Financial Services Alert - State Revenue Legislation Further Amendment Act 2009 (NSW)

State Revenue Legislation Further Amendment Act 2009 (NSW)

You might recall the recent coverage in the media of the closing of the upper house by the NSW government. This followed the stalling in the upper house of a number of key pieces of legislation which the government sought to have passed prior to the long winter recess.

Whilst some reports indicated that significant changes to the breadth of application of mortgage duty under the Duties Act 1997 (NSW) (Act) were caught up in the stalled agenda, they actually crept through in the early evening prior to the government’s closing of the upper house in the wee hours of the following morning. This article focuses on the changes to mortgage duty although it should be noted that a number of other changes have been made to the Act in respect of “landholder duty”, the “First Home Plus Scheme” and “business asset” transfers.

Background

Mortgage duty was to be abolished in return for the states’ receipt from the Commonwealth of all GST revenue. As of 1 July 2009, all states other than NSW have abolished mortgage duty even though it has taken quite some time since Victoria led the way on 1 July 2004.

For its part, NSW has consistently shifted its position regarding the timing for abolition of mortgage duty. Initially flagged for abolition on 1 January 2011, at its earliest, abolition was to occur on 1 July 2009. However, with the exception of some piecemeal changes to exempt owner-occupied housing and individual investment housing from mortgage duty, the NSW government seems to have consistently sought greater returns from the “mortgage duty calf” by “capping” refinancing exemptions at $1,000,000, increasing the duty payable in respect of “collateral” and “copy” instruments and pushing back the abolition date to 1 July 2012.

Until 30 June 2009, it was relatively usual practice to stamp mortgages/mortgage packages for the total amount of advances that might be secured from time to time. For example, if a financier provided a progressive draw facility and an overdraft, the mortgage/mortgage package would be stamped to secure the maximum potential exposure at or around the time they were entered into. Up-stamping would only occur if the amount secured exceeded the amount for which the mortgage/mortgage package had previously been stamped.

With the removal of the section of the Act enabling stamping of a mortgage/mortgage package before an advance is made, additional duty is payable if as a result of an advance or further advance the amount secured by a mortgage/mortgage package exceeds the amount previously secured by that mortgage/mortgage package. At the time of assessment, the amount of mortgage duty payable is reduced by the amount for which the mortgage/mortgage package has previously been duly stamped under the Act. Refunds are not available in respect of any excess amount in respect of which duty has previously been paid.

Mortgage Packages

Instruments which secure or partly secure the same money will comprise a mortgage package regardless of when they are executed. Consequently, a mortgage package must be assessed for duty payable each time a fresh mortgage is taken to secure the same money as an existing mortgage package.

Where a multi-jurisdictional mortgage package is in existence, a breakdown of the assets the subject of the mortgage package will be required at the time of:

1. the making of a further advance; or
2. the taking of a fresh mortgage.

To the extent that the NSW proportion of those assets has increased and the mortgage package has not otherwise been sufficiently stamped under the Act, additional mortgage duty will be payable in NSW.

Limited Mortgages

Whilst it was previously possible to “cap” recovery under a mortgage over NSW property to a definite and limited sum (and to thereby reduce the amount of mortgage duty payable by reference to such sum), the Act has been amended to effectively ignore any such “cap” and impose mortgage duty on the advances actually made.

This mechanism was previously used in a number of contexts, one being where security was granted over Australian assets by an Australian member of a corporate group based offshore. Recovery was usually “capped” at the value of the Australian assets the subject of the security. Of course, on and from 1 July 2009 a concession based on the value of the assets secured by the entire mortgage package will be available however it is often quite difficult and time consuming to prepare the requisite “multi-jurisdictional mortgage statement” in respect of an international group of companies.

Anti Avoidance Measures

A new Chapter has been inserted into the Act to deter artificial, blatant or contrived schemes to reduce, avoid or postpone liability for duty. The amount of duty payable is the amount which would have been avoided if the scheme had not been entered into or made. Whether a scheme exists is based around the Chief Commissioner determining whether the scheme was entered into for the sole or dominant purpose of avoiding or reducing a liability for duty.

Consequently, borrowers who have obtained funding under the relatively frequently utilised “no advance structures” or have secured borrowings with “orally accepted” or “future assets” charges will need to proceed with caution if obtaining fresh financial accommodation under those arrangements after 1 July 2009.

Transitional Provisions

The changes will apply after 1 July 2009 in respect of:

1. fresh securities or securities that first affect property in NSW after 1 July 2009 (e.g. all assets fixed and floating charges that attach to property in NSW);
2. previously granted securities that secure advances or further advances made after 1 July 2009;
3. limited mortgages where an advance or further advance is made after 1 July 2009. In the context of a post 30 June 2009 advance secured by previously granted mortgage containing a “cap”, there is ambiguity regarding whether duty is payable only in respect of the amount of the further advance or on the whole amount by which the “cap” has been exceeded and for which duty has previously been paid under the Act. The position seems to be that duty will only be payable in respect of the amount of the further advance; and
4. tax avoidance schemes where the scheme or part of the scheme is entered into or carried out on or after 1 July 2009. It does not seem that the provisions will apply to enable the Chief Commissioner to recover the amount of duty avoided via the scheme prior to 1 July 2009, only the amount of the “accommodation” made available after 1 July 2009.

Summary

Despite the suggested aim of revising and simplifying arrangements for the assessment of duty on mortgages, the changes have the effect of:

1. limiting the methods available to minimise mortgage duty payable in NSW in respect of secured lending transactions at a time when all other states have removed the mortgage duty burden; and
2. increasing compliance and associated advisory costs during a time of economic uncertainty when governments otherwise seem to be focussed on stimulating economic recovery.

Whilst the impact may be minimal in respect of single advance loans secured by assets solely located in NSW, the application of the new provisions to “revolving” and “progressive draw” facilities and structured financing arrangements will need to be considered more closely. Hopefully guidance from the Office of State Revenue as to the practicalities of some of the more onerous assessment provisions will be forthcoming.