Oak Brick Investment Pty Ltd v Chief Commissioner of State Revenue

[2016] NSWSC 1039

Supreme Court

New South Wales

Medium Neutral Citation:	Oak Brick Investment Pty Ltd & Anor v Chief Commissioner of State Revenue [2016] NSWSC 1039
Hearing dates:	29 June 2016
Decision date:	29 July 2016
Before:	White J
Decision:	Order that the defendant’s assessment made on 22 October 2014 that the plaintiffs are liable under s 107 of the Duties Act 1997 (NSW) for duty of $299,155 plus interest on the agreement dated 3 December 2013 between the plaintiffs, XZ International Holding Pty Ltd, Zhen Xin Zhong and Mo Xia be revoked.
Catchwords:	TAXES AND DUTIES —Section 107 of the Duties Act 1997 — Plaintiffs entered into a deed granting a call option to require a vendor to sell to them dutiable property — Plaintiffs entered into an agreement to rescind the deed on a third party entering into a contract to purchase the dutiable property from the vendor — Whether plaintiffs are to be treated as having assigned their right under the call option — Plaintiffs did not assign their rights under the call option — Plaintiffs did not nominate a purchaser on or in connection with the exercise of a call option — Assessment that plaintiffs liable for call option assignment duty revoked
Legislation Cited:	Duties Act 1997 (NSW) State Revenue Legislation Amendment Act 2005
Texts Cited:	The Law of Options and Other Pre-Emptive Rights, Farrands, LawBook Co, 2010
Category:	Principal judgment
Parties:	Oak Brick Investment Pty Ltd as trustee for The Zhi Family Trust (1st Plaintiff) Mercury Resources Pty Ltd (2nd Plaintiff) Chief Commissioner of State Revenue (Defendant)
Representation:	Counsel: A Ogborne (Plaintiffs) S Balafoutis with R Clarke (Defendant)   Solicitors: CFC Lawyers (Plaintiffs) Crown Solicitor (Defendant)
File Number(s):	2015/156705

Judgment

1. HIS HONOUR: On 24 September 2013 the plaintiffs entered into a put and call option deed with Belts Uomo Pty Ltd (“the Vendor”) under which they were granted an option (“the call option”) to require the Vendor to sell to them properties in Charles Street, Canterbury for the price of $3.8 million. The issue in this case is whether, by virtue of s 107(2)(b) of the Duties Act 1997 (NSW), the plaintiffs are to be treated as having assigned their right under the call option to require the Vendor to sell the Charles Street properties so that the call option is exercisable by XZ International Holding Pty Ltd (“XZ International”). If the plaintiffs are to be treated as having assigned their right under the call option to XZ International so that the option is exercisable by XZ International, then ad valorem duty is chargeable under Ch 2 of the Duties Act on that assignment as if it were a transfer of the dutiable property concerned (s 107(1)).

2. As a matter of fact, the plaintiffs did not assign their rights under the call option. Instead, and as outlined below, they entered into an agreement with XZ International on 3 December 2013 under which, for valuable consideration, they agreed to negotiate with the Vendor for terms acceptable to all parties under which the option deed between the Vendor and the plaintiffs would be rescinded upon XZ International entering into a new contract with the Vendor for the purchase of the properties.

3. The Chief Commissioner submits that what was done was sufficient to satisfy s 107(2)(b) so that the plaintiffs are to be treated as if their right under the call option had been assigned so that the transaction by which that was done is liable to ad valorem duty.

4. The Chief Commissioner did not press a contention raised in his appeal statement that alternatively the transaction was dutiable pursuant to s 107(2)(a).

5. Section 107 is in Ch 3 of the Duties Act that is headed “Certain transactions treated as transfers”. Sections 105-108 relevantly provided:

“105Introduction and overview

(1)     This Chapter charges duty at the same rate as for a transfer of dutiable property under Chapter 2 on certain transactions which are not ‘dutiable transactions’ under Chapter 2.

(2)     This Chapter also charges duty on certain transactions involving foreign persons that are not ‘surcharge duty transactions’ under Chapter 2A, at the same rate under that Chapter as for a transfer of residential-related property to a foreign person.

106      Definitions

In this Part:

assign or assignment includes transfer, and a reference to the assignment of a right under a call option includes a reference to a transfer of the call option.

call option means a right to require a person to sell dutiable property that is conferred by an agreement or arrangement (being an agreement or arrangement that is not a dutiable transaction).

put option means a right to require a person to purchase dutiable property that is conferred by an agreement or arrangement (being an agreement or arrangement that is not a dutiable transaction).

residential land has the same meaning as in Chapter 2A.

