Source: https://www.liv.asn.au/LIV-Home/Practice-Resources/Law-Institute-Journal/Archived-Issues/LIJ-December-2009/Leases-and-the-fiscal-sword-of-Damocles
Timestamp: 2019-11-15 13:44:06
Document Index: 151593802

Matched Legal Cases: ['art 6', 'art 6', 'art 6', 'art 6', 'art 6', 'art 2', 'art 2']

Leases and the fiscal sword of Damocles - Law Institute of Victoria
Cite as: December 2009 83(12) LIJ, p.44
Since 16 June 2004, Part 6 of ch 2 of the Duties Act 2000 (Vic) (DA) has contained a transfer duty general anti-avoidance provision which allows for the imposition of transfer duty on a transaction on which this duty would have been payable “but for a tax avoidance scheme”: s69B.
Yet, on 7 July 2009, the DA was retrospectively amended by the Duties Amendment Act 2009 (Vic) (Amendment Act) with the introduction of transfer duty on certain leasing arrangements entered into from 21 November 2008, ostensibly “to ensure that leases are not used as a mechanism for avoiding duty”: s1(a).
This article analyses the issues in relation to the transfer duty general anti-avoidance provision of the DA that are left unresolved by the Amendment Act.
Before the enactment of the Amendment Act, lease duty had largely been abolished in Victoria from 26 April 2001.1 Before then, stamp duty at flat rates that were lower than the general conveyancing rate were levied on leases under heading VIII of Sch 3 to the Stamps Act 1958 (Vic) (SA) if no exemption from this duty was available. Alternatively, s64 of the SA imposed ad valorem conveyance duty on any lease that involved consideration other than rent reserved and in which any covenant or agreement for the future conveyance of the remainder on the occurrence of any contingency was expressed or implied. An instrument by which the interest of any lessee in any Crown leasehold was transferred or assigned was brought to duty at ad valorem conveyance rates by virtue of the SA s66.
In 2001, by way of a retrospective amendment to the SA, the Victorian government, under its “Better business taxes” package,2 implemented a taxation reform whereby duty would no longer be payable under heading VIII of Sch 3 to the SA on a lease, the assignment of a lease or an agreement for a lease made on or after 26 April 2001.3
On 1 July 2001, the SA was replaced by the DA, and ss64 and 66 of the SA were rewritten respectively as ss7(1)(b)(v) and 10(1)(a)(ii) of the DA. Apart from these sections, the DA for the most part did not make any express mention of duty on leases.
The transfer duty general anti-avoidance provision
The abolition of lease duty in early 2001 and the uncertainty in Australia with applying the doctrine of fiscal nullity to stamp duty4 could have led to the legal avoidance of transfer duty imposed under ch 2 of the DA on certain arrangements that passed commercial ownership of land without the need for a dutiable transaction.5
A lease in perpetuity does not appear to be able to be created under the general law.6 However, instead of transferring land and incurring transfer duty, a long-term (e.g. 300-year) lease over the land could be given to one entity and an option over the remainder granted to a related entity, with the lease and option contained in separate agreements specifically to avoid the potential operation of s7(1)(b)(v) of the DA.7 Duty generally is only payable on the exercise of an option.8 However, the cases suggest that neither the grant of a lease nor that of an option could be said to amount to a transfer of the lease or the option or the relevant underlying land.9 Nevertheless, the combined grant of a lease and an option over land effectively passes commercial and economic ownership of the land where the lease and the option are held by related parties or the same party.10
Part 6 of ch 2 of the DA
Part 6 of ch 2 of the DA came into operation on 16 June 2004. It provides for a transfer duty general anti-avoidance rule that allows for the imposition of transfer duty on a transaction entered into from this date in circumstances where such duty would have been payable under ch 2, but for a tax avoidance scheme: s69B.
The rule is potentially applicable where:
there is a transaction;
there is a tax avoidance scheme; and
but for the tax avoidance scheme, duty would have been chargeable under ch 2 on the relevant transaction.
A “scheme” is defined in broad terms by s69B(2) to include the whole or any part of a contract, arrangement, understanding, undertaking or promise and extends to unilateral plans, proposals and courses of action.
