Chief Commissioner of State Revenue v Centro (CPL) Limited  NSWCA 325
In 2010 Centro (CPL) Limited (“Centro”) succeeded in an appeal to the Supreme Court against the decision of the Chief Commissioner of State Revenue (“Chief Commissioner”) to apply the anti-avoidance provisions of s.24 of the Duties Act 1997 ("Act"). Gzell J upheld Centro’s appeal against the Chief Commissioner’s decision to disregard the grant of a long-term concurrent lease of land in NSW in determining the dutiable value of the acquisition by Centro of the reversionary interest in Bankstown Shopping Centre
On 18 October 2011 the Court of Appeal delivered a unanimous judgment in favour of the Chief Commissioner, overturning the decision of Gzell J at first instance. The Court of Appeal found the scheme or arrangement identified by the Chief Commissioner had a collateral purpose of reducing the duty otherwise payable on the dutiable transaction under s 24 of the Act.
An application for special leave to appeal was subsequently lodged by Centro. On 9 March 2012 the High Court of Australia refused to grant special leave.
The case centred on a complex commercial transaction to purchase the Bankstown Square Regional Shopping Centre ("the Shopping Centre"). The Government Superannuation Office of Victoria ("GSO") and GPT Management Limited ("GPT") owned the Shopping Centre as tenants in common in equal shares, which was subject to various short-term commercial leases ("the short-term leases").
At the time of the transaction, s.24 of the Act (an anti-avoidance provision) provided:
[I]f any arrangement affecting the dutiable value of dutiable property that was entered into within 12 months before a dutiable transaction was brought about by any person with the intention of reducing the dutiable value of the dutiable property, the Chief Commissioner may:
- cause a valuation of the dutiable property to be made, and
- direct the valuer to disregard the arrangement for the purposes of the valuation, and
- assess duty on the basis of the valuation carried out in accordance with the direction.
A number of transactions occurred on 30 October 2002, including:
- an agreement to grant a long-term concurrent lease from GPT to CPT Custodian Pty Ltd ("CPT Custodian"), a wholly owned subsidiary of Centro. The lease was for a term of 300 years and required payment of an upfront premium of $175,950,000.
- an option to purchase the freehold interest from GPT to Centro for a price of $50,000. The call option could be exercised during the period of 1 month beginning one year and one day after the commencement date of the lease.
- a put option from Centro to GPT entitling it to require Centro to purchase the freehold interest in the Centre for a price of $50,000 during a period commencing 1 year, 7 months and 1 day after the commencement of the lease.
- a contract with the GSO as vendor and CPT Custodian as purchaser of GSO's interest in the Shopping Centre for $167.1 million.
Centro obtained legal advice about the structuring of the acquisition of the Centre. The advice was that put and call options should be exercisable only after the expiration of a period of 12 months from the grant of the concurrent lease in order to avoid the operation of s.24 of the Act.
The advantage to the Centro Group from these transactions was that they could acquire the Shopping Centre at a greatly reduced stamp duty impost as lease duty was only 0.35%, whereas conveyance duty was 5.5% for amounts over $1 million.
On 12 November 2002, the agreement for lease was lodged for stamping and lease duty was paid. On 21 November 2002, GPT granted the long lease to CPT Custodian. On the same day the sale of GSO's interest to CPT Custodian was completed. On 21 July 2004, GPT exercised its put option. On 22 July 2004 GPT and Centro entered into a contract for GPT's freehold interest in the Shopping Centre.
By this time, the current version of s 24 of the Act had taken effect.
Section s 24 the Act provides:
- In determining the dutiable value of dutiable property under this Part, any interest, agreement or arrangement (other than an encumbrance) granted or made in respect of the dutiable property that has the effect of reducing the dutiable value is to be disregarded, subject to subsection (2).
- An interest, agreement or arrangement is not to be disregarded if the Chief Commissioner is satisfied that it was not granted or made as a part of an arrangement or scheme with a collateral purpose of reducing the duty otherwise payable on the dutiable transaction.
- In considering whether or not he or she is satisfied for the purposes of subsection (2), the Chief Commissioner may have regard to:
- the duration of the interest, agreement or arrangement before the dutiable transaction, and
- whether the interest, agreement or arrangement has been granted to or made with an associated person, and
- whether there is any commercial efficacy to the granting of the interest or the making of the agreement or arrangement other than to reduce duty, and
- any other matters the Chief Commissioner considers relevant
On 3 November 2004, Centro lodged its contract of sale for stamping, paying duty of $765. The Commissioner issued an assessment to Centro based on the value of the freehold interest of $176 million, disregarding the concurrent lease. Centro was assessed with duty of $9,665,492.
Proceedings were commenced in the Supreme Court by the taxpayers under s.97 of the Taxation Administration Act 1996 ("TAA").
