22 June The Hon. Kim Wells, MP Treasurer Department of Treasury and Finance Level 4 1 Treasury Place MELBOURNE 3000 VIC

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1 22 June 2011 The Hon. Kim Wells, MP Treasurer Department of Treasury and Finance Level 4 1 Treasury Place MELBOURNE 3000 VIC By kim.wells@parliament.vic.gov.au Dear Treasurer, Duties Act 2000 (Vic) Lease Provisions We refer to the Call to the Parties Responses on behalf of Liberals-National Coalition paper released in 2010 in which the Government indicated support for amendments to the lease duty provisions of the Duties Act 2000 (Vic) (the Act). To this end we set out our comments below and attach the response from the Liberals-National Coalition. State Revenue Office statistics Since the Law Institute of Victoria (LIV) identified the need for legislative reform to the Act, it has continued to lobby and meet with the State Revenue Office (SRO) on this subject. As a result of those meetings, the LIV has been provided by the SRO, with statistics regarding private rulings in relation to section 7(1)(b)(v) of the Act. These statistics relate to the period from 7 July 2009 to 28 February 2011 and indicate that the total number of private rulings requests which were received by the SRO was 392. Of the requests received, 371 private ruling requests were completed; with 80 assessments being issued and 291 not being assessed for tax. The statistics also indicate that 5 objections were lodged in the last two years. Legislative reform The LIV is concerned that the high number of private ruling applications is indicative of a level of uncertainty amongst taxpayers which is unacceptable, not least because of greater taxpayer compliance costs. The LIV is also concerned that this high level of private ruling applications may also be creating an unnecessary administrative burden on the SRO. The LIV also notes that the SRO statistics do not reflect or assist in identifying the incidence of lease arrangements where there has not been proper regard or comprehension of section 7(1)(b)(v) of the Act. This is a consequence of the complexity in applying this section of the Act to "standard" commercial lease arrangements, which is supported by the number of public rulings and bulletins the SRO has been required to issue since the introduction of the Act.

2 The LIV does not wish to undermine the anti-avoidance rationale and revenue base upon which the lease duty provisions of the Act are based, acknowledging the policy behind these provisions. Rather, the LIV is seeking legislative reform to remove the current uncertainty and costs to the tax payer and the SRO in seeking to clarify the operation of these provisions. This certainty, gained from legislative reform, would ensure that the application of the lease duty provisions is maintained within the anti-avoidance parameters upon which they were originally based and not extended to bona fide (non-dutiable) lease transactions. The LIV therefore urges the Government to uphold its pre-election commitment to reform the lease duty provisions of the Act, to ensure that the rights and liabilities of Victorians are clearly set out in legislation, rather than being addressed via non-binding public or private rulings or bulletins issued by the SRO. The LIV s previous submissions regarding the application of the lease duty provisions in this context are attached for your reference. Comparable position in other Australian States To gain an insight into the possible examples on which legislative reform in Victoria may be based, the LIV has considered the wording of lease duty legislation in other Australian States. In this sense, the LIV notes that sections 8 11 of the Duties Act 1997 (NSW) has lease duty provisions which do not provide for duty to be imposed for consideration other than rent reserved, as occurs in section 7(1)(b)(v) of the Act. This enables the New South Wales legislation to address the intended anti-avoidance measures without the same level of uncertainty and ambiguity as is experienced in Victoria. Steps forward To address the concerns raised above and to present a case for moving forward, the LIV seeks a meeting with you as Treasurer. If you could please advise by 30 June 2011 as to when is a suitable time for representatives of the LIV to meet with you so this matter may be considered further, it would be much appreciated. If you would like to discuss any of the matters raised in this letter please do not hesitate to contact me or Angela Gidley, Commercial Law Section Lawyer, on Yours sincerely Caroline Counsel President Law Institute of Victoria

3 4 November 2010 Mr Paul Broderick Commissioner for State Revenue Victoria 121 Exhibition Street MELBOURNE 3000 VIC Cc: Mr Adrian Polizzi A/Manager, Tax Information and Education Unit Technical Advice and Review Branch State Revenue Office Victoria By Dear Mr Broderick, Lease Provisions Meaning of Consideration DA The Law Institute of Victoria (LIV) has recently considered your Draft Ruling (Draft Ruling) and the related assessment position you have announced with regard to the meaning of consideration under the Duties Act 2000 (Vic) (the Act). To this end we set out our preliminary comments below. Duty payable under lease transactions Section 7(1)(b)(v) of the Act requires duty to be paid on the grant of a lease for which consideration (other than rent reserved on the grant of a lease) is paid or agreed to be paid in respect of either the lease or various options or rights relating to the lease. The Act does not define what constitutes consideration paid or agreed to be paid. Whilst the Draft Ruling indicates that consideration should include non-monetary consideration, the LIV respectfully does not share this view. No express provision for non-monetary consideration Paragraph 6 of the Draft Ruling states that the payment of consideration under ss. 7(1)(b)(v) and (va) of the Act should extend to non-monetary consideration, as under section 20(3) of the Act, non-monetary consideration is expressly required to be included in determining the amount of duty payable in respect of a dutiable lease transaction. It is submitted that the fact that non-monetary consideration has been expressly provided for in calculating the amount of duty payable under the Act, but is absent from the assessment of whether duty is payable in the first place, supports the proposition that it is in fact not the legislature s intention for non-monetary consideration to trigger an obligation to pay duty.

