The risks of incurring double duty 12 min read
The recent Victorian case of Hartman1 demonstrates the potential stamp duty dangers of relying on nominee clauses in transactions involving land (or other dutiable property).
In Hartman, the taxpayer's nomination, pursuant to a nominee clause, of the trustees of two family trusts as transferees of real property purchased in his name, resulted in an assessment of double duty, an assessment upheld by the Victorian Civil and Administrative Tribunal (VCAT).
The VCAT decision highlights the importance of settling, if possible, on the identity of the ultimate transferee prior to execution of a contract and, above all, the need for developers and other purchasers of land to seek advice before relying on a nominee clause or otherwise seeking to transfer title to a third party.
- The risks of incurring double duty are particularly acute for developers and other purchasers, who may seek to rely on nominee clauses to effect a 'sub-sale' of land to a third party.
- If there is time, a purchaser of land should, if possible, identify the entity which will ultimately acquire title to the land, whether pursuant to an option or otherwise, and seek to make that entity the purchaser in the sale contract from the outset, without recourse to a nominee clause.
- If a nominee clause is necessary, then a purchaser should seek expert advice to manage the significant double duty risks. Preventing double duty in a sub-sale context is sometimes possible, but as Hartman demonstrates, significant care – combined with strong evidential proof – is often necessary.
Members of the tax and legal teams, and others involved in the structuring of transactions to acquire land or the drafting of sale of land contracts.
As a general rule, stamp duty is assessed on any transaction which results in a transfer (or other change in beneficial ownership) of an interest in land (or other types of dutiable property).
The various sub-sale provisions in the duties legislation apply to treat certain transactions, such as those involving nomination by the purchaser of a new transferee under an option or a contract of sale, as a 'sale' followed by a transfer (ie a sub-sale of the land). In those circumstances, duty is assessed as if two separate transactions had occurred.
The risk of double duty is therefore particularly acute for land developers, who may frequently rely on nominee clauses, assignments or options in ways that risk engaging the various sub-sale provisions. For example, double duty may be assessed where a developer or other party enters into an agreement or option to transfer ownership of land, but then seeks to effectively on-sell the property to a third party, without itself taking a transfer of title.
In Victoria and Tasmania, the specific sub-sale provisions2 will only be engaged either where 'land development' occurs after the first sale contract is entered into but prior to the nomination or transfer, or where the ultimate transferee provides additional consideration to the original purchaser. Care should be taken: 'land development' is defined very broadly, and changing the land in any way that would enhance its value, including preparing a plan of subdivision or merely applying for an approval under the Building Act 1993 (Vic), will suffice. (For more information on the 'land development' requirement, see our previous Insight on the topic). New South Wales also has specific sub-sale provisions which broadly impose double duty where there are simultaneous put and call options, but a third party obtains title to the property through a nomination, novation or assignment of one of the options.
In other Australian jurisdictions, double duty is generally payable where the transfer to the ultimate transferee is not 'in conformity' with the initial sale agreement. For example, this will be the case where the ultimate transferee is not identified by name in the initial sale agreement.
Alternatively, if the vendor and the developer agree to rescind the contract, on the basis that the vendor then enters into a contract for sale with the third party, then double duty will still arise if there is a denial of a refund of duty on the rescinded contract in those jurisdictions which impose duty on a contract for sale. In broad terms such a denial will occur if there is a 'sub-sale' – in other words a subsequent sale by the vendor to the third party.3
As Hartman illustrates, the sub-sale provisions may also apply where a developer or other party enters into an option or contract to purchase land in the name of one entity, yet subsequently wishes to nominate an alternative entity to be the purchaser or transferee of the land, even where each entity is controlled by the same person.
To avoid the imposition of double duty in such a sub-sale situation, the parties may therefore need to identify an exemption to transfer duty under the relevant duties legislation – or, as discussed below, avoid a sub-sale all together. The question of the availability of two such exemptions formed the subject of Hartman.
The facts in Hartman
Benjamin Hartman was a builder and property developer who entered into a contract to acquire a property in Northcote, Victoria, from an unrelated party. Mr Hartman's intention was to subdivide the property and build two houses: one to be sold, and the other for Mr Hartman and his wife to live in.
