Agreements for the Sale or Transfer of Dutiable Property - Cancelled Agreements
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Ruling number
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DUT 011
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Date issued
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9 March 1999
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Issued by
| JW Purcell
Chief Commissioner of State Revenue
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Effective from
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1 July 1998
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Effective to
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-
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Status
| Current |
Preamble
An agreement for the sale or transfer of dutiable property is a dutiable transaction, and is liable to duty under the Duties Act 1997. It is immaterial whether or not the agreement is in writing (section 10). A liability to duty arises when the agreement is entered into (sections 12 and 9 (2) (c)).
Section 501 of the Duties Act provides that an agreement for the sale or transfer of dutiable property that has been rescinded or annulled is not liable to duty in certain circumstances, and that any duty paid must be refunded. A cancelled agreement will be assessed as not liable if the Chief Commissioner is satisfied as to any one of 3 conditions:
that the agreement was not rescinded or annulled to give effect to a subsale, or
that the purchaser or transferee under the agreement is a promoter of a named company proposed to be incorporated and that the company is the purchaser or transferee of the dutiable property under a subsequent agreement, or
that the purchaser or transferee under the agreement and the purchaser or transferee under a subsequent agreement relating to the same dutiable property were related persons when the agreement that is rescinded or annulled was entered into.
This ruling identifies the circumstances in which the Chief Commissioner will assess or reassess a cancelled agreement as not liable to duty.
Ruling
Novation
Cancellation of an agreement often arises in the context of a novation, being the substitution of a ‘new’ agreement for an ‘old’ agreement in consideration of the discharge of the ‘old’ agreement. It is, of necessity, tripartite. In the case of the sale of land, it involves the original vendor, the original purchaser and a substituted purchaser. Usually, the terms of the agreements are the same and the only change is the substitution of the purchaser or the addition of a further purchaser. Following novation, the liabilities, obligations and interests of all the parties under the ‘old’ agreement are determined.
Regardless of the number of instruments involved, novation involves two agreements for the sale or transfer of dutiable property, the original agreement and the substituted agreement. Ad valorem duty is payable on the substituted agreement as a dutiable transaction. The original agreement will also be chargeable with ad valorem duty, subject to the provisions of section 50.
Subsale - section 50 (1) (a)
Where an agreement is cancelled to give effect to a subsequent agreement, the original agreement will be assessed as not liable if the Chief Commissioner is satisfied that the agreement was not rescinded or annulled to give effect to a subsale. In forming an opinion as to whether or not the substituted agreement is a subsale, the Chief Commissioner looks primarily at the intention of, and the benefit passing to, the original purchaser as a result of the cancellation of the original agreement.
One factor to be considered is whether or not a benefit passes from the substituted purchaser to the original purchaser in the nature of the benefit which ordinarily passes to a vendor pursuant to a sale. A sum of money passing from a substituted purchaser to the original purchaser would obviously suggest that there was, in fact, more than one sale. However, the benefit may be more intangible than this. For example, a developer may ‘onsell’ a vacant lot to an institutional investor at the same price or a lower price than the original purchase price, but as part of an arrangement to develop the site and erect income-earning buildings on it. A sale to the institutional investor in the form of a novation from the original vendor would be regarded as a subsale from the developer even though there was, on the face of it, no profit passing to the developer from the institutional investor pursuant to that subsale.
If the only benefit passing to the original purchaser is the benefit of being released from obligations under the original agreement, this would not, of itself, be sufficient to characterise the substituted agreement as a subsale from the original purchaser to the substituted purchaser. For example, if an original purchaser is unable to raise the finance necessary to complete an intended purchase, but locates an alternative purchaser and persuades the vendor to accept this substituted purchaser by way of novation of the agreement, the Chief Commissioner would not view this as a subsale.
On the other hand, the inclusion of a novation clause in the original agreement, whereby the original purchaser could require the vendor to accept a substituted purchaser by way of novation, would tend to suggest that the original purchaser intended to subsell the property. Accordingly, the Chief Commissioner would be inclined to regard any substituted agreement as a subsale.
Where a novation does not take place, and the agreement is cancelled with no subsequent agreement (whether or not in writing), the Chief Commissioner will accept that the agreement was not rescinded or annulled to give effect to a subsale and is therefore not liable to duty.
The Act does not allow an agreement to be assessed as not liable to duty in the case of a partial subsale. For example, if an agreement is novated and the substituted agreement shows the original purchaser together with an unrelated third party as co-purchasers of the property in equal shares, the original agreement remains liable to duty, as it was rescinded to give effect to a subsale to the third party. However, this could result in duty being paid twice on the interest ultimately purchased by the original purchaser. Consequently, the Chief Commissioner will consider ex gratia payment of a proportion of the duty in appropriate circumstances.