107Assignment of rights under call option dutiable as transfer

(1)  If a person (A) who has a right under a call option to require another person (B) to sell dutiable property assigns that right, so that the option is exerciseable by a third person (C), duty under Chapter 2 is chargeable on that assignment as if the assignment were a transfer of the dutiable property concerned. The duty chargeable on that assignment is referred to in this Part as call option assignment duty.

(1A) Duty under Chapter 2A is also chargeable on the assignment if A is a foreign person and the dutiable property concerned is residential-related property. The duty chargeable on that assignment is additional to call option assignment duty and is referred to in this Part as surcharge call option assignment duty.

(2)  For the purposes of this section:

(a)     if A enters into an agreement or arrangement under which A, for valuable consideration, relinquishes the right under a call option to require B to sell dutiable property and a call option to require B to sell the dutiable property is granted to a third person (C), A is to be treated as having assigned that right under the call option so that the option is exerciseable by C, and

(b)     if, on or in connection with the exercise of a call option, A, for valuable consideration, enters into an agreement or arrangement under which A nominates a third person (C) as the purchaser or transferee of dutiable property the subject of a call option, A is to be treated as having assigned the right under the call option to require B to sell the dutiable property so that the option is exerciseable by C.

(3)     An assignment is chargeable with duty as a consequence of this Part only if the person who may be required under the call option to sell the dutiable property (that is, B) has a right under a put option to require A, an associated person of A or an assignee of A to purchase the dutiable property.

(4)     If the assignment is chargeable with call option assignment duty, Chapter 2 applies in respect of the assignment in the same way as it applies to other transfers of dutiable property, and a reference in this Act to a dutiable transaction includes such an assignment, subject to this Part.

(4A)     If the assignment is chargeable with surcharge call option assignment duty, Chapter 2A applies in respect of the assignment in the same way as it applies to other transfers of residential-related property, and a reference in this Act to a surcharge duty transaction includes such an assignment, subject to this Part.

(5)     For the purposes of Chapters 2 and 2A, the transfer of dutiable property (including dutiable property that is residential-related property) is taken to occur when the assignment is made.

(6)     This section applies regardless of when the call option or put option is exercisable.

(7)     An assignment of a right under a call option to purchase dutiable property, as referred to in subsection (1) or (2), is referred to in this Part as a call option assignment.

108Person liable to pay call option assignment duty

(1)     The call option assignment duty chargeable on a call option assignment is payable by the person who assigns the right under the call option to require another person to sell dutiable property (the option holder).

(2)     Accordingly, the option holder is taken, for the purpose of charging duty under Chapter 2, to be the transferee of the dutiable property.

…

(5)     (Repealed)

Note.    The following is an example of how this Part operates:

B grants A a call option that confers a right on A (or any assignee of A) to require B to sell land. A also grants B a put option that confers on B a right to require A (or any assignee of A) to purchase the land from B. No duty is payable at this point.

A then transfers the call option to C. Duty is payable as follows:

(a)     A (as the option holder) must pay call option assignment duty, as a consequence of this Part, as if the transfer of the option were a transfer of the land. Duty is payable on the dutiable value of the land (determined as provided for by this Part),

(b)     C (as the transferee of the option) must pay duty under Chapter 2 on the transfer of the option. Duty is payable on the dutiable value of the option (determined as provided for by Chapter 2).

C then transfers the option to D. C (as the option holder) is required to pay call option assignment duty as if the option were a transfer of the land. However, in this case C will receive a credit for the duty paid by C on the transfer of the option to C. D (as the transferee of the option) is required to pay duty under Chapter 2 on the transfer.”

6. The Vendor and the plaintiffs entered into a deed titled Put and Call Option Deed on 24 September 2013. In the deed the plaintiffs were described as the Purchaser. Clause 3.1 provided:

“3.1   Grant of Call Option

In consideration of the Purchaser paying the Initial Call Option Fee and Monthly Call Option Fees to the Vendor, the Vendor grants to the Purchaser an option to purchase the Property for the Price and on the terms of the Contract, subject to this document.”

