Hardy v Chief Commissioner of State Revenue
[2009] NSWADT 168
•30 June 2009
CITATION: Hardy v Chief Commissioner of State Revenue [2009] NSWADT 168 DIVISION: Revenue Division PARTIES: APPLICANT
RESPONDENT
Robert Stanley Hardy and Sui Lin Lui
Chief Commissioner of State RevenueFILE NUMBER: 086093 HEARING DATES: 16 February 2009 SUBMISSIONS CLOSED: 16 February 2009
DATE OF DECISION:
30 June 2009BEFORE: Hirschhorn M - Judicial Member CATCHWORDS: Duties - Mortgage Duty LEGISLATION CITED: Duties Act 1997
Taxation Administration Act 1996REPRESENTATION: APPLICANT
RESPONDENT
In person
A Tsekouras, barristerORDERS: The objection decision of the Respondent under review is affirmed.
Introduction
1 The Applicants seek review of an objection decision of the Respondent on 6 August 2008 that wholly disallowed an objection made by the Applicant. The objection decision confirmed that mortgage duty was payable in respect of a mortgage dated 18 January 2008 that secured certain advances to the Applicants from HSBC Australia Limited (“the Loans”).
2 The application for review by the Applicants identified the relevant decision for review as a decision of the Respondent on 2 May 2008. On this date an initial letter was sent by the Office of State Revenue to the Applicants denying their request for a refund of mortgage duty of $1,907.00 in respect of the Loans.
3 As an initial matter, the Tribunal only has jurisdiction (pursuant to Section 96 of the Taxation Administration Act 1996 (“TAA”)) to review the objection decision of the Respondent of 6 August 2008 however as this decision dealt with the same subject matter as the letter of the OSR dated 2 May 2008 and the matter proceeded on this basis.
4 The Applicants relied on two sets of written submissions together with certain attached documents, some of the documents contained in the Section 58 documents filed by the Respondent and a booklet of Standard terms and conditions provided to them in respect of their Loan facility (“the Booklet”).
5 The Respondent relied on the Section 58 documents, a bundle of documents entitled “Index of Further Evidence”, a bundle entitled “Material in support of Submissions” and written submissions.
Facts
6 On 23 October 2007, the Applicants received a letter of offer of a loan facility from HSBC Australia Limited (“the Letter”). The offer made by the Bank was made according to the terms contained in the Letter as well as those contained in a booklet entitled “HSBC Home and Investment Property Loans” (“the Booklet”).
7 The total credit under the facility was $489,000.00 which consisted of two loans.
Loan 1
8 The first loan was called “Premier Investment Introductory Variable” and was in the amount of $419,000.00 (“Loan 1”).
9 For the first 12 months following draw down, a variable interest rate less 1.08% was to apply and thereafter the Bank’s variable rate applied (less a further discount if the HSBC Premier Package applied).
10 Loan 1 was for a term of 30 years with monthly repayments. The first 3 years of Loan 1 required only interest payments to be made.
Loan 2
11 The second loan was called “Premier Investment Fixed 3 years” and was in the amount of $70,000.00.
12 For the first 3 years, a fixed rate of 7.87% applied less a discount of 0.10% per annum if the HSBC Premier Package applied. After this Loan 2 reverted to the Bank’s variable rate.
13 Loan 2 was for a period of 30 years with monthly repayments. The first 3 years of Loan 2 required only interest payments to be made.
Security
14 The security for Loan 1 and Loan 2 was to be that set out on page 16 of the Letter as follows:
(a) A registered first mortgage of a unit in Campbell Street, Northmead given by the Applicants was to be taken;
(b) A registered first mortgage of a property at Murray Street, Northmead given by the Applicants was to be taken; and
(c) All existing security for the Applicant’s obligations to the Bank.
15 The Letter noted that the loan facility could not be drawn down until all security documents were signed and the Bank’s security requirements were met (as set out in clause 1.2 of the Booklet). Clause 1.2 of the Booklet specified, amongst other things, that before draw down, the security documents referred to in the Letter had to be duly executed and delivered to the Bank by the Applicants (paragraph (c)).
16 The Letter also stated that the amount of all of the Applicants’ loans could not exceed 58.77% of the value of the real property over which the Bank had security for the loans.
Stamp duty on mortgage
17 The Letter on page 5 showed certain fees and charges to be “paid out of Loan 1”. These included on page 7, under the heading “Government charges payable to the relevant government authority”, an entry for “stamp duty on mortgage” in the amount of $1,897.00.
