Della-Franca & Anor v Chief Commissioner of State Revenue [2005] NSWADT 106

CITATION: Della-Franca & Anor v Chief Commissioner of State Revenue [2005] NSWADT 106 DIVISION: Revenue Division APPLICANTS PARTIES: Marie-Louise Della-Franca and Andrew Giles Potter RESPONDENT Chief Commissioner of State Revenue FILE NUMBER: 046045 HEARING DATES: 28/02/2005 SUBMISSIONS CLOSED: 02/28/2005 DATE OF DECISION: 05/12/2005

BEFORE: O'Connor K - DCJ (President) APPLICATION: Duties Act - aggregation of dutiable transactions MATTER FOR DECISION: Principal matter LEGISLATION CITED : Duties Act 1997 Stamp Duties Act 1920 CASES CITED: Chief Commissioner of State Revenue v Pacific General Securities Ltd & Finmore Holdings Pty Ltd (RD) [2004] NSWADTAP 51 Triantafilis v Commissioner of Stamp Duties (unreported, 28 April 1998) APPLICANT REPRESENTATION: J Fisicaro, solicitor RESPONDENT R Seiden, counsel ORDERS: 1. Application for review dismissed; 2. Decision under review affirmed.

REASONS FOR DECISION 1 The respondent, the Chief Commissioner of State Revenue (the Commissioner), has assessed the applicants, Marie-Louise Della-Franca and Andrew Giles Potter, a married couple (Louise and Andrew) as liable to pay duty under s 8(1)(b)(ii) of the Duties Act 1997 (the Act). The assessment relates to a declaration of trust dated 25 June 2003 in which they declare that they hold dutiable property (land) purchased in their name in trust for the true purchaser, Louise's brother, Michael Della-Franca (Michael). 2 The applicants' claim is that the declaration should have been assessed only for nominal duty, as permitted by s 55(1)(a)(i) of the Act, which provides: ' 55 Property vested in an apparent purchaser (1) Duty of $10 is chargeable in respect of: (a) a declaration of trust made by an apparent purchaser in respect of identified dutiable property: (i) vested in the apparent purchaser upon trust for the real purchaser who provided the money for the purchase of the dutiable property.' 3 The Commissioner rejected their application to be relieved of the full duty. They have applied to the Tribunal for review. Their case has been prosecuted throughout by Michael. 4 The material before the Tribunal is as follows: (i) The emphatic statements made by Michael that he has paid his share and the statements made by Louise and Andrew. (ii) The affidavit of Michael filed 14 December 2004 (Ex 1). (iii) The affidavit of Michael filed 21 February 2005 (Ex 2). (iv) The documentation supplied to the Commissioner (Ex 3). (v) More particularly, the 'spreadsheet' showing who paid for what, supplied by Michael to the Commissioner, which appears at tab 21 of Ex 3; and the letter from Michael dated 5 April 2004 providing a bank statement for the period December 2002 showing the bank transfers connected with the payment of the deposits. (vi) The written submissions of the parties, and the submissions at hearing. Circumstances 5 Michael lives in Sydney. Louise and Andrew live and work in Hong Kong. Michael, Louise and Andrew decided a few years ago to undertake a joint venture in real estate in Sydney on a 50-50 basis. The task of finding suitable properties was left to Michael. Eventually Michael located two neighbouring plots of land with dwellings built on them at 9 and 10 The Crescent, Homebush. In July 2002, he negotiated options to purchase, valid for 6 months, which were open to be exercised by a nominee of Michael. In December 2003 Louise and Andrew as nominees exercised the options. Louise and Andrew obtained a mortgage loan to purchase the two properties through Westpac, Hong Kong. The parties had decided to do this because of the more attractive interest rates available there. Louise and Andrew were named in both contracts and both transfers as the purchasers. The transfers were stamped in March 2003 (consideration, No 9, $750,000; No 10, $700,000). Westpac's interest was subsequently registered. Duty was paid on the transfers at the rate applicable to individual transfers. 6 Louise and Andrew made all payments under the mortgage. Michael could not make payments to the account, as Hong Kong law prevents non-residents from making payments. Instead Michael, it is said, was responsible for paying all the local fees, such as the professional and other costs associated with the development application. He also paid the option fees. Michael said the arrangement was that his payments would be treated as contras to the extent they exceeded his 50/50 share of the costs. 7 The evidence also suggests that they had by December 2002 agreed to treat the (slightly) more costly property, 9 The Crescent, as Michael's property, and the other, 10 The Crescent as Louise and Andrew's property, with the outgoings and costs in respect of each property being paid by the party regarded as the owner. On 25 June 2003 Louise and Andrew made the declaration of trust in favour of Michael in respect of 9 The Crescent. The final development approvals were obtained during the next month, July. The approvals permitted demolition of two existing dwellings and erection of a residential flat building consisting of 18 units. 8 According to Mr Fisicaro, who appeared for Michael, the spreadsheet supplied by Michael shows that as at the June 2003, Michael had contributed approximately $253,000 to the venture and Louise and Andrew had contributed $118,200 giving rise to what he described as a credit in favour of Michael of about $130,000. 