One of the more contentious issues associated with the compulsory acquisition of land in NSW is the issue of stamp duty, and whether or not a dispossessed land owner is entitled to claim – in addition to the other heads of compensation available – stamp duty and financial costs associated with acquiring a replacement property under the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act).  The short answer is that if the acquired land was used by the former owner as his or her principal place of residence, they would be entitled to stamp duty and the financial costs associated with acquiring a replacement property.  If the acquired land was held by the land owner as a passive investment property, generally speaking, the dispossessed land owner would not be entitled to stamp duty or their financial costs associated with acquiring a replacement property.  A series of recent decisions of the Land and Environment Court have further considered the circumstances in which “stamp duty” and “financial costs” are payable, offering clarification and guidance on the issue, if not necessarily comfort to dispossessed investors.

The Just Terms Act

Stamp duty and financial costs are categories of “disturbance” under s55(d) of the Just Terms Act.  In addition to market value and various other heads of compensation, they are payable in certain circumstances, provided they satisfy the statutory criteria set out in s59(1)(d), (e) and (f) of the Just Terms Act:

(d) stamp duty costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the purchase of land for relocation (but not exceeding the amount that would be incurred for the purchase of land of equivalent value to the land compulsorily acquired)

(e) financial costs reasonably incurred (or that might reasonably be incurred) by those persons in connection with the discharge of a mortgage and the execution of a new mortgage resulting from the relocation (but not exceeding the amount that would be incurred if the new mortgage secured the repayment of the balance owing in respect of the discharged mortgage)

(f) any other financial costs reasonably incurred (or that might reasonably be incurred), relating to the actual use of the land, as a direct and natural consequence of the acquisition.

Pivotal to the entitlement to claim stamp duty and financial costs under the Just Terms Act is the requirement to establish that relocation costs will likely be incurred or that financial costs will likely be incurred, relating to the “actual use” of the property. Herein lies the challenge for dispossessed property owners who held their property in an investment or passive investment capacity, who arguably had nothing to “relocate” and were not physically “using the land”.

Speter v Roads and Maritime Services [2016] NSWLEC 128

In the recent decision of Speter v Roads and Maritime Services [2016] NSWLEC 128, the former land owners claimed, amongst other things, stamp duty and financial costs associated with procuring a replacement property.

The former owners purchased the land in 1988.  They lived at the premises for some years.  In 1994 they obtained development consent from Warringah Council to use the premises as “professional consulting rooms”.  Thereafter, the property was leased out for commercial gain.  As at the date of acquisition the property was under a long term lease to Health Administration Corporation, a NSW Government entity that was using the subject property for medical consulting rooms.

At the hearing, the former owners made two alternate submissions in relation to the interpretation of “relocation”.  Firstly, the former owners submitted that “relocation” is not restricted to the relocation of persons, but could be expanded to anything that could qualify as relocation. The former owners noted that previous cases have found that this conceptually includes the relocation of businesses.  It was submitted that the former owners’ investment in the property was a business, as the Applicants were “involved in an enterprise” that derived a profit, and that the investment could therefore be relocated.

In the alternative, the former owners submitted that because the correct construction of “relocation” was not restricted to persons or businesses, the relocation of an investment that was not a business could also qualify. The former owners contended that:

[T]hey operated an investment business, and submitted that this constituted an actual use of the land. It was submitted that the applicants’ investment was not a passive investment, as the subject property was put to the “actual use” of generating income, and was not passively held only for capital gains.

The Court disagreed.  Justice Robson observed:

[87] The applicants’ primary submission on this point was that their investment was a business, and so could be relocated. I do not accept this. Whilst some investments may be businesses, this is not necessarily the case. Operating a business requires some level of engagement with a commercial enterprise. Whilst the applicants did derive an income from leasing the subject property, they were not engaged in any enterprise beyond passively receiving that income…

[88] However, if I am wrong on this point, I also find that to the extent that the applicants operated a business, it has not been relocated. When a business sells a land asset, compulsorily or otherwise, it is not forced to relocate unless it was physically operating from that land asset. The applicants, who had leased out the entire property to the NSW Health Administration, did not operate any business from the subject property. Rather, if it were considered that the applicants were engaged in business, that business would be operated from another location which had invested in the subject property. As such, the applicants’ business would not have been relocated in any event.

