Collins & Leahy Ltd v Collector of Stamp Duties [2001] PGNC 75; N2150 (26 November 2001)

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STAMP DUTY – Ad valorem duty – Assessment under S.37(1) & (6) of Stamp Duties Act – Real Property – Sub-Lease agreement containing option to purchase clause – Accompanied by Draft Contract of Sale of Land – Also accompanied by Contract of Sale of plant and stock used in connection with business carried on in the premises – Whether there was an implied covenant or agreement to transfer or sell real property – Whether sale of certain "stock" "deemed to be and chargeable with stamp duty on a transfer on Sale of real property."

Commissioner of Stamp duties (Qld) v. Hopkins [1945] HCA 14; (1945) 71 CLR 351 at 360,
Comptroller of Stamps v. Bucklord [1959] VicRp 72; (1959) VR 517 at 20-21
Norah Mairi v. Alkan Tololo, Secretary for Education [1976] PNGLR 125.
Rennall v. Commissioner of Stamp Duties (Qld) 82 ATC 4496 at 4503.

Texts referred to:
Craies on Statute Law, 6th Ed. 113 – 114
Cheshire’s Modern Law of Real Property (12th Edn) Butterworths, 1976.

INJIA, J.: This is an appeal against assessment of ad valorem duty by the Collector of Stamp Duties under the Stamp Duties Act (Ch. No. 117) ("the Act").

*(A)*	the respondent erred in assessing stamp duty on the Sub-lease in that the assessment was based on the rental for the first year being K549,000 whereas the Sub-lease provided that the rental for the first year was K420,000; and
*(B)*	*(i)*	*the respondent erred in assessing stamp duty payable on Contract for Sale of Stock and Plant at the rate applicable to real property in accordance with Schedule 1 Item 5 of the Act, as –*
		*(a) the respondent failed to take into account sec 37(1) of the Act and mistakenly concluded that the Sublease is deemed to be a transfer on sale of real property by virtue of sec 37(1), and* *(b) the stock and plant is not being sold or transferred to the transferee by reason of the sale of or agreement to transfer real property, and* *(c) the sale or transfer of the stock and plant is not associated in any way with a conveyance of real property,*
	*and therefore sec 37(6) of the Act does not apply to this transaction and therefore the Contract for Sale and Plant is dutiable under Schedule 1 Item 6 at Nil:*
	*(ii)*		alternatively, the respondent erred in assessing duty payable on the Assignment of Interest in Software Licence at the rate applicable to real property in accordance with Schedule 1 Item 5 of the Act insofar as it relates to the value of the stock which is stock-in-trade (being K539,956.69), an amount of K26,997.83.
*(C)*	*The respondent erred in assessing stamp duty on the Assignment of Interest in Software Licence at the rate applicable to real property in accordance with Schedule 1 Item 5 of the Act, as*
	*(i)*		the interest in the software licence is not being sold or transferred to the transferee by reason of the sale or agreement to transfer real property, and
	*(ii)*		the sale or transfer of the interest in the software licence is not associated in any way with the conveyance of real property
	*and therefore sec 37(6) of the Act does not apply to this transaction and therefore the Assignment of Interest in Software Licence is dutiable under Schedule 1 Item 6 at Nil;*

The facts of the case are that Messrs Philip Hockman Seeto and Linda Christina Seeto (Lessors) are the registered proprietors of the business premises situated on Lot 1 Section 22 Kokopo, in the East New Britain Province ("the property"). The lessors conducted merchandise business in the premises under the name "Best Buy Supermarket". On 28/8/00, the lessors entered into a sub-lease agreement with the appellant (lessee) to "sub-let" the property at fixed monthly rental payments. The agreement contained an option for the appellant to purchase the premises. A draft Contract of Sale of Land was annexed to the Sub-lease agreement. If the appellant were to exercise that option, the parties were to execute this Contract of Sale at a later time. The sub-lease document was submitted to the respondent for assessment of duty. The respondent assessed duty on the monthly rental income for the relevant period at K60,548.85 This assessment is subject of appeal ground (A). This ground of appeal is conceded by the respondent. By consent of the parties, the total assessment of K60,548.85 under this item is reduced by K197.50. The appellant is to refund the sum of K197.50 to the respondent.

The second and third grounds of appeal are contested. They relate to assessment on two separate agreements submitted for duty together with the sub-lease agreement. First, there was a separate "Contract for the Sale" of various items of "Stock and Plant" executed between the lessor and the lessee. The total purchase price for the "stock and plant" was K1,358,564.60. The respondent treated all these items as not being "stock-in-trade" and assessed duty under Schedule 1, Item 5 at 5% at K66,143.96. The second separate agreement entitled "Transfer and Assignment of Interest in Software Licence from B & H Consultants" was in respect of 53 computer software equipments valued at K24,000.00. Total duty for this item was assessed under Schedule 1, item 5 at 2% at K482.00.

