Retrospectivity, Res Judicata and Tax
Just being a beneficiary of a discretionary trust (whether or not one ever receives any distribution from the trust) can have all sorts of unintended consequences.
For example, in Western Australia a company or unit trust which might not otherwise be a “landholder entity” for purposes of the Duties Act may in fact be a landholder entity if it is a beneficiary of a discretionary trust which owns land worth over the threshold value of $2 million.
Similarly, being a beneficiary of a discretionary trust can cause the necessary linkage for grouping of entities for payroll tax purposes.
That is precisely what happened in the New South Wales case of Smeaton Grange Holdings Pty Ltd (NSW 2016 and 2017). In that case, seventeen days after discovering the fact that he was a beneficiary of both “his parents’” discretionary trust and “his brother’s” discretionary trust, Michael Gerace disclaimed his entitlement to benefits from each trust thereby seeking (retrospectively) to break the payroll tax linkage.
The New South Wales Chief Commissioner of State Revenue contended that Mr Gerace couldn’t do this for four reasons namely:
- being a beneficiary is simply a status and not a proprietary interest and therefore there is nothing to “disclaim”;
- secondly the disclaimer was not effective because it was executed by deed poll i.e. a document executed by Michael himself and no one else and it would only be valid if the disclaimer was “for consideration”;
- thirdly Michael had already accepted the position of a beneficiary and it was too late for him to disclaim it. His evidence was that he wasn’t sure whether or not he was a beneficiary of “his parents’ trust” and he was unaware of the existence of “his brother’s trust”;
- fourthly disclaimers couldn’t operate retrospectively because the liability for payroll tax arose in each month in the tax years in question.
Mr Justice White dismissed all of the Chief Commissioner’s arguments holding that Michael’s disclaimer was effective not only as between himself and the trusts in question but also for purposes of breaking the payroll tax “grouping” i.e. it was binding on the Commissioner.
On appeal to the New South Wales Court of Appeal, the Chief Commissioner was more successful. The Court found that the determination of group membership in accordance with the Payroll Tax Act could only be undertaken by reference to the legal relationships as they existed between the relevant parties at the time the employer’s liability to payroll tax arose at the end of 7 days after the end of each month (for the first 11 months of the year) and at the end of 21 days after the end of financial year and the disclaimer could not alter that.
On one view, Smeaton Grange seems to overturn the principle in the Queensland Case of Thomas Nominees (Qld 2010) where, in litigation to which the ATO was not a party (although invited to be) the Queensland Supreme Court permitted the trustee of a trust to distribute franking credits separately to the income of the trust on the basis that the trust deed appeared to permit this. The court reached this view despite evidence disclosing that the Australian Taxation Office had (at the time) expressed the view that there was “some uncertainty” as to whether or not this could be done.
The matter subsequently went to the Federal Court where the Federal Commissioner of Taxation argued that whatever the Queensland Supreme Court may have ordered as between the trustee and the beneficiaries of the trust was not binding on the Commissioner.
The Federal Court disagreed. It relied on the “res judicata” principle, holding that the matter of whether or not it was possible to separate the income from the franking credits was something that had already been determined by a Court and could not be litigated again.
The Queensland Court of Appeal case of Hawley (Qld 1999) is another example of a situation where the agreement between the parties was held to be perfectly binding between them but not binding on the Commissioner for stamp duty purposes.
The Hawley case, of course, differs from Thomas in that, in Thomas, the second judgment (which arose from proceedings in which the Commissioner was a party) had to deal with the “res judicata” principle i.e. the fact that another judge, in other (non-taxation) proceedings to which the Commissioner was not party, had ruled on a particular state of affairs.
In Smeaton Grange and Hawley, on the other hand, the “res judicata” principle was not “in play” because the Commissioner was involved in the litigation from the outset and was therefore easily able to succeed with the argument that whatever the parties may have done was not binding on him.
By contrast, in the Thomas case, he was confronted not merely with the party’s actions but also with the fact that an earlier judge had made a decision in relation to which the “res judicata” principle applied.
Thus it seems that:
- Thomas’ case has not been overturned by Smeaton Grange; and
- if the revenue authorities get involved in non-taxation litigation early enough, they can avoid being thwarted by the “res judicata” principle.
5 October 2017
For any queries in relation to this please contact Colin Munro at firstname.lastname@example.org