18 Page 7 of the Letter indicated that the sum of $1,897.00 had been calculated based on the total amount borrowed on the assumption that the Applicants were not subject to any stamp duty exemption. If such exemption was granted, the Letter said that the stated amount would be adjusted accordingly.
19 On page 8, the Letter said that the stamp duty was payable at or before settlement. The “total initial credit fees and charges” to be paid out of Loan 1 was stated to be $3,143.40 which included the “stamp duty on mortgage” of $1,897.00.
20 By contrast, the actual stamp duty payable on transfer of land or contract for sale (relating to the purchase by the Applicants of a property in Murray Street, Northmead) was said on page 5&8 to be paid by the Applicants themselves.
Purpose of the loan facility stated in the Letter
21 The Letter at page 18 indicated under the heading “Purpose”:
- You intend to use more than half of your loan for business or investment (or both purposes). The bank is treating this offer as not regulated by the Consumer Credit Code.
22 Ultimately, the Applicants accepted the Bank’s offer by signing on 31 October 2007, an “Acceptance” at the end of the Letter.
23 Immediately above the signatures of the Applicants, the letter stated, amongst other things, that the Applicants declared that all the information given to the Bank was accurate and not misleading and that they were aware that the Bank was relying on it. It also contained a confirmation by the Applicants that they had received and read a copy of the Booklet and each security given or to be given by the Applicants.
24 In the Booklet at clause 1.1.1 it was stated that the Applicants could only draw the Loan Account for the purpose stated in the letter. It also went on to say that unless the loan was part of a Regulated Facility (defined in clause 14.2 as a “Facility which the Bank is treating as regulated by the Consumer Credit Code) the Applicants could only draw the Loan Account if the purpose for which they were going to use the money was wholly or predominantly (that is, more than half) a business or investment purpose (or a combination of these purposes).
25 At the time of the Letter, the Applicants explained that their plan was to purchase a property in Murray Street Northmead for rental purposes and to continue living in their existing unit in Campbell Street Northmead. At this time, both the Murray Street and the Campbell Street properties were intended to be securities under the Loan facility.
26 The Applicants explained some further background in their written submissions that their initial goal was in fact to move from their unit into a house. Whilst they found a house (being the Murray St property), they were concerned that they might not be able to sell their unit quickly enough for the right price. The Bank offered them an investment property loan to help overcome that problem and the Applicants said they accepted this on the basis that they could alter it prior to settling on the Murray St property, if required.
27 At the same time as they received the Letter (i.e. on or around 23 October 2007), the Applicants received from the Bank a “Statement of Disbursements and Balance of Available Funds to be drawn on settlement”. This document indicated an amount of $1,897.00 described as “Mortgage” under the heading “State Revenue Office”.
28 The Applicants said that they queried the above document with the Bank by telephone and were advised by two bank staff, on more than one occasion, that the mortgage duty would be repealed prior to settlement of their loan facility in January 2008 and therefore the Applicants would not have to pay it. The Applicants said that they had also been similarly advised by other banks and by their own solicitor. The Applicants said that there was no indication to them at this stage of any difference between owner occupied and investment housing in relation to liability for mortgage duty and indeed they did not understand this distinction until the duty was deducted by the Bank at settlement.
29 In between signing the Letter on or about 31 October 2007 and 10 December 2007, the Applicants sold their Campbell St unit. The evidence adduced by the Respondent (being a Department of Lands property details search) indicated that the Applicants exchanged contracts in relation to the Campbell Street unit on 10 December 2007 and settlement ultimately occurred on 1 February 2008.
30 On 18 January 2008, the Applicants settled their purchase of the property in Murray Street, Northmead . The evidence adduced by the Respondent (being a Department of Lands property details search) indicates that the contract to purchase the property was entered into on 26 October 2007 and that settlement occurred on 18 January 2008.
31 On 18 January 2008, it appears that the Applicants signed a mortgage in respect of the Murray St property (Lot 7/DP285744). The Applicants were the mortgagors. The mortgagee was HSBC Bank Australia Limited. The mortgage is dated 18 January 2008. The description on the mortgage was as follows:
Mortgages to the mortgagee all the mortgagor’s estate and interest in the land specified above, and covenants with the mortgagee that the provisions set out in annexure A and Memorandum No AA590235 filed in the Department of Lands, Land and Property Information Division are incorporated in this mortgage.