“Tax avoidance” is defined by s69B(2) of the DA to mean the elimination, reduction or postponement of liability to transfer duty. Under s69C(1), the duty that may be imposed on a transaction is the duty that would have been payable but for the tax avoidance scheme. As such, the making of a hypothesis as to what would have taken place if the impugned scheme had not been entered into is required. This has to be formulated by considering the relevant facts and evidence about any options that were reasonably available to the affected taxpayer(s).11
Applying the transfer duty general anti-avoidance rule
The introduction of Part 6 of ch 2 of the DA could be said to have limited the scope for the legal avoidance of transfer duty through the use of leasing-related arrangements.12 However, the provision has not been judicially considered as yet,13 and several issues are pertinent to the operation of this rule.
The constitution of a tax avoidance scheme has been discussed above. Under s69C(1) of the DA, if the Victorian Commissioner of State Revenue (Victorian Commissioner) “considers” that a person has participated in a tax avoidance scheme, the Victorian Commissioner may:
determine what transfer duty would have been payable but for the scheme; and
assess or reassess that or any other person’s liability to duty accordingly.
In this regard, s69C(1) is similar to the duties general anti-avoidance rule contained in s8(1) of the Taxation Administration Act 1999 (ACT). This provides that if the Commissioner for Australian Capital Territory Revenue “is satisfied” that a person has used a tax avoidance scheme, the Commissioner may:
determine the tax to which the person and other persons would have been liable apart from the scheme; and
take the action that he or she considers necessary to allow assessments of tax so determined.
The position set out above on the application in Victoria and the ACT of the duties general anti-avoidance rule of each jurisdiction14 may be compared to the situation that exists under Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA) and under the duties general anti-avoidance provision in Queensland (ch 11, Duties Act 2001 (Qld)).
For instance, the High Court in FCT v Peabody15 observed that the existence of a tax benefit in connection with a scheme under Part IVA is an objective matter which does not depend on the opinion of the Federal Commissioner of Taxation. Accordingly, it has been said that the actual presence or otherwise of the legislative requirements which need to be fulfilled in order for Part IVA to apply may properly be questioned in a challenge to the application of the provision.16
In comparison, it seems that under the Victorian transfer duty general anti- avoidance rule, the opinion of the Victorian Commissioner as to the existence or otherwise of a tax avoidance scheme is the criterion that principally establishes liability pursuant to the rule.17
As such, it would seem that (unlike the situation with liability under Part IVA) this liability would have to be challenged, not on the basis of the actual absence or otherwise of the objective requirements of Part 6 of ch 2 of the DA, but rather pursuant to general administrative law grounds18 such as those set out in Avon Downs v FCT.19 For instance, it would seem trite to note that the Victorian Commissioner must make a determination as to liability under the transfer duty general anti-avoidance provision by applying the correct legal test(s), and that such a determination needs to be founded on a consideration of relevant facts that would justify the making of the determination in question.20
Scope of provision: purpose or effect of tax avoidance (or both)?
Section 69B(1) of the DA defines a “tax avoidance scheme” as a “scheme” that directly or indirectly has “tax avoidance”:
as its purpose or effect; or
as one of its purposes or effects, provided that the purpose or effect of tax avoidance is not merely incidental to another purpose or effect of the scheme.
The definitions of the terms “tax avoidance” and “scheme” have been considered earlier and under s69B(1) tax avoidance may be the effect of the scheme either at the time that the scheme is entered into or subsequent to the entry into the scheme.
Section 69B(1) on its face would appear to be broader than any of its counterparts in those Australian jurisdictions which have a duties general anti-avoidance rule.21
The provision may be compared to the previous s260 of the ITAA, the predecessor to Part IVA. Section 260 was expressed to operate on contracts, agreements or arrangements which have, or which purport to have, any of the following purposes or effects:
defeating, evading or avoiding any duty or liability imposed on any person by the ITAA; or
preventing the operation of the ITAA in any respect.
It was observed early in the life of s260 that if the provision was construed literally, it would “extend to every transaction whether voluntary or for value which had the effect of reducing the income of the taxpayer”.22
Section 69B(1) of the DA may also be compared to s177E(1)(a) of the ITAA. The latter provides that one of the elements of a “dividend stripping scheme” is:
a scheme by way of or in the nature of dividend stripping; or
a scheme having substantially the effect of a scheme by way of or in the nature of dividend stripping (emphasis added).
