On 17 June 2009, the NSW Government announced major changes to mortgage duty. The changes, which apply from 1 July 2009, will have significant ramifications for both existing secured facilities (where further advances or new security are taken on or after 1 July 2009) and new secured facilities put in place on or after 1 July 2009. In addition, the proposed introduction of general anti-avoidance provisions to an area historically ruled by form alone will create added difficulties and uncertainty for financiers, borrowers and advisers alike.
The changes, contained in the State Revenue Legislation Further Amendment Bill 2009 (Bill), will apply to mortgages where a liability for mortgage duty arises on or after 1 July 2009. The changes will also apply to existing mortgages where a further advance is made on or after 1 July 2009 and before 1 July 2012 (when mortgage duty is scheduled to be abolished).
Limited mortgages no longer effective
Mortgage duty is imposed in respect of an advance or further advance on the "amount secured by the mortgage".
Under the existing provisions, where a recoverable limit was imposed the "amount secured by the mortgage" was the amount of the limit. This practice was commonly used to minimise mortgage duty with financiers later lifting the limit and up-stamping the mortgage if enforcement was required.
Under the new provisions, any such limit will be ignored. The "amount secured by the mortgage" will be the amount of the advances made under the relevant agreement for which the mortgage is security, irrespective of whether the amount recoverable is less than the amount of those advances.
New method for calculating mortgage duty on further advances
Under the existing provisions, mortgage duty is assessed separately in respect of a further advance, i.e. mortgage duty is imposed on the advance (any limits aside) by reference to the value of NSW secured property compared to total secured property.
Under the new provisions, the NSW proportion of secured property is still tested but is instead applied to the total advances (i.e. the advance and all further advances), with a credit given for NSW mortgage duty previously paid. The stated purpose of this measure is to "deter avoidance practices". The additional duty payable is therefore no longer limited by reference to the further advance. This may:
- increase the NSW duty where the NSW proportion increases over time. A concession is, however, provided for mortgage duty previously paid in another State, i.e. credit will be provided so that the maximum total duty payable on a mortgage is capped at 0.4% of total secured advances; and
- possibly result in the benefit of previous structuring around "after-acquired" property being lost if a further advance is made after 1 July 2009.
Further advances in respect of NSW limited mortgages entered into prior to 1 July 2009 will be subject to duty on those further advances made after 1 July 2009. However, transitional provisions will ensure that the benefit of the limit in relation to pre-1 July 2009 advances will not be lost if a further advance is made after 1 July 2009, i.e. the pre-1 July 2009 advances above the limit will not be subjected to duty.
Changes to mortgage package provisions
Under the current provisions, a mortgage may only come within a "mortgage package" if it is executed within 28 days of the other security instruments. Under the new provisions, the 28 day rule will no longer apply and security instruments that secure, or partly secure, the same money will be assessed as a "mortgage package".
Where a mortgage granted on or after 1 July 2009 secures or partly secures the same money as other security instruments, the mortgage package provisions will apply and additional mortgage duty may be payable where the NSW proportion of secured property has increased since the advances under the original mortgage, even if no further advance is made in connection with the new mortgage. This may present a trap in the current environment, where many borrowers are being called on by financiers to provide additional security for existing borrowings.
General anti-avoidance provisions introduced
The general anti-avoidance provisions contained in the Bill will apply to schemes entered into on or after 1 July 2009 and to schemes put in place before 1 July 2009 to the extent that they are carried out on or after 1 July 2009.
The provisions are targeted at "artificial, blatant or contrived schemes" where there is a sole or dominant purpose of enabling liability for duty to be avoided or reduced. The provisions operate in a similar way to the general anti-avoidance provisions in Part IVA of the Income tax Assessment Act 1936.
Accordingly, from 1 July 2009 consideration will need to be given to the potential application of these general anti-avoidance provisions to financing transactions that have the effect of minimising mortgage duty.
What do the changes mean for you?
The changes will have significant ramifications for financiers and borrowers in respect of both existing and new financing transactions planned to take place on or after 1 July 2009. Many of the previous finance structures that were used to reduce mortgage duty will no longer be effective.
In particular, the introduction of general anti-avoidance provisions to an area historically ruled by form alone will create added difficulties and uncertainty for financiers, borrowers and advisers alike.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.