Two taxpayers have been successful before the NSW Supreme Court in a matter concerning whether they were to be treated as having assigned their rights under a call option and therefore liable to duty under s107(2)(b) of the Duties Act 1997 (NSW).
- On 24 September 2013, the taxpayers entered into an option deed with a vendor under which they were granted an option to require the vendor to sell them a property for $3.8m (“the call option”).
- On 3 December 2013, the taxpayer entered into an agreement with a third party (X Co) under which, for consideration, they agreed to negotiate with the vendor for terms acceptable to all parties under which the option deed between the vendor and the taxpayers would be rescinded upon X Co entering into a new contract with the vendor for the purchase of the property.
The Commissioner decided the 3 December 2013 agreement effected an assignment of the call option under the 24 September 2013 option deed. He considered that fees payable by X Co were consideration for the assignment. Duty ($299,155) and interest were assessed accordingly.
In arguing that s 107(2)(b) applied, the Commissioner contended that the effect of the agreement was that X Co was “nominated” by the taxpayers as the purchaser of the property, and that the agreement was made “in connection with the exercise of a call option” because the agreement provided for the call option not to be exercised.
The Supreme Court rejected the Commissioner’s contentions. It found the taxpayers did not assign their rights under the call option to X Co, nor did they nominate X Co as the purchaser on or in connection with the exercise of their call option. Accordingly, it held s 107 did not apply.
(Oak Brick Investment Pty Ltd & Anor v Chief Comr of State Revenue [2016] NSWSC 1039, NSW Supreme Court, White J, 29 July 2016.)
[LTN 148, 3/8/16]
Extract from Supreme Court Decision
JUDGMENT
- 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)).
- 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.
- 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.
- 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).
107 Assignment 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.
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.
21. 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.