Both federal and state tax legislation contains different tax rules for different forms of trusts. It can therefore be critical to determine, for the particular legislative rule, which type of trust a trust is. In that light, the recent Victorian Civil and Administrative Tribunal (Tribunal) decision of Sharlin Pty Ltd v Commissioner of State Revenue (Review and Regulation) [2022] VCAT 378 has considered whether a “hybrid unit trust” is a unit trust or a discretionary trust for the purpose of the land tax exemption for primary production land (PPL) in the Land Tax Act 2005 (Vic) (LTA).
Background
The applicant company, Sharlin Pty Ltd (Sharlin), was the trustee of a hybrid unit trust known as the Sharlin Unit Trust (Trust). While the Trust had unit holder(s) who would, upon default, receive distributions of income, the trustee of the Trust also had a discretion to distribute income to a class of discretionary beneficiaries.
Sharlin owned a parcel of land located in partly or wholly within an urban zone in greater Melbourne (Property). On 16 February 2018, the Commissioner of State Revenue assessed Sharlin for land tax in respect of the Property for the 2018 land tax year. Sharlin objected to the assessment on the basis that the land qualified for the PPL exemption and subsequently sought a review of the commissioner’s decision to disallow its objection.
The former section 67 of the Act provided a land tax exemption for primary production land within an urban zone in greater Melbourne. Differing exemption requirements applied to the different types of landholders: natural person, trustee of discretionary trust and trustee of unit trust. Therefore, the Tribunal had to determine if the Trust was a unit trust or a discretionary trust and then whether the Trust met those relevant trust requirements for the PPL exemption under the former section 67 of the LTA.
Decision
What kind of trust is the Sharlin Unit Trust?
Firstly, the Tribunal held that the fact that the name of the Trust refers to it as being a unit trust is not determinative and the nature of a trust depends on an analysis of its terms as per the High Court decision of CPT Custodian v Commissioner of State Revenue (2005) 224 CLR 98.
Secondly, the Tribunal referred to the definition of discretionary trust in section 64 of the LTA and noted that the definition applies either where the distribution of income or property of a trust is ‘required to be determined’ or where the distribution ‘will occur’ if a discretion conferred under a trust is not exercised.
Here, the trust deed of the Trust (Trust Deed) provided that Sharlin, as trustee, had a discretion to distribute the whole or part of the income of the Trust to the general beneficiaries of the Trust and, with the consent of the unit holders, to apply or set aside income for charitable purposes. If Sharlin had failed to exercise the discretion, the unit holder of the Trust was entitled to the income. The Tribunal found the Trust was a discretionary trust within section 64 of the LTA as the Trust Deed met the definition of discretionary trust by conferring Sharlin a discretion under which the identity of the beneficiaries or the quantum of interest to be taken may be determined and it was only if neither discretion was exercised that the unit holder would be entitled to the income of the Trust.
Did the Trust have a specified beneficiary?
Having determined that the Trust is a discretionary trust, the Tribunal had to determine if at least one of the specified beneficiaries was a natural person (being a requirement of the former section 67). The Tribunal considered the definition of ‘specified beneficiary’ in section 3 of the LTA and noted that the meaning of ‘specifically beneficiary’ is a person or entity actually named as a beneficiary of a trust in the trust deed and not to a category or class of persons to whom distributions may be made.
Despite the fact that there is a definition of ‘general beneficiary’ in the Trust Deed to include shareholders and directors of a unit holder, only the sole unit holder company, Kameel Pty Ltd was identified by name as the original unit holder of the Trust in the schedule of the Trust Deed. Thus, the Property is not exempt from land tax as the Tribunal found that the Trust failed to satisfy the requirement that at least one of the specified beneficiaries is a natural person.
What are the implications for taxpayers?
The nature of a trust will depend on an analysis of its terms. This decision highlights the importance that a trust structure can make in whether tax is triggered or exemptions or concessions can be claimed. In particular, for taxpayers who operate out of hybrid trusts, it is important to determine how the hybrid trusts will be classified under the various tax regimes.
To discuss or for more information:
Jan Oh
Graduate Lawyer
T +61 3 9611 0158
E joh@sladen.com.au
Thomas Abraham
Senior Assoicate
M +61 3 9611 0178 | T +61 401 387 451
E tabraham@sladen.com.au
Laura Spencer
Senior Associate
M 0436 436 718 | T +61 3 9611 0110
E: lspencer@sladen.com.au
Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163
E: pbroderick@sladen.com.au
