Personal Property Securities Act 2009 (Cth) (PPSA) -
two year transition period ends on 31 January 2014
A secured party with a transitional security interest that is
not registered on the Personal Property Securities Register
(PPSR) should register that interest no later than
31 January 2014. This will ensure that the interest is perfected
and preserve the priority of that interest.
For example, if you have an interest that arose prior to 30
January 2012 and was created under:
- a lease or hiring arrangement;
- a PPS lease (eg a lease of a car for more than 90 days or, for
most other goods, for more than one year);
- a retention of title supply; or
- some commercial consignment arrangements,
then you will need to register your security interest if your
arrangement with the grantor party is continuing and you want to
preserve your right to reclaim your goods.
Author: Lyall Mabin, Cornwall Stodart
Contact: Ian Sinclair, Cornwall
Stodart
The effect of a 'retention of title' clause on unperfected
goods
Background
The New South Wales Supreme Court recently considered the
relationship between a retention of title (ROT)
clause and section 267 of the Personal Property Securities Act
2009 (Cth) (PPSA).
In Crossmark Asia v Retail Adventures Pty Ltd [2-13]
NSWC 55, the court found that despite goods being supplied on a ROT
basis (generally, title in all goods supplied is retained until the
purchase price is paid in full), if they have not been perfected on
the Personal Property Securities Register (PPSR),
they become the property of the customer immediately before either
the customer becomes bankrupt or the company is wound up.
Case summary
Crossmark and Retail Adventures Pty Ltd (RAPL)
had entered into two separate agreements regarding the sale and
purchase of convection ovens and electric fans. A dispute then
arose as to the terms of the supply agreements between the parties.
On 26 September 2012, Crossmark demanded payment from RAPL prior to
delivery of the goods, on the basis of RAPL's 'very high risk'
credit rating. On receiving the demand RAPL cancelled all orders,
which Crossmark accepted. On 26 October 2012, administrators were
appointed to RAPL. During this time, Crossmark had failed to
perfect its security interest in the goods in accordance with the
PPSA requirements.
The court ultimately found in favour of Crossmark. The
applicable terms on which the agreements were based were those set
out in the signed agreements incorporating the ROT clause and not
those in subsequent purchase orders. Additionally, the contracts
had been properly terminated after shipment but before delivery.
RAPL had no legal title in the goods at the time of its
insolvency.
As a result, Crossmark was entitled to regain possession of the
goods because both sale agreements had been terminated before RAPL
had gone into administration. Accordingly, section 267 did not
apply because there was no charge over the goods that could vest in
RAPL.
Comment
The judgment emphasises the necessity for suppliers to be
absolutely certain as to the terms of their supply agreements. If
the court had accepted the terms provided by RAPL in the purchase
orders as amending the signed agreements, the legal title in the
goods would have vested in RAPL, leaving Crossmark as an unsecured
creditor. Additionally, regardless of the presence of a ROT clause,
if the goods have not been properly registered, legal title will
pass to the purchasers immediately before their insolvency.
Consequently, the case highlights the need for suppliers to
perfect their ROT goods by registering them under the PPSR. By
doing so, suppliers avoid the potential to lose their security
interest in the goods supplied under the ROT agreement or having to
prove their retention of title in court.
Author: Lyall Mabin, Cornwall Stodart
Contact: Ian Sinclair, Cornwall
Stodart
Incorporating exclusion clauses via prior dealings
Background
In La Rosa v Nudrill Pty Ltd the Western Australian
Court of Appeal found that incorporating an exclusion clause on the
back of an invoice was not sufficient notice to bind the parties,
despite there being a long working relationship between them. At
issue was whether the clause had been accepted and treated as
contractual by the conduct of the parties.
Case summary
Mr La Rosa was contracted by Nudrill to transport a drill rig
from Perth to Kalgoorlie. Towards the end of the journey the drill
tipped off the back of the trailer, causing significant damage.
Nudrill sued Mr La Rosa for damages as a result of Mr La Rosa's
negligence. The trial judge awarded damages against Mr La Rosa, who
appealed to the Western Australian Court of Appeal.
The usual practice between the parties had been to enter into an
oral contract and on completion of the delivery, Mr La Rosa would
invoice Nudrill. Mr La Rosa argued that as the result of their
prior dealings, Nudrill should be taken to have accepted that any
future services provided would be subject to the terms included on
the back of the invoice. The court had to consider whether the
contract was subject to the exclusion clause, therefore excluding
Mr La Rosa for any damage or loss to property by act, default or
negligence.
In coming to the decision, the court concluded that neither the
timing of the notification of the clause nor the question of
whether the exclusion clause was part of a past contract were
determinative factors. Rather, it was the conduct of the parties
that had not reflected the knowledge and acceptance of the term.
