9 December 2004 BY & NORMAL MAIL. The Honourable John Brumby Treasurer Level 4, 1 Treasury Place Melbourne 3002.

Transcription

1 9 December 2004 BY & NORMAL MAIL NV:SG N. Velardi (03) The Honourable John Brumby Treasurer Level 4, 1 Treasury Place Melbourne 3002 Dear Mr Brumby, RE: STATE REVENUE OFFICE I would like to draw your attention to a number of matters of concern to our members relating to the manner in which the: 1. State Revenue Office (SRO) has in the past undertaken changes to practices affecting the public and 2. Increasingly harsh application of the interpretation of legislation administered by the SRO and difficulty in our members interaction with the SRO. Procedure for change in practice Progress has been made in relation to consultation with the SRO on Land Tax and trusts as well as possible changes to s31 Duties Act. The SRO has involved the LIV in discussions and requested comment on proposed changes. However, this does not occur across the board. There are occasions where changes to practices are made without informing the broad constituency of the SRO and which catch people unawares. Appendix 1 outlines examples of changes in procedure where consultation did not take place. This approach has the effect of creating uncertainty in business transactions and therefore detrimentally affects the business environment in Victoria.

2 Interactions with SRO Our members have experienced difficulty recently in relation to their interaction with the SRO. Appendix 2 lists some examples of the difficulties that have been experienced. Many of these examples have resulted in increased costs to clients and increase the cost of doing business in Victoria compared to other States. Proposed way forward The SRO Taxpayers charter states that the SRO will consult with relevant industry groups where appropriate. We request that a process be established whereby the LIV is informed of upcoming changes and involved in the consultation for the proposed changes. We also request that the SRO apply legislation enacted by Parliament and if there are any significant changes in law or practice, that they receive parliamentary authority. I request a meeting with you and representatives of the LIV to discuss the issues raised in this letter further. Please feel free to contact me or Natalina Velardi on to discuss the matters raised and to set a time for a meeting. Yours sincerely, Christopher Dale President Law Institute of Victoria Copy to: Paul Broderick Commissioner of State Revenue

3 APPENDIX 1 - Examples of procedure for change in practice Example 1: One example of a change in practice without consultation relates to the position in relation to fractional interests. In August this year in a DRS agent newsletter the SRO published an article relating to fractional interests. The article discussed the duty implications where Jack and Jill were purchasers in a contract of sale for $200,000. In the absence of anything to the contrary it is assumed that the purchasers are going to take the property in equal shares. The transfer of land however, shows Jack and Jill having different interest, Jack having 90 percent and Jill having 10 percent. The article then discusses the duty implications of the transaction. Where there is a change in fractional interest from contract to transfer of land between the same purchasers, it is considered that two transactions have occurred. Where two parties sign a contract as purchasers there is a presumption that they are to be co-owners in equal shares unless otherwise stated This means that if there is nothing in the contract of sale to indicate specific shares for a tenancy in common, there is a presumption that the purchasers take in equal shares. If the transfer has a different split up, SRO imposes extra (double) duty. The general rule (as opposed to the exception) in current conveyancing practice is that where purchasers buy as tenants-in-common their shares are not included in the contract of sale. Indeed the contract note or contract of sale may only include the names and addresses of the purchasers where their intention is to buy as tenant-in-common. The majority of contract notes and auction contracts have the purchaser s details hand completed by the selling agent (as agent for the VENDOR) at the point of sale (and the agent s sole interest is to complete these details as succinctly and expeditiously as possible). There is also the variation where a nomination is made to tenants in common, which may or may not set out the shares of the tenants-in-common. Prior to the August DRS newsletter we understand that it was the practice of the SRO to impose duty based on the transfer without requiring the contract of sale to specify the percentage interests. There were a number of aspects in the change of practice that we found concerning: The new SRO practice represented a fundamental change to the way in which people arrange their affairs. It assumes that purchasers are alert to the issues when they sign contracts. This assumption is incorrect. Many purchasers do not obtain legal advice until after they have signed the contract. Whilst estate agents are usually present when contracts are signed, it is inappropriate for estate agents to discuss these issues with purchasers. They are vendor representatives and are disqualified and should not be giving legal advice to purchasers. The change was only publicised via the August DRS Agent newsletter which is limited to agents registered under the DRS system. This meant that some settlements did not proceed because banks (as DRS agents) needed assurance of the duty that was going to be imposed. This was put into doubt because of the possibility of double duty if the contract of sale did not specify the amounts of the tenancy in common. No ruling or other public announcement was put out warning practitioners and the public of the impending change. This meant that only DRS agents were informed of the change. We consider that informing a section of the market of a change and not all of the market, particularly when the change affects all, is unfair, lacks transparency and creates inequities for taxpayers who are in the worst position to deal with the consequences. It also does not accord with the SRO s taxpayers