The duty difficulties arose from the inclusion – and subsequent use – of an 'or nominee' clause in the contract of sale. The contract specified the purchaser as Mr Hartman 'and/or nominee'. Approximately eight months after the contract was executed, but prior to completion, Mr Hartman nominated two related companies – the respective trustees of two family trusts – to take the transfer as tenants in common. Settlement occurred, and duty was paid in full – or so Mr Hartman thought.
The Commissioner subsequently issued an assessment for duty of a further $80,300 (plus penalties and interest) under the sub-sale regime in Part 4A of Chapter 2 of the Duties Act 2000 (Vic), assessed on a notional (sub-) sale from Mr Hartman to the two nominees.
Mr Hartman's objection to the assessment was disallowed and he appealed to VCAT.
The decision on double duty
Before VCAT, Mr Hartman accepted that the transaction would be caught by the Victorian sub-sale regime unless he could establish a relevant exemption. He contended that two applied.
The first, the 'apparent purchaser' exemption under s 34 of the Victorian Duties Act, draws on the law of resulting trusts. It provides that where the ultimate transferee (or 'real purchaser') provided the money that the first purchaser used to acquire the interest in the property, a transfer of the interest from the first purchaser to the real purchaser is exempt from duty.
The second exemption relied upon was s 36 of the Victorian Duties Act, which exempts a transfer from the trustee of a fixed trust to a beneficiary of the trust. Mr Hartman contended that he entered into the contract of sale as bare trustee for the beneficiaries of the two family trusts, such that the nomination of the corporate trustees constituted a transfer within the scope of s 36.
However, the Tribunal, interpreting the legislation, held that neither exemption could apply in such a sub-sale situation:
Sections 34 and 36 are simply incapable of having stand-alone operation to a sub-sale.4
In summary, the Tribunal reached the conclusion that, in the context of the sub-sale provisions, each exemption requires an assessment of whether the relevant relationship (of fixed trustee-beneficiary under s 36 and apparent purchaser under s 34) existed between the original vendor and Mr Hartman, not between Mr Hartman and the ultimate transferee. Since the original vendor had never held the property as trustee for Mr Hartman nor acquired it using his money, neither provision could apply. As such, it was irrelevant whether Mr Hartman had purchased the property with trust money and/or entered into the contract as bare trustee for the family trusts.
The decision on discretion
Mr Hartman also contended that even if double duty was lawfully assessed, the Commissioner should have exercised its discretion to not issue an assessment for the second amount of duty.
The Tribunal followed previous decisions of the Tribunal, deciding that once it found an assessment to be lawful, it was not open for the Tribunal to re-exercise the discretion of the Commissioner and decline to assess duty on discretionary grounds, lest the 'floodgates' open to the 'many others' who would seek similar review of harsh, but legally valid, assessments.5
How to take advantage of the apparent purchaser exemption
Notwithstanding the Tribunal's comment that 'sections 34 and 36 are simply incapable of having stand-alone operation to a sub-sale', taxpayers in Mr Hartman's situation can sometimes rely on the s 34 apparent purchaser exemption by structuring the transaction differently.
The apparent purchaser exemption may be available where the original purchaser (the apparent purchaser), using the money of the ultimate transferee (the real purchaser), completes the initial sale and takes legal title to the property (therefore not exercising any nomination right), before entering a subsequent second transfer to the ultimate transferee. In this circumstance, full duty would be assessed on the initial sale, but the parties could rely on s 34 to exempt from duty the second transfer to the ultimate transferee.
A resulting trust structure is typically used where the 'real purchaser' wishes to hide its identity from the vendor of the property. But it could also potentially be used for a sub-sale situation, for example where a developer who holds an option exercises the option and purchases the property using funds wholly provided by a third party investor. The developer and investor would generally need to enter into a document to protect themselves under such an arrangement; a declaration of trust in these circumstances would also benefit from the concession.
Should a taxpayer choose to pursue this path, then it becomes crucial that it collate the evidence necessary to establish the central requirement of the s 34 exemption: that the taxpayer prove that the ultimate transferee (the 'real purchaser') provided the money (including the deposit) which the original purchaser (or 'apparent purchaser') used to acquire the property under the first transaction.
