Key Trust Issues in NSW Supreme Court Case: ISPT Nominees Pty Ltd v Chief Commissioner of State Revenue

Younsel

Tax

Australia

Tue Mar 07 202317 minute read

On 12 August 2003, Barrett J of the Supreme Court of NSW handed down his judgment in ISPT Nominees Pty Ltd v Chief Commissioner of State Revenue [2003] NSWSC 697. This article focuses primarily on the trust issues considered in that case. The other issues considered in the case are examined briefly only.

The central issue Barrett J was asked to consider was whether ad valorem duty was payable on two instruments of transfer of land. The transferor in each case was Coles Myer Property Investments Pty Ltd (“CMPI”) and the transferee was ISPT Nominees Pty Ltd (“Nominees”).

Steps in transaction

There were 9 steps in the transaction Barrett J was asked to consider, namely:

ISPT Coles Myer (Forster) Property Trust (No 1) (“the Forster No 1 Trust”) was established by deed executed by CMPI and ISPT Pty Limited (“ISPT”). ISPT was appointed trustee of the Forster No 1 Trust.
CMPI applied for the issue of 17,973,996 units in the Forster No 1 Trust and provided ISPT as trustee of that trust with a cheque in the sum of $17,973,996. The units applied for were issued to CMPI. No other units in the Forster No 1 Trust had been issued at that time.
ISPT as trustee of the Forster No 1 Trust made a written offer to CMPI to purchase the Forster Shopping Village for $17,973,995. The offer made provision for CMPI “... to hold the property as a nominee under the deed establishing the Trust for so long as CMPI remains the registered proprietor.”
CMPI orally accepted the offer.
The cheque for $17,973,996 in favour of ISPT as trustee of the Forster No 1 Trust which CMPI had paid for its 17,973,996 units in that trust was then endorsed by ISPT in favour of CMPI and returned to it. An overpayment of $1 was returned to ISPT as trustee of the Forster No 1 Trust.
ISPT as trustee of the Industries Superannuation Property Trust (“the ISPT Trust”) and ISPT Custodians Pty Ltd (“ISPT Custodians”) as trustee of the ISPT Coles Myer (Forster) Property Trust No 2 (“the Forster No 2 Trust”) each applied for 8,986,998 units in the Forster No 1 Trust, and each paid for those units by a cheque for $8,986,998 in favour of ISPT as trustee of the Forster No 1 Trust. The units applied for were issued to each of ISPT as trustee of the ISPT Trust and ISPT Custodians as trustee of the Forster No 2 Trust.
ISPT as trustee of the Forster No 1 Trust redeemed the 17,973,996 units in that trust which had previously been issued to CMPI, and endorsed the two cheques, each for $8,986,998, which it had received from ISPT as trustee of the ISPT Trust and ISPT Custodians as trustee of the Forster No 2 Trust in favour of CMPI.
CMPI resigned as the ‘nominee’ of ISPT under the Forster No 1 Trust, and was replaced as ‘nominee’ by Nominees.
The Forster Shopping Village was transferred by CMPI to Nominees as the ‘nominee’ of ISPT under the Forster No 1 Trust. The stated consideration for the transfer was ‘nil’.

In summary, the effect of these transactions was to transfer the legal title to the Forster Shopping Village to Nominees, and beneficial ownership of the property to a party other than CMPI, which no longer had any estate or interest, legal or equitable (beneficial) in the property.

The original assessments and the challenge to them

On 20 April 1995, each of the transfers was assessed as liable to fixed duty of $2. That duty was paid and each instrument was marked as being duly stamped. This decision was made on the footing that the transfers fell within section 73(2A) of the Stamp Duties Act 1920 (ie the now repealed equivalent of section 54(3) in the Duties Act 1997 (NSW)).

On 21 September 1995, however, the Commissioner purported to issue to ISPT assessments under Division 3A of the Stamp Duties Act on the footing that ad valorem duty was payable by reference to undocumented transactions involving a change in the beneficial ownership of property. ISPT objected to the assessments. The Commissioner disallowed the objections, and ISPT appealed to the Supreme Court of NSW. Studdert J allowed the appeal: ISPT Pty Ltd v Chief Commissioner of Stamp Duties (1997) 38 ATR 128. An appeal against Studdert J’s decision was later dismissed on 23 December 1998 by the Court of Appeal.