4 charter of treat[ing] all taxpayers and customers equally. Subsequently a Duties Act Bulletin was issued in November 2004 on the issue; three months after the initial DRS Agent newsletter. There was no consultation about the change. Whilst we appreciate the consultative process that has been allowed in respect of other stamp duty changes, the LIV was not invited to comment on this change. It was not provided any information about the change. Our members only found out about the new approach from DRS agents (if they were not agents themselves.) As far as we are aware no other body was consulted. There was also no consultation in relation to the Duties Act Bulletin issued in November There has not been any grace period to allow people to accommodate the change in practice. There are many instances where contracts have already been entered into without clients or practitioners being aware of the change. This creates unnecessary inefficiencies and costs. Most properties are sold by means of a contract note or a contract of sale form that has been established either by legislation or by copyright. At present the forms do not contain any ready provision for addressing fractional interests. Any change in SRO practice should not have occurred until the standard transactional documents upon which the SRO now intends to rely are amended to highlight the issue. These points were made to the SRO. In response, the SRO claimed there had not been a change in policy. The experience of our members however, is that before August the SRO was not scrutinising the contract of sale for the fractional interests in order to consider stamp duty. Indeed, our members generally have little control over the expression of their client purchasers intentions at the point of sale as these have already been expressed for them by the vendor s agent at that time (for reasons outlined on the previous page of this letter). Example 2 A second example relates to the way in which duty is calculated on the value of the remainder interest and life interest. In past years the SRO imposed a rate of 7% in such calculations. This year the rate imposed was 5%. The SRO indicated that the rate changed following a report from an interstate review and recommendation as to what the rate should be. The material was not made public nor was the LIV informed of the change or requested to comment. No information was provided so that taxpayers could be informed of the increased duty for which the SRO now considered them liable. Example 3 The SRO has issued evidentiary requirements for sections 31(3)(a)(i) and (iii) of the Duties Act The requirements are not available on the SRO website. The requirements are onerous and go far beyond the requirements of the legislation. Previously, a statutory declaration was required confirming the nomination and providing a copy of the authority. Under the SRO requirements bank records proving that the transferee provided all purchase monies and was expeditious in reimbursing the agent are required. If they are not provided double duty is imposed. There are various circumstances in which these requirements will not be met, for example, payment by way of gift or loan of part of the purchase money by a friend or relative. Practitioners have not been generally informed about this requirement. They are finding it out when they are at settlement. This causes delay and additional cost.