32 A document was provided to the Applicants by the Bank on settlement entitled “Your Home Loan Disbursement Statement” which purported to confirm how the Applicant’s Loan proceeds had been disbursed. The settlement cheques included two large cheques, one to the vendors of the Murray St property (being the same names of the persons appearing on the Department of Lands property details search adduced by the Respondent) and another to NAB. The statement also included, as a fee debited from the Loan Account, an amount of $1,907.00 referred to as “OSR”.
33 The Applicants stated that the amount of $1,907.00 was deducted at settlement without their authority. Further they only became aware that the amount had been so deducted after settlement had occurred.
34 On 22 January 2008, after settlement had occurred, the Applicants signed a letter that varied their Loan facility (“the Variation Letter”). The Applicants said that they had advised the Bank that no investment property would be involved. The Variation Letter stated that the Loan contract was varied in the following respects:
(a) The limit of Loan 1 of $419,000.00 was reduced to $339,600.00 effective on and from the date of settlement;
(b) The collateral security for the facility on and from the date of settlement was a registered first mortgage by (the Applicants) over the Murray Street property.
(c) The mortgages given to the Bank by the Applicants in relation to their loan secured the amount owing in relation to the loan account from time to time, including any increase in the debit balance of that account due to the loan being varied by the Variation Letter; and
(d) Except for changes to the Loan Contract as set out in the Variation Letter, the Loan Contract remained unchanged.
35 The Applicants said that they were not particularly interested whether the Bank called the Loan facility an investment Loan or an owner-occupied Loan because they were not aware that mortgage duty would be payable in respect of an “investment” Loan. The Applicants said they had been told by two different staff members of the Bank that no duty would apply in respect of their loan after 1 September 2007. It was only following settlement, when the mortgage duty was deducted by the Bank and remitted to the Office of State Revenue, that the Bank informed them of the correct position.
36 The Applicants did make an attempt to address the matter with the Bank and made an enquiry as to whether the “format” of the mortgage could be changed to an owner occupied format. The Applicants said that the Bank said that they could do this but wished to charge an amount that would have exceeded the mortgage duty in question and accordingly they did not go ahead with this option.
37 The Applicants stated at the hearing and swore statutory declarations to the effect that they have never used the Murray St or the Campbell St properties as investment properties.
Relevant Legislative provisions
38 Chapter 7 of the Duties Act 1997 (“Duties Act”) imposes duty, referred to as “mortgage duty”, on instruments that fall within the definition of a “mortgage” (Section 204).
39 A “mortgage” is defined to include, amongst other things, a security by way of a mortgage or charge over property wholly or partly in NSW at the liability date (Section 205).
40 The person liable to pay mortgage duty is the mortgagor or the person bound (Section 207).
41 A mortgage becomes liable to duty on the date of its first execution (Section 208(1)). In relation to the execution of instruments for the purposes of the Duties Act, Section 295 provides as follows:
295 Execution of instruments
(1) For the purposes of this Act, an instrument is taken to be first executed the first time that it is signed and sealed, or signed (as the case may be) by any party to it.
42 Mortgage duty must be paid within 3 months after the liability to pay the duty arises (Section 209).
43 The amount of the mortgage duty due is generally determined on the basis of the amount secured in accordance with Section 210.
44 If mortgage duty is required to be paid in respect of a mortgage and has not been paid, then the mortgage will not be enforceable (Section 211). Accordingly it is clear that a mortgagee has an interest in ensuring mortgage duty is paid by the mortgagor, where required, to ensure that the mortgagee is able to enforce its security when and if required.
45 In 2007, Part 3A containing two exemption provisions in respect of mortgage duty was inserted in Chapter 7 Duties Act 1997 by State Revenue & Other Legislation Amendment (Budget) Act 2007 (No 22). The exemption provisions, namely Sections 221B and 221C had differing areas of operation and effective dates as set out below.
Part 3A Exemptions for mortgages associated with housing
221A Definitions
In this Part:
alterations or additions, in relation to a private dwelling house, includes:
(a) any improvements to the parcel of land on which the dwelling house is constructed, and
(b) the maintenance, repair or renovation of the dwelling house or of an improvement referred to in paragraph (a).