7. The “Initial Call Option Fee” was $190,000. “Monthly Call Option Fees” were $15,833.33 per month payable on the 24th day of each month up to the date of exercise of the “Call Option” or the end of the “Call Option Period”. The “Monthly Call Option Fees” were taken to be part of the deposit under the “Contract” if the put or call option were exercised. The Call Option Period was a period of 12 months. The contract to be entered into on the exercise of the call option or on the exercise by the vendor of the put option provided for the plaintiffs to purchase the Charles Street properties for a price of $3.8 million with completion to take place 12 weeks after the date of the contract. Clause 5 provided:

“5.   Nomination

5.1   Nominee exercises Call Option

Despite clause 2, if:

(a)   the Purchaser has not exercised the Call Option, and

(b)   the Call Option Period has not expired,

the Purchaser may deliver to the Vendor at the Vendor’s Solicitor’s address:

(c)   the Notice of Nomination executed by the Purchaser and completed by inserting the date of this document and the name of the Nominee, and

(d)   the Contract executed by the Nominee and (if the Nominee is a corporation) the Nominee’s directors (as guarantors) and;

(i)   completed by:

(A) dating the Contract the same date as the date of delivery to the Vendor, and

(B) inserting any other necessary particulars to give effect to the Contract

(ii)   revised by replacing:

(A) the purchaser’s details with the Nominee’s details, and

(B) the Purchaser’s Solicitors’ details with the Nominee’s solicitors’ details, and

(e)   a cheque payable to the depositholder under the Contract for the amount of the deposit under the Contract, less the Initial Call Option Fee and Monthly Call Option Fees.

5.2   Contract made with Nominee

From the time the Call Option is exercised by the Nominee in accordance with clause 5.1, the Contract is made and the Vendor is bound to sell and the Nominee is bound to buy the Property for the Price on the terms in the Contract.”

8. The Put Option could be exercised during the Put Option Period which was a period beginning on the day immediately following the day on which the Call Option Period ended and ending at 4pm 10 business days after that date. The Purchaser was to be given access to the Property up to the earlier of the expiry of the Put Option Period and the completion date under the Contract. The Vendor consented to the Purchaser’s lodging a development application. The Purchaser was given the right at its own cost to market any vacant premises in the Property for leasing.

9. The plaintiffs were advised of the Charles Street site as a potential development site by an architect, Mr Sam Guo, who acted for the Vendor. A few weeks after the plaintiffs entered into the option deed Mr Guo advised the sole director and shareholder of the second plaintiff, a Mr David Guo (no relation) that he had another client who might be interested in buying the site. The plaintiffs had engaged consultants to provide reports and plans as a preliminary step in preparing a development application.

10. Mr Sam Guo had indicated that his client was prepared to pay $5.6 million for the site and wanted to apply for their own development application. After discussing the matter with his partner, Mr David Guo told Mr Sam Guo that they were willing to sell the site for $5.6 million. The new potential purchaser was XZ International. The plaintiffs’ negotiations with XZ International were conducted through either Mr Sam Guo or the plaintiffs’ solicitor, Ms Angela Tao.

11. Ms Tao prepared a draft deed of nomination that provided in consideration of XZ International paying a Nomination Fee, the plaintiffs agreed to nominate XZ International under the option deed to exercise the call option.

12. XZ International retained Mr Spasevski of Di Lizio & Associates to act for it. On 6 November 2013 Ms Tao of Colin Biggers & Paisley sent an email to Mr Spasevski referring to a proposal raised the previous day by Mr Spasevski that rather than proceeding with a nomination under the Option Deed, the Option Deed be rescinded and that the “nomination fee” be paid to the plaintiffs and at the same time XZ International enter into a contract directly with the landowner. Ms Tao said that such an arrangement would involve the landowner who was currently overseas and that was not the plaintiffs’ preference. She advised that the plaintiffs wished to proceed with the nomination arrangement.

13. On 7 November 2013 Di Lizio & Associates sent an email to Colin Biggers & Paisley in which they advised that their client agreed to proceed with the nomination arrangements, subject to a satisfactory deed of nomination. However, XZ International withdrew from that position. On 11 November 2013 Di Lizio & Associates sent an email to Colin Biggers & Paisley in which they advised that they were instructed that their clients did not wish to continue with the nomination agreement and would continue with the matter only if the option deed were rescinded and a new contract were entered into directly and simultaneously with the owner.