9 Michael clearly was the active partner in the venture. He went out and found a site, dealt with the owners and managed the applications to council for development approval. There is nothing in the material that addresses the question of whether any payment was to be made by Louise and Andrew for his time and effort. The Tribunal infers, reflecting the family nature of the venture, that Michael did not intend to charge them for his services. 10 As noted the transfers were originally assessed separately. On 26 November 2003 the Commissioner sought information as to the nature and purpose of the transactions. They were reassessed for duty as aggregated transactions (notice dated 18 December 2003), resulting in $9,010 additional duty (plus interest). Michael objected to the reassessment (letter dated 27 January 2004) claiming they were separate transactions not subject to aggregation. At this point he submitted the declaration of trust in support of his claim that they were separate transactions. 11 The Commissioner rejected the objection to the reassessment, and compounded the parties' problems by notifying them that declarations of trust in respect of dutiable property were also dutiable. Michael's reply was that he was the real purchaser of 9 The Crescent, and therefore the instrument was only subject to the nominal rate, as provided by s 55. 12 The Commissioner considered the documentation supplied by Michael, but was not satisfied that Michael was the true purchaser of 9 The Crescent. The Commissioner issued a further assessment, this time for $29,240 (and interest). The Commissioner did, however, following representations from the Della-Franca family, later withdraw the aggregation assessment. 13 The Commissioner gave the following reasons (21 September 2004) for rejecting Michael's submissions: 'An assessment of duty in terms of section 55(1) of the Duties Act 1997 may be made where there is clear and definitive evidence that the real purchaser provided the whole of the purchase monies for the dutiable property. In your client's situation it has not been demonstrated that Michael Della-Franca provided the money to purchase 9 The Crescent, Homebush. The information provided in support of your objection indicates Michael has made some payments in respect of expenses that arose over both 9 and 10 The Crescent, Homebush and Marie-Louise Della-Franca and Andrew Giles Potter borrowed the monies to finance the purchase of both properties and are making repayments on this mortgage.' 14 Michael gave evidence to the Tribunal on affidavit, and was not required for cross-examination. Michael filed two affidavits. 15 The first affidavit (Ex 1) recounted the initial discussions with Louise and Andrew. It was to be a 50-50 enterprise. It recounted the work he did to set up the purchases during 2002. He said that the decision to split the properties between them was made after the options were obtained and following consultation with their accountants. He then referred to the decision to try to obtain finance in Hong Kong. He said that they had paid the amount of duty applicable to the property they had allocated between them. Michael said that his accountant advised him that the arrangement between the parties should be put in writing, otherwise there would be problems with the Commissioner, and that led to the declaration of trust being executed. Michael's position is that the written instrument merely confirmed a state of affairs that had existed in general terms between the parties from the outset, one that had become more precise once the decision had been taken to treat each property as separately owned. 16 He referred then to how he saw the financial contributions working between the parties. He saw himself as having a 'credit' for all the monies he had supplied up front. Similarly he was responsible for meeting development costs incurred locally such as architects' fees, engineers' fees and other relevant expenditure. They were to be set off against his portion of the interest only loan. He says that this is reflected in the material given to the Office of State Revenue. He states that he has continued to make payments on behalf of Louise and Andrew that are 'contra payments towards my mortgage repayment'. 17 The remainder of the first affidavit, as well as the second affidavit, refers to their decision late in 2004 to sell the two properties. Sale contracts were exchanged November 2004. They were on-sold before any work on the project had commenced. Michael said that he did all the work of negotiating the sales. He said that he had directed his solicitor that the proceeds of sale of 9 The Crescent were to be paid to him, and the proceeds of sale of No 10 were to be paid to Louise and Andrew. He said that the mortgage to Westpac was to be discharged by equal contributions from him on the one hand and Louise and Andrew, on the other. He said other liabilities such as capital gains tax and vendor tax would be paid separately on the same basis. The second affidavit gives an update report. It contains the settlement statement for No 9 which reflects the understandings outlined in the first affidavit. 18 In her submissions, counsel for the Commissioner, Ms Seiden made a number of criticisms as to the clarity of the transaction information provided by Michael in his affidavits and other material submitted to the Commissioner. 