APRA reporting standard means a reporting standard determined by the Australian Prudential Regulation Authority under section 13 of the Financial Sector (Collection of Data) Act 2001 of the Commonwealth.
private dwelling house includes:
(a) a lot within the meaning of the Strata Schemes Management Act 1996, and
(b) a land use entitlement that confers a right to occupy a private dwelling house.
residential land means a parcel of vacant land that is zoned or otherwise designated for use under an environmental planning instrument (within the meaning of the Environmental Planning and Assessment Act 1979) for residential or principally for residential purposes.
221B Mortgages associated with owner occupied housing
(1) Mortgage duty is not chargeable in respect of a mortgage if the mortgage secures an advance or advances made for the purpose of owner occupied housing and no other advances.
(2) If a mortgage secures an advance made for the purpose of owner occupied housing and another advance that is not made for that purpose, mortgage duty is not chargeable in respect of the mortgage in relation to the amount advanced for the purpose of owner occupied housing.
(3) This section applies in respect of a mortgage only if the borrower under the mortgage is a natural person or, if there is more than one borrower, each of them is a natural person.
(4) An advance is made for the purpose of owner occupied housing if it is to be applied wholly or predominantly for one or more of the following purposes:
(a) financing the acquisition of a residence,
(b) financing the construction of a residence,
(c) financing alterations or additions to a residence,
(d) financing the acquisition of residential land,
(e) repaying another advance, if the advance to be repaid was made for the purpose of owner occupied housing (within the meaning of this section).
(5) For the purposes of this section, a residence is a private dwelling house that is used and occupied or intended to be used and occupied by the borrower, or by any of the borrowers, as a place of residence.
(6) To avoid doubt, an exemption provided for by this section is not available in respect of any advance that is to be applied wholly or predominantly for business or investment purposes (or both).
(7) The Chief Commissioner may, by written instrument, determine the criteria that may be applied by lenders for the purpose of establishing that the exemption provided for by this section applies in respect of an advance.
(8) Without limiting subsection (7), the Chief Commissioner may determine that an advance is taken to be made for the purpose of owner occupied housing if it meets criteria set out in any APRA reporting standard relating to housing finance that is specified by the Chief Commissioner to be applicable to the exemption under this section.
(9) A determination made by the Chief Commissioner under this section:
(a) may be varied or revoked by the making of a further determination, and
(b) has effect according to its tenor.
(10) The exemption provided for by this section takes effect on and from 1 September 2007.
221C Mortgages associated with investment housing
(1) Mortgage duty is not chargeable in respect of a mortgage if the mortgage secures an advance or advances made for the purpose of investment housing and no other advances.
(2) If a mortgage secures an advance made for the purpose of investment housing and another advance that is not made for that purpose, mortgage duty is not chargeable in respect of the mortgage in relation to the amount advanced for the purpose of investment housing.
(3) This section applies in respect of a mortgage only if the borrower under the mortgage is a natural person or, if there is more than one borrower, each of them is a natural person.
(4) An advance is made for the purpose of investment housing if it is to be applied wholly or predominantly for one or more of the following purposes:
(a) financing the acquisition of investment housing,
(b) financing the construction of investment housing,
(c) financing alterations or additions to investment housing,
(d) repaying another advance, if the advance to be repaid was made for the purposes of investment housing (within the meaning of this section).
(5) For the purposes of this section, investment housing is any private dwelling house that is used, or is intended to be used or sold, for investment or business purposes (or both) by the borrower or by any of the borrowers.
(6) The Chief Commissioner may, by written instrument, determine the criteria that may be applied by lenders for the purpose of establishing that the exemption provided for by this section applies in respect of an advance.
(7) Without limiting subsection (6), the Chief Commissioner may determine that an advance is taken to be made for the purpose of investment housing if it meets criteria set out in any APRA reporting standard relating to personal or commercial finance that is specified by the Chief Commissioner to be applicable to the exemption under this section.
(8) A determination made by the Chief Commissioner under this section:
(a) may be varied or revoked by the making of a further determination, and
(b) has effect according to its tenor.
(9) The exemption provided for by this section takes effect on and from 1 July 2008.
46 Section 206 defines for the purposes of Chapter 7, an “advance”, amongst other things, as meaning the provision or obtaining of funds by way of financial accommodation by means of a loan being an advance of money.