The court explained that by receiving the invoice there was no
proof that Nudrill accepted the terms of the exclusion clause. An
invoice including terms after services are rendered cannot
constitute contractual terms of an agreement. In this sense, it was
too late for Nudrill to negotiate or refuse the terms of the
contact. In addition, the circumstance in which Mr La Rosa provided
the invoice, only after services had been performed, was indicative
of the nature of the document - to demand payment for work
completed, and not to add a 'last shot' to the existing terms.
In the end there was no evidence to suggest that Nudrill had in
fact accepted the exclusion clause as part of the contract. Had
Nudrill's attention been drawn to the back of the invoice, no doubt
the result would have been different.
Comment
Regardless of the nature of the relationship between parties, it
is necessary to include exclusion clauses within the main body of
the contract or else by sending a document that contains or refers
to the important terms and conditions, particularly in 'repeat
contracts'. It is essential to make the other party aware of the
existence of an exclusion clause, and to accept it as part of the
contract.
Author: Lyall Mabin, Cornwall Stodart
Contact: Ian Sinclair, Cornwall
Stodart
Case Note - Resource Capital Fund III LP v FCT
A recent decision of the Federal Court has addressed various
complex international tax issues, as well as approaches to valuing
mining tenements and related assets.
Of particular note was the fact that the court identified
'mining information' as a separate asset with a value distinct from
that of the mining tenements to which it related. Even though the
Commissioner has filed an appeal against the decision, the case may
present planning opportunities for taxpayers, especially those in
the extractive industries.
Facts
The case concerned a private equity fund, the Resource Capital
Fund III LP (Fund), which established a limited
partnership in the Cayman Islands. However, the Fund was managed in
the United States, and had mainly United States resident
investors.
In 2007 the Fund disposed of its investment in St Barbara Mines
Ltd (SBM), an ASX listed goldminer, and
crystallised a $52.25 million gain. Because neither the Fund nor
its investors were Australian residents, the gain on disposal of
the SBM shares could only be taxable in Australia if the shares
were taxable Australian property. The Commissioner took the view
that the shares were taxable Australian property, and assessed the
Fund for the gain.
The critical issues before the court were:
a) whether the
Australia/United States double tax agreement (DTA)
prevented the Commissioner from assessing the Fund for the gain;
and
b) if the Fund could be
assessed, whether the shares in SBM were taxable Australian
property.
Did the DTA prevent the Commissioner from assessing the
Fund for the gain?
Before addressing the specific question before it, the court
made various observations on the interpretation of international
tax treaties. It confirmed that such treaties should be interpreted
by reference to international legal principles concerning treaty
interpretation (rather than domestic statutory interpretation
rules), and that such principles permitted reference to OECD
commentaries on tax treaties. Although this is the generally
accepted view of treaty interpretation, it had been questioned
following a recent Federal Court decision,[1] and comments made by
the High Court in Minister for Home Affairs v
Zentai.[2]
Turning to the substantive issue in dispute, the court concluded
that the DTA operated such that only the Fund's investors could be
assessed for the gain, and that the Fund itself could not be
assessed. The reason for this was that the relevant article of the
DTA stated that only United States residents could be assessed for
the gain. Although the Fund was treated as a company under
Australia's domestic tax law, it was a fiscally transparent, 'flow
through' entity for United States tax purposes. The OECD commentary
expressed the view that this 'flow-through' treatment prevented the
Fund from being a United States resident, and consequently it could
not be assessed for the gain. The DTA operated such that only the
Fund's investors who were United States residents could be assessed
for the gain.
Were the shares taxable Australian
property?
The court's conclusion on the DTA point was sufficient for the
Fund to be successful. However, the court went on to consider
whether the SBM shares sold were taxable Australian property.
The Fund's shares in SBM could only have been taxable Australian
property if the value of SBM's Australian real property assets
exceeded the value of its non-real property assets. Both parties
accepted that SBM's only Australian real property assets were its
mining rights. The balance of its assets was not Australian real
property assets. In light of this, one might have expected the
resolution of this question to have involved a simple comparison of
the values of SBM's assets. However, the court's decision
demonstrates the complexities involved both in identifying the
relevant assets, and in determining their market value.
The court rejected the Commissioner's argument that SBM's assets
should be valued by reference to the company's entire value if sold
as a going concern. It viewed such an approach as flawed because it
did not reflect the value of SBM's specific assets, but rather the
value of SBM in its entirety.
When assigning value to SBM's individual assets, the court
confirmed that SBM's mining information should be identified and
valued separately to its actual mining rights. In other words, the
information and knowledge SBM had gained from its exploratory
activities had a value separate to that of the mining rights to
which the knowledge was applied. Although the mining rights were
Australian real property, the mining information was not.
The court discussed valuation methodologies regarding SBM's
various assets in considerable detail, analysing the approaches of
different experts called to give evidence for the parties. One key
message to take from this discussion is the method for valuing
mining tenements. It used the discounted cash flows from SBM's
mining operations as a starting point. It then subtracted the
'cost' of re-creating SBM's mining information and replacing its
plant and equipment. The remaining amount was the market value of
SBM's tenements. This approach leads to a lower value for the
tenements, primarily because the cost of re-creating SBM's mining
information was substantial.
