On 7 February 2014, the New South Wales Court of Appeal ruled in favour of the taxpayer in Bondi Beachside Pty Ltd v Chief Commissioner of State Revenue [2014] NSWCA 6, holding that mortgage duty was not payable on an extension to the maturity date under a deferred purchase price arrangement on the basis that the extension did not amount to an “advance” under the Duties Act 1997 (NSW) (“Duties Act”).

Background

On 30 November 2007, Bondi Beachside Pty Limited and Bondi Beachside Rebel Pty Limited (the “Taxpayers”) entered into an arrangement with its bank for the raising of funds for the acquisition of the Swiss Grand Hotel at Bondi.

Under the terms of the arrangement, the bank subscribed for certain loan notes issued by Bondi Notes Pty Ltd and sold those notes to the Taxpayers. Completion of the note purchase was to occur on the date the notes were issued to the bank by Bondi Notes Pty Ltd. Subject to satisfaction of certain conditions precedent, the Taxpayers were given the ability to elect to defer paying the purchase price for the notes until a date on which the notes were to be redeemed, initially set as 3 April 2009. Interest was payable on any deferral of the purchase price by the Taxpayers and was to be capitalised by the bank. The Taxpayers elected to exercise their deferral rights.

Payment of the deferred purchase price and interest on the notes was secured by numerous securities granted by the Taxpayers and other related entities, including over property in New South Wales (“NSW Security”).

On nine separate occasions, the Taxpayers and the bank agreed to extend the due date for payment of the purchase price of the notes beyond 3 April 2009. On each occasion, the relevant agreement for purchase was varied by a deed of variation which substituted a later date on which the deferred purchase price was to be paid in full.

The Chief Commissioner of State Revenue (“Commissioner”) claimed that as a consequence of amendments to the Duties Act brought into effect on 1 July 2009, the deferral of the purchase price amounted to an “advance” for New South Wales mortgage duty purposes on the basis that the deferral constituted a “forbearance”. The Commissioner issued a notice of assessment to the Taxpayers in this regard, assessing mortgage duty as a consequence of the deferral, by reference to the full purchase price for the notes together with capitalised interest.

The decision at first instance

The Taxpayers appealed the Commissioner’s assessment to the New South Wales Supreme Court. The Taxpayers submitted that the deferral of the purchase price for the notes could not be a forbearance as the deferral was made with the express agreement of the bank. The Taxpayers claimed that a forbearance must of necessity be a unilateral act, rather than a variation agreed to by both parties.

On 30 January 2013, the Supreme Court handed down its decision agreeing with the Commissioner that additional mortgage duty was payable by the Taxpayers. The Court’s decisions was based on the finding that extensions to the maturity date under a deferred purchase price arrangement gave rise to an advance in the nature of a forbearance for New South Wales mortgage duty purposes. The Court however found the Commissioner had erred in including capitalised interest in the sum on which mortgage duty was assessed and remitted the matter to the Commissioner for reassessment.

The Appeal

On 7 February 2014, in a unanimous decision (Bathurst CJ, Ward JA and Tobias AJA), the New South Wales Court of Appeal found that the primary judge had erred in holding that the post-2009 variation deeds created a liability to additional mortgage duty. On appeal the Taxpayers’ ran a different argument. They argued that there was no forbearance involving the actual (or constructive) “provision or obtaining of funds” by deferring the purchase price for the notes and hence submitted that such deferral did not attract mortgage duty. It was submitted that there was no constructive loan because there was no transaction which could be described as a notional repayment of an old loan and the creation of new obligations. The Taxpayers submitted that the parties clearly intended not to discharge their (then) existing agreements and enter into new agreements on each occasion but, rather, intended simply to vary their agreements.

Ward JA (with whom Bathurst CJ and Tobias AJA agreed) concluded at [71] that, for there to be an advance under the Duties Act, including an advance which occurs due to a forbearance, there must be a real or effective provision of funds. This could occur by way of either an actual or a constructive flow of funds.

Her Honour noted that a retention of funds for a longer period of time than initially agreed to does not involve a “provision” or “obtaining” of funds for mortgage duty purposes (even though it may well constitute financial accommodation). Her Honour went further in concluding that the fact that there is a financial benefit does not necessarily mean that there is an obtaining or provision of any new funds. In this regard, Ward JA stated at [79] that:

There is no basis to conclude, where the original transaction did not involve the provision of funds by way of an advance or loan…that the extension of the date for payment (not repayment) of the purchase price gave the [Taxpayers] an advance in the sense of the continued use of funds equivalent to that purchase price.

The result of this is that the Court of Appeal found that there was no actual or constructive obtaining of funds by the Taxpayers as a consequence of the deeds of variation entered into by the parties after 1 July 2009.

The Commissioner of State Revenue has not yet indicated whether he will seek special leave to appeal the decision to the High Court.

Where to from here?

Following the decision at first instance, borrowers faced the real risk of mortgage duty being charged in respect of existing deferred purchase price arrangements where there had been either a unilateral or agreed extension of time for paying the purchase price for relevant notes (although the Commissioner did issue a public ruling on his view of the mortgage duty consequences relating to deferred purchase price structures and forbearances prior to the decision being handed down). The Court of Appeal’s decision provides borrowers with comfort that a variation to the maturity date under a deferred purchase price arrangement will not amount to an “advance” for New South Wales mortgage duty purposes.

The decision of the Court of Appeal may also be of wider significance to the extent that, at a general level, it supports the proposition that the deferral of an obligation to pay money does not create a new loan.