Focus: High Court 'moves' unanimously in defining the scope of consideration for tax purposes
22 December 2014
In brief: Those involved in property development arrangements or business acquisitions should be aware of the tax implications of the recent High Court decision in Lend Lease Development that has broadened the scope of what forms the 'consideration' for the transfer of dutiable property. The High Court found that various contribution payments and construction covenants made to a vendor under a development agreement between the parties, and not just the purchase price described in the land sale contracts, would be regarded as consideration that 'moved' the transfers of land. Partner Adrian Chek (view CV), Senior Associate Jennee Chan and Associate Jay Prasad consider the reasoning adopted by the High Court and its implications.
- The High Court's reasoning
- The practical implications
- CGT and GST
- Conclusion and examples
How does it affect you?
- The High Court's approach in Commissioner of State Revenue v Lend Lease Development Pty Ltd.1 has the potential to expand the scope of what forms part of the consideration for the transfer of dutiable property to amounts that were previously considered not to be dutiable.
- Property developers who are proposing to enter into construction and development contracts should carefully consider their duty exposure, especially where there is a transfer of title to the land.
- The High Court's broad approach may also impact on transactions other than development arrangements, and impact on the meaning of consideration for capital gains tax (CGT) and goods and services tax (GST) purposes.
- It will be more important than ever to ensure that transactions are documented in such a way that unintended stamp duty and tax consequences do not flow from the transaction structure. A 'substance over form' approach should be adopted with the focus of the inquiry being on the commercial agreement (or bargain) that is reached between the parties.
The factual background and case history to Lend Lease was considered in depth in Focus: Lend Lease Development – will the High Court be moved on what 'moves' the transfer? In summary:
- Various Lend Lease related entities (collectively referred to as Lend Lease) entered into arrangements with the Victorian Urban Development Authority (VicUrban) for the transfer of land situated in the Docklands region in Melbourne.
- A Development Agreement entered into between Lend Lease and VicUrban outlined a number of mutual and interconnecting undertakings for the completion of development works and the transfer of land in the Docklands area. Lend Lease was obliged to develop and sell the land it acquired from VicUrban and the parties would share in the proceeds of the sale of developed lots to third parties. Lend Lease was also required to contribute towards VicUrban's costs of constructing infrastructure, remediating previously unused sites and erecting public art work.
- The development was conducted in stages, and the transfer of each stage to Lend Lease was subject to a separate Land Sale Contract in a form that was annexed to the Development Agreement.
- The Victorian Commissioner of State Revenue (the Commissioner) assessed duty on the land transfers on the basis that the consideration comprised the agreed purchase price under the Land Sale Contracts and the amounts that Lend Lease contributed towards VicUrban's costs in relation to infrastructure and construction works under the Development Agreement.
- The matter found its way to the High Court of Australia, with the Court unanimously allowing the Commissioner's appeal.
The appeal to the High Court turned on one central question: what was the consideration for the dutiable transaction (being the amount of a monetary consideration or the value of a non-monetary consideration)?
It was not disputed between the parties that the question was to be determined according to the money or value passing which 'moves' the conveyance or transfer from the vendor to the purchaser.2
The dispute between the parties lay with the identification of the things which moved the transfers of land to Lend Lease. Lend Lease submitted that the only consideration for the transfer of the land was the Stage Land Payments (ie the agreed purchase price under the Land Sale Contracts). The Commissioner, on the other hand, considered Lend Lease's contribution to the cost of development work which VicUrban had done or would do, and sums that were to be paid as a 'profit share' on the eventual realisation of the land to third parties, to be part of the consideration for the transfers.
In analysing the issue, the High Court concluded (as the Court of Appeal did before them) that the arrangements between Lend Lease and VicUrban were a 'single, integrated and indivisible' transaction.