The following are examples of cancelled agreements that are not liable to duty.
Novation at the initiative of the vendor
This goes to the facts and will not necessarily be apparent from the documents involved. However, on any view of the word ‘subsale’ it must mean, in the context of a novation, a sale (or notional sale) from the original purchaser to a substituted purchaser. If the novation takes place at the initiative of the vendor and the original purchaser withdraws at the request of the vendor, the Chief Commissioner would not regard the substituted agreement as amounting to a sale from the original purchaser to a substituted purchaser.
Novation to comply with government requirements
An example of this would be where X, a foreign person or corporation, purchases a property subject to Foreign Investment Review Board approval and this approval is subsequently obtained, but subject to X joining in an Australian person or corporation as a joint venturer in the purchase of the property. In such circumstances, if the original agreement is novated so that X and an Australian third party were substituted as co-purchasers, the Chief Commissioner's view is that there is no subsale.
Purchase by a trust to be formed
This occurs where a purchaser on behalf of a nominated trustee of a named unit trust that has yet to be formed enters into an agreement, and the agreement is novated following formation of the unit trust and appointment of the trustee. Provided the subsequent purchaser is purchasing in the capacity of trustee of the named unit trust, and there is no benefit accruing to the initial purchaser as outlined in paragraph 7 above, the Chief Commissioner considers that a subsale does not occur. (The unit trust need not have precisely the same name as in the agreement provided the Chief Commissioner is satisfied that the trust named in the transfer is the same as the proposed trust referred to in the agreement.)
Novation of a pre-incorporation contract - section 50 (1) (b)
Where a promoter on behalf of a named company to be formed enters into an agreement and the agreement is novated following incorporation, so that the new company is purchaser under the substituted agreement, the original agreement is not liable to duty. (The new company need not have precisely the same name as in the agreement provided the Chief Commissioner is satisfied that the company named in the transfer is the same as the proposed company referred to in the agreement.)
However, this provision does not cover a novation in favour of a shelf company that was in existence when the original agreement was entered into, where the shelf company was subsequently purchased by the purchaser under the agreement. A novation in these circumstances is considered to be a subsale from the original purchaser to the shelf company, and the cancelled agreement remains liable to duty.
Related persons - section 50 (1) (c)
If the original purchaser and the substituted purchaser were ‘related persons’ when the original cancelled agreement was entered into, the cancelled agreement is not liable to duty even if the novation constitutes a subsale.
‘Related person’ is defined in the Dictionary to the Duties Act to mean a person who is related to another person in accordance with any of the following provisions:
natural persons are related persons if:
one is the spouse or de facto partner of the other, or
the relationship between them is that of parent and child, brothers, sisters, or brother and sister,
private companies are related persons if they are related bodies corporate within the meaning of the Corporations Law,
a natural person and a private company are related persons if the natural person is a majority shareholder or director of the company or of another private company that is a related body corporate of the company within the meaning of the Corporations Law,
a natural person and a trustee are related persons if the natural person is a beneficiary of the trust (not being a public unit trust) of which the trustee is a trustee,
a private company and a trustee are related persons if the company, or a majority shareholder or director of the company, is a beneficiary of the trust (not being a public unit trust) of which the trustee is a trustee.
Examples of cancelled agreements that will be not liable to duty because of section 50 (1) (c) include the following.
The purchaser is a holding company but, at the time of the purchase, no decision had been made about which of a number of subsidiaries would be the ultimate purchaser.
The purchaser subsequently decides that, for tax purposes, it is desirable that the property be acquired in the name of a company, trust or partnership.
The purchaser intended to bring in a member of the family as a co-purchaser but had not decided, at the time of exchange, which family member was to be co-purchaser.
The purchaser, in the heat of the moment following an auction, gives the auctioneer incorrect or incomplete names of the intended purchasers.
Refunds - section 50 (2)
If duty has been paid on an agreement that is not liable to duty because of section 50 (1), the Chief Commissioner must reassess and refund the duty if an application for a refund is made within:
5 years of the initial assessment, or
12 months after the agreement is rescinded or annulled, whichever is the later.
The applicant may request the duty to be applied towards the liability for duty on the substituted agreement. However, in the event that the original agreement is not reassessed as not liable to duty, interest under Part 5 of the Taxation Administration Act 1996 might be payable on the substituted agreement.
Applications for assessment or reassessment and refund should be made using form ODA 015, which can be obtained from Revenue NSW.
Footnotes
- ^ Section 50 was amended on 27th November 2003 and includes an agreement for the sale or transfer of dutiable property that is cancelled. Section 50 (3) provides that cancelled means rescinded, annulled or otherwise terminated without completion.
