The NSW Duties Act provides that where an agreement for the sale or transfer of dutiable property is cancelled, the agreement is not liable to duty if the Chief Commissioner is satisfied of certain matters. The Act also provides that if the duty has been paid then the Chief Commissioner must reassess and refund the duty if an application for a refund is made within a certain period of time.
In a recent case before the High Court, the vendor and the first purchaser had entered into a contract for sale of land (first contract) that was not subject to duty because of the corporate reconstruction relief. The vendor, the first purchaser and a second purchaser entered into a “Deed of Consent and Assignment” pursuant to which the first purchaser agreed to assign its rights under the first contract to the second purchaser, the vendor consented to the assignment and the second purchaser promised the vendor that it would perform the first purchaser’s obligations under the first contract and the vendor released and discharged the first purchaser from all liability under the first contract.
A Deed of Termination was then entered into in order for the second purchaser to enter into a contract to purchase from the vendor more land than was the subject of the first contract. Although there was some confusion about this document it was accepted by the parties that this document purported to cancel the Deed of Consent and Assignment rather than the first contract.
The taxpayer made an application under the above provisions of the Duties Act for the Deed of Consent and Assignment to be assessed as not liable to duty because it was a cancelled contract.
The question then was whether or not the Deed of Consent or Assignment amounted to a novation or an assignment of the first contract. If it amounted to an assignment of the first contract, the document was dutiable because the document would have been a sale or transfer of dutiable property. However if the document was a novation of the first contract then the document was not dutiable because there was no sale or transfer of dutiable property.
The High Court stated a number of key principles in determining whether there is a novation or an assignment. French CJ, Crennan, Keifel and Bell JJ stated the following principles:
- a novation, in its simplest sense, refers to a circumstance where a new contract takes the place of the old,
- it is not correct to describe novation as involving the succession of a third party to the rights of the purchaser under the original contract because such a description under the common law comes closer to the effect of a transfer of rights by way of assignment,
- it is not correct to describe a third party undertaking the obligations of the purchaser under the original contract as a novation,
- the effect of a novation is upon the obligations of both parties to the original, executory, contract,
- the enquiry 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.
Their Honours held that the Deed of Consent was a novation because the deed contained the elements necessary for the discharge of the first contract and the substitution of a new contract. It did so because under the Deed of Consent:
- the vendor released and discharged the first purchaser from its obligations under the first contract,
- this release and discharge of the first purchaser’s obligations amounted to a renunciation of the vendor’s right to call upon the first purchaser for performance as purchaser under the first contract or to sue the first purchaser for specific performance of the first contract or for damages for its breach,
- the first purchaser was permitted not only to extricate itself from further obligations under the first contract, but also to be restored to its pre-contractual position, by the repayment of monies advanced by it to the vendor and the reimbursement of deposit monies by the second purchaser,
- it was necessarily implied that the vendor would convey the land and improvements the subject of the first contract to second purchaser upon tender by it of the purchase price,
- therefore the vendor’s prior obligation to convey to the first purchaser was to be regarded as extinguished by reason of the later implied obligation to convey to the second purchaser, the latter being inconsistent with the continuance of the former.
Hayne J agreed generally with their Honours’ reasoning.
It should be noted that the liability for duty in relation to a cancelled contract is dependent upon the Chief Commissioner being satisfied of certain things including that that the agreement was not cancelled to give effect to a sub-sale. This was not an issue in these proceedings. The Chief Commissioner has issued a public ruling on when he will be satisfied that there was no cancellation to give effect to a sub-sale to which regard should be had in every case.