Duty on default interest - Recent Supreme Court decision and potential implications for developers
A recent decision of the Supreme Court in Commissioner of State Revenue v 1043 Melton Highway Pty Ltd  VSC 820 has overturned an earlier VCAT decision to hold that default interest forms part of the consideration for duty assessment purposes.
The decision could have significant implications for the assessment of duty on property transfers where amounts referable to default interest are paid over and above the contract price.
In this article, we consider the Supreme Court decision and the potential implications for transactions. The State Revenue Office (SRO) is yet to provide guidance on their interpretation of the case and how they will administer default interest for duty purposes.
What was the case about?
Melton Highway was nominated as a substitute purchaser under a contract of sale to acquire land.
There were two amounts paid in addition to the headline purchase price that were ultimately treated as part of the consideration for duty purposes.
The first amount was referred to as ‘loan advance interest’ which were amounts payable to the vendor as a result of the failure to make cash advances to the vendor as required, and by the time stipulated in a special condition of the contract.
The second amount was referred to as ‘default interest’ and arose because the purchaser was unable to settle by the agreed settlement date so the parties agreed to enter into a deed of variation where the vendor agreed to not issue a notice of default and agreed to the extend the settlement date in return for the payment of an agreed interest amount. There was also a second deed of variation that was of the same effect to extend the settlement date a second time.
The contract eventually settled and the purchaser paid the loan advance interest and default interest in addition to the contract price.
How did the SRO assess the transfer and what did VCAT decide?
Duty was self-assessed on the headline contract price and paid by the purchaser. However, the SRO subsequently issued a re-assessment to also impose duty on both the loan advance interest and default interest by treating these amounts as part of the consideration for the transfer (and issued penalties and interest accordingly).
The purchaser objected and appealed to the Victorian Civil and Administrative Tribunal (VCAT). VCAT decided that whist the loan advance interest formed part of the consideration for duty purposes, the default interest did not.
What did the Supreme Court decide?
The Commissioner appealed the VCAT decision to the Supreme Court. The Supreme Court found that both the loan advance interest and default interest formed part of the consideration for the transfer and duty should therefore be assessed on both additional amounts.
The Supreme Court applied the test set out in the High Court in Commissioner of State Revenue v Lend Lease Development Pty Ltd (2014) 254 CLR 142. In this regard, the Court held that the statutory criterion of consideration ‘for’ the transaction looks to ‘what was received by the vendors so as to move the transfers to the Purchaser as stipulated in the agreement.’
The Supreme Court articulated this test as follows in deciding for the Commissioner:
‘the relevant question is whether, when considered as at the date of transfer, it was only in return for the promised additional payment that the vendors were willing to transfer the property. Whether the purpose of the payment was also the extension of the settlement date is not to the point.’
This case highlights the wider scope of the application of the test articulated in the Lendlease decision in determining the consideration for a transfer of land.
Implications of case for default interest for developers?
Whilst the SRO is yet to comment on the case and what it means for the treatment of default interest, developers should be aware that if they enter into a deed of variation to defer settlement and agree to pay the vendor an additional amount (either in the form of interest or otherwise), there is a significant risk that the SRO would seek to assess duty on the additional payment in addition to the contract price.
The decision could have wider implications for residential lot and apartment sales where it is not uncommon for default interest to be imposed if settlement does not occur on time.
We will await any further guidance from the SRO as to how they propose to administer the implications of this decision at a practical level.
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