| Revenue Ruling Public Ruling
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| Please note: This ruling has been replaced by ruling PUB-DT-2004-2 dated 20 January 2004 and therefore is no longer current. Preamble
This ruling identifies the circumstances in which the Commissioner will assess or reassess a cancelled agreement as not liable to duty. Ruling Novation Cancellation of an agreement often arises in the context of a novation, being the substitution of a "new" agreement for an "old" agreement in consideration of the discharge of the "old" agreement. It is, of necessity, tripartite. In the case of the sale of land, it involves the original vendor, the original purchaser and a substituted purchaser. Usually, the terms of the agreements are the same and the only change is the substitution of the purchaser or the addition of a further purchaser. Following novation, the liabilities, obligations and interests of all the parties under the "old" agreement are determined. Regardless of the number of instruments involved, novation involves two agreements for the sale or transfer of dutiable property, the original agreement and the substituted agreement. Ad valorem duty is payable on the substituted agreement as a dutiable transaction. The original agreement will also be chargeable with ad valorem duty, subject to the provisions of section 33. Subsale - section 33 (1) (a) Where an agreement is cancelled to give effect to a subsequent agreement, the original agreement will be assessed as not liable to duty if the Commissioner is satisfied that the agreement was not rescinded or annulled to give effect to a subsale. In forming an opinion as to whether or not the substituted agreement is a subsale, the Commissioner looks primarily at the intention of, and the benefit passing to, the original purchaser as a result of the cancellation of the original agreement. One factor to be considered is whether or not a benefit passes from the substituted purchaser to the original purchaser in the nature of a benefit which ordinarily passes to a vendor pursuant to a sale. A sum of money passing from a substituted purchaser to the original purchaser would obviously suggest that there was, in fact, more than one sale. However, the benefit may be more intangible than this. For example, a developer may "on sell" a vacant lot to an institutional investor at the same price or a lower price than the original purchase price, but as part of an arrangement to develop the site and erect income-earning buildings on it. A sale to the institutional investor in the form of a novation from the original vendor would be regarded as a subsale from the developer even though there was, on the face of it, no profit passing to the developer from the institutional investor pursuant to that subsale. If the only benefit passing to the original purchaser is the benefit of being released from obligations under the original agreement, this would not, of itself, be sufficient to characterise the substituted agreement as a subsale from the original purchaser to the substituted purchaser. For example, if an original purchaser is unable to raise the finance necessary to complete an intended purchase, but locates an alternative purchaser and persuades the vendor to accept this substituted purchaser by way of novation of the agreement, the Commissioner would not view this as a subsale. On the other hand, the inclusion of a novation clause in the original agreement, whereby the original purchaser could require the vendor to accept a substituted purchaser by way of novation, would tend to suggest that the original purchaser intended to subsell the property. Accordingly, the Commissioner would be inclined to regard any substituted agreement as a subsale. Where a novation does not take place, and the agreement is cancelled with no subsequent agreement (whether or not in writing), the Commissioner will accept that the agreement was not rescinded or annulled to give effect to a subsale and is therefore not liable to duty. The following are examples of cancelled agreements that are not liable to duty: Novation at the initiative of the vendor. This goes to the facts and will not necessarily be apparent from the documents involved. However, on any view of the word "subsale" it must mean, in the context of a novation, a sale (or notional sale) from the original purchaser to a substituted purchaser. If the novation takes place at the initiative of the vendor and the original purchaser withdraws at the request of the vendor, the Commissioner would not regard the substituted agreement as amounting to a sale from the original purchaser to a substituted purchaser. Novation to comply with government requirements. An example of this would be where X, a foreign person or corporation, purchases a property subject to Foreign Investment Review Board approval and this approval is subsequently obtained, but subject to X joining an Australian person or corporation in a joint venture in the purchase of the property. In such circumstances, if the original agreement is novated so that X and an Australian third party were substituted as co-purchasers, the Commissioner's view is that there is no subsale. Purchase by a trust to be formed. This occurs where a purchaser on behalf of a nominated trustee of a named unit trust that has yet to be formed enters into an agreement, and the agreement is novated following formation of the unit trust and appointment of the trustee. Provided the subsequent purchaser is purchasing in the capacity of trustee of the named unit trust, and there is no benefit accruing to the initial purchaser, as outlined above, the Commissioner considers that a subsale does not occur. (The unit trust need not have precisely the same name as in the agreement provided the Commissioner is satisfied that the trust named in the transfer is the same as the proposed trust referred to in the agreement.) Novation of a pre-incorporation contract - section 33 (1) (b) Where a promoter on behalf of a named company to be formed enters into an agreement and the agreement is novated following incorporation, so that the new company is purchaser under the substituted agreement, the original agreement is not liable to duty. (The new company need not have precisely the same name as in the agreement provided the Commissioner is satisfied that the company named in the transfer is the same as the proposed company referred to in the agreement). In situations where a purchaser, after entering into an agreement, subsequently acquires an existing company and the agreement is novated following purchase of that existing company, so that the purchased company is the purchaser under the substituted agreement, the original agreement is not liable to duty. Related persons - section 33 (1) (c) If the original purchaser and the substituted purchaser were "related persons" when the original cancelled agreement was entered into, the cancelled agreement is not liable to duty even if the novation constitutes a subsale. "Related person" is defined in the Duties Act to mean a person who is related to another person in accordance with any of the following provisions:
Examples of cancelled agreements that will be not liable to duty because of section 33 (1) (c) include the following:
Refunds – section 33 (2) If duty has been paid on an agreement that is not liable to duty because of section 33 (1), the Commissioner must reassess and refund the duty if an application for a refund is made within:
whichever is the later. The applicant may request the duty to be applied towards the liability for duty on the substituted agreement. However, in the event that the original agreement is not reassessed as not liable to duty, interest under Part 5 of the Taxation Administration Act 1997 might be payable on the substituted agreement. Applications for assessment or reassessment and refund should be made on the form ‘Section 33 – Application for Refund: Cancelled Agreements’, which can be obtained from the State Revenue Office or www.treasury.tas.gov.au\tax. Enquiries in relation to this Revenue Ruling should be directed to the Revenue Advice and Audit Section on telephone (03) 6233 5437 or email at audithelp@treasury.tas.gov.au. Copies of this ruling may be obtained from our Web site at www.treasury.tas.gov.au/tax and follow the "Revenue Rulings" link. All rulings must be read subject to Revenue Ruling PUB-GEN-2001-1. Peter Coe Commissioner of State Revenue |