In New South Wales, under the equivalent Duties Act 1997 s 55, the necessary evidence may include:
- documentary proof of payment by the real purchaser, including bank statements, passbooks, copies of cheques etc;
- an original executed declaration of trust or transfer;
- a statutory declaration by the apparent purchaser stating:
- the intention of the parties at the time of purchase by the apparent purchaser;
- why the property was purchased in the name of the apparent purchaser; and
- who actually provided the purchase money, including the deposit, payable under the contract for sale;
- the age or date of incorporation of the real purchaser;
- for ELNO settlements:
- bank statements showing the transfer of funds from the real purchaser to the general trust account of its solicitors;
- a screen shot of the transfer of the funds from the general trust account of the solicitors for the real purchaser to ELNO; and
- a record of the ELNO settlement in favour of the vendor; and
- a copy of the agreement for the sale of land.
In Victoria, the taxpayer must similarly furnish evidence, including:
- documentary evidence proving the payment of the purchase money, including the deposit, such as copies of financial statements etc.
- a copy of any relevant agreement between the real purchaser and the apparent purchaser at the time of the purchase;
- a copy of the transfer to the apparent purchaser;
- a statutory declaration, including similar information to that required in NSW, above;
- copies of any other relevant documents showing how the real purchaser is entitled to the exemption; and
- where the apparent purchaser is registered on title to satisfy the requirements of a lender, a statement from the lender confirming this.
There are corresponding resulting trust exemptions in other jurisdictions.6
However, pitfalls exist: if the original purchaser has already paid the deposit using their own money, or the money came from a different entity than the ultimate transferee, it may be too late or otherwise not possible to rely on the exemption.
The double duty dangers of nominee clauses – when can a nominee clause safely be used?
As explained above, in jurisdictions other than Victoria and Tasmania, double duty is generally not payable where the second transfer is 'in conformity' with the initial sale agreement.
Generally speaking, a transfer to a nominee will not be 'in conformity' if made pursuant to an 'orl-nominee' clause – that is, a nominee clause, like the one in Hartman, which fails to specify a particular nominee, and instead empowers the holder of the nomination right to select any entity to be the purchaser or transferee of the property. In this circumstance, double duty will likely be payable.
Therefore significant care must be taken in drafting a nominee clause, and advice should always be sought before relying on the clause in any context, including a sub-sale context.
In DUT 010 version 2,7 a 2016 NSW Public Ruling interpreting the phrase 'in conformity', the NSW Chief Commissioner of State Revenue relied on a judgment of Dixon CJ in the High Court case of Vickery v Woods8to rule that a transfer executed pursuant to a nomination clause which identifies the nominee, or provides that nomination may be made in favour of one of a number of named nominees, will be 'in conformity' with the contract:
A transfer to a person who is not the purchaser named in the agreement (and where the property, consideration and parties are otherwise in conformity) will be considered to be in conformity with the agreement … [if the] agreement that states that the property will be transferred to a named person other than the purchaser, or to one of a number of named persons.
Therefore the sub-sale regime will not impose double duty (at least in New South Wales) if the purchaser is A, but the agreement provides for a transfer to B, or to one of B or C. Whether this extends to an agreement which provides for a transfer in favour of A or B, where A is the purchaser and the transfer goes to B, remains less clear: the Commissioner's ruling may be limited to nominee clauses in favour of parties other than the purchaser.
Certain nominee clauses may thus avoid double duty. However, it remains most prudent for a purchaser to identify the intended ultimate transferee in advance, if possible, and generally to seek advice on possible double duty ramifications as soon as possible.
- When entering into a transaction to acquire land, consider identifying the ultimate intended purchaser as soon as possible, and if possible, arrange for that entity to enter into the agreement or option.
- Seek advice in any situation where a change of purchaser is being considered.
Hartman v Commissioner of State Revenue (Review and Regulation)  VCAT 28.
Vic Duties Act Ch 2 Part 4A; Tas Duties Act Ch 2 Part 4A.
NSW Duties Act s50; Qld Duties Act s115; WA Duties Act s107; NT Stamp Duty Act s56A; ACT Duties Act s50.
Hartman,  (Member Tang).
Hartman,  (Member Tang).
Tas Duties Act s39, WA Duties Act s117, ACT Duties Act s56.
An additional exception for transfers to 'related parties', discussed in DUT 010 version 2, is beyond the scope of this note.
Vickery v Woods (1951) 85 CLR 336, 343-4 (Dixon CJ).