The meaning of s177E(1)(a) was considered in FCT v Consolidated Press.23 At first instance, Hill J took the view that:
there is a difference between a dividend stripping scheme and a scheme that has the effect of such a scheme;
a tax avoidance purpose is relevant to a characterisation of a scheme, but not to a determination of its effect; and
that effect is to be judged in relation to the vendor of shares in the target company and the target company itself.24
A unanimous High Court disagreed with Hill J, noting that:
“The difficulty with this process of reasoning is that it fails to follow through the logic of the purposive construction . . . [of] s177E(1)(a)(i). Furthermore, as the Full Court observed, it gives s177E(1)(a)(ii) a meaning which appears to make s177E(1)(a)(i) otiose. If sub-par (ii) meant what Hill J said, it would never be necessary to look past the effect of a scheme.
“The reference in sub-par (ii) to effect does not require the element of purpose to be discarded. In particular, it does not require that any scheme which produces a substantial consequence which is in any respect the same as a consequence of a dividend stripping scheme is within the sub-paragraph”.25
Although it could follow from the above that the expression “purpose or effect”, as it appears in s69B(1) of the DA, should properly be interpreted and applied as a composite expression that requires a determination of the purpose and effect of the scheme,26 this outcome is not certain as the Victorian transfer duty general anti-avoidance rule is yet to be considered by the courts.
Since the abolition in Victoria in 2001 of lease duty in general, the Victorian State Revenue Office has reportedly been monitoring the use of leases, in particular long-term leases. A practice began to emerge among taxpayers under which the benefits associated with effective ownership of land were passed between parties through the use of leases over the land.27 The situation before 21 November 2008 meant that the absence of lease duty in Victoria had the result that the leases in question were not on their face subject to duty.
The Victorian Minister for Finance made the observation that: “The increase in the use of such transactions has the ability to erode the duty base and also to undermine the integrity of the tax. The measures are generally occurring in very large transactions. For instance, the State Revenue Office has identified a range of transactions of CBD properties for leases of up to 125 years. These often involve a very small annual rental, but a very large premium payment payable up-front. Lessees in these cases take all the usual benefits associated with ownership. Had this transfer of effective economic ownership been conducted by more standard arrangements, the stamp duty payable in these samples alone would amount to tens of millions of dollars”.28
One transaction in particular that caught the government’s eye was the leasing of the buildings that house Myer’s flagship city store to various members of the private equity consortium that acquired Myer in 2006.29 Under the arrangement, the building on Lonsdale Street would be used as a site for a new development while the building on Bourke Street would be redeveloped and sub-let for use by the store. The Myer family was on both sides of the transaction due to its stake in the consortium of a little over 8 per cent, with the other members of the consortium reportedly including entities associated with the Singapore Government Investment Corporation and Colonial First State. The building on Bourke Street would appear to have been leased to a Myer family company, a subsidiary of Colonial First State and an Australian-registered subsidiary of the Singapore Government Investment Corporation, with the latter two entities reportedly comprising the lessees of the building on Lonsdale Street. The amount of the total premium said to have been paid by the members of the consortium for the leases is AUD 605 million, with the rent under the leases reportedly being only in the amount of AUD 2 a year.30
Introduction of Part 2 of the Amendment Act
Those in power have implicitly characterised these various leasing arrangements as being patent transfer duty avoidance.31 Accordingly, the Victorian Commissioner could have applied the Victorian transfer duty general anti-avoidance provision to these and similar leasing arrangements. As noted above, the Victorian rule appears to be broader than the duties general anti-avoidance rule of any other Australian jurisdiction. Applying the Victorian rule to such leasing arrangements would have been a valuable opportunity to clarify the scope of the rule and the nature of its operation.