However, the High Court dismissed as not relevant observations that the land was undeveloped at the time of transfer. While the High Court noted that the state or condition of the land at the time of transfer might be relevant to the question of its unencumbered value, it was of no relevance to the identification of the consideration 'for' the transfer.3 This is in contrast to the importance placed by the Court of Appeal on the undeveloped state of the land at the time of transfer, which led the Court of Appeal to regard it as both possible and necessary in the circumstances to divide the 'single, integrated and indivisible' transaction into separate matters (being the transfer of land and other matters). While the Court of Appeal found that the development contributions were a separate matter, it did not expressly identify what criterion it used to make the division it did.
The High Court criticised the separation approach adopted by the Court of Appeal, observing that the Development Agreement between the parties contained mutual and interlocking rights and obligations, the performance of which were conditional upon each other. In the view of the High Court, there was no scope to divide the agreement into separate and distinct parts. Whether the agreement was stipulated in one document or two documents would be irrelevant. Instead, it is necessary to look at the bargain entered into between the parties.
Ultimately, the High Court referred to Dick Smith4 for the appropriate test to apply when determining the consideration 'for' the transfer of dutiable property:
the statutory criterion of consideration "for" the transaction "looks to what was received by the Vendors so as to move the transfers to the Purchaser as stipulated in the Agreement" (emphasis added)5.
In doing so, the High Court concluded that the consideration that moved the transfers by VicUrban to Lend Lease was the total amount that VicUrban would receive, including the development contributions under the Development Agreement. The High Court determined that it was only in return for the payment of the total sum of the payments required under the Development Agreement that VicUrban was willing to transfer the land to Lend Lease.
The High Court's reasoning focused on the interlocking nature of the obligations recorded in the transaction documents which were held together by the default provisions under the Development Agreement. Those provisions essentially provided that a failure by Lend Lease in relation to any of its payment obligations under a Land Sale Contract or the Development Agreement would allow VicUrban to terminate the Development Agreement. This would in turn trigger an obligation on Lend Lease to retransfer the land to VicUrban. In the view of the High Court, the default provisions demonstrated that there was only one bargain between the parties, not two or more.
The decision can perhaps be explained on the basis that the various 'contribution' and other payments made to VicUrban after the transfer of the land were just additional payments for the land. It would perhaps be different if those payments were able to be characterised as consideration for a separate substantive contractual obligation of the vendor, such as a building contract.
The High Court has adopted a broad approach for determining when payments and covenants will be treated as forming part of the consideration that moves the transfer of dutiable property. In doing so, it reaffirmed the position in Dick Smith that the consideration for the transfer of dutiable property would include those amounts received by the vendor so as to move the transfer to the purchaser.
Having regard to the High Court's reasoning in Lend Lease, it seems that when faced with any 'what is the consideration for the dutiable transaction' question, the first point of analysis should be to consider the entirety of the agreement between the parties.
The breadth of the approach adopted by the High Court has the potential to expand the scope of what forms part of the consideration for the transfer of dutiable property to amounts that were previously considered not to be dutiable. The decision of the High Court has obvious relevance for property development arrangements, and taxpayers proposing to enter into such arrangements should carefully consider their duty exposure in light of the High Court's judgment.
In addition, taxpayers should note that the High Court's reasoning reaches further than property development agreements and may impact on any transaction where the deal is more than a simple agreement to transfer property for an agreed purchase price. Parties entering into other 'single, integrated and indivisible' transactions should have regard to this decision in assessing the duty exposure on their transactions.
Further, the stamp duty concept of 'consideration' can also be relevant for CGT and GST purposes. The Federal Commissioner of Taxation (Federal Commissioner) has in several instances referred to Dick Smith in CGT and GST rulings.
For example, in the context of share disposals under a contract of sale or scheme of arrangement, the Federal Commissioner adopted the approach in Dick Smith as a basis for expanding 'capital proceeds' to include dividends that are received by the vendor as part of the disposal of shares.6 A taxpayer who triggers a CGT event (such as the disposal of assets) through a 'single, integrated and indivisible' arrangement should be mindful of the potential impact of Lend Lease on the calculation of the capital proceeds.