Applicant’s submissions
47 The Applicants said that they had made an application to the Office of State Revenue, rather than the Bank, on the basis that the amount of $1,970.00 was in the hands of the OSR. The Applicant submitted that the Bank was the agent of the OSR and that the OSR should have responsibility for how the money was collected and paid to them.
48 The Applicants had advised the Bank that no investment property would be involved and did re-sign documents reducing the securities in respect of their loan facility from two to one (being the Murray St property in which they were now living).
49 They were not particularly interested whether the Bank called the Loan an investment loan or an owner-occupied loan. This was because they were not aware that mortgage duty would be payable in respect of an investment loan.
50 The Applicants had been told by two different bank staff that no duty would apply in respect of the Applicant’s loan after 1 September 2007.
51 It was only after the loan was settled that the Applicants were informed that mortgage duty would apply – they became aware of this when the Bank deducted the mortgage duty at settlement and forwarded this amount to the OSR.
52 The Applicants made an approach to the Bank to remedy the situation. The Bank wanted to charge extra fees to change the format of the mortgage to enable the duty to be claimed back. The fees quoted for the amendments however were greater than the duty of $1,907.00 and accordingly the Applicants stated there was no point in doing this.
53 The Applicants also noted that the change in the law meant that there was transitional grey area. The mortgage duty was being abolished over a phasing out period from 1/9/07, 1/7/08 and 1/7/09.
54 The Applicants stated that they had never used the Murray Street or a property in Campbell Street Northmead as investment properties.
Respondent’s submissions
55 The Respondent’s case was essentially that the Applicants obtained a loan from HSBC in October 2007 and at the time the loan was entered into the loan monies were to be applied for investment purposes. At the time the mortgage was executed on 18 January 2008, there was no change to the character or purpose of the loan and the mortgage was intended to and did secure the loan. The only change was a reduction in the limit of the loan and the security was reduced from two properties to one. These changes were required because on the sale of the Campbell St unit, the loan to value of the security ratio (of around 58%) would have been breached otherwise.
56 At the time the mortgage was executed, there was no change to the Applicant’s Loan facility from a business/investment loan to a Regulated Facility (where the Bank would have needed to comply with the provisions of the Consumer Credit Code). The Applicants appear to have chosen and maintained an investment style product from the Bank. The Applicants appear to not have communicated their change of mind to the Bank and checked if there were different requirements if they were to now intending to “owner-occupy” the Murray St property. The Respondent submitted that in order to change the “format” of the loan to the Applicants, there would have needed to be changes to the interest rate structure, there may have been break costs to have been paid and the Bank would have needed to comply with fresh obligations under the Consumer Credit Code.
Issue
57 The issue to be decided by the Tribunal is whether the instrument of mortgage in respect of the Murray St property that would otherwise be liable to mortgage duty pursuant to Section 204, 207 and 208(1) at the time it was first executed (18 January 2008) satisfied the requirements of Section 221B such that mortgage duty was not properly chargeable in respect of it?
58 Specifically the Tribunal must decide whether the mortgage in respect of the Murray St property secured an advance or advances made for the purpose of owner occupied housing and if so, the extent to which this occurred (Sections 221B(1) and 221B(2))? In determining the nature of the advance made by the Bank, the Tribunal must decide whether it was to be applied wholly or predominantly for one or more of the purposes listed in Section 221B(4)? The Tribunal must also take account of Section 221B(6) that provides that an exemption provided for in the section is not available in respect of an advance that is to be applied wholly or predominantly for business or investment purposes or both.
59 As an initial matter, the exemption in Section 221C (relating to mortgages associated with investment housing) did not come into effect until 1 July 2008 (Section 221C(9)). Accordingly given the mortgage in respect of the Murray St property was executed before that date, Section 221C has no application to the facts in this case.
60 In relation to Section 221B, the subject matter of these proceedings essentially reveals a difference between what the documents record as the intention of the Applicants regarding the use of the Loan facility at the time the mortgage document was executed (i.e. on or around settlement of the purchase of Murray St property by the Applicants on 18 January 2008) and what the Applicants said in their submissions and at the hearing was their actual intention at that time regarding the use of the Loan facility.
61 As recorded in the facts, the Bank’s documents indicate the following:
(a) The Letter stated (on page 18) that the Applicants intended to use more than half of their loan for business or investment (or both purposes) and that the Bank was treating the offer as not regulated by the Consumer Credit Code. This letter was signed by the Applicants on or around 31 October 2007 and accepted by them at that time.
