Analysis of the NSW mortgage duty changes

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Who does this affect?

Any party to a secured transaction connected in a relevant way to NSW, both existing and implemented after 1 July 2009

What do you need to do?

Consider how the changes (assuming the Bill is passed in its current form) will affect mortgages, charges and security structures in which you are or may become involved

Author
Nuncio D'Angelo
Partner

Ken Astridge

Partner
T +61 2 9296 2146

Sydney
Peter Green
Martin James

Melbourne
Frank Brody

Perth
Nicholas Creed

Brisbane
Aaron Bourke

Analysis of the NSW mortgage duty changes - 19 June 2009

The NSW Government has introduced into Parliament the State Revenue Legislation Further Amendment Bill 2009. Among other things, it seeks to make several significant amendments to the mortgage duty provisions in the Duties Act 1997 (NSW), with effect from 1 July 2009. These changes will affect securities put in place prior to 1 July, as well as those executed after this date.

In an increasingly risk-averse environment where financiers are less inclined to provide unsecured accommodation, and are pressing for new or further security in relation to existing facilities (and where the market is still working through solutions to the issues thrown up by the decision of the Qld Supreme Court in Re Octaviar Ltd; Re Octaviar Administration Pty Ltd [2009] QSC 37 (6 March 2009), which will include, in some cases, new or further security), these changes represent real and immediate challenges to the banking and finance industry, where there is a NSW connection (remembering that, from 1 July 2009, NSW remains the only jurisdiction in Australia that retains mortgage duty, the others having abolished it as part of the deal with the Federal Government for the introduction of GST).

Highlights of the changes include the following:

The introduction of a general anti-avoidance regime for “tax avoidance schemes” that are “of an artificial, blatant or contrived nature”.

The abolition of the distinction between “all moneys” security and “limited” security (ie where the difference depended on whether the amount of advances secured or to be secured is a “definite and limited sum” or not). Securities will be liable for duty on the “amount secured”, a critical concept in the regime, which is defined as the amount of any advances made under an “agreement, understanding or arrangement for which the mortgage is security (even if the amount of advances made exceeds the amount of advances recoverable under the mortgage)”.

All mortgages or other instruments of security which secure the same money will be treated as a “mortgage package”, regardless of when executed (that is, the “28 day rule” has been abolished).

Transitional provisions that do not completely preserve or grandfather existing pre-1 July 2009 securities, and can make them dutiable if further accommodation is provided on or after 1 July 2009.

Each new advance which increases the amount secured above the amount secured at the time a liability to duty last arose will require a recalculation of the NSW duty payable. The recalculation will recognise a credit for NSW duty previously paid and will require the preparation of a (new) multi jurisdictional statement disclosing the location and value of assets secured at that time if the secured property is at the time located in and outside NSW, so that the duty payable can be calculated on a pro-rata basis.

Note, in this regard, that due to the importance placed on “advances” made on or after 1 July 2009, facilities that are structured as a repayment and re-advance on each rollover date are of particular concern. This is so even though parties may commercially regard and manage such facilities as “term” loans. Similar issues arise in revolving facilities and other facility types that allow future advances on or after 1 July 2009.

The table below sets out our preliminary analysis of how these changes (assuming the Bill is passed in its current form) will affect mortgage/charge types and security structures which are typical or commonly used today. In it, we consider:

Transitional issues: that is, what happens if further accommodation is provided on or after 1 July 2009 which is “secured” by a security or structure which is in place before 1 July 2009?

Future transactions: that is, how will the changes affect mortgage/charge types and security structures of a kind currently in use if they were to be put in place on or after 1 July 2009?

