Australia: Stamp duty update – Victoria

Last Updated: 25 July 2015
Article by Steve Aitchison and Harriet Burton

Most Read Contributor in Australia, September 2016

In this article we discuss some recent decisions affecting the important issues of what constitutes "consideration" for the purpose of assessing duty on land transfers, and what constitutes a change to the nature of a landholding trust, thus triggering a liability for conveyancing duty on the basis of a change in beneficial ownership. We also cover a recent case where the "off the plan" concession was disallowed, and significant penalties applied.

What is included in "consideration"

The High Court of Australia, in the recent case of Commissioner of State Revenue v Lend Lease Development Pty Ltd (and other Lend Lease entities) [2014] HCA 51, has held that duty should be assessed not only on the purchase price specified in the relevant land sale contracts, but also on other payments inextricably linked to the sale. The appeal turned on the central question - what was the overall "consideration", monetary and non monetary, for the transaction?

Lend Lease wished to purchase land in the Docklands area of Melbourne, for development. Lend Lease entered into a Development Agreement with VicUrban (formerly Docklands Authority) which provided for a separate land sale contract to be entered into for purchase of the land. In addition, the Development Agreement required Lend Lease to make contributions to art and infrastructure for the Docklands area, and to pay to VicUrban at a later time, a share of gross sale proceeds after completion of its development on the land. Under The Duties Act 2000 (Vic) duty is assessed on the higher of the "consideration" for purchase of the land and the unencumbered market value of the land. In assessing the duty payable the Commissioner included as the "consideration" for the purchase, not just the price in the land sale contract, but also the other payments due under the Development Agreement. Lend Lease objected to the assessment, arguing that duty should only be payable on the price specified in the land sale contract.

The High Court held that the Development Agreement and all the payments required under it, formed a single, integrated and indivisible transaction and that it was all of these payments, as a whole, that "moved the transfer". To put it another way, the court found that VicUrban would not have sold the land to Lend Lease unless Lend Lease made all the other payments under the Development Agreement. In this sense all those payments were integral to the sale of the land itself.

Lend Lease argued that the price in the land sale contract reflected the value of the land at the time it was sold (being undeveloped land) and that it was not appropriate that other payments which enhanced the value of the neighbourhood (such as contributions to art and infrastructure), and which did not affect the value of the land at the time it was purchased, should attract duty. Also the payment of the share of sale proceeds on completion of the development was a future payment, long after Lend Lease took title to the undeveloped land, and should not, according to Lend Lease, attract duty. These arguments appear reasonable, but were unsuccessful because the court found they were part of the "consideration" for the sale and the Duties Act applies duty to the higher of consideration and value.

The decision has made it very clear that payments not included in the price can nevertheless from part of the "consideration", and therefore attract duty, if the agreement of the vendor to sell the land is in any way conditional upon those payments being made. The case highlights the need for parties negotiating land sale transactions to carefully consider the true nature of payments which are separate to the specified purchase price, as they may in fact attract duty if those payments can be regarded, on an overall view of the transaction, as part of the consideration required by the vendor in exchange for its agreement to sell the land.

When is an old trust a new trust for duty purposes?

As a general principle, the Duties Act allows land held on trust for a beneficiary to be transferred to the beneficiary without payment of duty, provided it is clear the trust was established before the land was acquired and the beneficiary paid the duty in the first place. The Act also allows land held by a trustee under a trust to be transferred to a new trustee of that trust without the payment of duty, where the original trustee has retired or been replaced. This is because in such a case there is no change in the beneficial ownership under the trust – all that has happened is that the trustee has changed.

But these exemptions are only available if it is clear that the underlying trust itself has not changed.

Two recent cases have highlighted the pitfalls for developers who jointly develop property held under a trust with the intention of creating and allocating separate titles for the completed lots or units, where those arrangements in fact result in the creation of a different trust or a change in the nature of the beneficial interest held, thus attracting duty.

In the case of White Rocks Properties Pty Ltd v Commissioner of State Revenue [2015] VSCA 77, the Victorian Court of Appeal found that when land held on trust by one trustee was transferred to another trustee, the rights of the beneficiaries under the trust changed, and thus a new trust was created, triggering a significant liability for stamp duty which the owners were not expecting.

In this case the owner of land in Warrnambool created 5 testamentary trusts which took effect on his death. The trust property of each trust comprised a one-fifth interest in common in the land. There were 2 trustees of each trust, who each jointly held a one-fifth interest in the land. These were effectively bare trusts. A hallmark of bare trusts is that the beneficiary can call on the trustee to transfer legal title to them at any time.

The five beneficiaries wished to jointly develop the land. The trustees executed a partnership agreement that appointed White Rocks Properties Pty Ltd as the agent of the partners and transferred the properties to White Rocks. The partnership agreement expressly described the business of the partnership as the sale of the partnership property. Remember, the property consisted of land in which each beneficiary held a one-fifth interest in common with each other.

