Australia: No-advance tax structure caught out by variation deeds

No-advance tax structure caught out

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.