The NSW Court of Appeal has confirmed that an extension to the date by which the purchaser needs to pay the deferred purchase price in relation to a note does not constitute an advance for the purposes of the Duties Act 1997 (NSW) and does not require the payment of additional stamp duty. This is very good news for banks which have used no advance arrangements to provide their clients with secured financial accommodation.
Had the Court of Appeal decided otherwise, many banks which have entered into these arrangements would have found themselves relying on inadequately stamped security documents. A security document is unenforceable to the extent duty on it has not been paid to the OSR.
What is a no advance arrangement?
A no advance arrangement is an arrangement where a bank or a syndicate of banks provides financial accommodation to a person (referred to as the Purchaser in this article) by selling notes to the Purchaser and allowing the Purchaser to elect to defer payment for the notes to a specified date in the future.
The first step in any no advance arrangement is for the notes to be created and issued. The Purchaser usually establishes a special purpose vehicle to issue the notes (referred to as the Issuer in this article). The Issuer issues notes to the bank or banks, which in turn pay the Issuer for the notes the Issuer has issued to them.
The Issuer then advances the funds paid by the bank or banks for their notes to the Purchaser by way of inter-company loan.
The bank or banks, who now hold the notes, sell those notes to the Purchaser. The arrangements between the bank or banks and the Purchaser allow the Purchaser to elect to defer payment of the purchase price for the notes sold by the bank or banks. The Purchaser agrees to pay interest on the amount so deferred.
These steps, which occur simultaneously, result in the Purchaser obtaining the funds it requires from the Issuer through the inter-company loan. At the same time, the Purchaser is obliged to pay (on a deferred basis) the bank or banks the purchase price for the notes the Purchaser has purchased from the bank or banks (together with interest on that amount).
The period allowed for the deferral of payment of the purchase price will be the term agreed between the Purchaser and the bank or banks for the financial accommodation.
The security taken by the bank or banks will secure (and only secure) the obligation of the Purchaser to pay the deferred purchase price for the notes (together with interest on the deferred purchase price). In other words, the security does not secure an advance and need only be stamped with nominal duty.
Why are no advance arrangements no longer used when banks provide financial accommodation to their clients?
No advance arrangements were popular before 1 July 2009. From that date, however, anti-avoidance provisions were added to the Duties Act 1997 (NSW) and most practitioners accept that no advance arrangements would be caught by the new Chapter 11A.
As a result, no new no advance arrangements are likely to have been established after 1 July 2009.
However, given their popularity before 1 July 2009, there are likely to be many no advance arrangements in place today which have not yet expired or have had the term extended (possibly on multiple occasions).
What is the effect of an extension under a no advance arrangement?
The NSW Court of Appeal has recently given clear guidance on the effect of an extension under a no advance arrangement. That guidance should be warmly welcomed by banks which have provided their clients with secured financial accommodation using a no advance arrangement.
In its decision, the Court of Appeal held that an extension was not to be treated as an advance for the purposes of section 206(a)(iii) of the Duties Act 1997 (NSW) and did not require the payment of additional stamp duty.
In doing so, the Court of Appeal rejected the decision of Gzell J, in which it was held that additional mortgage duty was payable by the tax payer on a deed of variation which extended the time for payment of the purchase price.
Gzell J’s decision had caused some uneasiness in the market. The decision raised the prospect that security documents which should have been upstamped at the time of an extension had not been and were, as a result, unenforceable to the extent of the unpaid stamp duty.
Some banks may have reacted to Gzell J’s decision by upstamping the security they held in relation to no advance arrangements where there had been an extension. Where the extension had occurred some time earlier, the upstamping may well have involved the payment of penalties and interest.
The uneasiness referred to above has now cleared.
The Court of Appeal allowed the tax payer’s appeal and held that an extension did not fall within section 206(a)(iii) of the Duties Act 1997 (NSW). Ward JA (with whose reasons Bathurst CJ and Tobias AJA agreed) held that the opening words of section 206 (namely, that an advance was the “provision or obtaining of funds by way of financial accommodation (emphasis added) …”) could not be ignored. In order for an extension to be an advance under section 206, the extension had to result in the provision or obtaining of funds. In the case of the extension under consideration, this requirement was not met.
Where an extension does not result in the Purchaser receiving any new funds, the extension will not be an advance under section 206 and not require upstamping. As explained by Ward JA:
Retention of funds for a longer period does not, in the ordinary sense of the words, involve the “provision” or “obtaining” of any new funds (even though it may well constitute financial accommodation).
It is interesting to note that there were a total of nine extensions made to the Bondi Beachside no advance arrangement and that some of those extensions were made after the purchase price had already become due and payable.
In summary, we now have clear authority for the proposition that an extension to the date for payment of the deferred purchase price under a no advance arrangement does not constitute an advance under section 206 of the Duties Act 1997 (NSW) and does not necessitate upstamping of the security documents. This is a development that should please banks which have used these arrangements to provide secured financial accommodation to their clients.
As we noted earlier, no new no advance arrangements should have been put in place after 1 July 2009. However, for those arrangements already operating before that date and which are still in effect today, the Court of Appeal decision means that extensions to the date for payment of the deferred purchase price can be made without triggering an obligation to upstamp security documents. Important caveats are that no new security documents have been entered into after 1 July 2009 and that the financial accommodation was provided in full on or before 30 June 2009 (by this we mean the notes were issued by the Issuer and sold to the Purchaser).
What about the future?
It is our understanding that the Chief Commissioner of State Revenue does not intend to appeal the decision of the Court of Appeal.