4 Covenants as non-monetary consideration Paragraph 7 of the Draft Ruling states that non-monetary consideration may include covenants given by a lessee to a lessor, whether this is under the terms of a lease or a separate but related agreement. It is submitted that this interpretation discounts the words paid or agreed to be paid which are used in connection with consideration payable under ss. 7(1)(b)(v) and (va) of the Act. This disregard of particular words contained in a provision of the Act in effect changes the provision s meaning and cannot be supported. Commercial assessments of non-monetary consideration Paragraph 8 of the Draft Ruling lists numerous factors and principles which will be taken into account by the Commissioner when assessing whether non-monetary consideration triggers an obligation to pay duty on a lease transaction. These factors include whether market rent is payable under the lease, the term of the lease, and the adequacy of the consideration for the lease. There is however no basis for these factors and principles being determinative under the Act. The LIV is concerned that the Commissioner may become involved in commercial assessments in which it has no role to play under the legislation. Legislative intention to exclude normal commercial leases On 19 February last year, the Government issued a press release concerning the then proposed lease amendments. There it was stated that Ordinary retail and commercial leases will also not be affected by the amendments. The supposed intention not to affect ordinary commercial leases is also echoed in other material extraneous to the legislation, such as the Explanatory Memorandum. As it is common (almost universal) practice for commercial leases to contain some form of non-monetary covenants, an interpretation which provides for non-monetary covenants to constitute consideration paid or agreed to be paid has the potential to extend the application of the Act far beyond that which was apparently intended by the legislature. Conclusion For the reasons set out above, the LIV submits that a determination which provides that non-monetary consideration may give rise to a dutiable transaction is not only contrary to the intention and meaning of the Act, but also involves the Commissioner in matters that are irrelevant to the State Revenue Office s role under the legislation. The LIV therefore urges the State Revenue Office to refrain from extending the meaning of consideration in lease transactions that give rise to duty, to include non-monetary consideration which is not paid or agreed to be paid. If you would like to discuss any of the matters raised in this submission please do not hesitate to contact me or Angela Gidley, Commercial Law Section Lawyer, on Yours sincerely Steven Stevens President Law Institute of Victoria

5 15 July 2010 Mr Paul Broderick Commissioner of State Revenue Victoria 121 Exhibition Street Melbourne VIC 3000 Dear Mr Broderick The Law Institute of Victoria welcomes the invitation to comment on the State Revenue Office s draft Duties Revenue Ruling DA 'Lease Provisions - General Application'. Our submission is attached. If you would like to discuss any of the matters raised in the submission, please contact Karen Cheng, Lawyer, Property and Environmental Law Section on (03) or by kcheng@liv.asn.au Yours sincerely Steven Stevens President Law Institute of Victoria cc. Mr Adrian Polizzi Manager, Tax Information and Education Technical Advice and Review Branch State Revenue Office Victoria by Adrian.Polizzi@sro.vic.gov.au

6 State Revenue Office Draft Revenue Ruling DA Lease Provisions General Application Submission to Mr Paul Broderick, Commissioner of State Revenue Victoria 15 July 2010 Queries regarding this submission should be directed to: Contact Person Karen Cheng Ph (03) Law Institute of Victoria (LIV). No part of this submission may be reproduced for any purpose without the prior permission of the LIV. The LIV makes most of its submissions available on its website at

7 Table of Contents Introduction...3 General Comments...3 Comments on Draft Ruling...4 Paragraph Paragraph Paragraph Paragraph Paragraph Paragraph Paragraph Paragraph Paragraph Paragraph Example Example Example Example Example Example Issues not addressed in the Draft Ruling...8 Land Rich Provisions...8 Admissibility in Civil Proceedings...8 Conclusion...8 Page 2

8 Introduction The Duties Act 2000 (Vic) (the Act) was amended by the Duties Amendment Act 2009 (Vic) with effect from 21 November 2008 as the Victorian Government wishes to ensure that certain leasing arrangements are not used as a mechanism for avoiding duty. In June 2010, the State Revenue Office issued Draft Revenue Ruling DA Lease Provisions General Application (Draft Ruling) in respect of the relevant provisions in the Act (Lease Provisions) and to outline the factors that the Commissioner of State Revenue Victoria (Commissioner) will take into account in determining their application. The LIV appreciates the Commissioner s attempts to provide guidance on the operation of the Lease Provisions, and welcomes the opportunity to make this submission in respect of the Draft Ruling. However, the LIV also wishes to reiterate its concerns about the scope and operation of the Lease Provisions. In this regard, the LIV has previously expressed concern that the Lease Provisions are misconceived, and cause insurmountable difficulties for practitioners in attempting to determine whether ordinary commercial transactions are potentially subject to duty. The LIV has also provided extensive commentary in respect of the Lease Provisions and the administration of those provisions by the State Revenue Office (SRO). It appears that no response has been provided to the LIV s previous submissions and commentary. The LIV reiterates its position expressed in previous communications, and emphasises that its comments below should not be taken to detract from the LIV s earlier submissions and commentary. General Comments The LIV notes that public statements were made at the time of introduction of the amending legislation that the lease provisions are an anti-avoidance measure, designed to apply to arrangements by which a lease of land in Victoria is used to effectively transfer rights in the underlying land and / or the economic benefits of the land, similar to a sale and purchase transaction 1. The LIV considers that despite the public statements, those concepts are not reflected in the terms of the Act. The LIV observes that in the Draft Ruling the Commissioner has adopted a benign or lenient approach to the application of the Lease Provisions, possibly with a view to achieving consistency with the public statements which accompanied the introduction of the amending legislation. However, the LIV has previously questioned the statutory authority which allows the Commissioner to exercise any discretion in respect of the application of the Lease Provisions, as the Lease Provisions themselves do not contain any discretion (unlike, for example, s22 of the Act). Although the LIV appreciates the Commissioner s attempts to provide a practical answer to some of the issues, the LIV observes that the lack of discretion under the Act would prevent the Commissioner from substituting his own policy-based interpretation of the Lease Provisions when there is no uncertainty or ambiguity in the wording of those provisions. The LIV also notes that all SRO rulings including the Draft Ruling do not have the force of law. This is not to suggest that the LIV is recommending inclusion in the provisions of a general relieving discretion. The LIV submits that the Lease Provisions are so flawed that legislative change to the Act is the most appropriate remedy, so that it is clear that leases other than long-term leases are not dutiable under the Act. The LIV therefore proposes to revisit this issue with the Treasurer of the State of Victoria, and requests your confirmation that a copy of the Draft Ruling and this submission may be provided to the Treasurer to apprise him of the LIV s issues and concerns. 1 As noted in paragraph 6 of the Draft Ruling Page 3

