BY AMANDA TULLY
Snapshot
Timing matters when seeking the benefit of section 62B of the Duties Act 1997 (NSW).
A custodian that does not exist at exchange may result in double duty.
Happy Days Property v Chief Commissioner of State Revenue is a reminder to establish the limited recourse borrowing arrangement structure before exchange.
You are sitting in your beach chair, about to lose yourself in a good book, when your beach bag starts buzzing. You ignore it. You’re on holidays after all. But it keeps buzzing away so you hoist yourself out of your chair and go digging to find your phone — it’s work.
Irritated, you answer.
‘I’m really sorry to bother you,’ says your colleague, Joanie, ‘but I think we have a duty issue with my brother Richie and the commercial property he bought recently under the limited recourse borrowing arrangement.’
You ask Joanie to send you an email explaining the problem and flop back into your beach chair. All you want to do is read your book and listen to the ocean, not review a duty issue.
The email arrives in your inbox and you squint at your mobile to try and work out what is going on.
Background
You, with the help of Joanie, recently acted for Richie in relation to purchasing a commercial property under a limited recourse borrowing arrangement (‘LRBA’).
Apart from the LRBA, it had been a reasonably straightforward matter. It was all exchanged with some urgency as your client was desperate to acquire the property and was aware there was another party also very interested in buying it.
You hadn’t had a lot to do with LRBA arrangements and Richie didn’t have everything set up at the time of exchange. However, his self-managed superfund (‘SMSF’), Richie’s Super Investments, had been around for some time.
You told Richie he should exchange under the name of the trustee of the superfund for now and add the words ‘or nominee’ so the custodian could be sorted later. In the back of your mind, you thought you could rely on section 18(3) of the Duties Act 1997 (NSW) (‘Duties Act’) to add the custodian on the transfer, to then be stamped in accordance with that section later.
After exchange, Richie’s accountant sent Joanie the LRBA documents.
Joanie says she is concerned that the bare trust deed (required as part of the LRBA arrangement) has been stamped. However, she thought that, to qualify for the benefit of section 62B of the Duties Act, the bare trust deed couldn’t be stamped under that section until duty on the exchanged contract had been paid.
The stings
Requirement for section 62B not met
Section 8(1)(b)(ii) of the Duties Act charges duty on a declaration of trust over dutiable property. A ‘declaration of trust’ includes a declaration (other than by will) that identified property vested, or to be vested, in the declarant is, or is to be, held on trust for stated persons or purposes.
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In an LRBA, a bare trust deed will commonly constitute a declaration of trust where it records that a custodian (or trustee) holds identified property on bare trust for the SMSF trustee. Accordingly, ad valorem duty is payable under s 8(1)(b)(ii).
However, s 62B limits duty to $750 for a declaration of trust by an SMSF custodian that dutiable property is, or is to be, held for the SMSF trustee, but only if:
- the declaration names the SMSF (s 62B(a));
- ad valorem duty has been paid on the acquisition by the custodian or SMSF trustee, or section 62A applied (s 62B(b)); and
- the Chief Commissioner is satisfied the consideration was or will be provided by the SMSF trustee (s 62B(c)).
Because ad valorem duty has not yet been paid on the exchanged contract, s 62B(b) is not satisfied and the $750 concession cannot be relied on to stamp the bare trust deed.
Requirement for section 18 (3) not met
Another problem is that the contract refers to the purchaser as the SMSF trustee ‘or nominee’, but the custodian company did not exist at the time of exchange. Where a company does not exist at the time of exchange (unless it is identified as a named company ‘yet to be formed’), it could not have been a custodian of the SMSF trustee at that time. Therefore, if you proceed with the transfer to the later-formed custodian, there will be two separate dutiable transactions on which ad valorem duty is payable: the contract and the transfer to the custodian.
‘Gosh,’ you think to yourself as you pace up and down the sand, ‘what a dog’s breakfast…’
You start frantically googling to see if there is a solution you can suggest to Joanie and come across a case with similar facts, Happy Days Property Pty Ltd v Chief Commissioner of State Revenue [2016] NSWCATAD 289 (‘Happy Days’). In that case, a contract identified a purchaser in a trustee/custody capacity but a lender later required a different custodian. A new custodian was incorporated after exchange and the property was transferred to it. It was held that the relevant s 18 concession was unavailable because the ultimate transferee did not exist when the contract was entered into, and it was not enough that the LRBA structure was established by settlement.
So, there is no relief from Happy Days and Richie is not going to be impressed.