The Primary Judgement
- distinguished Trust Company Ltd v Chief Commissioner of State Revenue  70 ATR 505, which concerned a similar arrangement, in that it used a scheme to acquire property by a concurrent lease to limit the duty payable. In that case the vendor and purchaser entered into a heads of agreement prior to entering into the transactions and the lessee of the concurrent lease was the same person as the purchaser of the fee simple (as such, the leasehold and freehold interests merged);
- held there was nothing to indicate that the current version of s.24 was intended to introduce any significant change from s.24 in the form considered in Trust Co;
- held that a reduction in dutiable value calls for a comparison between what Centro acquired and what it otherwise would have acquired but for the impugned interest, agreement or arrangement;
- held the dutiable property was the reversionary interest in the Shopping Centre expectant upon the 300 year concurrent lease and it was that dutiable property that the Chief Commissioner had to assess for duty and not some other dutiable property;
- held "any interest, agreement or arrangement to be disregarded" had to be made in respect of the dutiable property assessed to duty and not in respect of some other dutiable property;
- held that it was never intended that Centro should acquire anything other than the reversion expectant upon the 300-year concurrent lease;
- held that there was no arrangement or scheme with a collateral purpose of reducing the duty otherwise payable by Centro on its agreement to acquire the reversion expectant upon the 300-year concurrent lease; and
- revoked the Chief Commissioner's assessment (and made ancillary orders).
Court of Appeal decision
Giles and MacFarlan JJA agreed with the following reasons of Sackville AJA who delivered the primary judgement:
- The two versions of s.24 are materially different both in structure and in language.
- A key concept in s.24(1) is dutiable property. In the present case, the interest was GPT's fee simple estate as a tenant in common, subject to the concurrent long lease (the "Reversionary Estate").
- Another key concept in s.24(1) is dutiable value. The dutiable value of the dutiable property the subject of the dutiable transaction is, for present purposes, the unencumbered value of the Reversionary Estate.
- The dutiable transaction in the present case was the contract of sale between GPT as vendor and Centro as purchaser.
- The dutiable value is to be determined without regard to any encumbrances to which the property is subject and a lease is not an "encumbrance". Therefore, s.24(1) does not require a lease to which the freehold is subject to be ignored in determining the value of the freehold.
- Where a contract is for the sale of the freehold subject to a lease, the usual principles apply. That is, the value of the freehold subject to a lease is to be determined for the purposes of the Act by taking into account the terms of the lease. As such, the dutiable property in the present case includes the terms of the long lease and the unencumbered value of the Reversionary Estate was its value taking into account the terms of the 300 year concurrent long lease.
- Section 24(1) of the Act requires that, in certain circumstances, a different approach is to be taken in determining the value of a freehold estate subject to a lease than is usual. If an interest, agreement or arrangement has been granted or made in respect of the dutiable property and it has the effect of reducing the dutiable value, the interest, agreement or arrangement is to be disregarded.
- Contemporanity is not required between the grant of the interest and the dutiable transaction.
- For s.24 (1) to apply, it is necessary for the interest to be granted "in respect of" dutiable property. Once that condition is satisfied, the effect of the interest on the dutiable value is to be determined by asking what the dutiable value would have been without the interest. If it would have been greater than the dutiable value of the dutiable property, s 24(1) is satisfied.
- The words "in respect of" are words of wide import. It does not strain the language to say that the grant of a limited interest in land is "in respect of" the reversionary freehold estate that is subject to that very interest. This is because the grant of the limited interest defines and delimits the freehold estate subject to that interest.
- The comparison envisaged by s.24(1) is between the dutiable value of the dutiable property and its dutiable value on the assumption that the interest had never been granted. If the dutiable value calculated on this basis is greater that the dutiable value of the dutiable property, the effect of the grant of the concurrent long lease is to reduce the dutiable value for the purposes of s.24(1).
- In this case, the comparison required is between the reversionary estate expectant on the concurrent long lease and a reversionary freehold estate expectant on the short leases.
- The net cast by s.24(1) is potentially wide. The creation of an easement or restrictive covenant over land, for example, might reduce the dutiable value of the fee simple estate when it is subsequently sold subject to the easement or covenant. The answer provided by Parliament is that the interest is not to be disregarded if the taxpayer satisfied the Chief Commissioner that the interest was not granted as part of an arrangement or scheme with a collateral purpose of reducing the duty otherwise payable on the dutiable transaction under s.24(2).
- The dutiable value of the reversionary estate without the long lease was in the order of $176 million.
Section 24(2) and (3)
Sackville AJA held as follows:
- Section 24(2) of the Act contemplates that the interest the subject of the Chief Commissioner's consideration may have been granted as part of a wider arrangement or scheme. In order for an interest not to be disregarded, the Chief Commissioner must be satisfied that the interest was not granted as a part of an arrangement or scheme with a specified collateral purpose under s.24(2). Thus the Chief Commissioner, in considering whether he or she is so satisfied, is to direct attention to an arrangement or scheme that may be wider than the interest itself and involve persons other than those participating in the grant of the interest.
