|Date of judgement||30 January 2017|
|Court or Tribunal||Supreme Court of New South Wales|
TAXES AND DUTIES – Mortgage duty – Duties Act 1997 ss 213 and 215 – Application of State Revenue Legislation Further Amendment Act 2009 – Application of changes to mortgage duty provisions, cl 76 of Schedule 1 – Refinancing using a “deferred purchase price loan structure” – Whether 2009 amendments applied - Whether unsecured advance made under an agreement, arrangement or understanding for which mortgage was security (s 213) – Whether mortgage capable of being used to recover an amount contingently payable in connection with an advance by a guarantor (s 215) – Assessment confirmed
On 11 July 2008, VKH Pty Limited (“VKH”) was provided with a $400m financial accommodation associated with the expansion of the Visy Tumut Kraft Pulp and Paper Mill in New South Wales, described as a “deferred purchase price loan note structure”. The Instruments were initially stamped with duty of $5 when they were executed on 11 July 2008.
On 30 May 2013, VKH refinanced this financial accommodation and described the transaction as replicating the deferred purchase price loan note structure pursuant to which the Instruments had been stamped with nominal duty. A bank cheque of $1,592,416 in payment of the estimated duty was tendered.
On 2 September 2013, the Chief Commissioner of State Revenue (“the Chief Commissioner”) retrospectively assessed the Instruments as being liable for ad valorem mortgage duty. An objection by VKH was disallowed by the Chief Commissioner, and the Taxpayer then applied to NCAT for a review of the assessment decision.
By a deed poll dated 30 May 2013, Visy Kraft Finance covenanted to issue Commercial Notes and to pay principal, interest and fees in respect of each Commercial Note. The obligations of Visy Kraft Finance as Issuer to the financiers were unsecured.
Visy Kraft Finance was required to on-lend the proceeds of issue of the Commercial Notes to the “Borrowers”, who were VKH and Visy Kraft Holdings Singapore Pty Ltd. The Borrowers could also purchase Commercial Notes issued to the Commercial Financiers. The Borrowers were required to pay the same interest on the outstanding purchase price for the notes as the Issuer was required to pay on the notes.
Whereas the obligation of VKH as Issuer to the lenders was unsecured, the obligation of the Borrowers was secured. VKH’s obligations were secured by the Instruments entered into on 11 July 2008.
Pursuant to s. 204 of the Duties Act, duty is charged on “mortgage” instruments. There was no issue that the Instruments were mortgages in accordance with this provision. However, the amount of duty that is charged depends on the “amount secured” by the mortgage. Between the execution of the mortgages in July 2008 and the refinancing in 2013, the relevant sections of the Duties Act were amended, with the amendments taking effect from 30 June 2009.
Prior to the 2009 amendments, s. 213 of the Duties Act provided that the amount secured by the mortgage was the “definite and limited sum, until such time (if any) as a greater amount of advances is secured by the mortgage”. Section 214 of the Duties Act provided that if there is not a definite or limited sum, then the amount secured by the mortgage is “the amount of advances actually secured by it”. The meaning of “advance” is defined in s. 206 to include a loan. The Chief Commissioner did not assess the Instruments as liable to ad valorem duty in 2008 on the basis that no advances were secured by the mortgage (i.e. on the basis that the deferral of the payment of the purchase price for the loan notes was not a loan).
Sections 208 and 213 were amended in 2009 as follows:
Clause 76(2) of Schedule 1 of the Duties Act provided when the 2009 amendments would apply to an advance or further advance made before 1 July 2009. Relevantly:
His Honour first considered whether cl.76(2) applied to an advance or further advance made on or after 1 July 2009 that is secured by the Instruments within the extended meaning of s.213(1) being an advance made under an “agreement, understanding or arrangement for which the mortgage is security". His Honour agreed with the Chief Commissioner’s submission, that in determining this question regard is to be had to the statutory definition of an advance, including the amendment made to s.213(2). Therefore, although the advance made by the lenders to the Issuer of the loan notes was not secured, that advance was part of an arrangement for which the mortgage was security. Accordingly, His Honour determined that the provisions as amended in 2009 applied in determining the application of s.213.
In relation to the application of s. 213, His Honour determined an advance made under an agreement, understanding or arrangement for which the mortgage is security may be an “amount secured” by the mortgage, even though the advance itself is not “recoverable under” the mortgage. Therefore, even though the advances made by the lenders to the Issuer were not themselves secured by the mortgages, it was sufficient that the mortgage was security for the agreement, understanding or arrangement, pursuant to which the advances were made. Therefore, the Instruments were liable to ad valorem mortgage duty.
His Honour stated that the subscription for the loan notes was part of an arrangement that involved the execution of all of the documentation to give effect to the refinancing, and that the Borrowers’ obligation was part of the same agreement, understanding or arrangement as that under which the advances were made by the lenders to the issuer of the notes.
His Honour also considered, and agreed with, the Chief Commissioner’s alternative argument in relation to the application of s.215 of the Duties Act as it applied before the 2009 amendments. Specifically, the Instruments were each a mortgage that was capable of being used to “recover the whole of any part of an amount contingently payable by a guarantor in connection with an advance” and were liable to duty as if the amount of the contingent liability under the guarantee were a separate advance secured by the mortgage (s.215).
His Honour stated that the fact that the advance by the lenders to the Issuer was not the subject of the guarantee does not mean that the guarantors’ contingent liability did not arise in connection with the advance, given the connection between the making of the advance to the Issuer of the loan notes and the Borrowers’ inseparable obligation to purchase the loan notes from the lenders on deferred payment terms. Accordingly, under this provision as it existed both prior to, and after, the 2009 amendments, ad valorem duty was payable on the Instruments.