Abuse of process

Barrett J found that in this case there was no abuse of process. Where, as was the case here, the revenue first invokes one head of duty by way of administrative action against one person and later invokes another head of duty by way of separate administrative action against another person there is no abuse of process. This is particularly so where, although both actions are taken by reference to the same set of facts or sequence of events, one fixes upon one element of the total matrix (the supposed change in beneficial ownership of land effected otherwise than by instrument of transfer) and the other fixes upon a different element (an instrument of transfer as such).

Therefore, even if the actions of the Commissioner in 1995 led the parties to believe that adoption of the basis of assessment founded on Division 3A of the Stamp Duties Act was the only way in which exaction of duty would be pursued, that would not prevent assertion of some other statutory basis subsequently.

Barrett J also concluded that no form of estoppel precluded the Commissioner from making, by means of the notices purportedly issued under section 37(1) of the Stamp Duties Act, the claims for payment challenged by Nominees.

The trust aspects

The elements of section 73(2A)

According to Barrett J, before section 73(2A) of the Stamp Duties Act operated the following 4 elements needed to be found:

the conveyance was “made for nominal consideration”;
it was “consequential upon the making of a decision”;
the decision was “recorded in writing”; and
the decision “has the same effect as” an “instrument appointing a new trustee”.

The Court of Appeal decision

The Court of Appeal decision on this issue could be broken down as follows:

Mason P and Fitzgerald AJA held that a trust arose at step 5 and that section 23C of the Conveyancing Act did not apply. Meagher JA did not come to any conclusion on those matters; and
all the judges agreed that the identity of legal proprietor and ultimate beneficiary did not prevent a trust from arising at step 5.

According to Barrett J, the findings of the Court of Appeal were binding on him only if they formed part of the ratio decidendi of its decision. In his Honour’s view, the better view was that they did not.

Was the land trust property when transferred to CMPI?

According to Barrett J there were 3 possible impediments to finding that a trust arose:

the operation of section 23C(1) of the Conveyancing Act;
the coincidence in identity of the legal owner of the land and the sole unit holder of the Forster No.1 Trust (ie the merger argument); and
the absence of prior written approval of the unitholders to the nomination of CMPI as nominee under the trust as required by clause 8.10 of the trust deed.

Disappearance of intermediate bare trustee

One of the most significant findings of Barrett J was that notwithstanding the views expressed in secondary material, there must be taken to exist a principle that the beneficiary of a bare trust, upon declaring himself a bare trustee of his equitable interest for a third party, “disappears from the picture”, whereupon the legal owner holds the property for the benefit of the ultimate beneficiary alone.

This approach, if followed by other judges, should be borne in mind by practitioners when devising dual trust structures.

Was CMPI an intermediate bare trustee?

To answer this question consideration needed to be given to clause 8.10(b) of the trust deed for the Foster No 1 Trust which provided that:

A nominee or custodian may perform the following actions in the name of the Trustee or, at the direction of the Trustee, in its own name as nominee for the Trustee:

(1) purchase or sell at the direction of the Trustee any Authorised Investment and execute all transfers and assurances necessary for any such purpose;

(2) receive and hold on behalf of the Trustee any Authorised Investment and any document of title thereto in safe custody provided that the Trustee may request access to, and return of, any Authorised Investment in the custody of the nominee or custodian and any document of title thereto;

(3) receive on behalf of the Trustee all amounts arising from any Authorised Investments referred to in sub-paragraph (2) above;

(4) procure registration of such Authorised Investments;

(5) hold and disburse moneys in the name of the Trust at the direction of the Trustee;

(6) perform any action the Trustee directs; and

(7) perform all actions incidental to any of the foregoing powers (other than any action which involves the exercise of a discretion).

According to Mason P in the Court of Appeal, the above clause meant that there was an active trust, despite the duties being exiguous. On one view, clause 8.10 imposed a duty to hold the equitable interest until the unitholders demanded assignment of it and that duty was sufficient to render the trust active.