9 In the event that the Victorian Government is not prepared to amend the Act and the Lease Provisions, the LIV suggests that amendment of the Taxation Administration Act 1997 (Vic) could be explored to provide that all public and private rulings issued by the Commissioner are binding on the SRO. This is the position under the Commonwealth Taxation Administration Act 1953 (Cth). The LIV also proposes that all private rulings issued by the SRO, including those in respect of the application of the Lease Provisions, should be sanitised and uploaded to a private rulings register available on the SRO website. This would allow practitioners and clients to gain a greater insight into the SRO s practices in relation to the administration of duties, including through application of the Lease Provisions. Comments on Draft Ruling Notwithstanding the LIV s firm view that amendment to the Act is the most appropriate outcome, the LIV makes the comments set out below on the Draft Ruling. The LIV has adopted the same paragraph and example numbering as in the Draft Ruling. Paragraph 2 The LIV is concerned that the SRO s summary of the Lease Provisions in Paragraph 2 does not clearly reflect the Lease Provisions with respect to assignments of lease. Ultimately, it is of no assistance for the SRO to ignore the more unpalatable parts of the legislation. It simply defers recognition of the need for substantial legislative rectification. Paragraph 7 It is stated in Paragraph 7 that the Lease Provisions can apply even if there is no intention to avoid duty and/or the leasing arrangement arises because of statutory, planning or other restrictions on a dealing in the freehold. The LIV observes that this statement seems completely at odds with statements made in Paragraph 6 and elsewhere, that the Lease Provisions are intended to be "an antiavoidance measure, designed to apply to arrangements by which a lease of land is used to effectively transfer rights in the underlying land, or the economic benefits of the land, similar to a sale and purchase transaction. The LIV queries how a statutory, planning or other restriction on the freehold can possibly be part of an arrangement to avoid duty. Paragraph 8 Paragraph 8 suggests the Lease Provisions only apply where valuable rights are acquired in relation to the underlying land, such as the right to sub-lease and receive rent and profits from the land. All (or almost all) leases confer such rights in relation to land. The LIV considers that it is, with respect, disingenuous to simply equate such rights with those acquired by a purchaser of land, in what might be seen to be an attempt to achieve some consistency between the supposed effect of the Act as expressed by the government and the actual effect of the Act. The LIV also observes that, insofar as it is being suggested that the legislation only applies to leases under which consideration other than rent is paid, this is incorrect. In particular, the LIV considers that the statement in the opening sentence that the Lease Provisions will only apply when consideration is paid in relation to a lease under which the lessee acquires valuable rights and/or benefits in relation to the underlying land is inconsistent with the wording of ss7(1)(b)(v) and (va) of the Act. These sections only require that the lessee or transferee obtain rights over and above the right to exclusive use and occupation in circumstances where sub-paragraph (D) of either of those provisions applies. Page 4