Instead, following some fanfare,32 and after an initial setback in the Upper House,33 Parliament enacted the Amendment Act. Part 2 of this Act substituted the former s7(1)(b)(v) of the DA with a new s7(1)(b)(v) that retrospectively introduced transfer duty on leases granted from 21 November 2008 for which any consideration other than rent reserved is paid or agreed to be paid,34 either in respect of the lease or in respect of what might broadly be summarised as certain other rights or interests pertaining to the leased land (set out at paras (A) to (D) of s7(1)(b)(v)). Transfer duty is also similarly imposed by a new s7(1)(b)(va) on the transfer or assignment of a lease of a kind that is referred to in new s7(1)(b)(v) if consideration is present in respect of the transfer or assignment, or in respect of what might be summarised as certain other rights or interests that pertain to the leased land (set out at paras (A) to (D) of s7(1)(b)(va)).35
A number of observations can be made about these new provisions. The amendments may address the transfer duty avoidance concerns that, among others, motivated the passage of the Amendment Act. However, akin to the observation of the High Court in WR Carpenter v FCT36 in relation to s136AD of the ITAA, there does not appear to be anything in the amendments that requires the existence of a tax avoidance purpose or motive. Instead, somewhat like the land-rich duty provisions, the amendments have created a new, substantive liability to duty under the DA. The mischief of transfer duty avoidance could have been more directly and proportionally addressed through the use by the Victorian Commissioner of the Victorian transfer duty general anti-avoidance rule. Unfortunately, the new law created by the amendments seems to bring new uncertainties that are in need of resolution.37 For instance, the Victorian State Revenue Office has foreshadowed a number of approaches to the provisions that would seem to be inconsistent with the drafting embodied in the sections concerned.38 Much of the debate that accompanied the passage of the Amendment Act could also suggest that the sponsors of the legislation did not consider the apparent availability of the pre-existing Victorian transfer duty general anti-avoidance rule.39
Practitioners seeking to advise on transfer duty in Victoria have been confronted with significant challenges following the introduction of the Victorian transfer duty general anti-avoidance rule. Under its literal interpretation, a transaction may be impugned even though it may be commercial in every respect except for a purpose or effect of reducing or postponing liability to transfer duty. The provision might therefore be described as akin to a fiscal sword of Damocles which dangles over the head of any taxpayer game enough to engage in anything other than the most plain of “plain vanilla” transactions.40
In light of this, the as yet untested nature of the provision, in combination with its potentially broad ambit of operation, could increase taxpayer uncertainty, inhibit many genuine commercial transactions, lead to distorted and inefficient reorganisations of business structures and transactions, and generate significant deadweight planning and consulting costs.41 It is therefore regrettable that the Victorian Commissioner did not address, with the application of the Victorian transfer duty general anti-avoidance rule, a perceived avoidance of duty through the use of leases, a measure which would in part have clarified the scope of the rule. Instead, a new substantive liability to duty has been introduced that gives rise to yet more uncertainty in the operation of Victorian duties law.
EU-JIN TEO is a fellow of the Taxation Institute of Australia, an adjunct lecturer in business law and taxation at Monash University and a senior lecturer at The University of Melbourne.
1. State Taxation Acts (Taxation Reform Implementation) Act 2001 (Vic) s15(3).
2. Victoria, Parliamentary Debates, Legislative Assembly, 17 May 2001, 1308 (John Brumby, Treasurer). Cf. Victoria, Parliamentary Debates, Legislative Assembly, 4 December 2008, 5031 (Timothy Holding, Minister for Finance).
3. Note 1 above.
4. See, e.g., Ashwick v Comptroller of Stamps (1987) 163 CLR 640; Peko-Wallsend v Commissioner of State Taxation (1989) 20 ATR 823. Cf. Ingram v IRC [1986] 2 WLR 598.
5. See, e.g., Nabil Orow and Eu-Jin Teo, “Duties general anti-avoidance rules: lessons from income taxation” (2004) 7(2) JAT 251, 259-60.
6. See, e.g., Sevenoaks v London, Dover & Chatham (1879) 11 Ch D 625, 635.
7. See, e.g., Bill Orow and Eu-Jin Teo, “Negotiating Victorian duties general anti-avoidance rules” (2004) 78(11) LIJ 31, 33-4; Orow and Teo, note 5 above, 259.
8. See, e.g., WM Cory v IRC [1965] AC 1088, 1108-9. Cf. George Wimpey v IRC [1975] 1 WLR 995.
9. See, e.g., Littlewoods v IRC [1961] Ch 597, 623-4; Commissioner of Taxes v Camphin (1937) 57 CLR 127, 133-4; Fairey v CSD (1998) 72 SASR 1, 5; Adamson v Hayes (1973) 130 CLR 276, 303; Allina v FCT (1991) 28 FCR 203, 210; Coles Myer v CSR [1998] 4 VR 728, 730, 740.
10. Cf. Commissioner of State Taxation v Linton (1978) 8 ATR 526, 527-8; Farm Products v IRC (NZ) [1969] NZLR 874.
11. Note 7 above, 32-3.
12. See note 7 above, 33-4; note 5 above, 259-60.
13. Note 5 above, 252.
14. See also to somewhat similar effect s270(1) of the Duties Act 2008 (WA).
15. (1994) 181 CLR 359.