19 In relation to the option and deposit phases of the venture, she noted first that he had asserted that in July 2002 Louise sent Michael $10,000 (equivalent to the option fee paid in relation to 10 The Crescent), but there was no supporting bank statement. She noted that there was a bank statement showing a transfer of $72,000 from Andrew to Michael in December 2002 and a withdrawal of $135,000 by Michael, the amount required for the deposits. She noted that Andrew's payment appeared to be an overpayment if the arrangement was one where each party would pay 100 per cent of the costs relating to the separate properties, as all that was due in respect of 10 The Crescent was $60,000 (the option fee was to be deducted from the sale price in the case of No 10). 20 The amount applicable to the mortgage for No 9 was $75,000 (no discount for option fee). On the evidence Michael only contributed $63,000 to the price. This material tends to suggest to the Tribunal that at the contract stage the parties were still proceeding as though they were involved in a 50-50 venture, rather than one that divided the two properties between them. 21 As to the sale phase of the venture, Ms Seiden noted that the duty was not, contrary to Michael's assertions, paid strictly consistently with the proposition that Michael would meet the costs in respect of No 9 and Louise and Andrew the costs in respect of No 10. The spreadsheet shows that Andrew and Louise paid only $20,000 (the duty paid was $26,994). She noted also that there is no supporting bank statement. This again tends to suggest that the parties were engaged more in a straight 50-50 venture. 22 As to the loan aspect of the venture, Ms Seiden noted, and the Tribunal agrees, that it is not possible from the material to see how the mortgage payments made by Louise and Andrew are to be reconciled with the payments made by Michael. 23 Finally, Ms Seiden referred to the recent sales of the two properties. She noted that Michael says that the instruction he has given is that each party meet half the balance due on the mortgage from the proceeds of sale. In her view, if the venture was one based on each being 100% responsible for the allocated property then Michael would pay a slightly higher proportion, as his property cost more. 24 All of these criticisms are available. In the Tribunal's opinion, they support the Commissioner's conclusion that the evidence was not sufficient for him to dispense the applicants from duty on the instrument at the ad valorem rate. 25 It seems to the Tribunal that the parties' view of their venture has varied at times between one in which there was a 50/50 split of all costs and receipts; and one where the division of costs and receipts was to be proportional to the costs of the properties. If the latter is the case the division should have been more along the 55/45 line reflecting the different prices. 26 The Tribunal is sceptical about the evidence that a strict proportionate split was contemplated. It seems to the Tribunal less than likely that parties would go into a development venture of this kind on the basis that the relative cost of the underlying properties would be used as in index for costs and receipts. (It may be that that the non-active party, Louise and Andrew, did leave some of the costs on a 50/50 basis as a way of providing some financial reward to Michael for his work, but there is no evidence before the Tribunal along those lines.) 27 At hearing both parties referred to a Court of Appeal decision in Triantafilis v Commissioner of Stamp Duties (unreported, 28 April 1998). The decision reflects a strict approach to the circumstances in which the relief discretion will be exercised in favour of the taxpayer. 28 A father had presented for stamping a transfer of a shop owned by him to his adult sons. He said that many years before, in 1980, he had purchased the shop using monies belonging to his sons, then minors. According to Mr Fisicaro, the money was money held in trust for the sons, in response to a promise made to their mother before she died about the division of family assets on her death. He asked to be relieved of ad valorem duty on the basis that the sons had actually paid the purchase price. Section 73(1)(e) of the Stamp Duties Act 1920 provides: ' 73 Certain conveyances not chargeable with ad valorem duty (1) The following instruments are not to be charged with ad valorem duty as conveyances namely: … (e) A conveyance whereby the apparent purchaser of property that is vested in him upon trust for the person who was the real purchaser and who has actually paid the purchase money therefor, conveys the same to the real purchaser.' 29 The purchase price in 1980 had been $73,000. The Supreme Court (Hodgson J) was prepared to accept that $63,000 of the $73,000 purchase price was the subject of a trust of the kind claimed, and that therefore the sons' money had been used. But the evidence was clear that the remaining $10,000 had been supplied by the father from a loan obtained by him at the time. Accordingly the terms of s 73(1)(e) were not satisfied in that the sons could not be shown to have actually paid the purchase money, the expression the 'purchase money' being interpreted to mean the whole purchase money. The Court of Appeal agreed. 