NSW Stamp Duty: novation not a transfer

Articles Written by Andy Milidoni (Partner)

A TAXPAYER WIN IN CTI JOINT VENTURE COMPANY PTY LTD v CHIEF COMMISSIONER OF STATE REVENUE [2013] NSWSC 20

On 30 January 2013, Gzell J of the New South Wales Supreme Court handed down the decision in CTI Joint Venture Company Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 20. The decision concerned the question of whether novations of four (4) call option deeds were dutiable pursuant to subsection 8(1)(b)(i) of the Duties Act 1997 (NSW) as a transfer of dutiable property.

An option over land is an item of dutiable property pursuant to subsection 11(1)(k) of the Act. Subsection 8(1)(b)(i) of the Act charges duty on an agreement for the sale or transfer of dutiable property.

Facts

Transport for NSW (as grantor) entered into 4 call option deeds, (all of which contained materially the same terms), in favour of CRI Chatswood Pty Ltd (CRI) (as grantee) (together, the Option Deeds) over contiguous parcels of land at Chatswood in New South Wales (the Land). The Option Deeds were granted as part of a wider transaction whereby Transport for NSW granted development rights to CRI in respect of developing the area in and around Chatswood railway station.

The Option Deeds were amended by substantially the same terms. Under the Option Deeds, the call option fee was $10, the price for the Land was $1.00 and the contract to be entered into in respect of the purchase of the Land was to be in the form of contract annexed to the Option Deeds (the Land Contracts).

There were 2 option exercise periods and CRI was able to exercise the call options granted in each of these periods or nominate another party to exercise them. If CRI nominated another person to exercise the call options, CRI was required by clause 10.1 of the Option Deeds to give a 'Call Option Nomination Notice' to the Transport for NSW. Clause 10.1 also required that:

  • CRI guarantee the performance of the nominee's obligations under the call option deeds;
  • the nominee assume CRI's obligations under the call option deeds and the Land Contracts subsequently entered into.

In November 2010, CRI entered into a nomination deed with CTI Joint Venture Company Pty Ltd (CTI) whereby CRI nominated CTI as the 'nominee' under each of the Option Deeds. A nomination fee of $60,518,675 was paid by CTI to CRI. CTI was the taxpayer in this dispute. Later in November 2010, CTI executed, under each of the Option Deeds, the following documents:

  • a nomination notice;
  • call option exercise notice; and
  • Land Contract.

In early December 2010, the nomination notices were delivered to CRI for execution and CRI delivered these to Transport for NSW. CTI delivered the call option exercise notice and the Land Contracts to Transport for NSW.

CTI lodged the 4 Land Contracts for stamping with the Commissioner of State Revenue and paid duty of $3,524,641. This duty was based on a dutiable value equating to the amount of the nomination fee (in the amount of $60,518,675 plus GST) and the aggregate consideration payable under the contracts for the sale of land (in the amount of $3,829,461.90)

The amount of duty charged on the 4 Land Contracts was not in dispute.

The submissions

It was not disputed that the rights under the call option deeds were dutiable property under subsection 11(1)(k) of the Act.

The Chief Commissioner submitted that the nomination notices under which CRI nominated CTI as grantee under the call option deeds were agreements for the transfer of dutiable property and therefore dutiable under the Act. This was because they could not amount to a novation on the basis that the nomination clauses in the call option deeds did not apply such that a new contract was entered into replacing the original call option contracts which remained in place. Further, the nomination process in question was a bipartite arrangement, involving only CRI and CTI, and not Transport for NSW. The Commissioner submitted that a novation is one which involves a tripartite arrangement leading to the entering into a new contract.

CTI submitted that the nomination notices were not agreements for the transfer of dutiable property as they gave effect to a novation, and not a transfer, of the call option deeds. As a novation, the new call options deeds were substituted for the original call option deeds with the latter expiring. Accordingly, on the basis that the nomination notices gave effect to a novation and not a transfer of rights under the existing call option deeds, it followed that a novation was not a transfer or a sale and the nomination notices were not agreements for the transfer or sale of dutiable property. They therefore were:

  • not agreements for the sale or transfer of dutiable property under subsection 8(1)(b)(i) of the Act; and
  • not subject to duty under the Act.

The decision

Gzell J agreed with the CTI's submission and in so doing examined the various clauses of the Option Deeds and the nomination process. His Honour also examined a 'novation' and a 'transfer' and found that a novation did not amount to a transfer. The recent High Court decision in ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338 (the ALH Decision) was relied on when His Honour stated:1

The effect of a novation is upon the obligations of both parties to the original, executory, contract. The inquiry in determining whether there has been a novation is whether it has been agreed that a new contract is to be substituted for the old and the obligations of the parties under the old agreement are to be discharged.

It is not correct to describe novation as involving a succession of a third party to the rights of a party under original contract (ALH Group at 346 [12]).

It is common ground that the benefit of a contract can be transferred but the burden of a contract cannot. That requires novation.

Accordingly, as a transfer requires the passing of rights from one party to another, so as to vest those rights in that person, a novation cannot be a transfer as there is no such vesting of rights as part of the novation process. One contract comes to an end and a new contract is entered into.

His Honour therefore held that:

In my view the nomination of CTI was effect by way of novation and was not a sale or transfer. In consequence, the Nomination Deeds are not agreements for sale or transfer of dutiable property pursuant to s 8(1)(b)(i) of the Act and the Call Option Nomination Notices did not effect a transfer of dutiable property under s 8(1)(a) of the Act.

Concluding remarks

This decision is consistent with the recent High Court's decision in ALH Decision.

Particular care should be taken when drafting nomination clauses in call option deeds over land (particularly in NSW) and particular note should be taken of Gzell J's examination of the nomination clauses in this decision if a novation rather than an assignment of an option is intended.



1 Paragraph 39 of the decision.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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