In the recent case of Bondi Beachside Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 21, Justice Gzell of the NSW Supreme Court held that an agreement (whether or not in writing) to extend the payment date for the purchase of a loan note under a deferred purchase price/loan note financing arrangement amounted to a forbearance to pay (and therefore was an "advance" for the purposes of section 206 of the Duties Act 1997 (NSW)).
We are aware that there have been differing views on this issue and consequently there could be lenders in the market whose current security arrangements are unenforceable because stamp duty has not been paid in respect of their securities (under section 11 of the Act, "A mortgage on which duty is required by this Chapter to be paid is unenforceable to the extent of any amount secured by the mortgage on which duty has not been paid.").
This raises significant risks for those lenders, particularly given the current market conditions.
The deferred purchase price loan note financing structure
The case involved a deferred purchase price loan note financing structure commonly used prior to 1 July 2009, whereby National Australia Bank Limited (NAB) subscribed for notes and Bondi Notes Pty Limited issued the notes, having a total face value of $92,006,545. The purpose of the arrangement was to finance the acquisition of the Swiss Grand Hotel at Bondi.
NAB then on-lent the proceeds to Bondi Beachside Pty Limited (Beachside) and Bondi Beachside Rebel Pty Limited (Rebel) under terms that required Beachside and Rebel to pay the purchase price for the notes at completion of the purchase transaction but they could elect to defer payment until a later date (being 3 April 2009). Interest was payable and was to be capitalised.
The deferred purchase price and interest on the loan notes acquired by Beachside and Rebel was secured by various securities, including a fixed and floating charge (Charge) over New South Wales assets which was initially stamped with nominal duty of $5 in New South Wales on the basis that the Charge did not secure an "advance".
The payment date for the purchase price of the notes was extended on several occasions via variation deeds.
In December 2010, the Chief Commissioner issued Beachside and Rebel with a notice of assessment for mortgage duty calculated on the amount of $102,600,000 (being the sum of the face value of the outstanding notes and the capitalised interest).
Question before the Court
The Court confirmed that as the Charge secured the payment of an unpaid purchase price and not an advance, it was only liable to nominal mortgage duty at the time of execution.
The relevant question before the court was therefore whether the extensions to the payment dates for the purchase of the notes (via the variation deeds) amounted to a forbearance of the requirement to pay the money owing, thereby constituting an "advance" under section 206(a) of the Act. If there was a forbearance, then on what amount would additional mortgage duty be payable?
From 1 July 2009, section 208(2) of the Act provides that:
"A mortgage becomes liable to additional duty on the making of an advance or further advance, if as a result of that advance or further advance, the amount secured by the mortgage exceeds the amount secured by the mortgage at the time a liability to duty last arose under the Act."
Under section 206(a) of the Act, an "advance" includes a forbearance to require the payment of money owing on any account whatever.
Why this was a forbearance?
It was argued by Beachside and Rebel that because the variations were consensual and contractual they could not be a forbearance, and that a forbearance had to be unilateral (i.e. it had to be a unilateral and positive act by the lender to give the borrower additional time to pay).
The Chief Commissioner on the other hand argued that it was the extension of time for payment that constituted the forbearance and that the variation deed was merely the form in which that forbearance was achieved. The Chief Commissioner argued that there was no reason why section 206(a) of the Act should be limited to just one method by which a forbearance could be achieved (when there are many others).
The Court agreed with the Chief Commissioner; while a forbearance may be non-contractual, it did not necessarily mean that it could also not be contractual. Accordingly, the variation deeds constituted an "advance", being a forbearance to require the payment of money owing on any account whatever.
Given the deferred purchase price/loan note arrangements did not constitute an advance prior to 1 July 2009, the Court accepted that there was no amount secured upon execution of the Charge. The Court held however, that once the variation deeds were executed, there was an "advance" by way of forbearance and the amount secured then became "the amount of any advances made for which the Charge was security", that is, $92,006,545.
The treatment of capitalised interest
In what was a win for the taxpayer, Justice Gzell held that the capitalised interest was not an "advance" for mortgage duty purposes because the parties had never agreed for the capitalised interest to convert into "principal". The Court found that if the capitalised interest would not amount to an advance if this were an ordinary loan, then it would also not be an "advance" where the financing arrangement used was a deferred purchase price structure.
In our view, it will depend on the exact drafting of the relevant finance documentation as to whether capitalised interest constitutes an "advance" for the purposes of the Act. That is:
- if the parties agree that the interest is converted into principal, or it is "deemed to be an advance" or "deemed to be a further issue and sale of notes" at the time it is capitalised, then such interest could, in our view, constitute an "advance" for the purposes of the Act in some circumstances, such as where there is an extension of time to pay; and
- if the parties merely agree to add the interest to the principal such that it is paid as a bullet payment on the relevant termination date then, in our view, this is unlikely to constitute an advance for the purposes of the Act.
Where to from here for lenders and borrowers?
This decision has serious consequences both for lenders and borrowers.
We strongly recommend that both lenders and borrowers conduct a thorough review of all securities provided in connection with any existing deferred purchase price financing arrangements where duty on the deferred purchase price has not been paid and an extension of time has been granted to confirm whether additional stamp duty is required to be paid in New South Wales.
Any securities that are required to be upstamped but have not been will be unenforceable to the extent that they have not been upstamped. However, this defect can be rectified by paying the relevant amount of duty (plus any penalties and interest) that the Chief Commissioner may assess. There is a risk that following this decision the Chief Commissioner may conduct audit activity targeting similar arrangements. Apart from the mortgage duty exposure, there is also the risk of significant penalties being imposed. In our experience, voluntary disclosure often results in penalties being reduced or even waived.
Lenders and borrower may wish to consider whether any such deferred purchase price facilities should be converted into ordinary cash advance facilities to simplify such financing.
We note that the last day to appeal the decision is 27 February 2013. Beachside and Rebel have not yet indicated whether they intend to appeal the decision.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.