Who should care: People who want to correct original drafting errors.
The Case: Chloe Adolphi Pty Ltd as trustee for The Chloe Adolphi Family Trust v Chief Commissioner of State Revenue [2024] NSWCATAD 48
Link to case: https://jade.io/article/1063474
Case Summary:
Issue: The primary issue is whether the deed of rectification executed by the trustee for The Chloe Adolphi Family Trust, effectively alters the trust’s liability for surcharge land tax by excluding foreign persons as beneficiaries.
Rule: Rectification can correct a document to reflect the true agreement of the parties involved, provided there was a mutual or unilateral mistake at the time of the original agreement.
Application: In this case, the trust executed a deed of rectification after being assessed for surcharge land tax, intending to exclude foreign persons as beneficiaries retroactively. However, the Chief Commissioner of State Revenue argued that the rectification did not reflect the true intention at the time of the trust’s creation and that the Commissioner is not bound by the rectification for tax assessment purposes.
Conclusion: The tribunal affirmed the decision under review, indicating that the deed of rectification did not alter the trust’s liability for surcharge land tax. The rectification was not effective in changing the taxable facts at the time of assessment.
Extra Tidbits:
Prior blog post has considered the legislative requirements to ensure surcharge land tax does not apply to discretionary trusts holding NSW land - see here. In that case, the taxpayer effected the change via a deed of variation. This case differs by way of the taxpayer seeking to amend the terms via a deed of rectification.
A deed can be rectified by court order or by deed of rectification. Rectification is a remedy to correct the record of an agreement where that has failed, whether through mutual or unilateral mistake, has omitted a term or failed to express a term of an agreement; Muriti v Prendergast [2005] NSWSC 281 at [105]; Pukallus v Cameron (1982) 180 CLR 447 at 452, 456; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336 at 350-351 - paragraph 16 of the case.
Accordingly, a rectification of a document will have retrospective effect.
It is important to note:
"A document is not capable of being rectified, in the legal or equitable sense, in circumstances where the parties never considered a matter that has then been brought to their attention subsequently. If there is no actual intention at the time of creation of the document, then there has been no mistake." - paragraph 20 of the case.
"Nor is rectification effective to correct an error about the legal or factual consequences of a document" - paragraph 21 of the case.
"The rectification of a document is enforceable against the parties to the contract or deed. However, as the Chief Commissioner correctly noted in submissions, the retrospective alteration of the parties' rights or obligations under a rectified instrument may be resisted by third parties to whom rights have accrued" - paragraph 22 of the case.
"A deed of rectification may, however, be capable of evidencing the true intention or taxable facts" - paragraph 23 of the case.
Based on the evidence, it was noted that the deed of rectification was executed months after the parties were alerted to the consequences of the trust deed in its original form and having taken all other steps to attempt to convince the Chief Commissioner that the Trust was not to be deemed a foreign person.
This lag in 'fixing' the trust runs counter to the argument that there was a mistake requiring rectifying.
If it was an actual mistake in drafting, rectifying the trust would have been the first action taken rather than taking all other steps to argue against the assessment.
Actions the taxpayer took rather than rectifying the mistake upon being informed on 23 July 2022 included:
lodging a land tax registration return - 8 August 2022; and
following receiving an assessment on 12 October 2022, lodging an objection to the assessment - 14 October 2022.
The rectification document was only executed on 22 December 2022 after the objective was rejected on 14 December 2022.
Evidence of the director of the trustee company was inconsistent as he noted that 'Accordingly, in late 2022, I discovered that the terms of the Trust Deed resulted in tax consequences which were unintended and which would amount to a usurpation of my true intention.' despite the issue being raised in mid 2022.
Evidence of the settlor included a discussion with the director of the trustee company noting that 'the definitions of beneficiary and spouse are wide enough to capture anybody in your or Lindy’s family (see clauses 26.3 and 26.9...'.' This evidenced specific consideration as to the beneficiary class at the time of establishment and that the parties were familiar with the relevant clause in the trust deed relating to the beneficiary class.
Takeaway:
If there are mistakes in documents, they should be fixed in the first instance known - and not used as a matter of last resort.
If mistakes are identified following the assessment of a tax liability, it may be too late for the rectification to have effect in terms of having the tax liability reassessed.
Persons executed a trust deed should familiarise themselves with the terms of the trust deed.