By Jinny Chaimungkalanont and Mark Peters
The Supreme Court of New South Wales has today in Leppington Pastoral Co Pty Ltd v Chief Commissioner of State Revenue ordered that a notice of assessment in excess of $14m issued by the Chief Commissioner of State Revenue in respect of an alleged declaration of trust over land in New South Wales contained within a “Development Rights Agreement” be revoked.
The decision is a timely reminder of the need for precise drafting of legal documents in respect of development projects, and the importance of obtaining duty advice to mitigate the risk of an adverse duty assessment and associated costly litigation.
- Development agreements and PDA structures are generally bespoke and the duty issues which arise can vary significantly between structures. Here, the inclusion of language which is typically associated with a declaration of trust was clearly a red flag for the Chief Commissioner and serves as a reminder that transaction documents when lodged for assessment may be construed in a way not intended by the parties.
- In concluding that the Development Rights Agreement did not contain a declaration of trust over the Project Land in favour of the developer by the landowner, the Court had regard to the entire suite of project documents. It is important that stamp duty advice is obtained in a comprehensive way to ensure that, when looked at as a whole, the project documents do not give rise to adverse or unexpected duty outcomes.
- Development transactions often involve the difficult questions associated with timing of transfers of the relevant land and the rights the developer will have in respect of the land, taking into account required commercial parameters including bankability and equity contributions. It is critical that a cohesive tax, financing, and legal approach is adopted to ensure that the transaction structure and drafting of the documents achieve all desired outcomes.
- This matter was ultimately brought to the Chief Commissioner’s attention because of earlier legal proceedings where the relevant document was before the Court. This highlights the importance of having the duty implications of documents confirmed at the appropriate time (and early on), and where dutiable, lodged with Revenue in a timely manner, rather than the issue arising as a surprise in unrelated proceedings. Although the matter was resolved in favour of the taxpayer, the first assessment issued by the Chief Commissioner included over $10m in interest and penalty associated with the late lodgement.
- Although not relevant to this case as it involved matters before 19 May 2022, the changing landscape associated with options and duty generally arising out of the new change of beneficial ownership provisions means it is time to revisit established approaches to ensure that they take into account the latest developments in the law (see our note here).
- It is unclear at this stage whether the Chief Commissioner will appeal the decision.
The key factual circumstances were:
- In June 2008, Leppington Pastoral Co Pty Ltd (LPC) and Greenfields Development Company Pty Ltd (GDC) and Landcom entered into a suite of deeds, agreements, and securities for the development of agricultural land owned by LPC. The transaction documents included the usual documents expected in a development project, including a Call Option Deed between LPC and GDC and a Project Delivery Agreement (PDA).
- The Call Option provided the right for GDC to acquire the Project Land in stages as well as the grant of exclusive development right. The PDA contained detailed provisions setting out the rights and obligations of GDC and Landcom in relation to the funding and execution of the Project.
- Sometime before 11 October 2010, GDC exercised the Call Option for the first time and took a transfer of part of the land and was assessed for transfer duty in the order of $1m. To overcome the double duty issue associated with GDC taking a transfer of the relevant land before on selling to the ultimate acquirer, LPC and GDC entered into a Development Rights Agreement and amended the original transaction documents to enable LPC to enter into contracts for sale directly with the ultimate acquirers.
- Critically, the Development Rights Agreement contained the following clause:
“16.1 Estate or interest in Project Land
LPC acknowledges and agrees that GDC has a beneficial and equitable interest in the Project Land (and in the Project Land Extension Option parcel) and in the Gross Proceeds of the Project, as those are described in the Transaction Documents.
GDC acknowledges and agrees that, as between LPC and GDC, subject to any Securities that may exist from time to time and GDC’s beneficial and equitable interest, as described:
(1) nothing contained in or implied by this document, operates to transfer to, or vest in, GDC any legal estate or interest in the Project Land; and
(2) the legal ownership of the Project Land remains vested in LPC until it is acquired by GDC or a Purchaser.”
The Call Option and the Development Rights Agreement both contained clauses which provided there was no trust relationship between LPC and GDC.
- In 2016, in respect of separate proceedings involving LPC where the Development Rights Agreement was before the Court, it was raised whether the agreement effected or evidenced a dutiable transaction, and accordingly lodgement was subsequently made with Revenue NSW.