The potential impact of Lend Lease may be even greater for GST purposes, where one of the primary tenets for the making of a taxable supply is that the supply must be made for 'consideration'. The Federal Commissioner has often relied on Dick Smith to define the scope of consideration for the making of a supply.7 Certainly it will be interesting to see whether the Lend Lease decision has the potential to further broaden the GST base, particularly following the recent views of the High Court in MBI Properties8 on the making of 'tolerance supplies'.
Having said that, it is interesting that the Federal Commissioner does not to date appear to have noted the judgments of the lower courts in Lend Lease at all.
It will be important to ensure that future transactions are documented in such a way that unintended stamp duty and tax consequences do not flow from the transaction structure. It is clear from the High Court's approach in Lend Lease that the mere separation of interlocking obligations into standalone documents would not necessarily mean that each is a separate matter. Certainly, a substance over form approach has been adopted with the focus of the inquiry being on the commercial agreement (or bargain) that is reached between the parties. In the context of land transfers, it will be important to assess whether additional payments or 'contributions' are just additional payments for the land, or can be characterised as consideration for something else, such as a building contract where the vendor is the builder.
It remains to be seen is how aggressively the relevant Commissioners will apply the High Court's approach in practice.
Here are some possible business acquisition transactions that may be 'caught' under the broader approach:
Assume a situation where X and Y enter into a Business Sale Agreement, under which X agrees to sell the assets of a clothing business to Y. All of the assets are dutiable property in New South Wales. The purchase price for the assets is $10 million, plus 25% of net sales for the first 3 months after completion.
It is in X and Y's mutual interest that sales are as high as possible and the parties are keen to promote brand awareness in the lead up to completion under the Business Sale Agreement. It is agreed that X would increase its advertising expenditure by $2 million before completion, but they would share the additional cost on a 50:50 basis.
It would seem, in light of Lend Lease, that the consideration for the transfer would comprise the $10 million + $1 million (ie, Y's share of the advertising expenditure) + 25 per cent of net sales.
Assume the same facts as in Example 1. X has an existing debt of $500,000 which is secured by assets of X's footwear business. Y agrees to refinance that debt on interest-only terms, with the principal to be repaid in five years' time.
The refinancing agreement is documented independently of the Business Sale Agreement, but each is conditional on the other.
Query whether, in light of Lend Lease and Dick Smith, it could be said that the consideration for the transfer of assets under the Business Sale Agreement includes the value of the refinancing arrangement.
-  HCA 51.
- Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW)  HCA 28.
- Duty is chargeable on the consideration for a dutiable transaction or the unencumbered value of the dutiable property, whichever is higher. In this case, the Commissioner assessed duty on the consideration for the transfers, on the basis that this amount was higher than the value of the undeveloped land.
- Commissioner of State Revenue (NSW) v Dick Smith Electronics Holdings Pty Ltd  HCA 3; (2005) 221 CLR 496 at 518.
-  HCA 3; (2005) 221 CLR 496 at 518 per Justices Gummow, Kirby and Hayne.
- See for example, Taxation Ruling TR 2008/5 – Income tax: capital gains: tax consequences for a company of issuing shares for assets or for services; Taxation Ruling TR 2010/4 – Income tax: capital gains: when a dividend will be included in the capital proceeds from a disposal of shares that happens under a contract or a scheme of arrangement.
- See for example, Goods and Services Tax Ruling GSTR 2009/1 – Goods and services tax: general law partnerships and the margin scheme; Goods and Services Tax Ruling GSTR 2009/2 – Goods and services tax: partitioning of law; Goods and Services Tax Ruling GSTR 2011/1 – Goods and services tax: development, lease and disposal of a retirement village tenanted under a 'loan-lease' arrangement.
- Commissioner of Taxation v MBI Properties Pty Ltd  HCA 49.
- Adrian ChekPartner,
Ph: +61 2 9230 4800
- Jennee ChanSenior Tax Counsel,
Ph: +61 3 9613 8537
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