10 Paragraph 9 Paragraph 9 suggests that if only market rent is payable for the lease, then it is unlikely to be dutiable under the Lease Provisions. Paragraph 11 goes on to state that ordinarily the Lease Provisions will not apply to ordinary commercial and residential leases which only require the payment of market rent and no premium. If payment of a premium is the touchstone, then these statements are difficult to reconcile with Example 4 in the Draft Ruling which involves the payment of market rent and a premium. The LIV also notes that the second sentence of Paragraph 9 seems to be suggesting that a lease may attract duty if below market rent is payable (irrespective of whether consideration for other rights is paid or payable). If so, this is most difficult to reconcile with other comments made in the draft. The LIV queries the legislative basis for distinguishing between cases of market rent and those at rents below market if no additional rights are acquired. The LIV further queries whether the Commissioner intends to second-guess the parties to a lease as to whether the rent adopted by them in an arm s length transaction is less than market rent. In this regard, the LIV notes that ss7(1)(b)(v) and (va) of the Act refer to rent reserved rather than market rent reserved. Further, the LIV observes that the Lease Provisions require duty to be paid on any lease with a payment other than rent reserved. For this reason, references in Paragraph 9 to the trigger for duty being the consideration paid for the lessee s acquisition of rights and/or benefits in relation to the underlying land over and above the right to use and occupy the land are inconsistent with the Lease Provisions and therefore incorrect. Paragraph 10 Paragraph 10(b) refers to the term profit rental. The LIV seeks clarification of this expression, and queries whether it is intended to read profits or rental. Paragraph 11 The LIV again notes that the Lease Provisions require duty to be paid on any lease with a payment other than rent reserved. Paragraph 11 appears to suggest that one of the considerations for the imposition of duty is whether the rent payable under a lease is market rent or below market rent. If no consideration other than rent reserved is payable, the LIV considers that it should be irrelevant to the dutiable status of a leasing arrangement whether the rent payable under lease is at market rent or below market rent. This represents an inconsistency between Paragraph 11 and the Lease Provisions. In any event, the LIV assumes that Paragraph 11 is directed to rights equivalent to those which would be obtained on a purchase of land. If so, the LIV considers that this should be expressly stated. The LIV also considers that at the end of Paragraph 11, the SRO could refer to the SRO s recent ruling on rent reserved. In this regard, the LIV notes that the meaning of rent and premium are separate questions in themselves, the SRO s view on which have been addressed to some degree in that ruling. Paragraph 12 Paragraph 12 states that the Lease Provisions will not apply to the transfer or assignment of an ordinary commercial lease for which nominal consideration is paid as part of a bona fide sale of a business which is conducted on the leased premises. This appears to be inconsistent with s7(1)(b)(va) of the Act, which unequivocally requires duty to be paid in respect of any transfer or assignment of lease for which any consideration is paid or agreed to be paid. Page 5

11 The LIV therefore suggests that Paragraph 12 should either be accompanied by an indication of the specific legislative discretion being relied upon by the SRO to exempt lease assignments for nominal consideration, or contain an express acknowledgment that duty is attracted by any assignment for consideration. The LIV also suggests that it would be useful for Paragraph 12 to note that an assignment of a lease to which s7(1)(b)(v) of the Act applies will also attract duty. This is so because the lease is dutiable property and a transfer of dutiable property is dutiable under s7(1)(a) of the Act. Paragraph 13 Paragraph 13 refers to the various exemptions, concessions and exclusions from the application of the Lease Provisions. The LIV submits that Paragraph 13(a) should be accompanied by an express statement as to the dutiability of a change in beneficial ownership of, or declaration of trust over, a retirement village lease. Paragraph 15 Paragraph 15 suggests that payment of duty may be deferred or relieved in the circumstances set out in that paragraph. This latitude appears to be inconsistent with the Lease Provisions concerning the payment of duty, as the provisions do not contemplate any such deferral or relief. The LIV therefore considers that Paragraph 15 should be accompanied by an indication of the specific legislative discretion being relied upon by the SRO to defer or relieve from duty leases of the type to which the paragraph relates. Further, the LIV seeks clarification as to whether any interest or penalties apply in the event that payment of duty is deferred. It is also suggested that Paragraph 15 clearly specify whether the capacity to obtain relief applies if the exercise price of the option reflects market value assessed at the time of grant of the option. Paragraph 17 Example 2 The LIV submits that Example 2 overstates the position. While the facts postulated might attract a liability for duty, it is not because the transferee effectively obtains ownership of the apartment. Like any lessee, the transferee obtains exclusive possession. Example 3 The LIV notes that Example 3 refers to duty based on the value of the income stream which need not be the same as the unencumbered value of the land. The LIV submits that one of the deficiencies of the Lease Provisions is that where a lease or transfer of lease attracts duty, duty is assessed on the value of the land and not the leasehold interest as it should be. Commenting specifically on Example 3, the LIV observes that the term of the leasehold estate in possession is 10 years. The options may create an equitable interest in land, but until exercised or exercisable, they do not create a leasehold term beyond the 10 years. The grant of a concurrent lease takes effect as a leasehold in reversion, with the potential to become a leasehold in possession at the expiration of 10 years. The $10m price may reflect the net present value of the income stream from the property in perpetuity (or more likely for the economic life of the building). However, that does not determine whether the payment is a payment of rent reserved or consideration for any other rights. If the term of the concurrent lease is 100 years and 1 day (which is not stated) the LIV considers that payment could simply represent the pre-payment of rent. Page 6