14. The plaintiffs and XZ International entered into an agreement on 3 December 2013. The agreement recited that the Option Deed provided that the Call Option could be exercised by the plaintiffs or their nominee (described as Party A) and that XZ International was seeking to purchase the property directly from the owner. It recited that the plaintiffs had agreed to assist XZ International by using reasonable endeavours to contact the owner and negotiate terms and conditions acceptable to all parties whereby the Option Deed would be rescinded and a new contract would simultaneously be entered into. The agreement provided for such terms. XZ International agreed to pay a fee of $190,000 to be held by the plaintiffs’ solicitor in its trust account and not released until a deed of rescission of the Option Deed and a new contract were entered into. If the new agreements were entered into by the “Sunset Date” the fee was to be released to the plaintiffs and XZ International was required to pay an additional fee of $1,560,000 and to reimburse the call option fees already paid under the option deed if the owner agreed to apply those amounts towards the deposit payable under the new contract.

15. On 10 December 2013 solicitors for the Vendor wrote to Ms Tao of Colin Biggers & Paisley stating that it was their understanding that the vendor and the plaintiffs had agreed in principle to rescind the current contract, subject to the plaintiffs’ paying $70,000 to the vendor and the vendor entering into a new contract with XZ International. This was agreed.

16. On 21 January 2014 the Vendor and the plaintiffs (described in the agreement as the Purchaser) entered into a deed called a Release deed which recited that the Vendor and the Purchaser had agreed mutually to rescind the Option Deed. The deed described as the “New Contract” a contract for sale of the property between the Vendor, XZ International and its guarantors. Clause 2 provided for the Option Deed to be rescinded with mutual releases with effect from the exchange of the New Contract, in consideration of the Purchaser paying a Release Fee of $90,000. The release of the Option Deed was subject to and conditional upon the successful exchange of the New Contract.

17. The New Contract was exchanged on the same day, that is, 21 January 2014, between the Vendor and XZ International. The contract provided for XZ International to buy the Charles Street properties for the price of $3.8 million. There were some different terms from the original contract. Under the New Contract with XZ International, completion was not due until 2 December 2014. There were additional special conditions, some of which replicated the terms of the Option Deed, but some were new.

18. The Chief Commissioner did not press a foreshadowed defence that the documents were not intended to take effect in accordance with their tenor. It is clear that the true arrangement between the parties was that for consideration passing from XZ International to the plaintiffs and from the plaintiffs to the Vendor, the option deed was rescinded on the entering into of the new contract for sale between the vendor and XZ International.

19. On 22 October 2014 the Chief Commissioner decided that the agreement dated 3 December 2013 effected an agreement of assignment of the call option under the option deed dated 24 September 2013. He considered that the fee and the additional fee payable by XZ International was consideration for the assignment. Duty and interest were assessed accordingly. An objection to that decision was disallowed. In disallowing the objection the Office of State Revenue stated that the fact that the agreement of 3 December 2013 did not specifically refer to an assignment of the call option was not determinative of whether there was such a transaction. The Chief Commissioner noted that a nomination deed was initially prepared, but due to perceived “legal risk” different documents were entered into. He said that there was no evidence that the parties decided to enter into any other different transaction, and that although the parties “altered the documentation” they continued to proceed with the “assignment”.

20. As noted above, the Chief Commissioner did not press his contention that the agreement of 3 December 2013 did not operate according to its tenor. The Chief Commissioner submitted that the purpose of s 107 of the Duties Act was to close a loophole, that being the avoidance of duty on a subsale by the use of put and call options. The means of closing that loophole was said to be by treating subsales as if they were agreements for sale. The Chief Commissioner submitted that s 107(1) deemed assignments of call options to be transfers of dutiable property and then s 107(2) deemed two types of transactions to be assignments of call options. One transaction (under s 107(2)(a)) was a transaction which resulted in the grant of a call option to a third party. The second (s 107(2)(b)) was one which resulted in a third party being nominated as the purchaser or transferee of the property. The Chief Commissioner submitted that the effect of the 4 December 2013 agreement was that XZ International was nominated by the plaintiffs as the purchaser or transferee of the property. He submitted that this was done not “on” the exercise of the call option, but was nonetheless done “in connection with” the exercise of the call option. This was so, the Chief Commissioner submitted, because the agreement of 4 December 2013 regulated the exercise of the call option by providing that the plaintiffs were not to exercise it. This had the requisite connection with the exercise of a call option. Even though the call option was relinquished, nonetheless the agreement under which the plaintiffs nominated XZ International as the purchaser or transferee of the Charles Street lands was made “in connection with the exercise of a call option” because the agreement provided for the call option not to be exercised.

