Issuu on Google+

Stamp Duty Anti-Avoidance Provisions A PAPER BY PAUL ANDERSON JANUARY 2008


Stamp Duty Anti-Avoidance Provisions by Paul Anderson

Stamp Duty Anti-Avoidance Provisions

Summary A recent decision of the Court of Appeal is a timely reminder that the Duties Act 1997 contains very broad antiavoidance provisions.

Who Does This Impact? Any person who is interested in minimising payment of stamp duty.

What Action Should Be Taken? Every taxpayer should be aware of the broad anti-avoidance provisions in the Act as well as the individual sections imposing particular heads of duty.

Contents:

1

2

Introduction

2

Facts

2

Legislation

3

Taxpayer’s Argument

3

Decision

4

Subsequent Changes to Section 24

4

Conclusion

T U R K S L E G AL

PAPER


Stamp Duty Anti-Avoidance Provisions by Paul Anderson

Introduction The recent Court of Appeal decision of Trust Company Limited v Chief Commissioner of State Revenue is a timely reminder that the Duties Act 1997 contains very broad anti-avoidance provisions.

Facts In December 2001 the parties executed Heads of Agreement for the sale and purchase of four industrial properties each subject to relatively short term leases for the price of $66,000,000.00. The stamp duty payable on such a transaction would normally be $3,615,490.00. The vendor was three Trusts associated with the Uniting Church and the purchaser was Macquarie Goodman Industrial Trust. In January 2002 the parties agreed on alternative arrangements. The parties entered into a ninety nine year concurrent lease in respect of each property for a total rental of $65,120,125.00 which was payable immediately. The parties then entered into put and call options which effectively sold the reversion in respect of each property subject to the ninety nine years leases for $1,850,000.00. In broad terms, the vendor received substantially the same consideration for the transaction but in a different form. Although no valuation evidence was available, the rent of $65,120,125.00 was presumably a market rental and the price of $1,800,000.00 was presumably a realistic estimate of the market value of the properties if sold subject to ninety nine year leases where the rent had been prepaid. The aim of the transaction was to take advantage of lower rates of stamp duty applying to leases compared to purchases. Leases are liable for stamp duty at the rate of $0.35 per $100.00 of the total rental payable compared to a maximum rate of 5.5% on that part of the consideration for a purchase that exceeds $1,000,000.00. The purchaser argued that the stamp duty payable on the lease was $227,920.70 and the stamp duty payable on the Contract for sale and purchase was $87,240.00, i.e the total duty payable on the arrangement was $315,160.70. The total saving in stamp duty was, therefore, $3,300,000.00 approximately. The vendor had no doubt also taken into account the income tax and capital gains tax implications of the new arrangement.

Legislation However, the Commissioner relied upon section 24 of the Duties Act 1997 and claimed that the transaction should be disregarded. At the relevant time section 24 was in the following terms: “An arrangement affecting the dutiable value of dutiable property that is subject to a dutiable transaction is to be disregarded in determining the dutiable value of the dutiable property if: (a)

the dutiable transaction is between associated persons; or

(b)

the Chief Commissioner is satisfied that a significant purpose of any party to the arrangement was the reduction of the dutiable value of the dutiable property.”

This version had recently replaced an earlier version of section 24. Accordingly to Hansard, the second reading of the Bill when it was introduced into Parliament indicated that

2

T U R K S L E G AL

PAPER


Stamp Duty Anti-Avoidance Provisions by Paul Anderson

“…these amendments seek to close a loophole with regard to the use of long term leases rather than the freehold ownership of a property”. At first instance, Gzell, J of the Supreme Court found for the Commissioner and the purchaser appealed to the Court of Appeal.

Taxpayer’s Argument The purchaser conceded that a significant purpose of the arrangement was to reduce its liability for stamp duty. The only issue then was whether there was within the meaning of Section 24 an “arrangement affecting the dutiable value of dutiable property”. The purchaser’s contention can be summarised as follows: •

The dutiable property the subject of each contract was the vendor’s reversionary estate in the land following the grant of the ninety nine year leases;

The “arrangement”, being each ninety nine year lease, created that dutiable property and for that reason did not “affect” the dutiable value of the dutiable property so as to reduce it; and

Consequently, it could not be said that any party to the “arrangement” had the reduction of the dutiable value of the dutiable property as its significant purpose.