The owners were expecting that Section 35(1)(a) of the Act would work to their benefit. This provision says that no duty applies in respect of a transfer to a trustee or nominee for the sole purpose of holding the property as trustee or nominee without any change in beneficial ownership of the property. The court found that this provision did not apply because:

  1. the land was not transferred to White Rocks to hold on trust for the testamentary trustees but instead it was transferred for development and subsequent sale
  2. the transfer of the properties and the creation of the partnership agreement created a new trust in which the testamentary trustees were no longer entitled to a retransfer of the land. Instead, they were entitled to a corresponding portion of the proceeds of sale
  3. the partnership agreement contained provisions that could require White Rocks to hold the partnership assets on trust for persons other than the testamentary trustees (for example, if one partner were replaced by another party).

White Rocks also sought to rely on the duty exemption in Section 33(3) of the Act to the effect that no duty is chargeable on a transfer of dutiable property if the transfer is made solely because of the retirement of a trustee and subsequent appointment of a new trustee. However the court found that the exemption was not applicable because the execution of the transfers and the partnership agreement gave rise to a new trust. The court found that the transfers were "predominately made to facilitate the carrying on of the partnership business - namely the development and sale of the land - rather than solely because of the appointment of White Rocks as trustee or solely in order to vest the land in White Rocks as the trustee entitled to hold it."

In the second case, Michaelides v Commissioner of State Revenue (Review and Regulation) [2015] VCAT 624, two parties acquired a residential property with the intention of constructing two new units and transferring one completed unit to each of them. The two parties were both family trusts, and the two relevant individuals, Mr Michaelides and Mr O'Malley, were the respective trustees. It was agreed that the two family trusts would form a partnership to develop the property. A company was formed (called Saint Swan Pty Ltd) to act as the trustee and agent for the partnership. Saint Swan was nominated as the purchaser under the contract and at settlement became the registered owner. In this capacity Saint Swan also borrowed funds from NAB to complete the purchase and granted NAB a mortgage over the property.

When the units were completed the partnership was dissolved, the NAB debt was taken over by the two family trusts and Saint Swan transferred the land (still in one title at that time) to the two individuals "as tenants in common in equal shares". Later, when the separate titles were issued for the two units, one was transferred to Mr Michaelides and the other to Mr O'Malley under section 27 of the Act which allows for "partition" of property free of duty.

The question was whether the first transfer (from Saint Swan to Mr Michaelides and Mr O'Malley as tenants in common) qualified for a duty exemption under section 33 of the Act. This is the section that allows for a duty free transfer where there has been a change to the trustee of an existing trust. For the exemption to apply it must be clear that the underlying trust is a "pre-existing and continuing trust", and that the new trustee (ie the transferee) has not been appointed to "perform a newly created trust". The developers argued that the trust had not changed – in substance, the property which was previously owned by Saint Swan as trustee for the two family trusts (ie the partners) was now owned by Mr Michaelides and Mr O'Malley as trustees for the two family trusts, and thus the beneficial ownership had not changed.

However, VCAT found that the trust had changed when the first transfer was signed and therefore the exemption under section 33 did not apply. Prior to the transfer, Saint Swan held the whole undivided interest in the Property for the partners (ie the two family trusts) and the effect of the transfer was to create two separate estates as tenants in common in equal shares – a significantly different estate and therefore a different trust. VCAT also found that there was no evidence that in fact Mr Michaelides and Mr O'Malley, as trustees of the respective family trusts, had simply replaced Saint Swan as the trustee of the partnership trust. One of the difficulties for the developers was that the evidence, including the accounting records for the partnership and the family trusts, was not consistent and did not support their arguments about the nature of the beneficial interests, and the nature of the underlying trust.

The case is a reminder of the importance of understanding the true nature of the trust and beneficial rights to be created at the outset, and ensuring that all documents, including accounting records, are consistent through the life of the project.

Off the plan duty concession - when false declarations are made

Developers and purchasers of "off the plan" apartments will know that in Victoria a special stamp duty concession is available, on the basis that duty is assessed on the value of the land at the time of contract, and thus excludes the value of building work undertaken after the date of contract. In the case of Balonyi v Commissioner of State Revenue [2015] VCAT 509 the developer entered into off the plan contracts for sale of some units, to related parties, and claimed the full "off the plan" duty concession. The Duties Office initially allowed the concession but later undertook an investigation. It interviewed relevant people and after finding that the contracts were backdated, disallowed the concession, issued amended assessments and imposed a penalty of 75%. The developer appealed the assessment to VCAT, who upheld the assessment and the penalty.

This case highlights the importance, when signing "off the plan" contracts, of ensuring there is clear evidence to support the date of signing. It is also a cautionary tale to vendors that false declarations can have significant consequences, including substantial penalties under the Duties Act.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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