12 In any event, the LIV considers that Example 3 should also include a statement that the fact that the concurrent lease attracts duty does not mean that the lease to XYZ is free of duty (so that, on the Government analysis, at any one time, multiple lessees may hold rights equivalent to ownership of the relevant land). Example 4 The LIV also queries the distinction between Example 1 and Example 4 which both involve the payment of a premium. Is the key difference that Example 1 also involves a right to develop? The LIV is concerned that it is not clear that this right is other than a right that arises under the term of the lease. In any event, the LIV submits that there appears to be no basis in the legislation to distinguish between Example 1 and Example 4; if any consideration other than rent reserved is payable in respect of the lease then it is a dutiable transaction. Section 7(1)(b)(v) of the Act does not draw a distinction depending on whether additional rights are acquired through the payment of that consideration. It is not to the point to state that XYZ in Example 4 has paid the premium to secure the right to use and occupy the premises over the term of the lease. The same can be said of the payment of a premium by XYZ in Example 1. Given the last two sentences of the example, the LIV queries whether it is being said that a payment to secure a right to occupy is to be treated as rent (that is, a payment for the use of land)? In light of the above, the LIV considers that Example 4 should be accompanied by an indication of the specific legislative discretion being relied upon by the SRO to relieve from duty leases of the type to which the example relates. Example 5 The LIV s comments above in relation to Paragraph 12 also apply here. Example 6 The LIV considers that there is no valid point of distinction between Example 1 and Example 6 as they both involve the payment of additional consideration, and the consideration paid is irrelevant if it is not rent reserved. In addition, Example 6 suggests that the surrender of the old lease is not dutiable. The LIV notes that a surrender is dutiable if it is of dutiable property. Under s10(1)(ab) of the Act dutiable property extends to any lease of a kind referred to in s7(1)(b)(va) of the Act. That latter section can extend to any kind of lease. Hence, there is a risk that s10(1)(ab) of the Act can apply to any type of lease. While the LIV suspects that a Court would be able to navigate its way around this type of analysis, the poor drafting of the legislation creates uncertainty. It would therefore be useful if the SRO can identify how it has construed the legislation to overcome this uncertainty. Example 9 The LIV s comments in relation to Paragraph 15 also apply here. Also, the LIV considers that it is not clear in Example 9 whether the market value is to be determined at the date of the exercise of the option or at the time of grant of the lease. The heading of Example 9 refers to the consideration being equivalent to full market value during or on expiry of the lease but the example refers only to market value at the time of the exercise. Many options are granted years in advance with a fixed exercise price and the market value at the date of exercise will not be capable of being ascertained. In the event that the full market value is to be determined at the time of exercise of the option, the LIV seeks clarification as to whether the full market value will include the value of any fixtures installed or constructed by XYZ. Page 7

13 Issues not addressed in the Draft Ruling Land Rich Provisions The LIV notes that the different operation of the land rich provisions has not been addressed in the Draft Ruling. Admissibility in Civil Proceedings The LIV is concerned that the Draft Ruling does not address the question of admissibility, in civil proceedings, of a lease (or assignment of a lease) where the SRO has ruled that the lease, or assignment, is not dutiable, as a matter of SRO practice but where the lease, or assignment of a lease is legally dutiable, under the terms of the legislation. For example, in a civil dispute (for example, as between a lessor and a lessee), the lessor could argue that a lease is not admissible because consideration was given by the lessee for the assignment of lease, but duty was not paid on the assignment. A lessor who takes such a point is likely to succeed on the argument that the document was not duly stamped with the result that the document will not be admissible in that civil dispute. The LIV considers that it is not satisfactory to say that the lessee (assignee) can, years later, pay the duty in order for the lease to be admissible in the civil proceeding. First, that does not address the central objection to this provision and, secondly, the lessee (assignee) would need to pay duty calculated at 5.5% of the value of the freehold in order for the assignment document to be admissible (notwithstanding a favourable private ruling which may have been issued to the taxpayer by the Commissioner). The LIV submits that the inability of a party to a civil proceeding to rely on a lease or assignment in these circumstances is an issue which has not been satisfactorily addressed by the SRO to date. Conclusion As indicated at the outset, the LIV welcomes the Commissioner s attempts to provide some practical answers to the problems caused by this ill-considered legislative mess. Nevertheless, we hope the above comments indicate that attempting to do anything other than amend the legislation is futile. To attempt to read limitations which are not there into the legislation, or to exercise discretions which the Commissioner does not have, is not appropriate. Page 8

14 10 December 2009 The Honourable John Lenders Treasurer of the State of Victoria Level 1, 2 Treasury Place East Melbourne VIC 3002 By post and to: john.lenders@parliament.vic.gov.au Cc to: paul.broderick@sro.vic.gov.au Dear Treasurer, Duties Amendment Act 2009 (Vic) Supplementary Submission The Law Institute of Victoria (LIV) takes this opportunity to make a supplementary submission regarding the Duties Amendment Act 2009 (Vic). Our submission is attached. If you wish to discuss this matter further, please do not hesitate to contact either myself or Michael Hayes LIV Commercial Lawyer, mhayes@liv.asn.au or by phone on Yours Sincerely Danny Barlow President Law Institute of Victoria

15

16 Duties Amendment Act 2009 (Vic) Supplementary Submission Submission to the Treasurer the Hon John Lenders MLC; and; Cc: Commissioner for State Revenue (Victoria) Paul Broderick 10 December 2009 Queries regarding this submission should be directed to: Contact Person Michael Hayes Commercial In House Counsel Ph (03) Law Institute of Victoria (LIV). No part of this submission may be reproduced for any purpose without the prior permission of the LIV. The LIV makes most of its submissions available on its website at

17 Table of Contents 1. Introduction Background and intention of the new lease provisions Value of lease Rent reserved Change of beneficial ownership Commissioner s administration Impact on revenue Other impacts...9 Page 2

