You act for Tom who has been running a farming business since the early 1980’s, grazing sheep. Unfortunately for Tom his wife left him many years ago not long after their twins Gerrie and Matthew were born. Matthew and Gerrie both went to live with their mother however after Gerrie’s 10th birthday Tom had full custody of Gerrie. Times were tough, particularly whilst Gerrie was at school.
Tom never had any help from family with the farm work and could not afford to employ anyone. Things improved when Gerrie finished school and started working on the farm, and during the last ten or so years the business took off and started to become very successful, largely due to the innovative ideas of Gerrie who had just finished studying agricultural engineering in Sydney.
During this time business was booming and Tom decided, as Gerrie was doing such a brilliant job on the farm, and he had already hit retirement age, to gift the farm to Gerrie.
However Gerrie, being a hard worker and not wanting to take anything for granted told Tom that she would only take over the farm if she bought it from him. There was also a risk that Matthew would get upset if he found out she got the farm for nothing and could potentially challenge Tom’s will. They agreed to a price of $1.5M.
Tom and Gerrie come to see you for advice on the transfer. The accountant has already told you that there is no CGT on the transfer because the land is pre CGT. You tell Tom and Gerrie that stamp duty is not an issue either because the intergenerational farm exemption should apply. You ask Gerrie how she is going with the bank and she tells you that the bank is reluctant to lend her the money due to not having any assets in her name. Tom then offers to provide Gerrie with vendor finance, payable by 10 annual instalments at a concessional interest rate which Gerrie accepts. You advise that because the abolition of mortgage duty is now not taking place until 1 July 2016, mortgage duty will be payable on the amount secured. You tell Gerrie that that Mortgage duty on $1.5M is $5,941.
You prepare the necessary documents and have them signed and stamped.
The transfer comes back stamped exempt from duty because, as you thought, the intergenerational provisions in the Duties Act applied: (in accordance with s274(1) the transferor is a member of the transferee’s family, the land was used for primary production with a business carried on by the transferee or member of the transferee’s family and the business is to continue to be carried on by the transferee). You advise Gerrie that she just has saved $67,990.
However, Gerrie has paid $5,936 which was not necessary.
In the mortgage document you described the debt from Gerrie to Tom as a loan, when in reality the debt is not a loan; it is an unpaid purchase price.
Section 210 of the Duties Act 1997 (the “Act”) states that the amount of duty chargeable is calculated by reference to the “amount secured” by it at the liability date. The “amount secured” by a mortgage is the amount of any advances made under an agreement, understanding or arrangement for which the mortgage is security, as defined in section 206 of the Act.
Under section 206 of the Act an “advance” means the provision or obtaining of funds by way of financial accommodation, by means of either (a) a loan or (b) a bill facility.
As the mortgage is only securing unpaid purchase monies through a vendor financing situation, it is not considered that an "advance" of monies has occurred and therefore the mortgage does not secure any amount for duty purposes.
The mortgage therefore should have been stamped with minimum duty of $5.00 in accordance with section 210(2)(a) of the Act. You would then have saved $5,941, as well as $67,990.
It is important to note however that if there is default on the mortgage, it is only enforceable to the amount of $16,000, being the minimum duty amount. To recover the full $1.5M here, the mortgage would have to be up stamped and full duty paid.
It is always important to check the sections of the Act carefully when advising clients on duties. If in doubt, run by the OSR first.
Section 203A of the Act states that “Mortgage duty is abolished on and from 1 July 2016” – we’ll see!
This article is general information only and should not be relied on without obtaining further specific information.
Author: Michaela Schmidt