The NSW Duties Act has a specific anti-avoidance rule that enables the Commissioner when determining the dutiable value of dutiable property, to disregard any interest, agreement or arrangement (other than an encumbrance) granted or made in respect of the dutiable property that has the effect of reducing the dutiable value.
An interest, agreement or arrangement may not be disregarded if the Chief Commissioner is satisfied that it was not granted or made as a part of an arrangement or scheme with a purpose of reducing the duty otherwise payable on the dutiable transaction. In considering whether or not he or she is so satisfied the Chief Commissioner may have regard to the following matters:
- the duration of the interest, agreement or arrangement before the dutiable transaction
- whether it involves an associated person
- whether there is any commercial efficacy to it other than the reduction in duty, and
- any other matters the Chief Commissioner considers relevant.
The NSW Court of Appeal had to consider this rule in a case where there was a sale of the freehold interest in land which was subject to a concurrent lease for 300 years that had been granted by the vendor to another company some 20 months earlier. The lease was on terms requiring payment of a large premium, but a nominal rental. Duty had been paid on the concurrent lease on the premium. The purchaser paid duty on the basis of the reduced value of the reversionary freehold caused by the presence of the 300 year lease.
The Chief Commissioner applied the anti avoidance rule to assess duty as if the freehold land was not affected by the 300 year lease. The NSW Court of Appeal held that these provisions in the NSW Duties Act invited a comparison between the dutiable value of the dutiable property and its dutiable value if the relevant interest had never been granted. In this case, the comparison that has to be made is between the value of the freehold reversionary estate (that is, the estate subject to the lease) and the freehold estate if the concurrent long lease had never been granted. If the dutiable value calculated on the latter basis is greater than the actual dutiable value of the dutiable property, the effect of the grant of the concurrent long lease is to reduce the dutiable value of the dutiable property.
The Court therefore found that the Chief Commissioner, in determining whether or not to be satisfied that an interest, agreement or arrangement was not granted or made as a part of an arrangement or scheme with a collateral purpose of reducing the duty otherwise payable on the dutiable transaction, must first form a judgment as to what dutiable transaction would have occurred but for granting or the making of the interest, agreement or arrangement. If the comparison between this counterfactual and the actual dutiable transaction indicates that duty payable has been reduced, the Chief Commissioner must then consider whether a reduction of duty was a collateral purpose (not necessarily a dominant purpose) of the granting or the making of that interest, agreement or arrangement, taking into account the specified matters.
The Court held the subjective purpose of the parties could be taken into account although it noted that if the Court was wrong on that point the purpose of the parties objectively determined in this case indicated a reduction of duty was in fact collateral purpose of the granting of the long term lease.
This indicates that care must be taken when dealing with interests in land where long term leases are involved. It is not sufficient that the purchaser of the reversionary freehold interest and the lessee of the long term lease are different parties.