In Barrett J’s view, whether or not a trust is a bare trust involves more than a question whether the trustee has active duties. A bare trust is one in which property is vested in one person on trust for another, the nature of the trust not being prescribed by the settlor but being left to the construction of the law, as where property is transferred to T ‘on trust for B absolutely’.” Accordingly, as well as determining whether the trustee is subject to active duties, it is necessary to decide whether the trustee “has no interest in the trust assets other than that existing by reason of the office of trustee”.

Barrett J notes that an “active power” (as opposed to an “active duty”), regardless of its significance, should be sufficient to render the trust something other than a bare trust. A power expressly conferred upon a trustee will give that trustee an interest in the property other than the minimal interest that exists simply by virtue of the trusteeship itself. The fact that, in this case, the terms of the trust were spelled out in the trust deed meant that the trust could not be a bare trust having no express incidents and including only such terms as were implied by law. Accordingly, Barrett J concluded that since ISPT retained some interest in the property as subtrustee of CMPI’s equitable estate, the legal and equitable estate did not merge in CMPI at step 5.

If CMPI had been an intermediate bare trustee, would it have disappeared? Having reached the conclusion above, Barrett J nonetheless goes on to consider whether the legal and equitable estates would have merged in CMPI. Barrett J notes that the doctrine of merger of estates will not be applied by a court of equity if its application would run counter to the parties’ actual or presumed intentions. According to Barrett J, in the case before him, the fact that CMPI entered into the trust deed, the terms of which included the creation of an express trust in favour of ISPT (which, in turn, held its interest on trust for CMPI) was probably sufficient evidence of an expressed intention on the part of CMPI that its legal interest did not merge with its equitable interest. If it was not, however, the context of the transaction as a whole, and the advantage to both CMPI and ISPT of maintaining ISPT’s subtrusteeship, was relevant to ascertaining CMPI’s presumed intention. Barrett J concludes that the parties’ intention that the land become a trust asset at step 5, rather than CMPI remaining absolutely entitled to it, prevented the legal and equitable estate from merging (or, more correctly, remaining merged) in CMPI at step 5.

The section 23C argument

Barrett J also considered whether the operation of the Statute of Frauds (ie section 23C of the Conveyancing Act) prevented the land from being trust property at step 5.

Express trust

In this case, Barrett J found that there was no express trust. To conclude that an express trust arose, it would have been necessary to identify some writing, signed by CMPI, whether contemporaneous or not, evidencing CMPI’s oral declaration of trust - this was not found. Constructive or resulting trust

According to Barrett J, there were 4 ways in which a trust might have arisen in the case before him, notwithstanding the absence of writing:

by the operation of the principle whereby a contract to create a trust over property, being a contract in respect of which the court would order specific performance, creates an equitable interest in the subject property in the intended beneficiary because equity regards as done what ought to be done;
by the operation of the principle whereby the Statute of Frauds cannot be used as an instrument of fraud;
by the operation, by analogy, of the principle whereby a vendor under a contract for sale of land, upon the payment of the purchase money, holds the land on trust for the purchaser; and
by estoppel.

Proprietary interest created by contract

For a proprietary interest to arise, the oral agreement that the property be held by CMPI on trust for ISPT as trustee of the Forster No.1 Trust must have been such that a court would have ordered specific performance at the appropriate time, or would have ordered some injunction to protect ISPT’s rights. The interest created would reflect the degree of protection that the court would provide.

The oral contract under which CMPI promised to declare itself trustee over the property in favour of ISPT as trustee of the Forster No.1 Trust was enforceable at the suit of ISPT, and therefore created an equitable interest in the land in ISPT upon payment of the purchase money by it (step 5). Therefore, in Barrett J’s opinion, the land was trust property at step 5.

The Statute of Frauds did not apply in this case. The contract was enforceable, and as such created an equitable interest in ISPT.

Accordingly, the land was trust property at step 5 and the exception in section 73(2A) of the Stamp Duties Act applied.

The Statute of Frauds cannot be used as an instrument of fraud

On this issue, Barrett J draws the following 2 conclusions:

the Statute of Frauds will not prevent the enforcement of a trust where land was conveyed to the legal owner on condition that it be held for the benefit of the conveyor; and
notwithstanding the first conclusion, the Statute of Frauds will apply where a legal owner with full beneficial ownership makes a voluntary oral declaration of trust over the land.

