Background facts

The facts of Commissioner of State Revenue v 1043 Melton Highway Pty Ltd [2020] VSC 820 (Melton Highway) were published in our article last year, which summarised the outcome of the case at first instance. We summarise some key facts below.

In 2010, a company (Universal) associated with 1043 Melton Hwy Pty Ltd (Taxpayer) entered into a contract to purchase land on the Melton Highway in Plumpton, Victoria (land).

In the period leading up to the eventual settlement of the purchase in April 2017:

• Universal nominated the Taxpayer to become the purchaser of the land;
• there were multiple variations made to the original contract, and the parties agreed to defer settlement on a number of occasions;
• the Taxpayer paid to the vendors:
  • amounts described as 'interest' relating to the delayed settlement (Default Interest); and
  • other amounts also described as 'interest' for the late provision of a loan to the vendors (Loan Advance Interest), which the contract of sale required to be advanced in two instalments.

The Commissioner, in calculating the duty on the transfer of the land, determined that the 'consideration' for the transfer (and therefore the 'dutiable value' upon which duty was assessed) was equal to the sum of:

• the contract price under the contract of sale; and
• the Default Interest and the Loan Advance Interest.

Duty assessment and arguments

We set out in detail the arguments advanced by both the Taxpayer and Commissioner at first instance, and the findings of VCAT, in What constitutes consideration for the transfer of dutiable property.

In particular, VCAT decided that the Loan Advance Interest formed part of the consideration for the transfer of the land as it was an essential element of the vendors' agreement to sell the land.

However, the Default Interest was held not to be consideration for the transfer of the land. Rather, the Default Interest was treated as consideration for a separate promise, being the vendors' agreement to the extension of the settlement date and to refrain from issuing a notice of default to the purchaser.

This position was consistent with the generally adopted market view.

Key matters for resolution on appeal

Both the Commissioner and the Taxpayer sought leave to appeal the orders of VCAT.

The two key questions for resolution were whether:

• the Default Interest was part of the consideration for the transfer of the land; and
• the Loan Advance Interest was part of the consideration for the transfer of the land.

VSC decision

In partly overturning the decision of VCAT, the VSC held that both the Default Interest and Loan Advance Interest were part of the consideration which 'moved' the transfer of the land (and therefore both components formed part of the dutiable value of the land).

In concluding that the Default Interest was to be properly characterised as an amount payable so as to move the transfer of the land, the VSC held that:

• the relevant question was whether, when considered as at the date of transfer, it was only in return for the promised additional payment (i.e. Default Interest) that the vendors were willing to transfer the land;
• in determining whether an amount is payable 'for' the transfer, the test as established by the High Court in Commissioner of State Revenue v Lend Lease Development Ply Ltd (2014) 254 CLR 142 (Lend Lease) does not require a close or direct connection between the payment and the transfer;
• the fact that the Default Interest was consideration to secure an extension to the settlement date and for the vendors to refrain from issuing a notice of default did not mean that it could not also be consideration given to move the transfer; and
• it was only in return for the promised additional payments (represented by the Default Interest) that the vendors were willing to transfer the property.

The VSC agreed with VCAT in concluding that the Loan Advance Interest was part of the consideration which moved the transfer of the Land.

In particular:

• the Loan Advance Interest was expressed in the sale contract to be 'in consideration for the mutual promises contained in this agreement' (which included the agreement to transfer the Land); and
• the vendors were only prepared to transfer the property if they received the 'cash advances' on the days stipulated, and the timing was sufficiently significant that an obligation was imposed on the purchaser to pay additional amounts (i.e. the Loan Advance Interest) in the event such cash advances were not made on time.

Is default interest now dutiable as a general rule?

Melton Highway again demonstrates the importance of the landmark decision in Lend Lease, and in particular the broad interpretation of when consideration is given 'for' a transfer.

While the VSC made clear that the question of consideration will always require reference to the specific facts and circumstances of each particular case, its decision gives rise to important questions for even the most basic conveyancing matters.

For example, if a purchaser is late in settling and is consequently charged interest upon settlement, is the interest dutiable? Clearly this situation occurs frequently, often due to the purchaser being unable to promptly arrange finance. The generally accepted market practice has (to date at least) been to not treat such interest as forming part of the dutiable consideration (upon which duty is assessed), however Melton Highway suggests that it could be.

If default interest is to be included in the dutiable consideration, how is the Victorian State Revenue Office (SRO) to be notified? Practically the Duties Online and PEXA systems (used to facilitate electronic conveyancing) are not well equipped to cater for this. Further, the administrative burden associated with arranging a duty assessment or reassessment on (for example) a $1,000 default interest amount will far outweigh the additional duty involved.

Significant consequences could arise where the contract price for the purchase of land falls just below a relevant dutiable value threshold. For example, significant Victorian stamp duty discounts have been made available in response to COVID. These discounts are for qualifying properties up to a dutiable value of $1m. What happens if $1,000 of default interest is payable on settlement when the contract price was $999,500?

The SRO is yet to provide public guidance on the treatment of default interest and the above questions highlight the need for urgent clarification.

While the focus of Melton Highway was on the treatment of interest payments, it also opens up questions as to whether any other common payments made by the purchaser could form part of the dutiable consideration for a transfer of land. For example, could other reimbursement payments made to the vendor, such as payments made for rates and land tax adjustments, be included in the dutiable consideration? Taxpayers are now left in a position where it is difficult to draw the line on what should be treated as dutiable consideration.

We expect that Revenue Offices in other States will keep a watching brief on these issues, though they may not be as relevant in jurisdictions where ad valorem duty is assessed on an agreement to purchase land (noting that Victoria generally only assesses duty on the transfer of land, i.e. at settlement).

Having market leading national stamp duty and real estate practices, we regularly assist clients with all aspects of their property transactions. Please contact us if you would like to discuss the above issues or require advice.