The Victorian Civil and Administrative Tribunal (VCAT) recently handed down its decision in 1043 Melton Hwy Pty Ltd v Commissioner of State Revenue (Review and Regulation) (Corrected) [2020] VCAT 396 (Melton) in which the critical concept of what constitutes 'consideration' for the transfer of 'dutiable property' was revisited.

Implications From VCAT's Decision

VCAT found that the 'Loan Advance Interest', but not the 'Default Interest', formed part of the consideration which moved the transfer of the land. By treating the former as 'consideration', additional duty was payable by the Taxpayer on the acquisition of the property.

The decision is an important reminder that where a dutiable transaction is part of a broader arrangement (including an acquisition financing) involving several integrated mutual promises, great care is required when drafting the documentation to quarantine the consideration that can be taken to be paid or provided for the dutiable transaction.

The case (which has not been appealed), highlights that without careful planning, there is the very real potential for monetary amounts in respect of associated obligations, as well as the non-monetary value of promises and other obligations, to be included as consideration "for" the transfer of the dutiable property (often far exceeding the stated purchase price for the land and the anticipated duty payable).

Factual background

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

In August 2015, Universal was unable to settle on the contract because its financier declined to provide funding as a development milestone had not yet been achieved.

In October 2015, Universal and the vendors agreed to vary the contract of sale so that:

• The settlement date was extended to November 2016;
• The vendors agreed to refrain from issuing a notice of default until the extended settlement date;
• Universal would grant the vendors a licence to remain in occupation of the property for 4 years after the settlement date for $1 per month; and
• Universal would pay interest on the amount of $5,145,000 (being the balance of the contract price, net of a deposit of $735,000 and further amounts – provided by the Taxpayer to the vendors by way of a loan – totalling $1,470,000) at the rate fixed under the contract of sale, in arrears on a quarterly basis.

In December 2015, Universal nominated the Taxpayer to become the purchaser of the Dutiable Property.

In November 2016, the development milestone had still not been achieved. As a result, the vendors and Universal further varied the contract of sale to further extend the settlement date to April 2017.

Settlement finally took place in April 2017. 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 the loan to the vendors (Loan Advance Interest), which the contract of sale had required to be advanced in two instalments.

Duty assessment

Duty is calculated on the 'dutiable value' of the 'dutiable transaction'. The 'dutiable value' of 'dutiable property' is the greater of the consideration for, or the unencumbered value of, the dutiable property. In Melton, it was the first limb (the consideration) of the definition of 'dutiable value' that was relevant.

The Commissioner of State Revenue of Victoria (Commissioner), in calculating the duty on the purchase of the Dutiable Property, determined that the ‘dutiable value’ was equal to the sum of:

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

The disputed issue was whether the Default Interest and the Loan Advance Interest should be included in the ‘consideration’ for the acquisition of the Dutiable Property on which duty is assessed.

Taxpayer's arguments

The Taxpayer argued that the consideration for the Dutiable Property was only the contract price because:

• The Default Interest was consideration for moving the time of the settlement date, not for the transfer of the land;
• The contract of sale was a 'terms contract' and in Revenue Ruling DA.037 ‘Dutiable value of dutiable property acquired under a terms contract’ (Revenue Ruling), the Commissioner accepts that interest payments made under a terms contract do not form part of the consideration for the dutiable property; and
• The payment of the Loan Advance Interest did not move the transfer of the land, but rather was consideration for the vendors agreeing not to enforce their default rights under the contract of sale by reason of the failure by Universal to advance the loans on the due dates, and for the vendors agreeing to accept those loan advances at a later date.

Commissioner's arguments

The Commissioner argued that the consideration for the transfer was the contract price and the Default Interest and the Loan Advance Interest.

In particular, the Commissioner argued that:

• The agreement between the parties was always that Universal would pay to the vendors the contract price, plus any applicable default interest, and that these were the promises that were made to move the transfer of the Dutiable Property;
• The apportionment of the consideration was contrary to the High Court authorities (including Chief Commissioner of State Revenue v Dick Smith Electronics Holdings Pty Ltd (2005) 213 ALR 230, and Commissioner of State Revenue v Lend Lease Development Ply Ltd [2014] HCA 51 (Lend Lease)), that established that the consideration for duty purposes ‘is the performance of the several promises recorded in a sale agreement in consequence of which the vendor agreed to transfer the dutiable property’;
• Like the payments in Lend Lease, the ‘primary payment obligation’ (ie to pay the contract price) and the interest amounts ‘formed a single, integrated and indivisible whole’, and that one could not conclude that the Dutiable Property would have been transferred had Universal not agreed to pay both.