(b) The offer in the Letter was said by the Bank to have been made on the terms set out in the Letter and also the Booklet. The Booklet said in clause 1.1.1 that the Applicants could only draw the loan accounts for the purpose stated in the Letter.
- Further it said that unless the loan was part of a Regulated Facility the Applicants could only draw the loan account if the purpose for which they were going to use the money was wholly or predominantly (that is more than half) a business or investment purpose (or a combination of these).
(c) By letter from the Bank dated 18 January 2001, it appears that the Applicants did draw down their loan facility on settlement of the Murray Street property on 18 January 2008 and the bank was instructed as to how the funds were to be disbursed. The total of the loan drawn down was $489,000.00 and the Bank provided a “Home Loan Disbursement Statement” that indicated that settlement cheques had been drawn in favour of a number of parties including the vendors of the Murray St property, NAB and in payment of fees (one of which was mortgage duty in the amount of $1,897.00).
(d) In a Variation Letter dated 22 January 2008, the Bank consented to vary the Loan Contract in respect of (a) a reduction in the limit from $419,000 to $339,600 effective from the date of settlement for Loan 1(b) a change in the collateral security being just a mortgage over the Murray St property. Page 2 of the Variation Letter said that apart from the changes referred to, the Loan Contract remained unchanged. Although the Applicants said that they told the Bank that there was no longer an investment property involved, there was no mention in the Variation Letter of the purpose of the Loan Contract having changed and/or that it would be changed to a Regulated Facility and/or that the funds could be properly drawn down at settlement for a purpose other than that set out in the Letter. The Variation letter is signed by a representative of the Bank and the Applicants but the signatures are undated.
(e) From a review of the Letter and the Booklet, it seems clear that the bank distinguished between a loan for business and investment purposes that was not regulated by the Consumer Credit Code and a “Regulated Facility” (refer page 18 of the Letter, clause 1.1.1 (p1) Booklet, clause 5.5 (p 23) Booklet, clause 11.1.1 (p29) Booklet, clause 14.2 (p54) Booklet)
62 The Applicants say that their intention at the time of settlement and a few days beforehand was that they would live in the Murray St property. They had sold their Campbell St property in December 2007 and it was due to settle on 1 February 2008. The Applicants say that they moved into the Murray St property following settlement on 18 January 2008 and have resided there ever since.
63 The Applicants also say that they informed the Bank specifically that there would be no investment property involved and they signed the Variation Letter which showed that the security for their Loan facility was reduced from two properties to just one (being the Murray St property in which they were then living).
64 In reviewing this matter, it appears that on or before settlement, there was for some reason, no change made by the Bank to the stated “purpose” of the Applicant’s Loan Account. The Variation Letter certainly makes no mention of the purpose of the Loan Contract as having changed from that agreed between the parties in the original Loan Contract.
65 Further there was no change made by the Bank to the type of Loan provided to the Applicants. In other words, the Loan remained called an investment loan (i.e. Premier Investment Introductory Variable). There was no mention in the Variation Letter of the loan having become a “Regulated Facility” (i.e. defined in clause 14.2 of the Booklet as a loan that the Bank is treating as regulated by the Consumer Credit Code). As stated above, the documentation indicates that the Bank distinguished between the two types of loans in terms of the borrower’s right to draw (p1), the lender’s rights in respect of security (p23) and default events (p29).
66 In the absence of any change to the terms of their Loan Contract, it would appear that clause 1.1.1 of the Booklet would have in fact forbidden a drawing of the Loan Account by the Applicants on settlement unless it was for the purpose stated in the Letter. If the Loan Account was not part of a Regulated Facility (as it seems was the case for the Applicant’s loan facility due to p18 of the Letter), the second paragraph of clause 1.1.1 prohibits a draw down unless the purpose for which the borrower will use the money is “wholly or predominantly (that is, more than half) a business or investment purpose (or combination thereof).
67 On the basis that the Applicants did draw down their Loan Account on settlement for the Murray St property and the mortgage was executed on or around the same date and secured that Loan Account, the contemporaneous contractual documentation at that time indicates, certainly as far as the Bank was concerned, the advance (i.e. the loan funds) was to be applied wholly or predominantly for business or investment purposes (or a combination thereof).