Mortgage/charge types or security structure	Transitional issues	Future transactions
Security with no limit [Currently, these are stamped by reference to the amount of advances actually secured by it and upstamped if an advance increases the amount actually secured above the amount by reference to which the security has been stamped]	Substantively, very little changes. These securities will become liable if an advance or further advance on or after 1/7/09 means the amount secured exceeds the amount secured when a liability to duty last arose. Duty is on the entire amount secured (ie not just the post-1/7/09 advance), less credit for any duty paid, and subject to pro-rating if secured assets are cross-border. For cross-border security packages, additional duty will arise if the proportionate value of assets in NSW has increased since the date a liability to duty last arose.	Substantively, very little changes. These securities will be dutiable on the amount secured, which is the amount of any advances made under an agreement, understanding or arrangement for which the mortgage is security (even if the amount of advances made exceeds the amount of advances recoverable under the mortgage).
Security limited to a “definite and limited sum” (“Limited Securities”) [Currently, if properly drafted, these are dutiable by reference only to the limit amount and any increase in the limit amount]	According to the Explanatory Notes (and since confirmed to us by the OSR), the legislative intent is that an advance on or after 1/7/09 in excess of the limit is dutiable only with respect to that advance and not the entire amount secured (ie in effect the OSR will treat them as fully stamped for advances to 30/6/09). However, the Bill is ambiguous on this point. No advances should be made on or after 1/7/09 where Limited Securities are involved without first considering the duty implications.	See above. From 1/7/09 there is no stamp duty benefit or convenience in making securities “limited”. For example, if an Australian subsidiary gives security over local assets to secure a parent’s global borrowings limited to the value of that subsidiary’s assets, that limit will be irrelevant for stamp duty purposes after 1/07/09 (though cross-border pro-rating will be available).
Future property securities (assuming properly constructed under current laws) (“Future Property Securities”) [Currently, these are not dutiable at any time because no relevant connection to NSW at any relevant time]	No duty if an advance or further advance is made on or after 1/7/09 either because the amount secured will not exceed the amount secured when a liability to duty last arose (since such a liability will never have arisen or because it is not a “mortgage”).	No change under the substantive mortgage duty provisions. Arguably, the breadth and scope of the anti-avoidance provisions may raise a question in some circumstances on or after 1/7/09 (although there is a question around the relationship between the new general anti-avoidance provisions and the existing specific anti-avoidance provisions relating to future property securities).
Deferred purchase price/no advance structures (“No Advance Securities”) [Currently, these attract nominal duty only because they do not secure “advances”]	Even if further accommodation is provided on or after 1/7/09, it will not be an “advance or further advance”. However, the breadth and scope of the anti-avoidance provisions may raise a question concerning potential liability for duty in respect of post-30/6/09 accommodation. However, no duty liability should arise in respect of pre-1/7/09 accommodation.	The breadth and scope of the anti-avoidance provisions raise serious questions about these types of structures on or after 1/7/09.
Deferred collateral/mortgage package structures [Currently, these are dutiable by reference to the initial “mortgage package”, with later (ie >28 days later) security being stamped collateral]	Becomes liable if an advance or further advance on or after 1/7/09 means the amount secured exceeds the amount secured when a liability to duty last arose. The package will be assessed as one package, even if originally separated by more than 28 days. Duty is on the entire amount secured (ie not just the post-1/7/09 advance), less credit for any duty paid, and subject to pro-rating if secured assets are cross-border.	Given the abolition of the 28 day rule for mortgage packages and the breadth and scope of the anti-avoidance provisions, there is no stamp duty benefit or convenience in implementing these structures on or after 1/7/09.
Relocation of assets to non-dutiable jurisdictions [Currently, these are dutiable by reference to where secured property is located at relevant times]	If the security never had a duty nexus to NSW then an advance or further advance on or after 1/7/09 has no effect. If the security did have a duty nexus to NSW prior to 1/7/09, then an advance or further advance on or after 1/7/09 will trigger a duty liability if the amount secured exceeds the amount secured when a liability to duty last arose. Duty is on the entire amount secured (ie not just the post-1/7/09 advance), less credit for any duty paid, and subject to pro-rating if secured assets are cross-border.	No change under the substantive mortgage duty provisions but the breadth and scope of the anti-avoidance provisions may raise a question in some circumstances (eg if assets are relocated “for the sole or dominant purpose of enabling a liability for duty to be avoided or reduced”).

This is a basic and general guide only, designed to assist in understanding the impact of the pending changes. It is not intended to be definitive advice. There will be many situations that are not addressed by this alert. Much will depend on the drafting of the documents involved, and each situation needs to be carefully examined and specific legal advice taken.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.

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