|Date of judgement||29 July 2016|
|Court or Tribunal||Supreme Court of New South Wales|
TAXES AND DUTIES —Section 107 of the Duties Act 1997 — Plaintiffs entered into a deed granting a call option to require a vendor to sell to them dutiable property — Plaintiffs entered into an agreement to rescind the deed on a third party entering into a contract to purchase the dutiable property from the vendor — Whether plaintiffs are to be treated as having assigned their right under the call option — Plaintiffs did not assign their rights under the call option — Plaintiffs did not nominate a purchaser on or in connection with the exercise of a call option — Assessment that plaintiffs liable for call option assignment duty revoked
The Law of Options and Other Pre-Emptive Rights, Farrands, LawBook Co, 2010
On 24 September 2013, the plaintiffs entered into a Put and Call Option Deed with Belts Uomo Pty Ltd (“the Vendor”) under which they were granted an option (“the call option”) to require the Vendor to sell to the plaintiffs, the properties at 6 and 6A Charles Street, Canterbury (“the Property”) for $3.8 million.
On 3 December 2013, the plaintiffs and XZ International entered into the Agreement under which, for valuable consideration, they agreed to negotiate with the Vendor for terms acceptable to all parties under which the option deed between the Vendor and the plaintiffs would be rescinded upon XZ International entering into a new contract with the Vendor for the purchase of the properties.
On 21 January 2014, the vendors and the plaintiffs entered into the “Release deed” in which they agreed to mutually rescind the call option. This release was subject to and conditional upon the successful exchange of the new contract for the sale of the Property between the Vendor and XZ International. A new contract was exchanged between the Vendor and XZ International on the same day, 21 January 2014.
On 22 October 2014, the Chief Commissioner assessed the Plaintiffs as liable to pay ad valorem duty on the Agreement between the Plaintiffs and XZ International, on the basis that pursuant to s. 107(2)(b) of the Act, the Agreement constituted an assignment of the Plaintiffs’ rights under the call option to XZ International, such that the call option would be exercisable by XZ International.
Section 107(1) of the Act establishes liability for “call option assignment duty” as follows:
“if a person (A) who has a right under a call option to require another person (B) to sell dutiable property assigns that right, so that the option is exercisable by a third person (C), duty under Chapter 2 is chargeable on that assignment as if the assignment were a transfer of the dutiable property concerned...”
Section 107(2)(b) of the Act provides:
“if, on or in connection with the exercise of a call option, A, for valuable consideration, enters into an agreement or arrangement under which A nominates a third person (C) as the purchaser or transferee of dutiable property the subject of a call option, A is to be treated as having assigned the right under the call option to require B to sell the dutiable property so that the option is exercisable by C.”
The plaintiffs submitted that the Agreement between them and XZ International did not constitute an assignment pursuant to s.107(2)(b) of the Act, as XZ International was not nominated as the purchaser or transferee of dutiable property under the Agreement. Instead, on 21 January 2014, the Vendor and the plaintiffs entered into a Release deed which served to rescind the Option Deed from the date of the exchange of the New Contract between the Vendor and XZ International. The New Contract provided for XZ International to purchase the Property from the Vendor.
The Chief Commissioner submitted that the purpose of s.107 of the Act was to close a loophole that enabled the avoidance of duty on a sub-sale of otherwise dutiable property, through the use of put and call options. The Chief Commissioner further submitted that the fact that the Agreement did not expressly refer to an assignment of the call option was not determinative, since the ultimate effect of the Agreement was that the plaintiffs nominated a third party, XZ International, as the purchaser or transferee of Property.
The Chief Commissioner submitted that although the effective nomination did not occur “on” the exercise of the call option, it occurred “in connection with” the exercise of the call option, since the Agreement regulated the exercise of the call option by prohibiting the plaintiffs from exercising it.
His Honour Justice White did not accept the Chief Commissioner’s submissions. His Honour reasoned that the reference to A nominating C as a proper transferee or purchaser in the context of s.107(2)(b) refers not to A proposing C as the transferee or purchaser, but to A designating C as the purchaser or transferee in exercising the option or in connection with doing so. Further, his Honour noted that to read “in connection with” to apply when there has been a relinquishment of the call option, was “a strained interpretation” of s. 107(2)(b) where the relinquishment of a call option is dealt within s.107(2)(a). His Honour did not consider that the relevant Second Reading Speech assisted as there was nothing to indicate that Parliament intended to close all possible loopholes under which transactions that had the same effect as a sub-sale would become liable to ad valorem duty. In any event, his Honour noted that “on the face of it, the omission has been rectified by subsequent amendments to the Duties Act (s.9B(1)(c))” (at 23).
His Honour found at  that “the plaintiffs did not assign their rights under the call option to XZ International. They did not nominate XZ International as the purchaser on or in connection with the exercise of their call option. They relinquished their call option, but the vendor did not enter into a new call option with XZ International. Although the transaction entered into had a substantial economic equivalence with any of those alternatives, it was a different transaction that did not fall within s.107.”
The assessment was revoked, with the defendant to pay the plaintiffs’ costs.