Steps in the right direction
The NSW State Government has recently passed legislation bringing forward the abolition of mortgage duty from 1 January 2011 to 1 July 2009.
In addition, from 1 September 2007, no mortgage duty has applied to the financing of a principal place of residence. It will also no longer apply for the financing of investment housing from 1 July 2008.
These measures are to be applauded, but there are still a number of aspects of the mortgage duty regime in NSW (and indeed all other jurisdictions which impose this duty) which cause unnecessary complexity in financing transactions resulting in increased costs being payable by commercial borrowers.
Areas where reform is required
One issue which deserves consideration for reform is multi-state stamping of security documents. In circumstances where a security is given over assets which are located in more than one dutiable jurisdiction, the mortgagor is required to execute a multi-jurisdictional mortgage statement. The purpose of this statement is to indicate the location and value of the assets of the mortgagor throughout the various States and Territories of Australia and overseas.
The statement allows the mortgagee and the various Offices of State Revenue to determine the duty payable in all relevant jurisdictions (generally on a proportional basis).
This practice brings with it a number of practical difficulties which result in unnecessary costs being incurred in financing transactions. These are:
- Each State has its own form of multi-jurisdictional mortgage statement. Although the contents of each statement are generally the same, it would be preferable if only one form was required to be executed and which could then be used in all States where such duty is levied.
- The value of the property to be included in the statement must be verified by reference to a number of options. These are:
- Independent valuation.
- A statement by the mortgagee based on information obtained in determining to make the advance to the mortgagor. As the forms are generally executed by the mortgagor, this option is not often used or appropriate.
- Property valuations used in preparing an annual return under the Corporations Act.
- Financial reports of the mortgagor certified by an independent auditor.
- Agreed valuations for property insurance purposes.
In the case of certain companies and indeed certain assets, none of these options apply. This then opens the question as to how the statements can be completed in compliance with the required form.
- Common examples where these issues raise difficulties are where assets include accounts receivable, intellectual property or the mortgagor is a private company which does not have its financial statements audited.
- In respect of accounts receivable, stamp duty laws provide that such assets are located where the debtor (being the person who is liable to pay the account receivable) resides. Where a corporation carries on business throughout Australia, its debtors may reside in a number of jurisdictions. In addition, billing addresses do not necessarily indicate where such debtors reside. In any event, it is not likely that the value of such debtors can be verified by any of the five options allowed for in the multi-jurisdictional mortgage statement.
This generally leads to confusion and unnecessary costs being incurred in discussing the issue with not only the mortgagor's own advisers but those of the lender. As the value of accounts receivable changes everyday, the confusion and issues associated with this form of asset highlights the difficulties associated with providing accurate information to a mortgagee and in completing the current form of multi-jurisdictional mortgage statement.
- Where assets consist of intellectual property, legal rules have been developed to try and attribute a location to such intellectual property. Although such intellectual property generally arises under Commonwealth based legislation rather than any State or Territory legislation, the rules relating to the identification of the location to such property for stamp duty purposes is based on where the property is used by the mortgagor. This is often determined by reference to relative sales values in each jurisdiction.
Again, for the purposes of the multi-jurisdictional mortgage statement, it may be difficult to determine the appropriate value attributable to intellectual and the jurisdiction to which it should be allocated. In addition, the five options contained in the multi-jurisdictional mortgage statement as to how such values are verified may be difficult to complete.
The desire of each State (which still imposes mortgage duty) to maximise revenue from this tax continues to drive up transaction costs. The various rules for determining the location of certain assets are difficult for commercial people to understand (and cause difficulties in completing the required paperwork necessary for a mortgagee to ensure proper stamping of its security).
Suggestions for reform
- To simplify the process, further options should be included in the multi-jurisdictional statements as to the means by which the assets’ value as contained in the statement can be verified. Management accounts or director’s valuations should be an option as they are particularly relevant to certain types of assets, such as those mentioned above.
- Although provision exists in the duties legislation of some jurisdictions to allow for collateral securities (even if they are collateral to security that is stamped in other jurisdictions) to be stamped with a nominal duty of $10, various other provisions make it difficult for this to be applied in a consistent manner.
One suggestion to simplify all of the above and reduce transaction costs would be to allow for the security to be stamped as the prime security in the jurisdiction in which the majority of the assets of a mortgagor are located, with securities over assets in other jurisdictions being able to be stamped with nominal duty and nothing else. Due to the spread of businesses throughout the country, it makes sense that if a lender is dealing with a business in a particular State where the majority of its assets are located, it should not have to (and neither should the mortgagor) calculate complicated proportions and work through complicated provisions so as to stamp the security documents in other jurisdictions.
In other words, if mortgages were only required to be stamped in one State where the majority of a company’s assets are located (with the securities in other States in which assets are located only being liable to nominal duty to be fully enforceable in that State), this would simplify financing transactions involving assets in multiple jurisdictions and reduce transaction costs.
The opportunity is now
Western Australia has recently announced its desire to simplify and bring its stamp duty legislation up to date. New South Wales has recently announced a review of State taxes, again with a view to simplifying the same. One can only hope as part of these processes, reforms dealing with matters such as the above are considered and implemented as it is very difficult to explain to clients who operate offshore (where no mortgage duty is levied) how and why transactions take as long as they do and cost as much as they do merely because of the operation of the current mortgage duty provisions in Australia.
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