68 The Applicants are quite adamant that their purpose changed before settlement and that this was communicated to the Bank, however unfortunately it does not appear to have been incorporated by the Bank into the Variation Letter and, more importantly, no change was made in respect of clause 1.1.1 in order to actually permit the Applicants to draw down the Loan Account on 18 January 2008 for a purpose other than predominantly business/investment.
69 Ultimately, the Applicants did sign the Variation Letter which amounted to an acceptance that apart from the matters specifically referred to, their Loan Contract itself remained unchanged. It is of course important when signing such documents to ensure that they reflect the true and correct position in all respects.
70 Whilst I am sympathetic to the Applicants in that they say they were told on three separate occasions that they would not be liable to pay mortgage duty, as I understand it, the Applicant says those representations were made by staff members of the Bank or by other banks and the Applicant’s solicitor. Any such representations could not alter the fact that mortgage duty would be payable by the Applicants under the Duties Act on first execution of the mortgage of the Murray St property pursuant to Section 204 unless the exemption in Section 221B applied.
71 I appreciate that the Applicants say at the time of settlement of the Murray St property they were not concerned with whether the Bank called the loan an “investment” loan or an “owner-occupied” loan because they did not appreciate the difference between the two or indeed the significance of this until they received an unsolicited information brochure from a firm of solicitors some time after settlement that explained the difference in terms of the liability for mortgage duty. Ultimately, however, from a review of the contractual documentation, it does seem that the Bank regarded the difference (in terms of whether it was a Regulated or Unregulated Facility) to be of significance in terms of not only mortgage duty but also for those matters referred to in paragraphs 65 and 66 above. The Applicants ultimately signed the Variation Letter without there being any change noted in respect of the purpose of the Loan and/or any conversion of the Loan to a Regulated Facility.
The operation of Sub sections 221B(7) and (8)
72 In respect of Section 221B, sub-sections 221B(7) and 221B(8) indicate possible systems that might be put in place for the purposes of lenders and the Chief Commissioner in establishing or determining the exemption applies in respect of an advance.
73 Given that a liability for mortgage duty arises on the first execution of the instrument, it is apparent that the “purpose” of an advance secured by the mortgage needs to be determined at an early stage and this may be well before the funds are actually applied by the borrower for a particular purpose. The focus in Section 221B is clearly on the “advance” (i.e. the provision or obtaining of funds by way of financial accommodation by means of a loan being an advance of money) being made for a particular purpose.
74 In respect of sub-section 221B(7), the Respondent indicated that there was no “official” written instrument issued by the Commissioner in respect of that sub-section however Counsel referred me to an extract from a publication of the Office of State Revenue entitled “Mortgage Processing on EDR Financial Institutions”. This document contained instructions for an electronic process of stamping mortgage documents. In section 4, it indicated that to satisfy the OSR that an advance falls within section 221B, the mortgagee (e.g. the Bank) would need to have evidence of:
(a) the date and amount of the advance
(b) the identity of the borrowers
(c) the property description; and
(d) the predominant purpose of the advance.
75 The document stated that the loan contracts and mortgage documents held by the mortgagee should satisfy the amount of the advance, identity of the borrowers and the property description and the predominant purpose of the advance would need to be determined as part of the mortgagee’s application process, or as required for APRA (Australian Prudential Regulation Authority).
76 In the present case, the contractual documentation, as stated above, indicates that as far as the Bank was concerned, the advance was made for the purpose of the Applicants using more than half of it for business or investment (or both purposes).
77 In respect of Sub-section 221B(8), Counsel for the Respondent indicated that the Chief Commissioner had not officially “specified” any particular APRA reporting standard relating to housing finance that was applicable to the exemption.
78 However Counsel provided me with Reporting Standard ARS 320.8 – Housing Loan Reconciliation. The data in this report is used by APRA for the purpose of prudential supervision and the reporting standard applies to authorised deposit-taking institutions (such as the Bank in the present case).
79 The aim of the abovementioned report appears to be to reconcile changes in the outstanding balance of housing term loans over each quarter. On page 3 it refers to “Owner-occupied loans” as mortgage loans secured against property occupied by the borrower. ‘Investment loans” are said to consist of the value of secured and unsecured housing loans to households for the construction or purchase of an investment property (for non-owner occupation).
