ON 30 JANUARY 2013, JUSTICE IAN GZELL OF THE NEW SOUTH WALES SUPREME COURT HANDED DOWN HIS JUDGMENT IN THE CASE OF BONDI BEACHSIDE PTY LTD V CHIEF COMMISSIONER OF STATE REVENUE.
WHY IS THIS CASE IMPORTANT?
The case involved the issue of whether an extension of the term of a deferred purchase price/loan note financing structure amounted to a forbearance to pay resulting in additional mortgage duty being payable on the security held by the financier.
As a result of the judgement, where financiers are a party to a deferred purchase price/loan note financing structure, (the repayment or termination dates of which have been extended), careful consideration needs to be given to the mortgage duty consequences of the extension.
This is particularly important should the financier wish to enforce its security as under Section 211 of the Duties Act 1997 (NSW) (Act):
"A mortgage on which duty is required by this Chapter to be paid is unenforceable to the extent of any amount secured by the mortgage on which duty has not been paid".
WHAT WAS THE CASE ABOUT?
The structure involved in the case was consistent with similar structures used prior to 1 July 2009 in relation to secured financing arrangements. The financing arrangements the subject of the case related to the acquisition of the Swiss Grand Hotel at Bondi in New South Wales.
The security granted by the Mortgagor secured the obligation to pay the deferred purchase price and interest on loan notes acquired by the Mortgagor from the National Australia Bank (NAB).
The original arrangements were entered into in December 2007. The termination date applicable to the original facility was 3 April 2009.
Interest under the facility was to be capitalised.
During the course of the facility Variation Deeds were executed between the relevant parties resulting in extensions of the term of the facility.
The question before the court was whether the extensions of the term of the facility constituted a forbearance to require the payment of money owing. If such extensions constituted a forbearance to pay, the forbearance would constitute an advance for the purposes of Section 206(a) of the Act, which would result in mortgage duty becoming payable on the security as from the date of the forbearance.
Whether or not an extension of time in relation to a facility constitutes forbearance has, in our view, always been a controversial issue. Although it may have been arguable that the answer depended on whether the extension time was provided before or after the expiry of the original facility term, the Chief Commissioner, in Revenue Ruling DUT No. 40 (issued on 23 December 2009), took the view that this was not relevant.
In the case, arguments were put that forbearance is a unilateral act (not consensual) and therefore "one cannot have a contractual forbearance". The court dismissed this argument and took the view that the variation resulting in the extension of the facility constituted "an advance as being a forbearance to require the payment of money owing on any accounts whatever". No mention was made as to whether the time at which the variation occurred had any bearing on this conclusion.
The court held that prior to 1 July 2009 (being the date on which the State Revenue Legislation Further Amendment Act 2009 (NSW) (Amendment Act) became effective), no amounts were secured (as required under the Act) as the court impliedly accepted that the deferred purchase price/loan note arrangements did not constitute an advance for the purposes of the Act. However, once the Variation Deeds were executed, "there was an advance by forbearance and the amount secured then became the amount of any advances made for which the charge was security". The court agreed with the Chief Commissioner that the amount secured by the charge "ceased to be no amount and became $92,006,545 plus capitalised interest making the total amount $102,600,000".
Interestingly, the anti-avoidance provisions in Chapter 11A of the Act were not invoked by the Chief Commissioner as it is clear from both Paragraph 78 of the Schedule 1 to the Act and Revenue Ruling No. DUT 40 that Chapter 11A:
"Does not apply to any amount of duty avoided by a person as a result of a tax avoidance scheme if, apart from the scheme, liability for the duty concerned would have arisen before 1 July 2009".
The court relied solely upon the interpretation of Chapter 7 of the Act relating to mortgages. In any event, the liability for duty assessed related solely to the advances of which arose as a result of the forbearance which, arguably, were not amounts to which the above grandfathering provided for in Section 78 would apply.
CAPITALISED INTEREST
In a win for the taxpayer, the court rejected the Chief Commissioner's suggestion that the forbearance to pay removed the distinction between principal and interest. The court held that capitalised interest was not an advance for mortgage duty purposes. As a result, to the extent that the amounts secured by any securities relating to a deferred purchase price structure comprise of capitalised interest, no mortgage duty will be payable on such amounts.
WHAT SHOULD YOU DO?
We recommend that both lenders and borrowers carefully consider any current deferred purchase price financing arrangements which have been extended to determine whether or not any additional mortgage duty is payable on the security documents given the results of the above case.
If you would like to discuss any such matters with us, please contact Peter Faludi, Hugo Thistlewood and any other member of our Banking & Finance Team.
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