30 The Commissioner drew support for his approach in the present case from the following observations of Priestley JA in the Court of Appeal: 'The provision [s 73(1)(e)] in my view is talking about one conveyance where the whole of the purchase money has been actually paid by the real purchaser although title has been taken to the property by an apparent purchaser. In my view a condition of non chargeability with ad valorem duty is that the whole of the purchase money for the one property conveyed by the instrument must have been actually paid by the real purchaser before the exemption from ad valorem duty is available.' 31 The case was also seen as having some relevance on a second point. The father had submitted that at least he should be relieved of duty as to 63/73rds reflecting the extent to which, on any view, the sons had been the true owners from the outset. The Court did not accept this submission. In its view the Act could not be read as allowing for a proportionate reduction of the ad valorem duty where there had been substantial contribution by the person claiming to be the real purchaser. 32 While the present application relates to a provision somewhat differently expressed from the one under notice in Triantafilis, the Tribunal agrees that Triantafilis provides insight into the appropriate approach to this case. 33 The applicants need to show that Michael is the 'true purchaser'. This would, the Tribunal, require clearer evidence that Michael has been able to furnish. The Tribunal accepts that Michael made a significant contribution to the purchase of 9 The Crescent within the framework of the joint venture. But the kind of detail tieing payments to 9 The Crescent such as would allow a finding that he is the 'true purchaser' of 9 The Crescent is not available. Louise and Andrew raised the loan and made the repayments. Were there accounting records that showed a precise separation of the costs in respect of No 9 and for precise reimbursement of the repayments initially made by Louise and Andrew in respect of No 9, together with similar material going the other way in respect of No 10, it might be possible to make a finding that Michael was the 'true purchaser' of No 9. 34 Mr Fisicaro submitted that arrangements of this kind involving minimal records as between members of a family who trusted each other were not unusual. The Tribunal accepts that point. The Tribunal also accepts that the law of trusts has a sophisticated approach to accounting, and allows for set-offs and allowances to be made in respect of payments made by one party to the benefit of the other, and in ascertaining the extent of respective contributions to a venture. 35 On the other hand, the Tribunal does not accept Mr Fisicaro's submission that '… if there is any doubt about chargeability of stamp duty then the applicant must be given the benefit of the doubt'. Section 55(1)(a) does not involve a complicated concept. The 'true purchaser' must, the Tribunal considers, be a purchaser for full value; and there needs to be good evidence that at the time of the purchase transaction the 'true purchaser' had supplied the funds; or, perhaps, had within the framework of a broader venture had sufficient credits due to him, which were clearly allowed as credits in his favour for the purpose of the purchase. In an instance where a mortgage had been raised, there would also need to be clear evidence that the mortgage repayments attributable to the property of the 'true purchaser' were being met, either directly or by reimbursement or through specific credits, by the 'true purchaser'. It is impossible, the Tribunal considers, to reach the necessary state of satisfaction on the evidence here. 36 Revenue Ruling No. SD 120 (29 November 1988) at [8] is not unduly strict, taking a broad approach to what documentation is adequate. The bookkeeping arrangements between Michael and Louise and Andrew were so informal that Michael was unable to produce many bank statements or other independent accounting records showing how their respective contributions to the project were managed. 37 The Commissioner in the Tribunal's opinion made the correct and preferable decision in deciding not to allow the applicants' objection. The result is that the Tribunal affirms the Commissioner's decision. 38 The case has odd aspects. On its face the parties embarked on a development project of a 50/50 kind, without regard to the individual costs of the properties procured for the purpose. Transfer duty was initially paid on the basis that two properties acquired involved separate transactions. The Commissioner's subsequent reassessment requiring payment of aggregation duty was, in the Tribunal's opinion, clearly open. This appears to be the very kind of case to which aggregation duty is directed: for a recent discussion by the Appeal Panel of the Tribunal, see Chief Commissioner of State Revenue v Pacific General Securities Ltd & Finmore Holdings Pty Ltd (RD) [2004] NSWADTAP 51. The parties' decision to execute a declaration of trust over No 9 seems to have been a vain attempt to defeat any assessment that the transfers were subject to aggregation duty; and done oblivious to the duty consequences of declaring a trust. Had they not declared a trust and paid the aggregation duty without protest, they would have ended up paying extra duty of approximately $9,000 (plus interest) rather than the amount they now face, of approximately $29,000 (plus interest). Order 1. Application for review dismissed. 2. Decision under review affirmed.