According to Barrett J, the present case did not fall into either of the above categories. CMPI was not conveyed the land by ISPT, but its declaration of trust was not voluntary: it was made in consideration for the purchase price.

Barrett J holds that the principle that the Statute of Frauds cannot be used as an instrument of fraud is limited to cases in which the legal owner of property has only obtained its legal title by acceding to the existence of a trust. As that was not the case on the facts before him, he held that the Statute of Frauds had no application.

Analogy with purchaser under uncompleted contract

In Barrett J’s view a promise by a full beneficial owner to constitute itself trustee of property in favour of a promisee cannot be equated to a contract to assign the equitable interest. A declaration of trust by a legal owner with full beneficial ownership cannot be equated with the assignment of the equitable estate. A legal owner with full beneficial ownership does not own two estates, one legal and another equitable. Accordingly, a declaration of trust by a legal owner with full beneficial ownership should be regarded as creating an equitable estate in the beneficiary rather than divesting the legal owner of the equitable estate and vesting it in the beneficiary. As such, in Barrett J’s opinion, it was inappropriate to consider the transaction in terms of the principle whereunder the vendor holds as trustee upon payment of the purchase money.

Estoppel

In Barrett J’s view, the doctrine of estoppel could not apply to the facts before him. This was primarily for the reason that such an estoppel would effectively arise in relation to every contract affecting land (including a contract for the sale of land) and would render the Statute of Frauds irrelevant.

Decision on status of the land after step 5

Barrett J concludes that a trust came into existence when ISPT paid the purchase price and CMPI came under an obligation to perform its contractual promise to constitute itself trustee of the land. The contract was enforceable at the suit of ISPT. Accordingly, an equitable interest was created in ISPT commensurate with that which a court of equity would protect. The trust arose notwithstanding the lack of writing. Is “nil” a “nominal consideration”?

Section 73(2A) of the Stamp Duties Act was expressed to apply to transfers “made for nominal consideration”. The operative words of each of the transfers considered in the case, however, were that the transferor, CMPI “… acknowledges receipt of the consideration of Nil and as regards the land specified above transfers to the Transferee an estate in fee simple.” Another issue that Barrett J therefore had to decide was whether a transfer expressed to be for nil consideration is properly regarded as “made for nominal consideration”.

In ordinary parlance, the expression “nominal consideration” denotes merely token consideration, or consideration in name only. In Barrett J’s view, therefore, it would be absurd to exclude from the operation of section 73(2A) transfers for no consideration by adhering unnecessarily to a literal reading of a section which was phrased with obsolete conveyancing practices in mind. In Barrett J’s opinion, a reference to “Nominal” was not a reference to money and was therefore not apt to show that any consideration at all passed or was accepted as having passed. Barrett J was thus satisfied that section 73(2A) reflected an unstated assumption that there was no such thing as a conveyance made without consideration. In his Honour’s view, the reference to “a conveyance made for nominal consideration” covers a case in which the expressed consideration is not real, having an existence in name only. Transferors who purport to acknowledge receipt of (and to convey in consideration of) $1 or a peppercorn or “nominal” or “nil” must be regarded as communicating a uniform and consistent message, namely, that the transfer, although expressed to be made for the “consideration” so described, is made without any real consideration at all. In each case, therefore, the supposed consideration is to be regarded as existing in no more than name and is “nominal consideration”. Thus, Barrett J concludes that each of the transfers with which he was concerned were therefore “a conveyance made for nominal consideration” as referred to in section 73(2A) and subject to only nominal duty.

Conclusion

In conclusion, therefore, Barrett J held that the transfers were only liable to $2 duty under section 73(2A) of the now repealed Stamp Duties Act. However, there are a number of important points that should be taken away from Barrett J’s decision. In particular, note should be made of the distinction between a bare trust and a trust where the trustee has active powers and duties and quite apart from that distinction, the importance that equity places on parties’ intentions. Practitioners should bear these issues in mind in advising clients on stamp duty outcomes, but equally importantly, in advising clients on their position under equity.