Duty considerations muddy the waters

A recent decision of the Queensland Supreme Court has highlighted the complexity in determining the duty payable on a commercial transaction and the consequences that can follow where the parties disagree on the duty liability.

Key points

• The case (Sentinel Citilink Pty Ltd v PS Citilink Pty Ltd [2018] QSC 239) involved a contractual dispute between the seller and buyer of commercial property in Brisbane.
• The case was about what should appear on the Form 1 transfer as ‘consideration’ where there is an adjustment to the purchase price, which arguably could affect how transfer/stamp duty is calculated.
• The Court held that the adjusted amount should appear on the Form 1 and noted that, if there is any concern that this might mislead the QRO about the dutiable value, further information can be provided in the Land Title forms.
• The decision has been appealed and we may see some amendments to Land Titles /Queensland Revenue Office guidance for buyers, sellers and self assessors.

Although the Court (Bond J) regarded the focus of both sides on the duty issues to be a ‘red herring’, the basis for the dispute between the seller and buyer, and the subsequent litigation, can be attributed to the parties’ conflicting view on the duty payable on the transaction.

Facts

• The seller and buyer entered into a contract dated 20 December 2017 for the buyer to acquire certain commercial property from the seller.
• The contract was a standard REIQ contract for the sale of commercial property with additional special conditions. It recorded a purchase price of $81,200,000. A deposit of $4,060,000 was payable by the buyer as at the date of contract and was paid. The buyer was obliged to pay ‘the balance of the Purchase Price’ on the settlement date.
• The commercial property the subject of the sale was subject to various continuing leases specified in the schedule to the contract.
• Special conditions to the contract provided that the seller transfer to the buyer all of the rights and obligations of the seller under the leases and the buyer agreed to comply with the obligations of the lessor under the leases on and from the settlement date, whether or not those obligations ran with the land.
• The seller was required to pay to the buyer, by way of an adjustment to ‘the balance Purchase Price payable on settlement’, an amount equivalent to the value of any outstanding incentives.
• ‘Incentive’ was defined to mean ‘any incentive, such as rent concession, fit out contribution, works or other inducement, the seller (or its predecessors in title) had agreed to provide to or perform for a tenant …’.
• There was no dispute between the parties as to the value of the outstanding incentives as at the contract date and at the settlement date.

What was the dispute?

• The seller and buyer disagreed on how to complete the transfer forms under the Land Titles Act 1994 (Qld) – specifically, the particulars of the consideration for the transaction required to be included in the Form 1 Transfer and the Form 24.
• The seller asserted that the consideration and ‘dutiable value’ was $81,200,000, which was the amount of the purchase price with no deduction for the outstanding lease incentives.
• The buyer’s position was that the consideration for the Forms 1 and 24 should be recorded as $79,196,949.34, being the amount obtained after deduction of the agreed value of the outstanding lease incentives from the original purchase price, and the dutiable value of the transaction. In support of its position, the buyer relied upon a Queensland Law Society practice note and instructions provided in the Land Title Practice Manual of how to complete Forms 1 and 24.
• The seller and buyer could not agree on a compromise, with both parties maintaining that completing the forms contrary to their respective positions might misrepresent the consideration for the Queensland Revenue Office and the Land Titles Registrar.
• The contract did not settle at the agreed date and time.
• The seller terminated the contract and retained the deposit. The seller sought declaratory relief as to the validity of its termination and its entitlement to retain the deposit. It also sought an order removing a caveat lodged by the buyer.
• The buyer sought a declaration that the contract had not been validly terminated and sought an order for specific performance of the contract and damages by way of compensation.

How did the duty issues affect the contractual dispute?

In Queensland, duty is charged on the ‘dutiable value’ of a transaction. For the transfer (or agreement for the transfer) of land in Queensland, the dutiable value is the higher of the ‘consideration’ for the transaction and the ‘unencumbered value’ of the land.

As the consideration for a transaction informs the duty payable, the determination of the consideration for a transaction is critically important.

The concept of consideration for duty purposes is not limited to the stated purchase price in a contract. For example, if liabilities are assumed under a transaction, the amount of the liabilities is included in the calculation of the consideration and, therefore, the dutiable value of the transaction. An example of a liability commonly assumed under a transaction is employee entitlements on the acquisition of a business.

In this case, if the lease incentives taken on by the buyer in relation to the leases were correctly characterised as liabilities assumed by the buyer under the transaction, then the value of the incentives is required to be added back to the adjusted purchase price to determine the duty payable on the transaction. This seems to be the position taken by the seller.

In this case, each party:

• had a different view of the dutiable value of the transaction; and
• considered that the dutiable value of the transaction equated to the consideration for the transaction for the purposes of completing the Forms 1 and 24.

This made a dispute on how the Forms 1 and 24 should be completed inevitable.

In the judgement, the basis for the seller’s position included the requirement to comply with section 502 of the Queensland Duties Act. Section 502 deals with ‘contingent’ consideration. The contingency principle can broadly be described as the requirement for consideration that is contingent on a specified event to be included in the calculation of the consideration for the transaction, even if the specified event or circumstances may not occur. A common example of contingent consideration is an earn out arrangement.

The decision

The Court held that the seller was not contractually entitled to insist on its version of the transfer forms and to terminate the contract. It was open to the seller to include the particulars of the adjustment mechanism for the outstanding incentives in an annexure to the transfer forms. This disclosure should have alleviated the seller’s concerns of misleading the Queensland Revenue Office or anyone else.

The buyer was granted specific performance of the contract and compensation of an amount to be determined.

In relation to the conflicting submissions on the duty issues, His Honour Justice Bond did not think it was necessary to determine the dutiable value of the transaction for the purposes of the Duties Act in order to determine whether the seller was contractually entitled to take the course it did.

Where to from here?

The seller has appealed the decision.

In addition to the further litigation (and the unavoidable costs of an appeal for both parties), the parties will no doubt also be taking more than a passing interest in the duty assessment to be issued by the Commissioner of State Revenue on the transaction.

Implications of decision

It’s likely that the Land Titles Office and the Queensland Revenue Office will review their respective guidance on completing the Form 1 transfer and the Form 24 to provide greater clarity for parties buying and selling land and for self assessors.

Determining the consideration for a transaction for duty purposes is difficult enough, and any ambiguity on the proper basis to complete required land transfer forms is not helpful.