The statutory empowering provisions under which the respondent assessed duty is section 37(1) and (6)(a), which provide:

(a)	a reference in this Act to real property includes a reference to goodwill or chattels not being stock-in-trade, held or used in connexion with a business carried on in connexion with the real property---
(i)		that, by reason of the sale of or agreement to transfer the real property to the transferee, is or are sold or transferred to the transferee; or
(ii)		the sale or transfer of which to the transferee forms, in the opinion of the Collector of Stamp Duties, substantially one transaction with the conveyance of real property; and

The Collector’s reasons for the assessment as stated in his decision on objection to assessment is as follows:

"The decision was based upon the stamp duty assessment per Sections 37(1)(b) ‘in which a covenant or agreement for the transferor sale of real property is expressed or implied, shall be deemed to be and is chargeable with stamp duty as a transfer on sale of real property to the lessee". And Section 37(6) where real property includes a reference to goodwill or chattels not being stock-in-trade, held or used in connexion with a business carried on in connexion with the real property, forms one transaction.

As the sublease was lodged with other documents, such as a contract for sale of stock and plant, assignment of license and contract for sale of stock, they were then, assessed on different Items of the Stamp Duty Act Schedule 1." (my emphasis)

Mr. Pryke of counsel for the appellant makes submissions in two parts. First he submits that the Collector erroneously assessed duty under Section 37(6) without taking into account s.37(1) of the Act because this transaction was not one of conveyance or transfer of real property but a sub-lease of real property and that the Sale of stock and plant and equipments were not sold by reason of transfer of real property.

The second part of his submission relates to assessment on stock and plant items themselves. The appellant does not contest the assessment for the store items valued at K19,977.91 and plant valued at K798,630.00 both of which duty was assessed at 5%. The appellant only disputes the assessment for the stock valued at K504,151.34, which the respondent treated as "stock-not-in-trade" and assessed duty at 5% as well. This particular item he submits was "stock in trade" and by virtue of section 37(1) and (6) of the Act, they are exempt from duty under item 6 of the Schedule 1 of the Act. Therefore, he submits duty erroneously assessed for these items at K66,137.96 should be refunded to the appellant.

Ms Bre of counsel for the respondent submits that pursuant to s.37(1), the sale of stock and plant accompanying the sub-lease agreement are payments in addition to rent and deemed to be transfers of real property and is subject to a higher rate at 5% under item 5 of Schedule 1. She submits in deciding whether a particular lease agreement may be deemed to be a transfer, the Collector is entitled to look at the substance and not the form of the instrument. She refers to the Australian cases of Commissioner of Stamp duties (Qld) v. Hopkins [1945] HCA 14; (1945) 71 CLR 351 at 360, Comptroller of Stamps v. Bucklord [1959] VicRp 72; (1959) VR 517 at 20-21 and Rennall v. Commissioner of Stamp Duties (Qld) 82 A.T.C 4496 at 4503. She submits that eventhough the head transaction on its face was not a conveyance or transfer on sale of real property but a sub-lease agreement, when the option to purchase clause in the Sub-lease agreement is read together with the draft Contract for Sale of Land annexed to the sub-lease agreement, and the sale of "stock" the payment for the stock items valued at K504,154.34 this payment in addition to rent made pursuant to an implied agreement to sell the premises to the lessee, and therefore they are deemed to be transfer of real property and chargeable under this item 5 at 5%.

Ms Bre submits that from the broad definition of "real property" in S.1(1) includes the transfer of "any interest in land including ... leasehold" land, it can be implied from the option to purchase clause in the sub-lease agreement that the payments made for the plant and stock were in effect in furtherance of an intention of the parties to sell the premises sub-leased on the occasion the option to purchase is exercised by the appellant/lessee. Mr. Pryke submits this was purely as sub-lease agreement with a standard option to purchase clause coupled with an unsigned Draft Contract of Sale of Land and the stock and plant sold were separate items on their own.

The meaning of S.37(1) and (6) is not really in issue before me. I accept Ms Bre’s submissions that S.37(1) and (6) are tax avoidance provisions, subsection (1) being the charging provision and subsection (6) being an interpretation provision to the phrase "real property" used in subsection (1). The pivotal issue before me is whether in the circumstances of the present transactions, there was an implied agreement between the lessor and the lessee to transfer or sell the property pursuant to which the "stock" in question, whether "stock in trade" or "stock not in trade" was sold. If the answer to this issue is "NO", then that is the end of the inquiry. If the answer is "YES", then it is necessary to determine the question of whether the stock "were stock in trade" or "were not stock in trade". If they were "stock in trade", then even if they are sold or transferred with a transfer or sale of real property, they are exempt from duty. The converse is that "stock in trade" will form part of the transfer of the real property.

In interpreting and applying this tax legislation, it is convenient to remind myself of an important principle of statutory interpretation laid down by the Supreme Court in Norah Mairi v. Alkan Tololo, Secretary for Education [1976] PNGLR 125. The Supreme Court said tax provisions must be strictly construed. In the joint judgment of Prentice DCJ and Williams J, at p.139 they adopted the following text for Craies on Statute Law, 6th Ed. 113 – 114:

"In a taxing Act one has to look at what is clearly said. There is no presumption as to tax. Nothing is to be read in, nothing to be implied over cases, only look fairly at the language used". And again "If the case is not brought within the words of the Statute, interpreted according to their natural meaning, and if there is a case which is not covered by the natural meaning, that can only be cured by legislation and not by any attempt to construe it benevolently in favour of the (State)".