- The Chief Commissioner in forming the judgment required by s.24(2) must direct attention to a purpose of a scheme rather than part of a scheme.
- The negative matter as to which the Chief Commissioner is to be satisfied if the interest is not to be disregarded, is defined by reference to "a collateral purpose" of the relevant arrangement or scheme.
- A scheme may have "collateral purpose" even if it is not the dominant purpose of the scheme.
- The purpose identified by the sub-section is that of the arrangement or scheme, rather than of the participants in the arrangement or scheme.
- Section 24(2) does not state that a collateral purpose of a scheme or arrangement is relevant only if the purpose is to reduce the duty otherwise payable by the particular taxpayer assessed to duty on the dutiable transaction. So expressed, s24(2) is apt to refer to an arrangement or scheme with a collateral purpose of reducing the duty payable by some other taxpayer.
- Section 24(3) identifies the considerations the Chief Commissioner may have regard to in determining whether he or she is satisfied of the matters in s.24(2). Three of those considerations are objective facts. However the fourth matter permits the Chief Commissioner to have regard to any other matter he or she thinks relevant. This allows the Chief Commissioner to have regard to the subjective purposes of those involved in the grant of the interest, provided that the Chief Commissioner does so in the context of forming a judgment as to whether the arrangement or scheme has a collateral purpose of reducing duty otherwise payable on the dutiable transaction.
- It may be that the Chief Commissioner is bound to take into account the three objective criteria specified in s.24(3) (but found it unnecessary to decide).
- The Chief Commissioner may seek to rely on the grant of a long lease as a part of a scheme or arrangement with a disqualifying purpose.
- The critical word in s.24(2) is "otherwise". Just as s.24(1) requires the interest to be disregarded and a hypothetical situation to be considered, so the word "otherwise" in s.24(2) requires the Chief Commissioner to consider a hypothetical or counter-factual situation. By using the word "otherwise", s.24(2) requires the Chief Commissioner to consider what duty would have been payable had the interest not been granted.
- The Chief Commissioner must consider whether the amount of duty payable on the hypothetical dutiable transaction would have been greater than the amount of duty payable on the dutiable transaction that did take place. If the amount of duty would have been greater, the Chief Commissioner must then consider whether it was a collateral purpose of the relevant scheme or arrangement to reduce the amount of duty that would have been payable had the interest not been granted.
- It follows that s.24(2) does not require the Chief Commissioner to confine attention to the very dutiable transaction which is the product of the interest that s.24(1) says is to be disregarded.
- The better view is the Chief Commissioner must form a judgment as to what dutiable transaction would have occurred but for the grant of the interest. The alternative is to construe s.24(2) as identifying the hypothetical dutiable transaction as the dutiable transaction that actually took place but disregarding the interest. It is not necessary to finally decide between these alternatives since in the present case each produces the same result.
- A collateral purpose may be present even if the party liable to pay duty on the hypothetical dutiable transaction would not have been the same as the party liable to pay duty on the transaction that actually took place.
- Centro did not challenge the proposition implicit in the Chief Commissioner's determination that if the arrangement or scheme had not been entered into, GPT's freehold estate would have been transferred to CPT Custodian. That inference is clearly warranted having regard to CPT Custodian's acquisition of GSO's freehold estate and the long lease.
- The fact that there is a disparity between the duty payable on the hypothetical dutiable transaction and that payable on the actual dutiable transaction does not necessarily mean that it was a purpose of the arrangement or scheme to reduce the duty that would otherwise have been payable on the actual dutiable transaction. It is necessary for the Chief Commissioner to address whether that indeed was a purpose of the arrangement or scheme. This is to be done by reference to the matters identified in s.24(3).
- It is true that the long lease was in existence for some 19 months before GPT exercised its put option, leading to entry into the contract of sale between GPT and Centro. But a delay of this magnitude was expressly contemplated by the transaction comprising the scheme and had its own taxation rationale (albeit under a different taxation regime). The delay was entirely consistent with the arrangement having a purpose of reducing the duty otherwise payable on the dutiable transaction.
- It is permissible under s.24(3)(d) to have regard to the subjective purposes of the participants in the scheme provided that attention remains focussed on whether the scheme or arrangement has a collateral purpose of the kind identified in s.24(2).
Even if it was not permissible to have regard to subjective purposes, His Honour found the scheme or arrangement identified by the Chief Commissioner had a collateral purpose of reducing the duty otherwise payable on the dutiable transaction.
The Court allowed the appeal, set aside the orders made by Gzell J, dismissed Centro's summons and ordered Centro to pay the Chief Commissioner's costs of both the appeal and the original hearing.
Link to decision
Chief Commissioner of State Revenue v Centro (CPL) Limited  NSWCA 325