Due to this, the court found that the value of SBM's non-real
property assets exceeded that of its real property assets.
Consequently, the Fund's gain could not be taxed even if the DTA
did not apply.
Subsequent developments
As we have mentioned, the Commissioner has already filed an
appeal against the decision. But, perhaps pre-empting the outcome
of any appeal, the government announced a legislative measure as
part of the 2013/14 Budget that will reverse aspects of the case.
It will amend the test for determining whether an asset is taxable
Australian property. Mining, quarrying or prospecting information,
know-how and goodwill will be valued together with the mining
rights to which they relate. In essence, this means that these
assets will be treated as though they are real property assets for
the purposes of the particular division.
Implications for taxpayers
Despite the government's announcement, the court's approach
presents a number of planning opportunities around the valuation of
mining assets. The approach could be particularly useful for
landholder duty purposes. In most jurisdictions, duty is calculated
by reference to the value of mining tenements, but not of any
mining information. It may be possible to rely on this case to
attribute a lower value to mining tenements and hence reduce a
landholder duty liability.
A further opportunity relates to the acquisition of mining
assets (tenements, information etc). Taxpayers undertaking such
transactions could potentially allocate a higher proportion of a
purchase price to mining information rather than mining tenements.
The cost of mining information is likely to be immediately
deductible rather than simply a depreciation deduction, so this
strategy can accelerate tax deductions. We note that this strategy
is not a new development; however, the court's decision arguably
confirms the technical reasons behind its use.
We recommend that businesses undertaking mining acquisitions
consider these strategies when negotiating transactions.
Contact: Michael Kohn, Cornwall
Stodart
Accountants must obtain limited AFSL to advise on SMSFs
The government has announced it will remove a licensing
exemption that currently allows accountants to provide financial
advice on self-managed superannuation funds
(SMSFs) without an Australian Financial Services
Licence (AFSL). A new 'limited financial services
licence' (Limited AFSL) that enables licensees to
advise on, or deal in, SMSFs has been introduced to replace the
exemption.
The government has given accountants three years to comply with
the new licensing requirements or revise the scope of their
business activities. From 1 July 2016, accountants must have either
a Limited AFSL or an AFSL in order to advise clients on SMSFs.
Among other things, the transitional arrangements lower the
competency requirements for accountants who are members of specific
professional organisations (Recognised
Accountants).
Purpose of removing the exemption
Under the previous regime, Recognised Accountants were able to
advise on the acquisition and disposal of an interest in an SMSF
without an AFSL. However, the practical operation of this exemption
resulted in various undesirable consequences for consumers. For
example:
- Accountants were not required to adhere to the regulatory
requirements imposed on other financial service providers (eg
ongoing training obligations and maintenance of dispute resolution
procedures).
- Accountants were not permitted to advise on certain matters
incidental to SMSFs (eg investment strategies for SMSFs).
In order to enable accountants to provide more balanced
commercial advice to their clients, the Corporations Amendment
Regulations 2013 (No 3) (Cth) were introduced to streamline
the licensing regime for limited categories of financial
advice.
Who can apply for a Limited AFSL?
A Limited AFSL is not restricted to accountants and any person
who satisfies the eligibility requirements may obtain a Limited
AFSL. Recognised Accountants can take advantage of the lower
competency requirements for obtaining a Limited AFSL during the
transition period from 1 July 2013 to 30 June 2016. Corporations
and partnerships can also apply for a Limited AFSL if they have
Recognised Accountants who are responsible for and supervise the
provision of financial advice (Responsible
Managers) within their organisation.
What does a Limited AFSL cover?
Limited licensees may provide financial product advice on the
following:
- SMSFs (eg making a recommendation to establish an SMSF,
providing advice regarding contributions or pensions under a
superannuation product).
- 'Class of product' advice (ie general advice regarding
superannuation products, securities, simple managed investment
schemes, general insurance products, life risk insurance products
and basic deposit products). A limited licensee must not make a
specific recommendation that a person invest in a particular
financial product (eg a term deposit product offered at a
particular bank or institution).
- Arranging to deal in an interest in an SMSF (eg applying for,
acquiring, issuing, varying or disposing of an interest in an
SMSF).
Key date
Recognised Accountants (and entities that employ Recognised
Accountants) should consider applying for a Limited AFSL prior to
30 June 2016 to take advantage of the transitional arrangements.
These arrangements dispense with the requirement to demonstrate
'appropriate experience' in providing financial services of a type
that will be authorised under the prospective Limited AFSL.
Recognised Accountants who apply for a Limited AFSL after 1 July
2016 will be required to demonstrate a minimum of three years'
experience (or make a written submission to ASIC), in addition to
meeting the 'knowledge' (ie training or qualifications) conditions
currently required pursuant to the transitional arrangements.
Contact: Michael Kohn, Cornwall
Stodart
[1] Russell v Federal Commissioner of
Taxation (2011) 190 FCR 449
[2] (2012) 289 CLR 644