Charge on land for unpaid duty in NSW
A recent change of law in New South Wales creates new challenges to the taking of securities over land and in particular risk that securities over land may be impaired in value on account of liability for landholder duty being charged on the land.
Landholder duty generally is charged on the acquisition of certain interests in companies or trusts that own interests in land whether directly or through relevant chains of security holdings.
The State Revenue Legislation Further Amendment Bill 2020 (NSW) (Bill), changes the Duties Act 1997 (NSW) (Duties Act), so that there will be a charge on land for landholder duty in New South Wales that remains unpaid. This change will apply to any liability for landholder duty arising on or after the day of the change of law. This will be the date of assent of the Bill.
A consequence of this change of law is that the rights of any security holder arising under a mortgage or charge over land in New South Wales and any subsequent purchaser’s interest may be subject to the statutory charge in favour of the Chief Commissioner of State Revenue created by the amendment in question. This will apply where the charge or mortgage is one that is to be granted after a charge for unpaid landholder duty comes into existence.
The Chief Commissioner may protect any interest in the land arising under the relevant charge by lodging a caveat. However, the charge will inure regardless of whether a caveat is lodged or not.
This will create obvious difficulties for purchasers and providers and takers of security over land in New South Wales in the future given that absent a thorough due diligence process to work out whether or not there is a charge over land for unpaid landholder duty, the value of the security provided may be compromised by the prior existence of a charge for unpaid landholder duty.
That due diligence exercise may require not only tracing changes of ownership of the particular company or trust holding the land but also changes of ownership in any direct or indirect holding entity, whether or not that holding entity is situated locally or overseas. This may in practical terms be difficult. It should also be noted the charge on land will inure at all times in the future, even after the land has been transferred by the landholding entity to some third party. Purchasers will need to consider an appropriate warranty from vendors that survives completion that there is no existing duty liability.
The Bill does not provide for any procedure to obtain a clearance certificate as in the case of land tax that will tell any party doing a search of the relevant title as to whether or not there is unpaid landholder duty charged on the land in question. Given that the charge in question will inure solely by force of the Duties Act once amended, without the need for any registration of the charge on title, a simple search of the LPI Register may not disclose the existence of the charge.
The charge for unpaid landholder duty will also apply to land that is already mortgaged or charged to a third party. There is no express provision in the Bill setting out how the law of priorities will apply to any later charge created by the Bill. In other words, there is no express provision as to whether the statutory charge will operate under the usual rules of priorities or whether they will operate in some other way that prioritises the statutory charge over other security interests. In any event, where a statutory charge for unpaid landholder duty exists before the taking of security over a parcel of land by a third party, it should be clear enough that the charge in favour of the Chief Commissioner for prior unpaid landholder duty will take priority over the interests of any subsequent person who obtains security over the land.
The statutory charge for unpaid landholder duty will also cover penalties (which could be as high as 90% of the unpaid tax) and accumulating interest. It follows that the longer the period landholder duty remains unpaid, the greater the amount of the liability protected by the statutory charge.
The original version of the Bill as introduced into the Legislative Assembly applied the charge for unpaid landholder duty to historic liabilities and not just liabilities arising after the change of law. The current provisions that will exclude these historic liabilities from the scope of the statutory charge are an improvement on the proposed original version that would have created greater difficulties for lenders and borrowers in leaving them with the risk of carrying potentially unascertainable past tax liabilities.
These changes will create new challenges in the future for purchasers and providers and takers of securities over land in New South Wales in that in doing so, the parties may not be able to ascertain with the requisite degree of certainty whether a charge for unpaid landholder duty that arose after the change of law exists and if it does, the quantum - when accumulating interest and possible penalties are also taken into account. How the market will deal with these new circumstances remains to be seen.