Stamp Duty & the Apparent Purchaser Exemption by Paul Anderson | October 2006
Following the recent Supreme Court decision of Sportscorp v Chief Commissioner of State Revenue, the State Government has amended section 55 of the Duties Act 1997 to broaden and clarify the exemption granted by that section. In simple terms, the section applies where property is purchased in the name of a third party and it is then wished to transfer title back to the real purchaser. Normally a transfer of dutiable property is liable for stamp duty at full rates based on the value of the property. However, if the conditions of section 55 (1) (b) are satisfied, duty of only $10 is payable on the transfer of title back to the real purchaser. At the time of the decision section 55(1)(b) was in the following terms: “Duty of $10 is chargeable in respect of a transfer of dutiable property from an apparent purchaser to the real purchaser, in a case where the dutiable property is vested in an apparent purchaser upon trust for the real purchaser who provided the money for the purchase of the dutiable property.” It is common knowledge that the Commissioner has scrupulously examined any application for relief under section 55. In particular, the real purchaser must have provided all of the money for the purchase, e.g. deposit, stamp duty, balance of price payable on settlement and legal costs. The usual approach is to provide the real purchaser’s bank statements to demonstrate that they made all the relevant payments. Payment by the apparent purchaser of any of the above items is usually fatal to the application of section 55. For example, it is not unusual for the apparent purchaser in haste and without giving it much thought to draw the cheque payable to the agent for the deposit. Even though the real purchaser subsequently reimburses the apparent purchaser for the amount of the cheque, this is normally enough to rule out the application of section 55. The important point is that the application of section 55 is highly technical and it is easy to succumb to the many pitfalls inherit in the section. This is clearly illustrated by the Sportscorp judgment handed down on 12 November 2004.
Facts Three plaintiffs entered a partnership to develop land at Queenscliff in northern New South Wales. The general plan was to acquire several adjacent blocks of land, consolidate them, build home units, register a strata plan and sell the individual home units to occupiers or investors. A fourth plaintiff, Queenscliff Estate Pty Limited (“Queenscliff”), was appointed agent of the partnership and it acquired the land. Full ad valorem stamp duty (i.e. calculated on the value of the property) was paid on the purchase by Queenscliff. Following construction of the home units and registration of the strata plan, Queenscliff transferred each lot in the strata plan to the three partners as tenants in common in equal shares. The partners claimed that this transfer was only liable for nominal stamp duty of $10 relying upon section 55 of the Duties Act 1997. The Commissioner alleged that full ad valorem duty was payable.
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Given that the home units were valued at $52.9 million, the stamp duty payable of $2,894,990 can only be described as significant! The partnership had subsequently partitioned the home units between themselves prior to retail sale so that each lot in the strata plan was registered in the name of only one partner. Subject to payment of stamp duty on an adjustment in value between the respective units, only nominal stamp duty was payable on the partition and the Commissioner accepted that this was the correct treatment of this stage in the transaction.
Submissions The partners argued that section 55(1)(b) applied to the transfer of each unit from Queenscliff to the three partners. The Commissioner submitted (and the presiding judge Gzell, J, agreed) that section 55(1)(b) did not apply because the land transferred to the partners as strata lots was different to the land purchased by Queenscliff. In particular, on registration of the strata plan the common property was vested in the Owners Corporation (and not the partners) and was held subject to various restrictions on dealings set out in the Strata Schemes (Freehold Development) Act 1973. “That which was transferred to the partners differed from what Queenscliff had purchased by exclusion of the common property…That was a significant reduction in the rights acquired by the parties in comparison with the rights acquired by Queenscliff on purchase of the land.” Gzell, J.
Timing It is often said that success in life is all in the timing. The Commissioner conceded that if the consolidated land had been transferred to the parties before registration of the Strata Plan then section 55(1)(b) would have applied and only nominal stamp duty of $10.00 would have been payable on the transfer.
Improvements Queenscliff had only one (but very significant) success in the case. Section 23 of the Duties Act 1997 provides that stamp duty is payable on the unencumbered value of dutiable property, i.e. no allowance is made for any outstanding mortgage. Section 23(3) further provides that “if, before land is transferred to a transferee, the transferee has made improvements to the land then the unencumbered value of the land is to be determined as if those improvements had not been made.” Gzell, J held that while Queenscliff entered into the construction contract to build the home units, the finance was arranged by the partners who were equally liable for it. As a result, the partners had made the improvements before transfer within the meaning of section 23(3). The matter was remitted to the Commissioner to determine the unencumbered value of the land without the improvements, i.e. without the home units. Although the value would be the subject of expert evidence, one would imagine the unencumbered value on this basis would be in line with the price paid for the land by Queenscliff.
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This success was no doubt a source of some relief to the partners and their advisers but the result was still a liability for the parties of at least double the initial duty.
Amendment The State Revenue Legislation Amendment Act 2006 has amended section 55(1)(b) so that it is now in the following terms: “Duty of $10 is chargeable in respect of a transfer of dutiable property from an apparent purchaser to the real purchaser if: 1. 2.
the dutiable property is property, or part of property, vested in the apparent purchaser upon trust for the real purchaser; and the real purchaser provided the money for the purchase of the dutiable property and for any improvements made to the dutiable property after the purchase.”
Subsections (1A) and (1B) were also added in the following terms: “(1A)
(1B)
For the purposes of subsection (1), money provided by a person other than the real purchaser is taken to have been provided by the real purchaser if the Chief Commissioner is satisfied that the money was provided as a loan and has been or will be repaid by the real purchaser. This section applies whether or not there has been a change in the legal description of the dutiable property between the purchase of the property by the apparent purchaser and the transfer to the real purchaser.
Note: For example, if the dutiable property is land, this section continues to apply if there is a change in the legal description of the dutiable property as a consequence of subdivision of the land.”
Effect of Amendments The amendments have two effects. Firstly, they deal with a point that was not relevant to the Sportcorp decision. Section 1(A) now makes it clear that the exemption can apply if “the money was provided as a loan and has been and will be repaid by the real purchaser”. This would cover the common case where part of the purchase price is provided through a bank loan arranged by the real purchaser. The loan would need to be in the name of the real purchaser even if secured by a mortgage granted by the apparent purchaser of the subject land. Presumably, the amendment would also cover the situation mentioned at the start of this paper where a deposit is paid by the apparent purchaser who is subsequently reimbursed by the real purchaser, if appropriately documented as a loan. Secondly, the amendments overcome the Sportscorp decision. This flows from the addition of the words “or part of the property” in section 55 1(b)(i) and by the addition of subsection of (1B) which refers to the section applying despite a change in the legal description of the dutiable property.
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Any doubt about the matter has also been removed by the example quoted immediately after subsection (1B) which indicates that the exemption applies if there has been a change in the legal description of the dutiable property “as a consequence of the subdivision of the land”. This would cover the Sportscorp situation where the land was converted to strata title but also a subdivision of vacant land into separate lots.
Conclusion Although the broadening and clarification of section 55 can only be welcomed, the application of the section is still very technical. The best advice is to avoid the problem completely and wherever possible purchase dutiable property in the name of the real purchaser only. If it is impossible to avoid a purchase in the name of an apparent purchaser, extreme care should be taken to ensure all the steps and elements of section 55 have been satisfied.
For More Information Please Contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au
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