5 APPENDIX 2: Interactions with SRO Our members have experienced difficulty recently in relation to their interaction with the SRO. Below are some examples: A member recently had three section 31 assessments on a transaction. The SRO claimed that there had been a sub-sale. The property value was $4.2 million. The stamp duty initially assessed was approximately $2.3 million. When our member sought a meeting with the SRO the officer acknowledged that the officer did not understand the transaction and that if an assessment was issued someone would explain it to her. The initial assessments were withdrawn and assessments totalling $693,000 were re-issued. The extra work involved in dealing with the assessments will cost the client approximately $30,000 extra in legal costs. The SRO has recently adopted a practice of: Not accepting a written authority signed before a contract of sale under section 31(3)(i) and insisting on proof of the money trail. Treating an option to purchase as a contract of sale and therefore if the person exercising the option is different to the grantee of the option, double duty is imposed. Both these practices cause unnecessary difficulties for clients where there is clearly no avoidance present. A member recently had a transaction involving a major building. The name on the contract differed from the name on the transfer. Rather than querying why the names differed, an assessment was issued by the SRO. The SRO had previously been provided with material that showed the existence of a trust (which had existed for some years). Single duty rather than double duty was therefore applicable. Another member reports a matter which involved repeated requests by the SRO for further documents and information in an exemption claim, much of it seemingly irrelevant to the claim and not stipulated in the SRO s Document Stamping Requirements. The result was significant additional expense and delay causing much anxiety to the client. Another member example involved the SRO taking many months to reply to an objection, then, when a notice of appeal was lodged, refusing to refer the matter to VCAT until the matter was further considered by its legal department. The result was further unnecessary delay in an already protracted matter. There are also examples of inconsistent treatment of similar matters creating uncertainty in members advice to clients. We are also aware of at least one example of a SRO officer admitting that a request for additional information (not usually required) was made because of the large amounts of money involved in the particular transaction. Our example above in appendix 1 relating to the change in the interest rate imposed on the calculation of the value of the remainder interest, is also an example of the difficulty experienced by members in their interactions with the SRO. Members also noted that if an incorrect assessment is issued and acknowledged by the SRO, it then takes up to six months to obtain a refund. A member recently submitted a transfer for stamping where there had been a change of trustee of a superannuation fund. The trust deed made provision for a change of trustee. Notwithstanding information requested and provided to the SRO assessor, an assessment was

6 made based on a change of beneficial ownership rather than a change in trustee. When asked why this was done, the assessor said that he did not understand the explanation given by the member. Rather than asking for an explanation, the assessor made the assessment and the member on behalf of the client was forced to lodge an objection on what on its face was a simple stamping of a transfer. Again in this case the client was put to extra expense due to the approach of the SRO. Ruling DA.029 requires valuations to be provided where land is transferred together with a business. This is an onerous requirement that is not justified by the legislation, case law or business practices. The law has not changed in over twenty years: the SRO has recently taken a different approach and sought to impose duty on goodwill. The SRO has consistently lost in the courts on this issue. The SRO has now resorted to imposing duty on a transfer of goodwill by a back-door administrative requirement, which is not supported by the legislation or by the case law on the issue. The authorities are clear that the value of goodwill is not attributable to the land or to the value of the land. The ruling now effectively requires a valuer to state the extent to which goodwill is attributable to the value of the land. There is a requirement that a contract of sale be entered into not only in contemplation of the incorporation of the nominee, but that steps must have been put in place to incorporate the nominee prior to entering into the contract. This is evidenced by the SRO s decision to litigate this issue in Commissioner of State Revenue v Viewbank Properties Pty Limited. Again, this is a relatively recent approach by the SRO and the Courts have disagreed with the SRO s interpretation. The SRO is also taking a very technical position in relation to nominations where a person is appointed as agent to enter into a contract of sale by a principal and enters into the contract as purchaser and/or nominee. The circumstances of Vida Development v Commissioner of State Revenue are evidence of the SRO taking an extremely technical approach. Section 50 of the Duties Act allows a reduction in duty where assets are distributed in specie by a liquidator to shareholders but only if the SRO is satisfied that the company is not being wound up as part of a scheme to reduce duty. Some members have encountered a view within the SRO that, if the company has not owned the dutiable property for at least 12 months before the distribution, then it must be part of an arrangement to reduce duty. This is not supported by the legislation. If the legislation required property to be held for 12 months, it would say so. In fact, this is more onerous than the corporate reconstruction requirements, which have now dispensed of the need for a 12-month pre-association.