80 I was informed by Counsel for the Respondent that reports are made for each reporting period by banks as to the total types of loans they have made in the period but there is no detail regarding actual loans provided and accordingly it is impossible to tell, for example, how the Bank in the present case classified the loan facility to the Applicants for its reporting purposes. As stated above, the contractual documents would suggest the loan facility would have been classified by the Bank as an investment loan however the evidence of the Applicants is that they informed the Bank verbally prior to settlement that no investment property would be involved (and therefore implicitly that the Applicants would be occupying the Murray St property themselves).
81 The Chief Commissioner has not himself “specified” to date any particular APRA reporting standard that is applicable to the exemption in Section 221B and I was not provided with a complete list of all possible reporting standards that might be applicable to consider in the present case. In relation to ARS 320.8, however, as this is a report prepared by a lender for each period in which they make loans, I think it is reasonable to expect that lenders would categorise loans as “owner-occupied” or “investment” loans according to the objective contractual documentation in their possession at the time the loan is made. I think therefore it is likely that on the basis of the contractual documentation that, at settlement, the Applicant’s loan would have been regarded as an “investment” loan despite the fact that following settlement and to the present day, it appears that the Applicant’s have physically occupied the Murray St property.
82 In the present circumstances, I am of the view that given the contractual documentation in this case specified that the purpose of the Loan was to be used more than half for business or investment purposes and that a draw down of funds could only occur if they were to be used for this purpose, the mortgage of the Murray St property was not exempt from mortgage duty by reason of Section 221B(6). The contractual documents indicate that the advance was made by the Bank to the Applicants on the basis that the funds were to be used predominantly for business or investment purposes and the mortgage of the Murray St property secured the advance to be made for that “purpose”.
83 The contractual documents are objective evidence as to the intended use of the loan funds and the purposes for which the loan funds could be drawn down by the Applicants and in this case I am of the view that they were properly relied upon by the Respondent in concluding that there was no exemption from mortgage duty pursuant to Section 221B.
84 The Applicants also made a submission to the effect that the Bank had no authority from the Applicants to deduct the amount of $1,897.00 from the loan funds at settlement. The Applicant further submitted that the Bank was the agent of the OSR and that the OSR should have responsibility for how the money was collected and paid to them.
85 In relation to the first submission, as set out above at paragraph 17 and following, the Letter did indicate that the amount of $1,897.00 was to be “paid out of your First loan” (refer p5 and p7-and relevant columns). The Bank also provided at the time the Letter was issued a “Statement of Disbursements and Balance of Available Funds to be drawn on settlement”. The net balance of available funds was reduced for “costs” which included an amount of $1,897.00 to the State Revenue Office.
86 Clause 1.2 of the Booklet also indicated that before the Applicants could draw their Loan facility, they had to pay the fees and charges referred to as “Initial fees and charges” unless the bank agreed that they could be paid out of the loan proceeds.
87 It seems to me from reviewing the above, that pages 5 and 7 of the Letter appears to have contained an implicit agreement that the fees and charges (which included the mortgage duty of $1,897.00) could be paid out of the loan funds. If this had not occurred, then the Applicants would not have been able to draw down their funds at all until the fees and charges (including mortgage duty) were paid (clause 1.2). I only note this by way of observation since it is not strictly necessary to decide this matter in the context of the present proceedings.
88 Finally I also note that the mortgage duty was ultimately listed as a disbursement on the document “Your Home Loan Disbursement Statement” provided to the Applicants on settlement. The amounts for disbursements on this statement (for mortgage duty as well as other fees such as the Establishment Fee, Valuation Fee etc) appear in the same amounts as the “Statement of Disbursements and Balance of Available Funds to be drawn on settlement” provided to the Applicants in October 2007.
89 In relation to the Respondent, it received a payment on account of mortgage duty in respect of the Murray St property that having regard to the Duties Act it considered was properly due and payable. From the information provided by the Respondent regarding the electronic stamping process for mortgages, it does not appear uncommon for the mortgagee (as opposed to the mortgagor) to arrange on behalf of the mortgagor, for the stamping of the mortgage and payment of the mortgage duty, no doubt because mortgages remain unenforceable to the extent that any relevant mortgage duty remains unpaid. Having regard to my conclusions in relation to the operation of Chapter 7 of the Duties Act and the terms and conditions of the Applicants Loan contract, I do not consider that the Respondent improperly retained the sum of $1,897.00 paid to it by the Bank on account of mortgage duty in respect of the mortgage executed by the Applicants on 18 January 2008.
Orders
90 For the reasons above, I make the following order:
(a) The objection decision of the Respondent is affirmed.
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