Justice Robson went on to distill the relevant principles applicable to claims for stamp duty and financial costs associated with relocation under the Just Terms Act:

  • the term “financial costs” should be interpreted broadly: McDonald v Roads and Traffic Authority of New South Wales (2009) 169 LGERA 352.
  • the actual use must exist in fact at the time of the acquisition, and cannot be either “a future use or potential use”: Blacktown Council v Fitzpatrick Investments [2001] NSWCA 259 at [26]-[27].
  • actual use can include “land banking” for future development of that land and construction that is being conducted on the land at the date of acquisition: Al Amanah College Inc v Minister for Education and Training (No 2) [2011] NSWLEC 254 at [44].
  • an Applicant must be more than “a passive investor”: Blacktown Council v Fitzpatrick Investments [2001] NSWCA 259 at [34].
  • holding land as an “investment rather than as trading stock” is not an actual use of the land: Cannavo v Roads and Traffic Authority of New South Wales [2004] NSWLEC 570 at [46].

Justice Robson held that the former owners “did not established that they have any involvement with the property other than deriving an income and potentially making a capital gain”. He accepted the submission of RMS that the Applicants were “the classic examples of a passive investor”, and found that they were not entitled to stamp duty or financial costs associated with any replacement investment property.

Hatzivasiliou v Roads and Maritime Services [2017] NSWLEC 9

In the recent decision of Hatzivasiliou v Roads and Maritime Services [2017] NSWLEC 9, which followed the decision of Speter, the former land owners claimed, amongst other things, stamp duty associated with procuring a replacement property, in the amount of $238,490.00.

Relevantly, the property was acquired by the former owners in 1998, and it was thereafter leased by the former owners as a tyre repair outlet.  At the date of acquisition, the property was under lease to Jax Tyres.

Again, there was no dispute that the property was held by the former owners as an investment property.  Seeking to distinguish themselves from the findings of Speter, however, the former owners were able to demonstrate a relatively high degree of involvement in their investment properties, including the subject property. That involvement included:

  • managing rental payments including issuing reminders and following up with tenants.
  • managing and paying outgoings including land tax, council rates, water rates, insurance and repairs.
  • managing reimbursement of outgoings from the tenant(s) including issuing tax invoices and following up payment.
  • managing and negotiating terms of leases including renewal options.
  • being the point of contact for tenant complaints, queries and issues relating to the properties.
  • visiting the properties to discuss any issues and inspect any damage or work that is proposed by the tenant; and
  • arranging repair and maintenance of the properties.

The Court acknowledged these uncontested assertions by the former owners regarding their involvement in the management of the property, as “active investors” as opposed to “passive investors”.  However, the Court was not persuaded that their involvement constituted “actual use” of the land.  Justice Pain observed:

[144] I agree with the RMS that being personally active in collecting rent and other management activities is not an actual use of the subject land over and above the leasing of the land. The circumstances are not distinguishable from Speter at [87]-[92] where a comprehensive consideration of a number of relevant authorities was helpfully undertaken. As I can add nothing further to that analysis, I gratefully adopt the reasoning of Robson J. That part of the Applicants’ disturbance claim is not claimable under ss59(1)(c)-(d) and part (e) or in the alternative under (f).

In the circumstances, the Court declined to award the former owners stamp duty or financial costs associated with any replacement investment property.

Rocco Fraietta v Roads and Maritime Services [2017] NSWLEC 11

In the recent decision of Rocco Fraietta v Roads and Maritime Services [2017] NSWLEC 11, which again followed the decision of Speter, the former land owner claimed, amongst other things, stamp duty and financial costs associated with procuring a replacement property, under s59(1)(d) and (e) and, in the alternative, s59(1)(f) of the Just Terms Act (similar to the approach adopted in Speter and Hatzivasiliou).

