Does Late Settlement Interest Affect the Dutiable Value of the Property?

Stamp Duty on a property purchase is calculated on a property’s dutiable value but does late settlement interest resulting from a delayed settlement, and other payments form part of the dutiable value? This value is generally the price a purchaser paid for the property or market value, whichever is greater. It includes any GST payable and recent case law tells us about the extra payments.

The decision of Commissioner of State Revenue v 1043 Melton Highway Pty Ltd [2020] VSC 820 (1043 Melton case)

This case looked into whether the additional amount received as ‘default interest’ and ‘loan advance interest’ because of a purchaser’s failure to make advances to the vendors on the due dates under a contract should be included in consideration of the transfer.

The facts of the case are:

• An original contract was signed by Universal Brothers Developments Pty Ltd (Universal) as the purchaser of a property in Plumpton on 18 November 2010 for a price of $7,350,000, with a deposit of $735,000 and a balance of $6,615,000 due at settlement.
• The original contract provided for settlement to occur on 18 November 2015 and contained special conditions that required Universal to make payments to the vendors in the amounts of $735,000 due on 18 May 2012 and 18 May 2013 (cash advances).
• The original contract further provided that interest will accrue from the date that Universal fails to pay the cash advances.
• Universal paid both the cash advances however did not pay them on the dates they were due and, as a result, was required to pay loan advance interest totally, which was $127,744.17.
• Universal failed to obtain a loan to settle by the due date, and a deed of variation (first deed of variation) was entered with Universal and the vendor to allow an extension of settlement. The deed of variation provided that Universal agreed to pay interest on the balance of $5,145,000 at a rate of 2% per annum plus the rate fixed by section 2 of the Penalty Interest Rates Act 1983. Universal was also required to pay reasonable costs and expenses, including legal costs.
• The first deed of variation provided that if Universal did not comply and pay the balance and interest by 18 November 2016, then the vendor may serve a notice of default per the original contract.
• On 20 December 2015, Universal nominated a related company, 1043 Melton Highway Pty Ltd (1043 Melton Highway).
• On 22 February 2016, 1043 Melton Highway paid $147,918.75 in default interest per the first deed of variation and then equal amounts on May and August 2016.
• 1043 Melton Highway again was not able to settle due to financing issues, and a second deed of variation (second deed of variation) was entered into, which allowed for settlement to occur on 28 April 2017. The second deed of variation allowed for further payments of default interests.
• At settlement on 28 April 2017, 1043 Melton Highway paid the vendors a total sum of $857,522.98 as default interests.
• The Commissioner of State Revenue (Commissioner) issued a Notice of Reassessment on 19 September 2018, for additional duty of $47,164 for default interest together with penalties and interest.
• The matter went before VCAT on 1 April 2020 and the Tribunal decided in favour of the Commissioner that the loan advance interest was to be included as consideration and part of assessment but not the default interest.
• The Commissioner appealed to the Supreme Court of Victoria because it sought for the default interest to be included and 1043 Melton Highway cross-appealed.
• On 9 December 2020, Kennedy J found that the loan advance interest payments formed part of the consideration which moves the transfer of the property because the Vendors would not settle in the absence of receipt of such payments. The Court found that the default interest also formed part of the consideration because the vendor would have terminated the contract if such payments were not paid.

The case highlights that a late settlement and settlement failing and being rescheduled where the purchaser is charged interest form part of the consideration.

The State Revenue Office (SRO) said on 20 June 2022 that as an interim position (12 months from 1 July 2022), a minimum dutiable value of $5,000 for late settlement interest will require a re-lodgement of reassessment. This only applies to contracts entered into after 1 July 2022.

Late settlement interest should not be included in Duties Online; however, an obligation to notify the SRO by email and re-lodge the transaction for reassessment applies within 30 days after settlement.

The SRO advises that the late settlement interest will not form part of the dutiable value assessment for duty concessions and exemptions such as First Homeowner, Principle Place of Residence, Off-the-Plan, Pensioners and Young Farmers.

It is interesting to note that the reasonable costs and expenses under the variations were not assessed by the Commissioner. The Tribunal in the 1043 Melton case considered that the Commissioner had not sought to impose duty on reasonable costs and expenses associated with the variation was consistent with the position that not all promises under a contract form part of the relevant consideration to stamp duty.

While it is a positive sign for taxpayers that the Tribunal has adopted such a view, sale and purchase  document should include other promises such as, but not limited to, payment of commissions to a real estate agent or promises to pay third party expenses or interest arising out of a terms contract.