Decision Santow, J A and Mason, P dismissed the appeal. Giles, J A dissented. Santow, J A gave the principal judgement and considered that there was “an arrangement affecting the dutiable value of dutiable property that is subject to a dutiable transaction” within the meaning of the opening words of section 24. The work “affecting” was of particularly wide import. The significant purpose required by section 24 (b) was also established. As a result, the Commissioner was entitled to disregard the earlier steps consisting of registration of the concurrent leases when determining the dutiable value of the dutiable property. The arrangement affecting the dutiable value of the dutiable property need not be contemporaneous with the entry into the dutiable transaction itself. Rather it may precede it, as here. The original Heads of Agreement contemplated a simple sale and purchase. By instead entering into and registering the ninety nine year concurrent leases, there came into being “an arrangement affecting the dutiable value of dutiable property” within section 24. Alternatively, at a lower level of generality, there was throughout a reversion. All that was altered was the expectancy of that reversion. It was previously expectant on short term existing leases. Now it was expectant on the long term concurrent leases. That simply reduced the value of the reversionary estate. This approach treats the “dutiable property” as being a reversionary interest in land but section 24 has still been satisfied because the expectancy period has changed as a result of the arrangement. Any other construction would render section 24 incapable or remedying the very mischief to which it was directed. The words of section 24 should be given a purposive construction.

3

T U R K S L E G AL

PAPER


Stamp Duty Anti-Avoidance Provisions by Paul Anderson

Subsequent Changes to Section 24 Section 24 has since been further amended and now reads as follows: 24

Interests, agreements and arrangements that reduce the dutiable value (1)

In determining the dutiable value of dutiable property under this Part, any interest, agreement or arrangement (other than an encumbrance) granted or made in respect of the dutiable property that has the effect of reducing the dutiable value is to be disregarded, subject to subsection (2).

(2)

An interest, agreement or arrangement is not to be disregarded if the Chief Commissioner is satisfied that it was not granted or made as a part of an arrangement or scheme with a collateral purpose of reducing the duty otherwise payable on the dutiable transaction.

(3)

In considering whether or not he or she is satisfied for the purposes of subsection (2), the Chief Commissioner may have regard to: (a)

the duration of the interest, agreement or arrangement before the dutiable transaction; and

(b)

whether the interest, agreement or arrangement has been granted to or made with an associated person, and

(c)

whether there is any commercial efficacy to the granting of the interest or the making of the agreement or arrangement other than to reduce duty, and

(d)

any other matters the Chief Commissioner considers relevant.

If anything, the new wording of Section 24 would appear to strengthen the Commissioner’s powers. Certainly, it is difficult to see a different outcome to this case under the present legislation.

Conclusion The case highlights how easy it is to get absorbed in the intricate steps of an arrangement to reduce stamp duty, thereby overlooking the broader powers granted to the Commissioner by section 24. Clearly, a case of not seeing the wood for the trees. The price for the purchaser in addition to legal costs may well have been interest on the duty and possibly penalties.

4

T U R K S L E G AL

PAPER


Stamp Duty Anti-Avoidance Provisions by Paul Anderson

For more information, please contact:

Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099 Business & Property | Commercial Disputes | Insurance & Financial Services | Workers Compensation | Workplace Relations

www.turkslegal.com.au This Pap er is cur rent at i t s d ate o f p u b l i c at i o n . Wh i l e eve r y c a re h a s b e e n t a k e n i n t h e p re p a rat i o n o f t h i s Pa p e r i t d o es not constitute legal advice and should n o t b e re l i e d u p o n fo r t h i s p u r p o s e. Sp e c i f i c l e g a l a dv i ce s h o u l d b e s o u g ht o n p a r t i c u l a r m atters. Tur ksLegal do es not accept resp on s i b i l i t y fo r a ny e r ro r s i n o r o m i s s i o n s f ro m t h i s Pa p e r. Th i s Pa p e r i s co py r i g ht a n d n o p a r t m ay b e repro duced in any for m without th e p e r m i s s i o n o f Tu r k s Le g a l . Fo r a ny e n q u i r i e s, p l e a s e co nt a c t t h e a u t h o r o f t h i s Pa p e r.


Stamp Duty Anti-Avoidance Provisions