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Tax Issues : What’s in a transfer?

Every Issue

Cite as: (2002) 76(11) LIJ, p.76

Purchasers need to take care when documenting a sale where the vendor does not sell all of its interest.

In Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd [2002] HCA 432 (4 October 2002) the Full High Court has unanimously upheld an appeal by the Victorian Commissioner of Revenue from a unanimous decision by the Victorian Court of Appeal that would have resulted in a greatly reduced stamp duty liability for a purchaser of development land in circumstances where the contract of sale included substantial reservations of interests in the land for the vendor for quarrying, tipping and extractive purposes.

The issue before the courts was to describe the extent of the interest in real property that was the subject of a dutiable transfer. The facts of the case were relatively straightforward. The vendor, Amatek Limited, was the owner of some 35 hectares of land at Clayton on which there was a partly worked out quarry. By a contract of sale in November 1995, the purchaser agreed to purchase the land for a price that was calculated as approximately $1.73 million, and the taxpayer naturally contended that duty was properly payable on that amount.

The rights retained by the vendor were prescribed in special conditions 5.1 to 5.8 of the contract of sale. Special condition 5.1 provided that “The Vendor retains to itself as trustee for Thomas the right to possess, use and occupy (excluding the Tipping Rights)” six separately described portions of the land, for periods up to 12 years from the settlement date. These rights, as amplified by special condition 5.3, included the right to occupy and possess the relevant land area to the exclusion of third parties, and the right to use, sell or otherwise supply cover material and tailings on or from the relevant land area (this included sand extraction and sale). The vendor was also entitled to use the relevant land areas for any purposes whatsoever including but not limited to quarrying operations. Special condition 5.2 provided that “The Vendor retains to itself as trustee for Thomas Tipping Rights in respect of” those six portions of land for periods of two to 15 years from the settlement date.

Although not directly relevant because of the way the case was argued, there was also a separate contract referred to as a “grant agreement” that was executed between the vendor and two Pioneer companies that, it seems, were like the purchaser part of the Pioneer group of companies. Under that agreement, the vendor assigned to Pioneer Australian Waste Management Pty Ltd (Pioneer Waste) rights in relation to the tipping of waste on portions of the land which had been quarried and were suitable as sites on which to dump waste materials. The consideration payable by Pioneer Waste was $1.5 million plus other amounts calculated in accordance with a formula.

However, the Commissioner of Revenue chose to ignore the consideration paid by the purchaser and the value of certain tipping and quarry related rights retained by the vendor under the contract of sale. The Commissioner chose to obtain a Valuer-General’s valuation, disregarding the effect of special conditions 5.1 to 5.8 of the contract of sale. Based on the valuer’s land value of $7.14 million, the Commissioner assessed duty on the transfer of the land at $424,050, which was substantially in excess of the $78,486 duty that the taxpayer claimed was payable.

In the instrument of transfer, “the estate and interest transferred” was described as all the transferor’s estate in fee simple in the land described in certain certificates of title. As the case was argued in the High Court, the critical question concerned the meaning and effect of s63(3)(b)(i)(B) of the Stamps Act 1958. In assessing duty, the Commissioner valued the real property the subject of the instrument of transfer by estimating the amount for which the estate in fee simple might have been sold in the open market. The taxpayer contended that allowance should have been made for what the Court described as the “contractual rights” retained by the vendor, which it was said diminished that amount.

At first instance, Balmford J had held that the land the subject of the transfer was real property, which was the whole of the vendor’s estate in fee simple in the land. Her Honour held that the tipping rights were not property rights but contractual rights. The property the subject of the transfer being unqualified by the contractual rights as to tipping, s63(3) (b)(i)(B) was to be applied without regard to those rights.

In the Court of Appeal, Tadgell JA, with whom Batt JA and Chernov JA agreed, indicated that he would have been prepared to hold that the property the subject of the instrument of transfer was a lesser estate than the vendor’s full fee simple in the land, by virtue of the tipping rights being proprietary rights. However, Tadgell JA preferred the analytical approach that the critical question was the value of the estate in real property to a reasonable hypothetical purchaser in the open market on the day, rather than the extent of the estate being transferred. Logically, of course, both approaches resulted in the same answer. According to Tadgell JA:

“The evidence indicates that the land was not in fact available in the open market for purchase on the footing that the purchaser could use it for its highest and best use . . . It follows in my opinion that the relevant suppositious amount contemplated by paragraph (B) is the price that might reasonably have been obtained for the real property had it been sold (a) free from encumbrances (b) in the open market (c) on the day of the date of the actual sale but (d) otherwise on the terms on which the vendor did actually sell it, save for the price.”

There is a compelling logic to Tadgell JA’s analysis, which underscores the irony that his analysis was ultimately and unanimously rejected by the High Court. Surely, when applying the hypothetical valuation principles deriving from Spencer v The Commonwealth (1907) 5 CLR 41, the Commissioner is only entitled to value the same property that the vendor was willing to, and did in fact, sell.

In respect of this passage of Tadgell JA’s judgment, the High Court commented:

“The subject of the valuation [NB] is the unencumbered estate in fee simple. In determining the value there is no warrant, either in the language of the statute or in principle, for departing from the hypothetical inquiry as to the point at which a desirous purchaser and a not unwilling vendor would come together. The purpose of making the inquiry hypothetical is to isolate the value of the estate or interest to be transferred from factors that are extraneous to the purpose for which such a value is to be ascertained. To introduce into the exercise a special condition for which, on a particular occasion, a particular vendor chose to stipulate, and to which a particular purchaser chose to agree, is to depart from the statutory requirement, which is to determine the value of that which was transferred. It is, rather, to value the net benefit which the transaction conferred upon the purchaser. It is to treat stamp duty as a tax on a transaction.”

The High Court’s decision might be regarded as no more than an application of “form over substance” – that is, the simplistic rule that stamp duty as imposed under the Stamps Act was as noted by High Court “a duty on instruments, not on transactions” and the instrument of transfer purported on its face to be a transfer of the full fee simple without regard to the qualifications set out in (special condition 5 of) the contract of sale.

There are some interesting observations in this case regarding the treatment of reservations, presumably those set out within the body of the dutiable instrument, of minerals or sands contained within the land and how they might be treated differently for duty purposes to reservations contained in a contract of sale. The majority (Callinan J dissenting on this point) also considered that subsequent amendments to legislation, in this instance amendments to s63 following the decision of O’Bryan J in Commissioner of State Revenue v Bradney Pty Ltd (1996) 34 ATR 233, should not be used to construe earlier legislation.

Given that the High Court’s reasons emphasise “form over substance”, one is left wondering whether the case would have been decided more favourably to the taxpayer under the Duties Act 2000 charging provisions where the legislative scheme is to impose duty on transactions (“dutiable acquisitions”) rather than on instruments as under the older instrument-based legislation. The Pioneer Concrete case also demonstrates that care is required, notably by the purchaser who bears the liability for duty, when documenting a commercial transaction where the vendor does not sell all of its interest. One is left with the feeling that, even under the taxing provisions in the Stamps Act, this is a situation where the taxpayer ought not to have incurred duty on an amount derived from a hypothetical valuation which was almost twice the total considerations paid by Pioneer Concrete and Pioneer Waste for what they received, respectively, under the contract of sale and the grant agreement.

JAMES JOHNSON is a sole practitioner and the principal of Sutton Johnson Taxation Lawyers.

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