The decision of the Supreme Court of New South Wales in Bondi Beachside Pty Ltd v Chief Commissioner of State Revenue  NSWSC 21 is a timely reminder of the need to obtain specialist stamp duty advice even in the face of the impending abolition of mortgage duty in New South Wales from 30 June 2013 (assuming that abolition is not again deferred).
The case was primarily concerned with the question of whether the extension of the termination date of a financing arrangement, commonly referred to as a “deferred note purchase arrangement” (and which was employed prior to major changes being made to the Duties Act 1997 (NSW) (Duties Act) which took effect from 1 July 2009) amounted to a forbearance to require the payment of money owing under section 206(a)(iii) of the Duties Act. If it did, mortgage duty would be required to be assessed at the time of the extension on the basis that the forbearance was an “advance” within the meaning of the Duties Act.
Under the deferred note purchase arrangement, the financier provided financial accommodation to a company via an agreement to defer the payment of the purchase price for a debt instrument issued by its wholly-owned subsidiary. Security for the unpaid purchase price was granted to the financier by the company and its wholly-owned subsidiary. As the security did not at the time of execution secure an “advance”, only nominal mortgage duty was payable.
However, the termination date of the arrangement (ie. the date on which the unpaid purchase price was required to be paid in full) was extended on a number of occasions. The question for determination by the Supreme Court was whether such extensions were a “forbearance to require the payment of money owing on any account whatever” so as to fall within the definition of “advance” under the Duties Act. Gzell J agreed with the submissions of the Chief Commissioner and found that the extension of time for payment constituted an advance by way of forbearance. As a result, the existing securities now secured an advance and would be liable to mortgage duty.
Implications for financiers and borrowers
Financers and borrowers that have deferred note purchase financing arrangements in place should be aware of this decision and take stock of whether any past variation to the arrangements may have triggered a liability to mortgage duty. If it has, and the correct amount of mortgage duty has not been paid, there may be expected to be difficulties with the enforceability of the security until such time as the duty is paid. Further, the decision highlights the need to obtain specialist stamp duty advice when amending complex financing arrangements or granting further security for existing transactions.
Abolition of NSW mortgage duty
New South Wales is the only State or Territory that currently imposes mortgage duty but this is due to be abolished on and from 1 July 2013 (assuming there is no further deferral of the abolition). The Duties Act has a number of transitional provisions concerning the abolition of which note should be taken in relation to any secured financings that may straddle the abolition date. Importantly, mortgage duty will continue to apply to mortgages first executed before 1 July 2013. However, no additional mortgage duty will apply in respect of an advance or further advances made after that date.