18 1. Introduction The Duties Amendment Act 2009 (Vic) made significant changes to the imposition of duty in Victoria in relation to: the grant of a lease where any consideration is payable other than the rent reserved; the transfer or assignment of a lease where any consideration is payable for the transfer or assignment or for other rights; and a transaction that involves a change of beneficial interest in land or other dutiable property. The Law Institute has serious concerns as to the scope and operation of these provisions. We refer to the submission to you dated 8 December 2008, and to subsequent meetings with your office and with representatives of the State Revenue Office during the passage of the Bill. Despite a number of amendments made to the Bill during its passage, the LIV and Victorian practitioners remain concerned at the scope of the amendments and the administrative treatment of the new provisions by the Commissioner of State Revenue. In particular, the LIV remains concerned that: the stated objectives of the Bill are not reflected in the terms of the new provisions; the effect of the lease duty provisions is to impose duty based on a valuation that might be far greater than the value of the economic interest acquired; the Commissioner is administering the provisions in an ad hoc manner, which is not consistent with either the terms of the legislation or the stated objectives of the legislation; and while the legislation did not receive Royal Assent until 7 July 2009, the amendments apply retrospectively from 21 November 2008 and in circumstances where the amendments travel well beyond the changes announced in the press release. 2. Background and intention of the new lease provisions In announcing the changes the Treasurer drew attention to the fact that loopholes were being exploited resulting in the underpayment of duty in Victoria. According to a Press Release dated 21 November 2008: The Victorian Government has moved to close a loophole which allowed the use of complex longterm lease arrangements to escape stamp duty liability. The long-term lease schemes allowed a small number of parties to use and control leased land equivalent to ownership without having to pay the appropriate stamp duty. Effectively, a purchaser can acquire rights which are equivalent to ownership but not pay duty, Victorian Treasurer John Lenders said today. It is not fair on the vast majority of Victorians who do the right thing if we are allowing some to slip through loopholes. It s the ordinary Victorian taxpayer who ends up paying for those who don t. Typically these arrangements are used at the top end of the property market, this will not affect those entering into ordinary commercial leases. At the same time the Government also announced an intention to overcome potential loopholes in relation to changes of beneficial ownership which follow a recent Supreme Court decision1. 1 Trust Company of Australia Ltd (atf the Clayton 3 Trust) v Commissioner [2007] VSC 451. Page 3

19 Despite the statements in the Press Release, when introduced, the Bill contained no reference to long-term leases, and the amendments as enacted are not restricted to leases of a long-term nature. The amendments apply to leases of any term. The Explanatory Memorandum to the Duties Amendment Bill confirmed that the provisions were anti-avoidance in nature and directed at persons acquiring an interest equivalent to the rights and benefits obtained by a person who acquires the land directly: Both section 7(1)(b)(v) and section 7(1)(b)(va) are anti-avoidance in nature and are intended to have broad application. A liability to duty will result where leases are used to effectively transfer rights in the underlying land and/or the economic benefits of the land. The rights and benefits obtained by the lessee as a result of such leasing arrangements are viewed as being equivalent to the rights and benefits obtained by a person who acquires the land directly. Essentially, the lessee acquires rights over the land equivalent to ownership. The consideration paid, or agreed to be paid, is for the acquisition of these valuable rights and is in contrast to the rent payable under the lease, which is often minimal. For example, a transaction which uses leasing arrangements and provides the purchaser with rights over the land such as the right to occupy and use the land and economic benefits from the land such as a right to the rent and profits will be subject to duty. Normal commercial leases for which market rent is payable and no premium is paid should not be affected by these provisions. Again, despite the statements in the Treasurer s same press release being suggestive of a narrow scope for operation of the new lease duty provisions the SRO now says that The lease provisions apply broadly and potentially include the grant, transfer, assignment or surrender of a lease for which consideration is paid in respect of any Victorian land whether used for residential or commercial purposes.... Indeed, because the SRO construes the concept of consideration paid or to be paid as extending to non-monetary promises, there is a risk that the new provisions apply to almost every lease given that almost every lease provides for the payment of rent reserved and includes non-monetary promises. This is a long way from instances where the grant or transfer of a lease is used to effectively transfer rights in the underlying land or the economic benefits of the underlying land. 3. Value of lease If the grant, transfer or assignment of a lease is a dutiable transaction, new sub-section 20(3) specifies the dutiable value of the lease. This is the greater of: the value of any consideration given other than rent reserved (whether monetary or nonmonetary consideration); the unencumbered value of the land that is subject to the lease. It is unlikely that the value of the consideration given for a lease would ever exceed the unencumbered value of the subject land, so the value of the land that is subject to the lease is effectively the taxable amount. That is, a tenant under a lease where any consideration other than rent reserved is paid in the specified circumstances will pay duty on the unencumbered value of the freehold land, or in the case of a sub-lease, the value of the head-lease. This is despite the fact that the tenant may not acquire anything like rights equivalent to the ownership of the unencumbered land. A taxpayer who enters into a long-term lease and pays a premium for that long-term lease obtains a lease and nothing else. The lessee does not obtain any interest which can be said to be equivalent to ownership. As each day goes by, the lessee s interest in the property reduces daily until the point is reached where the lease comes to an end and the lessee has no further interest. An entity that enters into a long-term lease and pays a premium for the grant of the lease is doing no more than buying an annuity stream. In other words, the entity pays a capital sum for the right to receive certain payments over a particular time period. It is not correct to say that the entity acquires rights which are equivalent to ownership because ultimately the lease will come to an end and the lessee will not have any interest in the property at all. Page 4