As to the Revenue Ruling, the Commissioner said the Taxpayer couldn't rely on the Revenue Ruling because the ruling did not have the effect of an estoppel against the operation of the law, and in any event, inter alia, Revenue Ruling did not apply as the contract of sale was not a 'terms contract' because the loan advances were not ‘payments’.

Findings of VCAT

VCAT held that the 'Loan Advance Interest', but not the 'Default Interest', formed part of the consideration which moved the transfer of the Dutiable Property.

In particular, VCAT held:

In respect of the 'Loan Advance Interest':

• The agreement by Universal to advance the loans to the vendors was an essential element of the vendors' agreement to sell the Dutiable Property;
• It was closely connected with the contract price as the loan was to be set off against that amount at settlement, and could be forfeited to the vendors in the event that the purchaser was in default;
• Was calculated under the Penalty Interest Rates Act 1983 (which was calculated as a set percentage of the contract price for the specified time period);
• Was the same or similar to the amounts which were held to be capital (and non-deductible) in Federal Commissioner of Taxation v Broken Hill Co Pty Ltd [2000] FCA 1431 (where the ‘consideration for the shares was a payment comprising two components, the so-called purchase price on the one hand and the so-called interest payments on the other’);

In respect of the 'Default Interest':

• It was payable under the variation deeds on a quarterly basis which could have resulted in compound interest being payable so that it was not necessarily the same interest rate on an effective basis;
• The agreement by the vendors to change the settlement date and to refrain from issuing a notice of default was expressly conditional on Universal meeting its obligations to pay that interest;
• Was payable for the extension of credit by the vendors to Universal and/or the Taxpayer;
• The vendors’ agreement to the extension of the settlement date and to refrain from issuing a notice of default was expressly tied to payment of the Default Interest so that the Default Interest was consideration for those matters, rather than the transfer of land which may (or may not) occur subsequently; and
• If the Commissioner was correct that the Default Interest was dutiable, because the Taxpayer’s obligations under the variation deeds became ‘primary obligations’, it would follow the consideration ought to also include Universal’s agreement to grant a licence allowing the vendors, as well as the payment of the vendors’ costs associated with the variations (both of which the Commissioner did not seek to include as consideration for the transfer).

Conclusion

VCAT endorsed the observations of Pagone J in Condor Tower Pty Ltd v Commissioner of State Revenue [2012] VSC 107 that the need to identify that which moves that part of a composite transaction relating to the transfer of land will require consideration of the notions of causation and attribution and the determination of what the consideration is “really paid for”.

In considering the potentially broad interpretation of 'consideration' in Lend Lease, VCAT stated the analysis is not satisfied merely by finding promises in one place or by finding that the promises (whether in one place or in more than one place) are interdependent. Instead the analysis requires an evaluation of the promises and of their connection with the transfer, and that not all promises under a contract form part of the consideration for any dutiable transaction contemplated by the contract.

Lend Lease was a landmark stamp duty decision which continues to significantly impact property and infrastructure development arrangements. That decision treated consideration "for" a dutiable transaction as including not only land transfer payments, but also the total sum of the promised amounts (including promises to make other payments or provide other services (ie non-monetary consideration)) recorded in the transaction documents for the broader land development arrangements.

In what is perhaps a positive sign for taxpayers, VCAT, in Melton, appears to narrow the potentially broad interpretation of 'consideration' from Lend Lease by stating that not all promises under all contracts are to be regarded as a single, integrated and indivisible part of an overall transaction.

Notwithstanding this positive approach by VCAT (noting it is a decision limited to Victoria and at the tribunal level only), thought must be given when drafting documents to understand when other promises, including the following as examples only, may be included as consideration for the transfer of dutiable property:

• Assumption of a liability (eg to pay employee entitlements or outstanding land tax)
• Promises to develop or improve other properties or provide goods or services, with such promises being interdependent with a vendor's obligation to transfer land.
• Goods and services tax
• Payments having a connection with, but not constituting damages, in a settlement of litigation
• Interest payable under a terms contract or on other forms of vendor finance
• Promise to pay stamp duty before settlement (particularly where the applicable duties legislation makes all parties to the transaction liable for such duty)
• Payment of a commission to the real estate agent on the sale
• Promise to grant occupancy rights on the premises pending settlement