8. I do not accept this submission. The question is whether “in connection with the exercise of a call option” the plaintiffs entered into an agreement under which they nominated XZ International as the purchaser or transferee of the property the subject of the call option. In my view the plaintiffs did not “nominate” XZ International as the purchaser or transferee of the property that was the subject of the call option. Nor did they do so in connection with the exercise of the call option.

9. It is commonplace for option agreements to provide that the option may be exercised by the grantee of the option or its nominee (The Law of Options and Other Pre-Emptive Rights, Farrands, LawBook Co, 2010 pp 129-132). In other contexts the use of the word “nominate” may be equivalent to “propose”, as where one nominates a person to appointment or election for an office. But that is not the context in which the word is used in s 107(2)(b). I agree with the submission of counsel for the plaintiffs that the context of s 107(2)(b) indicates that the reference to A nominating a third person C as the purchaser or transferee of dutiable property in connection with the exercise of a call option indicates that the reference to A nominating C as the purchaser or transferee is not merely to A’s proposing C as a proper transferee or purchaser, or doing so effectively, but refers to A so designating C as the purchaser or transferee in exercising the option or in connection with doing so.

10. The words “in connection with” are apt to cover a case in which the option does not in terms permit the grantee of the option to nominate somebody else to exercise the option. On the submission of the Chief Commissioner the words “in connection with the exercise of a call option” apply where what is done involves the relinquishment of the call option, where the parties agree not to exercise the call option. But the relinquishment of the call option is dealt with under s 107(2)(a). Section 107(2)(a) applies only where A relinquishes the call option but a call option is granted (presumably by B) to C. Section 107(2)(a) simply does not apply to a case where instead of B entering into a call option with C, B agrees to sell the dutiable property to C. This is a glaring omission. But it is no reason to give a strained construction of s 107(2)(b). On the face of it, the omission has been rectified by subsequent amendments to the Duties Act (s 9B(1)(c)).

11. Both parties referred to the second reading speech for the State Revenue Legislation Amendment Act 2005 that introduced Pt 2 of Ch 3 including ss 106-108. In introducing the Bill, Mr Gaudry, Parliamentary Secretary for the Minister, said:

“Amendment of the Duties Act – Put and Call Options: The amendments close two loopholes in the duties legislation which had the potential to allow duty to be avoided. The first relates to the use of put and call options. Simultaneous put and call options can have a similar effect to an agreement for sale of the property, so that an assignment of the call option is effectively a subsale of the underlying property. There is evidence that put and call options have been used to avoid duty on subsales of property, particularly in relation to purchases off the plan. The bill provides that an assignment of a call option over property in respect of which a put option is also in existence will be liable to duty as if it were an agreement for the sale or transfer of the property. This liability will fall on the assignor, as this would impose the same liability to duty as applies to the purchaser under an agreement prior to a subsale.

As the amendment only applies upon assignment of an option, it will not inhibit the granting of put and call options as a legitimate commercial practice. As a further safeguard, the provisions will not apply if the chief commissioner is satisfied that the options are being used solely for financing purposes or have been entered into under arrangements relating to the continuation of a business by its proprietors.”

25. The Second Reading Speech does not assist the Chief Commissioner. It appears from the Second Reading Speech that the relevant loophole sought to be closed was only the assignment of a call option that was effectively a subsale of the underlying property. (The second loophole referred to in the Second Reading Speech was unrelated to the present issue.) There is nothing in the Second Reading Speech to indicate that Parliament intended to close all possible loopholes under which transactions that had the same effect as a subsale would become liable to ad valorem duty. In this case the new contract of sale entered into between XZ International and the vendor contained some terms that were different from those that would arise under a subsale. But that is not a relevant issue. The plaintiffs did not assign their rights under the call option to XZ International. They did not nominate XZ International as the purchaser on or in connection with the exercise of their call option. They relinquished their call option, but the vendor did not enter into a new call option with XZ International. Although the transaction entered into had a substantial economic equivalence with any of those alternatives, it was a different transaction that did not fall within s 107.

26. For these reasons the Chief Commissioner’s assessment dated 22 October 2014 should be revoked. Prima facie the defendant should pay the plaintiffs’ costs. I will hear the parties on costs.

27. I order that the defendant’s assessment made on 22 October 2014 that the plaintiffs are liable under s 107 of the Duties Act 1997 (NSW) for duty of $299,155 plus interest on the agreement dated 3 December 2013 between the plaintiffs, XZ International Holding Pty Ltd, Zhen Xin Zhong and Mo Xia be revoked.

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Decision last updated: 29 July 2016