19 October 2020

Stamp duty and contingent consideration

This article was written by Katrina Parkyn and Adrian Linneth.

The recent decision in Resolute Mining Limited v Commissioner of State Revenue[1] is an important reminder of the need to carefully consider the duty implications of any contingent consideration for a transaction.

1. Background

Resolute Mining Limited (Resolute Mining), through its wholly owned subsidiary Carpentaria Gold Pty Ltd, owned the Ravenswood Gold Mine. 

As part of an expansion of the mine, Resolute Mining entered into an agreement with the State of Queensland (State) for the relocation of the Ravenswood State School. 

It was agreed that the State would transfer the site on which the existing school was located (Existing Site) to Resolute and Resolute would pay an agreed Funding Amount to the State (representing the cost of relocating and refurbishing the school).

The Funding Amount was a specified amount of approximately $9 million (including GST), which could be increased for any cost overruns or, in limited circumstances, refunded.

The Commissioner assessed duty on the specified amount of $9 million, in circumstances where the unencumbered value of the Existing Site was only $635,000.

2. What was the issue?

There was no dispute that the agreement to transfer the Existing Site was a dutiable transaction.  The question was how much duty was payable?

The answer to that seemingly simple question turned on whether the consideration for the acquisition of the Existing Site could be ascertained on the date the agreement was entered into (when the liability for duty arose).  If the consideration could not be ascertained, duty would be payable on the unencumbered value of the Existing Site.  But if the consideration could be ascertained, then duty would be payable on that (higher) amount.

3. When is consideration not ascertainable?

The key issue was whether the amount of consideration for the transfer of the Existing Site could be ascertained at the date the agreement was entered into, having regard to the various ways in which the Funding Amount could be adjusted.

Resolute argued that the consideration could not be ascertained, such that duty should be assessed on the (lower) value of the Existing Site.

The Commissioner argued that the consideration could be ascertained and assessed duty on that basis.

4. The contingency principle

Recognising that liability to duty has to be determined at the time liability for duty arises led the courts to develop, over time, the so called ‘contingency principle’.

This principle, broadly, entitles the revenue to assess duty on the maximum amount payable for a transaction taking into account all contingencies.  However, where the amount payable is a specified sum which is neither a maximum nor a minimum (i.e. it can vary up or down), duty is to be assessed on the specified sum.[2]

Several states and territories (including Queensland) have also developed statutory regimes to deal with contingencies.

Relevantly, section 502 of the Duties Act 2001 (Qld) provides:

502      Consideration based on contingency

1. Subsection (2) applies for determining the consideration payable under an instrument or transaction if the consideration payable—
    • may be increased or decreased depending on a particular thing happening or not happening; or
    • may or may not actually become payable depending on a particular thing happening or not happening; or
    • is agreed to be a minimum amount, whether or not depending on a particular thing happening or not happening; or
    • is agreed to be a maximum amount, whether or not depending on a particular thing happening or not happening; or
    • is agreed to be either a minimum or maximum amount, whether or not depending on a particular thing happening or not happening.
2. Regardless of whether the thing happens or does not happen, the consideration is—
    • if subsection (1)(a) or (b) applies—the highest consideration payable under the instrument or transaction; or
    • if subsection (1)(c) applies—the minimum amount; or
    • if subsection (1)(d) or (e) applies—the maximum amount.

At issue was the interplay between the common law contingency principle found in relevant caselaw and section 502.

5. The decision

The Commissioner’s assessment did not rely on section 502, and instead relied on the common law contingency principle to assess duty on the fixed sum that was specified in the Funding Agreement, notwithstanding that it was neither the maximum nor minimum amount that could be payable.

The Commissioner’s position was rejected, with the Court finding that section 502 did apply:

If the consideration payable under the relevant transaction falls within any of the categories in ss502(1)(a) to (e), then section 502(2) will apply and determine the consideration payable.  It matters not if, as the commissioner submits, the application of the contingency principle would produce a different result.

Having found that the relevant transaction did fall within section 502(1)(a) and (b), the consideration (for duty purposes) fell to be determined in accordance with section 502(2)(a) – being the highest consideration payable under the instrument or transaction.

However, the ‘highest consideration’ could not be ascertained on the date of the agreement, because the amount of any increase to the Funding Amount could not be ascertained at that date. This meant that duty had to be assessed on the value of the Existing Site (which was only $635,000).

6. Practical impact

The Court did not regard it necessary to determine whether section 502 operates as a code for dealing with contingent consideration in Queensland.

The approach to dealing with contingent consideration would appear to be to ask, first, whether the transaction falls within any of the categories in section 502(1). 

If so, then the consideration is to be worked out in accordance with section 502(2).  If section 502(2) does not produce an outcome, the consideration is not ascertainable and duty is to be assessed based on unencumbered value.

Given the Court was careful to avoid stating that section 502 operates as a code, one point that would appear to remain open is the possibility of the common law principle having continued operation in some cases (however limited they may be).

The take-away is that where you are dealing with a transaction that involves contingent consideration, thought should be given to the duty implications of how that consideration is structured.  For the purchasing (paying) party, specifying a maximum amount if often commercially desirable as it provides certainty as to the maximum exposure, but is likely to result in duty being payable (upfront) on the maximum amount, even if the total consideration ultimately paid is less than the amount on which duty was originally assessed.  In Queensland, it is not possible to have the transaction reassessed if the actual amount payable is less than the maximum amount.

Different issues arise for transactions outside Queensland. For example, in New South Wales and Victoria, contingent amounts are specifically accommodated by provisions which provide for an ‘interim’ assessment of duty. These provisions allow for an assessment of duty by way of estimate if the full dutiable value cannot be immediately ascertained.  The documents are later re-submitted for ‘final stamping’ once the total consideration payable has been ascertained.  Any excess duty is refunded, and any additional duty is payable.  The apparent intention, which is also consistent with current assessing practices, is that the interim stamping provisions essentially replace any application of the contingency provision, allowing the final assessment of duty in a particular case to be reflect the total consideration actually paid. 

These issues are mostly relevant to transactions involving transfer duty (where duty is generally assessed on the higher of consideration or value).  They are less relevant to transactions where duty is assessed by reference to market value only.  With that in mind, where  the commercial settings of a transaction require consideration which exceeds the market value, alternative structuring options may in some circumstances be available to bring the transaction within rules which result in duty being assessed on market value only and not by reference to the consideration, including contingent consideration.

 

[1] [2020] QSC 281

[2] Ansett Transport Industries (Operations) Pty Ltd v Comptroller of Stamps [1981] VR 35

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