16. See, e.g., CPH v FCT (1998) 88 FCR 21 (CPH); FCT v Sleight (2004) 136 FCR 211.
17. Cf. Jeffery v Commissioner of Stamps (1980) 23 SASR 398; Old Reynella v Commissioner of Stamps (1989) 51 SASR 378; Holiday v Lockwood [1917] 2 Ch 47; Kimbers v IRC [1936] 1 KB 132.
18. Philip Bender, “Casting a challenge” (2009) 83(6) LIJ 40, 42-3.
19. (1949) 78 CLR 353.
20. See, e.g., note 5 above, 270.
21. See, e.g., Duties Act 2008 (WA) s268(2); Duties Act 2001 (Qld) s433(1)(c); Taxation Administration Act 1999 (ACT) s8(5).
22. DFCT v Purcell (1921) 29 CLR 464, 466. See also Davis v FCT (1989) 86 ALR 195, 225-6.
23. (2001) 207 CLR 235.
24. CPH (1998) 88 FCR 21, 49-50.
25. FCT v Consolidated Press (2001) 207 CLR 235, 276.
26. See, e.g., note 5 above, 290; note 7 above, 32-3. Cf. Justice Graham Hill, “Countering avoidance on stamp duty”, paper presented at the Fifth Annual States’ Taxation Conference, Adelaide, 29 July 2005.
27. Victoria, Parliamentary Debates, Legislative Assembly, 4 December 2008, 5031 (Timothy Holding, Minister for Finance).
28. Note 27 above.
29. See, e.g., Victoria, Parliamentary Debates, Legislative Assembly, 26 February 2009, 470, 473 (Kimberley Wells); Victoria, Parliamentary Debates, Legislative Assembly, 26 February 2009, 476-7 (Robert Stensholt); Victoria, Parliamentary Debates, Legislative Assembly, 26 February 2009, 484 (Timothy Holding, Minister for Finance).
30. The transaction is described in some detail in Ben Butler, “Stamp duty attack to close loophole”, Business Daily, Herald Sun (Melbourne), 5 January 2009, 24.
31. See, e.g., Victoria, Parliamentary Debates, Legislative Assembly, 4 December 2008, 5031 (Timothy Holding, Minister for Finance); Victoria, Parliamentary Debates, Legislative Assembly, 26 February 2009, 470, 473 (Kimberley Wells); Victoria, Parliamentary Debates, Legislative Assembly, 26 February 2009, 476-7 (Robert Stensholt); Victoria, Parliamentary Debates, Legislative Assembly, 26 February 2009, 484 (Timothy Holding, Minister for Finance).
32. See, e.g., Office of the Treasurer, “Government closes duty avoidance loophole”, press release, 21 November 2008.
33. Kimberley Wells, “Duties Bill bites the dust”, press release, 11 March 2009; Treasurer, “Greens Liberal alliance gives green light to corporate tax avoidance”, press release, 11 March 2009.
34. Under s3 of the DA, the meaning of the expression “rent reserved” for the purposes of s7(1)(b)(v) is given an expansive definition that arguably is wider than the scope that has been ascribed by the general law to the term “rent” in relation to a lease: cf. Yanchep v Commissioner of State Taxation (1984) 15 ATR 1165; CSD v JV (Crows Nest) (1986) 7 NSWLR 529.
35. Sections 7(3AA) and 49 of the DA expressly exclude certain types of leases from duty under ch 2, which is where ss7(1)(b)(v) and 7(1)(b)(va) are located. For a more detailed discussion of these provisions, see, e.g., Tim Grace, “Fishing for new property: the Duties Amendment Act 2009” (2009) 83(11) LIJ 56.
36. (2008) 237 CLR 198.
37. See, e.g., Law Institute of Victoria, Submission regarding the media release: “Government closes duty avoidance loophole” (15 December 2008); Grace, note 35 above.
38. See especially State Revenue Office Victoria, Examples on operation of lease provisions (2009): www.sro.vic.gov.au/SRO/sronav.nsf/fid/C941E31A9491EFECCA257634001C3F72 (accessed 21 October 2009).
39. See note 31 above. Cf. Victoria, Parliamentary Debates, Legislative Assembly, 26 February 2009, 476 (Robert Stensholt).
40. Cf. Andrew Rider and Andrew Parrish, “Changes to stamp duty legislation in Victoria: duty to pay duty?” (2004) 1(10) Corp Prac 116.
41. As Richard Krever has observed in “New tax attack challenge” (2006) Financial Mail: http://secure.financialmail.co.za/06/0317/opinion/guest.htm (accessed 29 October 2009), albeit in a different context.