Search

No-advance tax structure caught out

Focus: Bondi Beachside Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 21
Services: Financial Services
Industry Focus: Financial Services
Date: 18 February 2013
Author: Jeff Baker, Partner & Joshua Khoo, Associate

The recent NSW Supreme Court decision in Bondi Beachside Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 21, highlights the potential difficulties in amending provisions in respect of 'no-advance' structures.
 

Background

 
Back in the days when state governments inflicted mortgage duty on borrowers who obtained secured debt (and notably, NSW remains the sole state levying such duty), 'no-advance' structures developed to facilitate revenue neutrality in respect of such debt.
 
One particular structure involved financiers subscribing for loan notes issued by a Special Purpose Vehicle (SPV). The SPV would loan the money raised via the notes to the borrower on an unsecured basis. The financier would sell the notes to the borrower and agree to defer payment of the purchase price for the notes. The financier would also take security from the borrower securing the deferred purchase price.
 
As the security did not secure an “advance” (for the purposes of duties legislation), nominal mortgage duty was payable (i.e. $5 mortgage duty as opposed to potentially hundreds of thousands of dollars if the security secured an "advance" for the purposes of the duties legislation).
 
The NSW Government responded to the above structures by amending the Duties Act 1997 (NSW) and issuing pronouncements of the Chief Commissioner regarding the intended approach to 'no-advance' structures, particularly where limits were increased or payment dates were pushed back. The recent NSW Supreme Court decision in Bondi Beachside Pty Ltd v Chief Commissioner of State Revenue [2013] NSWSC 21 illustrates how an extension of a repayment date can unravel a 'no-advance' structure.
 

The case

 
In late 2007, the borrower and lender established a typical loan note sale 'no-advance' structure and the borrower paid $5 nominal duty on the securities. In mid-2009 the Duties Act was amended such that additional duty would be payable if securities secured 'further advances' – calculated by comparing the amount secured by the securities following the 'further advance' against the amount secured when the most recent duty liability arose.

In late 2009 the parties entered into variation deeds in respect of the 'no-advance' structure which, relevantly, extended the date for payment by the borrower to the lender of the deferred purchase price under the loan notes.

The decision

 
For various detailed reasons, Justice Gzell considered entry into the variation deeds constituted a "forbearance", which (conveniently) is an "Advance" for the purposes of the Duties Act. Whilst Justice Gzell indirectly suggested that pre-2009 the structure was effective and the securities were correctly stamped with nominal duty, the "forbearance" increased the advances secured from nil in late 2007 to the face value of the loan notes (approximately $92M).
 

The result and things to consider

 
As a result of the above, the borrower will be liable for mortgage duty on the securities in the vicinity of $370,000 (excluding any interest and penalties) once the Chief Commissioner issues its amended assessment. Fortunately for the borrower, the Court held that capitalised interest on the deferred purchase price (approximately $10M) did not form part of the Advance and duty was not payable on this amount.
 
In light of the above, parties should tread lightly when considering extending or varying any 'no-advance' funding structure. To ensure securities for existing structures are enforceable, lenders must consider reviewing 'no-advance' structures with which they have been involved to ascertain whether up-stamping is required.
 
For more information, please contact:
 

Jeff Baker | Partner

T +61 7 3100 5167

F +61 7 3100 5001

 

David Carter | Partner

T +61 2 8233 9550

F +61 2 8233 9555

 
The information in this document, broadcast or communication is provided for general guidance only. It is not legal advice, and should not be used as a substitute for consultation with professional legal or other advisors. No warranty is given to the correctness of the information contained in this document, broadcast or communication or its suitability for use by you. To the fullest extent permitted by law, no liability is accepted by DibbsBarker for any statement or opinion, or for an error or omission or for any loss or damage suffered as a result of reliance on or use by any person of any material in the document, broadcast or communication.
 
This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, it may only be reproduced for internal business purposes, and may not otherwise be copied, adapted, amended, published, communicated or otherwise made available to third parties, in whole or in part, in any form or by any means, without the prior written consent of DibbsBarker.
 
 
You may also be interested in:
17 Apr 2014
ASIC's proposed reform to employee incentive schemes may have the unintended consequence of making such relief less likely to be available to private equity and venture capital investees.
16 Apr 2014
The Queensland Government has taken the first steps to address land tenure reform with the introduction of the Land and Other Legislation Amendment Bill 2014 into Parliament.
16 Apr 2014
A recent decision of the NSW Supreme Court in a cheque conversion claim has left the gate open for banks to rely on the proportionate liability defence under Civil Liability legislation to reduce their liability when sued in conversion as the collecting bank of cheques.
14 Apr 2014
The April 2014 edition of the Australian Health Law Bulletin (LexisNexis publication) contains an article by Timothy Bowen, Senior Associate at DibbsBarker. The article discusses the extent of a medical practitioner's obligation to be a 'good samaritan' when emergency medical treatment is required off-duty.
11 Apr 2014
The Queensland Government recently announced its intention to amend the Building and Construction Industry Payments Act 2004. The flagged amendments will implement some of the 49 recommendations made in a review of the BCIPA released at the same time.
Privacy Disclaimer Contact Us Site Map CLIENT & STAFF LogIN © DIBBSBARKER 2010 - 2014