20 If duty is to be imposed on the grant of a lease, it should be assessed by reference to the amount paid by way of premium, and not by reference to the value of the underlying land. This result would be consistent with the position in other States and Territories. As currently drafted; the legislation results in a potentially draconian amount of duty which has no relationship with the economic substance of the transaction. 4. Rent reserved The Act contains a new (but somewhat unhelpful) definition of rent reserved : "rent reserved in relation to a lease, means the rent paid or payable during the term of the lease and any amount paid or payable for the right to use the land under the lease; Example Amounts paid under the lease for the following purposes are payments for the right to use the land under the lease (a) (b) (c) (d) (e) (f) (g) (h) (i) rates; charges; taxes; maintenance; utilities; legal costs required to be paid by the lessee on behalf of the lessor in relation to the grant of the lease; insurance premiums; marketing costs; car park contributions." It is by no means apparent that the examples are correct. 2 Certainly case law would suggest that a number of the examples are not rent or payments for the use of land. 3 In any event, the list merely raises further questions. For instance is any of the following rent reserved: legal costs required to be paid by the transferee or assignee on behalf of the lessor in relation to the transfer or assignment of a lease; costs payable to a mortgagee that are required to be paid by the transferee or assignee to obtain the mortgagee s consent to the transfer or assignment of a lease, including legal costs, production of title costs and fees etc; contributions towards marketing funds, cleaning contributions, security costs, and other common area contribution funds*; amounts payable under agricultural managed investment schemes for planting and maintaining crops; amounts paid directly to third parties in discharge of the lessor s liabilities (such as the payment of arrears of land tax and rates that are not payments under the lease); additional rent that is calculated by reference to turnover or similar factors (that is base rent, plus additional rent); 2 As to the status of an example contained in a statute see section 36A of the Interpretation of Legislation Act 1984, which provides the example is not exhaustive and may extend, but does not limit, the meaning of the provision. 3In Yanchep Sun City Pty Ltd v Commissioner of State Taxation (WA) (1984) ATR 1165, Olney J considered that covenants to repair, and costs of and incidental to the preparation of the lease were clearly not rent. In Commissioner of Stamp Duties (N.S.W.) v. J.V. (Crows Nest) Pty. Limited (1986) 7 NSWLR 529; (1986) 86 ATC 4740 Mahoney JA considered that covenants to repair would not form part of the rent. Page 5

21 guarantees, bonds or bank guarantees*, make good clauses invoked at the end of a lease*; amounts payable by a lessee to a lessor in respect of the installation or upgrade of services and utilities (e.g. gas, water, telephone, electricity)*; other costs/expenses payable under a lease (e.g. other than the common area contribution fund costs or expenses referred to above), such as: - costs payable where the parties agree to appoint an independent expert to resolve a dispute under a lease and the lessee contributes to/pays for the expert s costs; - if the parties agree to appoint a valuer to revalue the lease after a particular term, or upon the transfer or assignment of a lease, the costs of the valuer payable by the lessee or by the lessee and lessor jointly; - where the lessee is required to reimburse the lessor for any costs, charges or expenses that the lessor has elected to pay where the lessee has failed to (e.g. rates and taxes, insurance premiums); - damages payable by a lessee to a lessor for breach of a lease by a lessee; - costs incurred by a lessee to register a lease (legal fees, lodgement fees, production fees); - if the lessee is required to pay the lessor s legal costs in the event that the lessor incurs any liability as a result of the action/inaction of a lessee; works/tenant s improvements where title vests in the lessor but there is no positive obligation on the tenant to undertake the works (i.e. it is a commercial decision for the tenant to determine whether it wants to undertake the works knowing title will vest in the lessor at the conclusion of the lease) Change of beneficial ownership Under the duties legislation a change in beneficial ownership of dutiable property (such as a fee simple estate in land) is a type of dutiable transaction. The new legislation: deems a change in beneficial ownership to occur when dutiable property is created, dutiable property is extinguished, equitable interests in dutiable property change or when dutiable property becomes the subject of a trust or ceases to be the subject of a trust; 5 expands the dutiable property concept to include most interests in land (with the interest concept being defined so as to include an estate or proprietary right). The upshot is that, as a general rule, duty is attracted on the creation of an interest in land, the extinguishment of an interest in land, a change in equitable interests in land, the subjection of an interest in land to a trust or on an interest in land ceasing to be subject to a trust. Seemingly contrary to the Government s apparent intent, this dramatically expands the duty base. Some examples of newly dutiable transactions are identified below. We stress that the following are some examples only: Sale of land contracts 4 Those items marked with an * are specifically referred to by the Commissioner in his website commentary. The Commissioner suggests that, depending on the circumstances, payments under these types of clauses should not amount to consideration other than rent reserved. 5 s7(4) Duties Act Page 6