At the same time, I agree with Ms Bre that S.37(1) and (6) are tax avoidance provisions and one has to look at all the transactions and documents together and their substance and not merely their form.

In my view, S.37(1) clearly speaks of a lease for land in which there is a "covenant" or "agreement" to sell the property is either "expressed or implied". In the present case, when applying S.37(1), I am of the view that the payments received for the sale of plant and stock were in addition to the rent under the sub-lease. I am also satisfied that the option to purchase clause coupled with the draft contract of sale of land amounted to an "implied" covenant or agreement to transfer or sell the premises to the appellant/lessee at a later date when the lessee exercised the option. Not all sub-lease or lease agreements contain options to purchase clauses because once an option to purchase is granted, it confers on the guarantee or lessee a proprietary interest in the land. An option to purchase in a lease is not a mere clause in the agreement without any value because this affects the rental value of the property. And in return it vests an equitable interest in favour of the lessee. There is ample authority at equity for this view. It suffices to re-state what the learned author in Cheshire’s Modern Law of Real Property (12th Edn) Butterworths, 1976, at p.128.

"An option to purchase is an offer to sell which "the grantor is contractually precluded from withdoing so long as the option remains excessible." A contract to purchase is formed when the notice exercising the option is given to the grantor. Although the option does not itself form a contract, it does create an immediate equitable interest in favour of the grantee as soon as it is granted. The grantee’s right to call for a conveyance of the land is an equitable interest, as far as the grantor is concerned, "his estate or interest is taken away from him without his consent; and the right to take away being vested in another, the covenant giving the option must give that other an interest in the land" (see English cases listed at footnotes No. 5 and 6) at bottom of the page 128).

The term "real property" is defined in S.1(1) of the Stamp Duties Act as including "any equitable interest". In the present case, it is clear that the option to clause was accompanied by a Draft Contact of Sale and the sale. The sale of substantial capital stock and equipment situated in the property and used in connection with the business conducted on the property shows the strength of the equitable interest conferred on the lessee. There was clearly an implied agreement to transfer or sell the property to the appellant pursuant to which the capital plant and equipments were sold. In the light of these facts, when one looks at the transfer of what appears to be the entire fleet of plant and stock used in the premises to conduct the business, one is left with the unavoidable conclusion that they were all formed substantially one transaction with the conveyance of equitable interest in the property. The execution of the Contract of Sale of Land would have become a mere formality when the lessee exercised his option to purchase. For these reasons, I am satisfied, as did the respondent, that the payments received for plant, equipment and stock were payments received in addition to rent and in pursuance of an implied covenant or agreement to sell or transfer the premises to the lessees as stipulated under S.37(1).

In relation to the second issue of whether the plant and stock items taxed at K504,154.34 were stock-in-trade, if they are not stock-in-trade, then they are deemed to be and chargeable as part of sale of real property under S.37(1). If they are stock in trade, they are chargeable as part of real property under S.37(1).

What I gather from the reasons given by the respondent is that it appears that no determination was made on whether the stock he was asked to assess duty on were either "stock-in-trade" or not. It appears that the respondent having determined the first issue, regarded all the items of stock in question as automatically becoming dutiable as stock-not-in-trade and therefore chargeable under Schedule 1 item 5 without really going through each item and determining their status. It also appears to me that the appellant did not clearly set out the stock items and clearly identify which items were stock-in-trade or not stock in trade and why, to assist the respondent make that determination. For this reason, I will allow this ground of appeal but remit the matter to the respondent to make that determination and apply the correct duty rate. I also order the appellant to re-submit a list of the same stock items in question indicating if they are stock in trade or not stock in trade and where appropriate, stating why that is so, within 21 days..

The next item in issue is on the assignment of licence. Mr. Pryke submits a licence is not a lease nor a conveyance nor a chattel or goodwill and therefore cannot come under any definition of real property. He submits the correct duty rate was under Schedule 1 Item 6 and no duty payable. Ms Bre submits that the assignment of software licence was a "piece of property" not being stock in trade and treated as part of the deemed transfer of real property and correctly dutied under item 5. This submission of Ms Bre is a fallacy. If this property item is not stock-in-trade, then it is clearly exempt from duty under item 6. For this reason, I allow this ground of appeal. I order that the respondent refund the appellant the sum of K482.00 paid from this item.

________________________________________________________________________
Lawyer for the appellant : Pryke & Bray Lawyers
Lawyer for the respondent : Ms. Bre

(1)	A Lease for land---
(a)		for which a consideration other than the rent received is paid or agreed to be paid; and
(b)		in which a covenant or agreement for the transfer or sale of real property is expressed or implied,
shall be deemed to be and is chargeable with stamp duty as a transfer on sale of real property to the lessee.

National Court of Papua New Guinea

Collins & Leahy Ltd v Collector of Stamp Duties [2001] PGNC 75; N2150 (26 November 2001)