benidorm Pty Ltd (2020) 101 NSWLR 729.

The post NSW significantly expands stamp duty regime appeared first on SW Accountants & Advisors.

The contents of these pronouncements are both voluminous and complex and are still being digested, but essentially relate to the Commissioner’s views on the operation of two integrity measures – section 100A and Division 7A. 

Section 100A

What is it?

Section 100A is an anti-avoidance provision that has the potential of imposing a penal tax outcome where one person (beneficiary) is made presently entitled to trust income, but another person effectively receives the benefit of the income.  The provision was originally introduced (way back in 1979) to attack aggressive tax avoidance arrangements, but it is worded so broadly that it can technically apply to much more commonplace circumstances.

If it applies, the relevant trust income is generally subject to tax within the trust under section 99A at the top marginal rate of tax (currently 47%).

Historically, many taxpayers and their advisers have taken comfort from the rule in section 100A that ‘ordinary family or commercial dealings’ are excluded from the operation of section 100A.

What is changing?   

In recent years, it has become evident that the Commissioner has been looking to apply section 100A to circumstances well beyond its originally intended targets, and yesterday made public his detailed (preliminary) views on this troublesome provision in the form of:

• Draft Taxation Ruling 2022/D1 – Income tax: section 100A reimbursement agreements
• Taxpayer Alert TA 2022/1 – Parents benefitting from the trust entitlements of their children over 18 years of age
• Draft Practical Compliance Guideline 2022/D1 – Section 100A reimbursement agreements – ATO compliance approach

Whilst administrative guidance on this difficult subject is welcomed from a clarity perspective, the preliminary views expressed will present challenges to many and could fundamentally change the tax planning considerations for trusts and beneficiaries.

What does this mean?  

Whilst the detail of these lengthy and complex draft pronouncements is still being digested, we note the following key points:

• the Commissioner has expressed a very broad view of circumstances to which section 100A could apply
• the Commissioner has expressed a very narrow view of when the ‘ordinary family or commercial dealing’ exception is likely to apply.

The Commissioner has indicated that section 100A could apply to the following circumstances, including:

• gifts from individual trust beneficiaries on low marginal tax rates to other family members with a higher marginal tax rate – for example, gifts or reallocations from adult children that have unpaid trust distributions to their parents.
• a pattern of behaviour involving continuous gifts from beneficiaries back to the trust or even circumstances involving accumulation of unpaid trust distributions with the funds being retained in the trust
• non-commercial loans between family members funded by income distributions from a trust
• manipulation of income of the trust estate and net income.

The examples referred to above have far reaching implications for trusts and their beneficiaries (including corporate beneficiaries).  The approach that Commissioner proposes to adopt represents a significant departure from arrangements that many family groups will have adopted in the past.

The Taxpayer Alert TA 2022/1 specifically identifies circumstances which the Commissioner regards as high risk in relation to distributions to children of parents who control a discretionary trust.  The TA not only addresses 100A, but indicates the distributions may be legally ineffective or subject to Part IVA.

When will this new approach apply from?

The draft ruling indicates that the approach will apply retrospectively as well as prospectively, subject to some concessions set out in Draft Practice Compliance Guideline PCG 2022/D1.  This is significant, as section 100A (being originally intended for aggressive tax avoidance measures) is not subject to any statutory time limits – it can be applied retrospectively indefinitely, without the usual limitations upon the Commissioner.

Unfortunately, the draft PCG only provides limited concessions for arrangements entered into prior to the release of the pronouncements referred to above.  In very broad terms, certain pre-existing arrangements that are regarded as relatively benign will not be reviewed by the ATO. The limits to these concessions is one of the elements of the new suite of drafts that we believe is worthy of further dialogue and submissions in an effort to seek an outcome that is less harsh.

The PCG also provides something of a ‘heat map’ for taxpayers and advisers to rate the risks of arrangements under section 100A.

Division 7A – complying subtrusts no longer permitted

In addition to the section 100A developments, the Commissioner has also issued a draft determination in relation to Division 7A (TD 2022/D1: when will an unpaid present entitlement or amount held on sub-trust become the provision of financial accommodation). Whilst this TD is quite lengthy, the essence of it is that the Commissioner has announced a prospective (from 1 July 2022) change to his previous approach under which he allowed unpaid trust distributions owing to a company beneficiary to be put on interest-only terms for a 7 or 10 year period (depending on the interest rate).  The new approach will be more challenging for taxpayers in that such unpaid entitlements will need to be put on complying Division 7A loan terms, which broadly require both interest and principal repayments annually.   

Next steps

Section 100A in particular is a very technical and difficult provision and there is much to digest in the pronouncements referred to above.  SW will be considering the draft guidance in detail and propose to make submissions to the ATO prior to the finalisation of these pronouncements. 

Another factor to bear in mind (which is also referred to by the Commissioner in the draft ruling) is that the recent Guardian case concerning the operation of section 100A (refer to SW summary here: Guardian case – section 100A win for the taxpayer (sw-au.com), which was decided in favour of the taxpayer, is subject to appeal.  The draft views expressed appear to have been formed without any major regard to this decision, so the outcome of this appeal will be particularly relevant in this context. 

In addition to making submissions to the ATO in respect of these drafts, SW will be closely monitoring developments in this area and will keep its clients well informed as circumstances evolve.

Contributors

Ophelia Katrivessis

Ned Galloway

The post Trust distributions – the game has changed appeared first on SW Accountants & Advisors.