In this case, the former landowner was able to paint a significantly different picture regarding his involvement with the acquired property, for the purposes of demonstrating “actual use” as opposed to “passive use”.  The former owner deposed that he had purchased the property in 1991 from the NSW Department of Main Roads. He deposed that he:

  • intended to build a stone house in the south of the property.
  • collected stone blocks, bricks and other building material over the past 25 years that he has stored on the property.
  • spent many hours over the past 10 to 15 years dealing with weed infestation.
  • purchased an excavator in 2011 which he intended to use to develop the property, which he stored on the property.
  • had ceased “plans” to build the stone house when his mother fell ill approximately three years prior to September 2016, and that he had “planned to recommence” these plans in May-June 2014 after this mother passed away in December 2013.

On the facts of the case the Court was satisfied, in this instance, that the former owner’s association with the land was more than passive, and that the former owner was “involved in the actual use of the land”.  The “preparation” of the site for future development, albeit arguably modest (the deposit of a large pile of stones on the property and some weed management over some years) was critical to the Court’s finding.

The Court held that, as the former land owner did not reside on the land, there was no basis to claim relocation or financial costs under ss59(1)(d) or (e) of the Just Terms Act.

[170] Relocation requires, necessarily, that something be relocated. The intention to purchase a replacement property alone is insufficient, unless something is also relocated, whether it be a person, a business or physical objects. As noted above, the applicant has not personally been relocated. Whilst certain physical items on the property have been relocated, this has occurred without the need for the applicant to purchase another property or take out another mortgage, whatever his intentions may be. I therefore find that there has been no relocation that would enliven any requirement to compensate the applicant pursuant to ss59(1)(d) and 59(1)(e) of the Just Terms Act.

However, the Court then considered the claim under s59(1)(f) of the Just Terms Act, which provides that a dispossessed land owner is entitled to “any other financial costs reasonably incurred (or that might reasonably be incurred), relating to the actual use of the land, as a direct and natural consequence of the acquisition.”

Justice Robson observed that, consistent with the authorities, the term “financial costs” should be interpreted broadly.  In the present case, his Honour was satisfied that the relocation costs related to the “actual use of the land”, and “would likely involve a new mortgage, the payment of stamp duty and the use of a conveyancer who will charge a fee.”

The Court awarded compensation accordingly, including stamp duty and associated financial costs associated with procuring a replacement property.

Konduru t/as Warringah Road Family Medical Centre v Roads and Maritime Services [2017] NSWLEC 36

In the more recent decision of Konduru, [^1] the former land owners of 40-42 Bantry Bay Road, Frenchs Forest, claimed, amongst other things, stamp duty for a replacement property, as part of their investment portfolio.

The Applicants’ contended that they undertook all the relevant “management tasks” associated with the investment property, and were more than mere passive investors.

The Respondent acquiring authority resisted the claim, based on the Court of Appeal authority of Blacktown Council v Fitzpatrick Investments [2001] NSWCA 259, which the Respondent asserted was authority for the proposition that where an applicant is characterised as a passive investor, there was no entitlement to reimbursement of stamp duty or related costs under the Just Terms Act.

Justice Moore agreed with the Respondent.  His Honour went on to cite the recent authorities of Speter and Hatzivasiliou in support of the reasons for rejecting the claim:

[107 I am satisfied that this is the correct approach based on authority. Indeed, the nature of this, and the reasons for adopting it, were recently summarised by Robson J in Speter v Roads and Maritime Services [2016] NSWLEC 12 where his Honour took the approach advocated by the RMS in these proceedings… Indeed, even if I had any lingering doubt as to its correctness, the recent following of this approach by his Honour in Speter and by Pain J in Hatzivasiliou v Roads and Maritime Services [2017] NSWLEC 9 would mean that, even if I had some vestige of doubt as to the correctness of the approach (which I do not), comity would oblige me to follow their reasoning to the same conclusion, unless I felt that there was compelling reason not to do so.

