Last Friday, 9 March 2012, the High Court refused Centro (CPL) Ltd special leave to appeal against a NSW Court of Appeal decision concerning stamp duty and long-term lease arrangements. Consequently the landmark Court of Appeal decision1 stands.
The Centro decision highlights that long-term lease arrangements are a key stamp duty risk area for taxpayers. The case is also likely to impact on taxpayers outside NSW as similar anti-avoidance provisions exist in most jurisdictions (such as Victoria). Consequently taxpayers contemplating arrangements involving acquisitions of freehold interests with long term lease arrangements in place should ensure they seek advice on the potential duty implications.
Background to the dispute
The dispute concerned Centro (CPL) Ltd's acquisition of a freehold interest in the Centro Bankstown shopping centre.
The structure it adopted may be one contemplated by many property funds, and is broadly as follows:
- CPT Custodian Pty Ltd on behalf of Centro Bankstown Sub-Trust No 1 entered into an agreement for a long term lease of 300 years for an upfront premium and nominal rent.
- As a result of this long term lease Centro Bankstown Trust derived rental income from tenants.
- Centro (CPL) Ltd acquired the freehold which was subject to the long term lease a little more than one year after the lease commenced for a nominal price.
At the time of the transaction, duty on long term leases in NSW was only subject to nominal duty (as compared to land transfers) therefore, CPT Custodian Pty Ltd was only subject to nominal duty on the transaction. It was Centro (CPL) Ltd's contention that the reversionary freehold was worth little, if anything, given that it was subject to such a long-term lease. Consequently, it argued the transfer of the freehold should result in only a nominal duty liability.
Issue and decision
The Duties Act 1997 (NSW) contains an anti-avoidance provision which allows the Commissioner to disregard an arrangement designed to reduce the dutiable value of property being transferred. Relying on this provision, the Commissioner determined that Centro had entered into the long-term lease in order to reduce the value of the freehold land, and consequently disregarded the lease when determining the dutiable value of the freehold interest. This resulted in a significantly higher value for the freehold, and consequently a much higher duty liability.
Centro attempted to challenge the Commissioner's decision through the courts, arguing that the Commissioner was not entitled to disregard the long-term lease when assessing it for duty. Centro was initially successful in the Supreme Court, but that decision was overturned by the Court of Appeal. The Court of Appeal held that the Commissioner was entitled to disregard the lease; hence the higher duty assessment was valid. As the High Court has refused special leave to appeal, this decision stands.
Ongoing impact of the decision
The decision is significant as it is one of the few times the Commissioner has successfully applied this anti-avoidance provision to a transaction. Similar anti-avoidance provisions apply in other jurisdictions (eg Victoria) so other Revenue Offices are likely to examine the case with interest.
A number of duty measures have been targeted towards such leases in recent years. For example, in Victoria, from 21 November 2008, the granting of a long-term lease will be subject to duty at the land transfer rates if a premium (e.g. an upfront payment) is paid for the lease or a payment is received for various rights, options or arrangements to purchase the underling land. A similar provision exists in NSW.
The Centro decision highlights that the State Revenue Commissioners have multiple tools in their arsenals with which to attack long-term lease arrangements. Taxpayers should seek proper advice prior to entering into such arrangements to ensure they are not exposed to substantial stamp duty.
1Commissioner for State Revenue v Centro (CPL) Ltd  NSWCA 325.
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