- The Commissioner ultimately issued a notice of assessment on the basis that clause 16.1 of the Development Rights Agreement constituted a declaration of trust over dutiable property (i.e. the Project Land) under s 8(1)(b)(ii) of the Act.
- The assessment was in the sum of $26,981,990.66, comprising duty of $15,596,805.50, interest of $10,605,344.88, and penalty tax at the rate of five per cent ($779,840.28). In 2021, following an internal objection, the duty assessment was reduced, but remained more than $14m.
The principal issue before the Court was whether the Chief Commissioner’s notice of assessment ought to be revoked on the basis that clause 16.1 did not effect a declaration of trust over dutiable property (i.e. the Project Land) for the purpose of s 8(1)(b)(ii) of the Act.
The relevant provisions provide:
“8 Imposition of duty on certain transactions concerning dutiable property
(1) This Chapter charges duty on—
(a) a transfer of dutiable property, and
(b) the following transactions—
(i) an agreement for the sale or transfer of dutiable property,
(ii) a declaration of trust over dutiable property,
“declaration of trust means any declaration (other than by a will or testamentary instrument) that any identified property vested or to be vested in the person making the declaration is or is to be held in trust for the person or persons, or the purpose or purposes, mentioned in the declaration although the beneficial owner of the property, or the person entitled to appoint the property, may not have joined in or assented to the declaration.”
The Court’s Determination
After a detailed review of the various transaction documents, Williams J concluded that the assessment ought to be revoked on the basis that clause 16.1 did not effect a declaration of trust over dutiable property.
The salient features of her Honour’s reasons were:
- whether an express trust was created under the Development Rights Agreement turned, in her Honour’s view, on the proper construction of the relevant transaction documents relying on orthodox principles of contractual interpretation (at ). Critically, an express trust is not to be inferred or implied merely because a court thinks it is an appropriate means of protecting or creating an interest (at ).
- in construing clause 16.1, it was proper to have regard to the inclusion of clauses within the transaction documents expressly disclaiming a relationship of trustee and beneficiary between LPC and GDC, although this is not determinative (at ).
- when the transaction documents were read as a whole, in context her Honour was satisfied that a reasonable businessperson would not have understood the words “beneficial and equitable interest in the Project Land” in clause 16.1 of the Development Rights Agreement to mean that GDC had an interest in the Project Land as the beneficiary under a trust as:
- although GDC was entitled to carry out the development for its sole benefit and retain all gross proceeds, under the contracts for sale to be entered into by LPC and the ultimate acquirers, GDC was still required to pay LPC the “LPC Lot Amount” on completion of the contracts for sale which was the value of the relevant land before civil works were undertaken. As such, the transaction documents did not confer all benefits derived from the Project Land on GDC, and LPC retained a real interest in the land inconsistent with being trustee for GDC (at -).
- LPC was also entitled to continue its existing farming, dairy, and grazing business on the Project Land for its own benefit and profit, unless and until GDC acquired parts of the Project Land by exercising its Call Options or by issuing Development Notices that then entitled GDC to exclusive possession (which could be rejected by LPC in certain circumstances). The obvious effect of LPC’s right of refusal was to ensure that LPC’s express right to continue its farming, dairy and grazing business on parts of the Project Land was not undermined by GDC (at ).
- LPC had the right to terminate the Development Rights Agreement if GDC committed an Event of Default, including by failing to make timely payment of the LPC Lot Amounts or other moneys payable to LPC under the Development Rights Agreement. Upon termination, LPC was entitled to vacant possession and could exercise step-in rights that included transferring or novating GDC’s rights and interests under its agreements with Landcom and others for the Project to any such third party engaged by LPC (at -).
- the comprehensive security package entered into by LPC, GDC, and Landcom demonstrated that GDC’s rights were amply protected and as such there was no basis to construe clause 16.1 as creating a trust in order to address the commercial risk for GDC and its financiers (at )
- the better construction of the provision was that the reference GDC’s “beneficial and equitable interest in the Project Land” related to the rights arising under the Call Option (at ).
It is unclear at this stage whether the Chief Commissioner will appeal the decision.