Why are passive investment properties treated differently?

The issue for many dispossessed land owners is why the law treats investment properties so differently, bearing in mind that stamp duty levies and other financial costs associated with purchasing a replacement property will be substantial, and unavoidable (unless, in the circumstances, the dispossessed property owner elects to invest in something other than real estate, which may or may not incur some other tax or levy in any event).

The reasoning behind the approach, reflected in ss59(1)(c)-(f) of the Just Terms Act, is that ownership of an “investment property” is unrelated to any actual use of that property, strictly speaking.  The money paid for the “investment property”, the reasoning goes, could have been put towards some other investment, such as shares or bonds.  When the investment property is compulsory acquired, the investor is left with the choice of reinvestment in the property market or some other investment.

The Court has reaffirmed this reasoning in various authorities.  In the decision of Sebastian Cannavo and Alfia Jennifer Busa v Roads and Traffic Authority of New South Wales [2004] NSWLEC 570, Justice Talbot referred, at para [42], to the often cited commentary of Lord Denning in Harvey v Crawley Development Corporation [1957] 1 QB 485:

Supposing a man did not occupy a house himself but simply owned it as an investment. His compensation would be the value of the house. If he chose to put the money into stocks and shares, he could not claim the brokerage as compensation. That would be much too remote. It would not be the consequence of the compulsory acquisition but the result of his own choice in putting the money in stocks and shares instead of putting it on deposit at the bank. If he chose to buy another house as an investment, he would not get the solicitor’s costs on the purchase. Those costs would be the result of his own choice of investment and not the result of the compulsory acquisition.

Of course, the former owners of investment properties, having had their properties compulsorily acquired, do not necessarily see it this way.  For many people, their principal investment strategy is property, and when their property is compulsorily acquired, they purchase a new investment property, and incur all the associated replacement costs associated with that acquisition, including stamp duty.  Those costs would not have been incurred but for the compulsorily acquisition.   It represents actual financial loss to their investment portfolio.

The legislature’s approach to stamp duty in this area of law contrasts with the approach taken by the Australian Tax Office to capital gains tax, which is ordinarily payable upon the sale of an investment property.  The ATO has published a number of tax rulings effectively granting relief for dispossessed land owners from the requirement to pay capital gains tax on the compensation received (by way of deferral or rollover provisions, provided certain re-purchase conditions are satisfied), whether those proceeds were received via sale to the acquiring authority or compulsory process.  In other words, the ATO recognises that land acquired by compulsory process cannot be regarded as an ordinary transaction.  No such relief or credit is available in relation to the issue of stamp duty, should those who have lost their investment property elect to purchase a replacement property.

Practice verse law

Interestingly, stamp duty and related financial costs associated with the acquisition of a replacement investment property are typically offered up by acquiring authorities during the negotiation phase, prior to the compulsory acquisition taking place.  Such costs are also typically awarded by the Valuer-General in compensation notices issued by the Valuer-General relating to investment properties, whether under instruction or as a matter of discretion.

However, whatever the approach adopted by acquiring authorities or the Valuer-General in relation to stamp duty and financial costs associated with investment properties, this approach does not necessarily accord with the application of the Just Terms Act, to which the Court is bound to apply.

That is why, often enough, an appeal to the Land and Environment Court seeking a review of the Valuer-General’s determination of compensation associated with the compulsory acquisition of an investment property (which may include a component for stamp duty), may need to factor in the possibility of not being awarded stamp duty by the Court.

 

[^1]: The proceedings involved three related entities.  The full citation is Konduru t/as Warringah Road Family Medical Centre v Roads and Maritime Services; Konduru v Roads and Maritime Services, Konduru v Roads and Maritime Services [2017] NSWLEC 36.