|Ruling number||DUT 027|
|Date issued||23 February 2004|
|Issued by||P Achterstraat|
Chief Commissioner of State Revenue
|Effective from||23 February 2004|
|Effective to||1 July 2016|
This Ruling provides a general guide about when provisions within Chapter 7 of the Duties Act 1997 will be applied to treat capitalised interest as an ‘advance’.
It is common in relation to construction loan agreements that the lender agrees to provide a facility for a particular principal sum on which interest is agreed to be capitalised for a specified period. Mortgagees effect the capitalising of interest by a number of different procedures to produce a similar result.
Mortgage duty is calculated in most cases according to the amount of advances secured by the mortgage. An ‘advance’ is defined in Section 206 of Duties Act. The term ‘advance’ includes the provision of funds by way of ‘financial accommodation’ which includes any transaction that in substance affects a loan of money.
In Bank of New South Wales v Brown 57 ALJR 155, the High Court held that debiting of sums of unpaid interest does not have the effect of converting them into capital, such sums retaining their character as interest. The word interest was to be read as referring to an amount whose original character was interest even if it subsequently became capitalised by arrangement between the parties.
If a mortgage is used to secure such a facility, the question arises as to whether or not the upstamping provisions contained in Section 208(2) of the Duties Act require the mortgage to be upstamped to include the amount of interest which is capitalised during each interest period.
Although there are a number of different procedures whereby a lender may capitalise interest, such capitalisation is only considered to be an ‘advance’ in circumstances where the obligation to pay interest is converted into an obligation to repay an additional advance, i.e.:
where there is an express agreement between the parties providing that interest would be discharged by a book entry which is deemed to be an advance of principal; or
where there is an express agreement between the parties whereby an advance of principal would be made to discharge obligations for interest.
In the instances outlined, there is an obligation to upstamp in accordance with the provisions in Section 208(2).