22 Under an uncompleted land sale contract an interest in land is created in favour of the purchaser. Hence, such a contract now effects a dutiable transaction. Any duty liability triggered by a sale contract would not seem to be capable of being offset against duty on the ultimate transfer; the relief from double duty provision of the duties legislation generally only applies where the one dutiable transaction is effected by several instruments. The dutiable transaction now effected by a sale contract differs from that affected by a land transfer, as is the dutiable property; one being an equitable interest in a fee simple estate and the other being the transfer of the legal fee simple estate). Indeed, the effect of the legislation might be to impose triple duty in relation to land sale transactions. The first duty liability would arise upon entering the sale contract and paying a deposit. At this point the purchaser has acquired an equitable interest in the subject land, the interest being commensurate with the deposit paid. 6 The second dutiable transaction would arise on completion of the contract, the handing over of an executed transfer of land and payment of the balance of the purchase price. This second transaction involves the purchaser acquiring full beneficial ownership of the relevant land. The third dutiable transaction would arise on the registration of the transfer itself, effecting the conveyance or transfer of the legal title. At this point, the vendor s interest in the relevant land might be considered to have been extinguished or a trust on which the vendor held the land up until registration would cease to apply to the land. Despite the Commissioner s statements to the effect that contracts of sale have not become dutiable transactions in Victoria, it is hard to see how that conclusion can be justified. Even taking at face value the statement that the provisions are only directed at tax avoidance schemes such as the Clayton 3 case, that case revolved around the interest of a purchaser under an uncompleted contract of sale. The Commissioner s position would therefore seem to be that at least some contracts of sale are dutiable transactions; if not, the provision would be wholly ineffective to achieve its stated purpose. However, as with the lease provisions, the Commissioner has no discretion to determine that some contracts of sale are dutiable transactions and others are not. Either all contracts of sale are dutiable transactions, or the provisions wholly fail to achieve their stated purpose. Deceased estates A liability to duty is likely to be attracted on completion of administration of a will or intestate estate where the estate assets include Victorian land. When administration of an estate is complete (in essence, when the personal representative s role is complete, such as when estate debts and liabilities have been discharged), an interest in estate assets is created in favour of the estate beneficiaries and the personal representative then commences to hold the estate assets on trust. Hence, if an estate includes Victorian land, when its administration is complete a dutiable transaction occurs as an interest in the land will have been created and the land will have commenced to be held on trust. Others Duty will be attracted on the grant of an easement with respect to Victorian land (as the grant serves to create dutiable property, an interest in a fee simple estate). Duty may be attracted on a transfer of units in a listed property trust holding Victorian land if the units confer on their holder an equitable interest in the trust s property and if, say, the units are entered on a NSW register. Duty will be attracted on a transfer of an interest in farm land involving relatives or associates despite the fact that a transfer of the farm land itself in these circumstances would usually be exempt. 6 Chang v Registrar of Titles (1976) 137 CLR 177; Tanwar Enterprises Pty Ltd v Cauchi (2003) ALJR Page 7

23 6. Commissioner s administration The LIV also has concerns as to the manner in which the Commissioner is seeking to administer the new provisions. The Commissioner s approach to date has been to exercise discretion so as to ameliorate the less palatable elements of the new provisions. However, not only does the Commissioner not have this discretion, the administration of the provisions in this manner is highly undesirable. It simply results in uncertainty and arbitrary outcomes that are not consistent with either the terms of the legislation or the stated objectives of the legislation. Citing a few examples from the State Revenue Office website, it seems that the Commissioner has concluded that the following arrangements are tax avoidance schemes where the rights and benefits obtained by the lessee are equivalent to the rights and benefits obtained by a person who acquires the land directly: an acquisition of a 30 year sub-lease of an alpine apartment (example 2) (in relation to this example, it is observed that no mention is made by the SRO of the likely liability of the same transaction to transfer duty on the transfer of a land use entitlement, and how the SRO proposes to deal with the problem of double duty on these alpine lease transactions); a sub-lease of a site in a caravan park, where the tenant does not occupy the caravan as a principal residence (example 5). In addition, the LIV questions the basis identified by the Commissioner for determining that certain transactions that clearly involve the payment of consideration other than rent reserved, are not dutiable, such as: the sale of a business where nominal consideration of $1 is attributed to the transfer of the lease (example 4). If the outcome depends, as the examples suggest, on the expedient of simply attributing a payment to something other than the lease, then the law simply becomes absurd, and will fall into further disrepute. The administration of the legislation in this manner leads to uncertainty as to the outcome. Practitioners are unable to second guess the Commissioner s views, and to provide any certainty to their clients, Practitioners must resort to private ruling requests on any transaction involving the grant, transfer or assignment of a lease or anything that may result in a change of a beneficial interest. This leads to delays in completing transactions, additional legal costs, and additional administrative costs to the State. It is understood that the State Revenue Office has employed additional staff simply to deal with the number of private ruling requests resulting from the new provisions. Further, if the lessee or lessor need to rely on the lease in court proceedings in the future, regardless of whether the Commissioner has given a ruling that duty is not payable or made comments on his website that certain types of transactions will not invoke the duty provisions, if a court determines that in accordance with the terms of the legislation that duty should have been paid on the lease (e.g. if a lease is assigned under a sale of business transaction for $1), the court may refuse to allow the lease into evidence until the correct amount of duty is paid. In addition, the person seeking to rely on the lease may not be the party liable to pay the duty and, accordingly, may have difficulty obtaining payment from the party liable (particularly if the SRO has given a ruling or made comments on its website that duty is not or should not be payable). It is also observed that, if this legislation is to be the subject of numerous private rulings for the most part inconsistent with the legislation, as drafted the Commissioner should be prepared to publish (sanitised) versions of all private rulings which are issued by the SRO. In this way, practitioners and taxpayers are at least able to gauge how the SRO is administering the legislation and advise, or act, accordingly. The ATO, for its part, publishes all private rulings on its website. Plainly, given the nature of the legislation being considered here, the preferable alternative would be to amend the Act. However, if these provisions are to remain, the Commissioner must be prepared to publish all private rulings issued by his Office (with any taxpayer-identifying details removed). Page 8

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