High Court Rules Novation Agreement Is Not Subject To Ad Valorem Stamp Duty

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Recently, in GSB v Pemungut Duti Setem, the taxpayer successfully challenged a stamp duty assessment raised at ad valorem rate on a novation agreement. The High Court held that the stamp duty assessment issued by the Collector of Stamp Duties (Collector) to be erroneous.

Background Facts

Two shareholder loan agreements (Original Loan Agreements) were executed between Petroliam National Berhad (Petronas) and Gentari Renewables Sdn Bhd (GRSB). The loan was fully disbursed and the Original Loan Agreements were also duly stamped. Subsequently, pursuant to a group restructuring, the taxpayer became the shareholder of GRSB. As part of the restructuring process, the taxpayer together with Petronas, and GRSB decided to novate the Original Loan Agreements from Petronas (as the original lender) to the taxpayer as the new lender through a novation agreement.

The Collector subjected the novation agreement to stamp duty based on ad valorem rate by relying on Section 17(1) of the Stamp Act 1949 (SA) read with item 32(a) of the First Schedule of the SA. The taxpayer objected to the ad valorem rate and submitted that the novation agreement should be subjected to the nominal stamp duty rate of RM 10. Notwithstanding the taxpayer’s objection, the Collector maintained the assessment.

Issue

The issue was whether the novation agreement should be subjected to stamp duty at ad valorem rate or nominal rate.

Legal Position

Section 17(1) of the SA provides that if an instrument transfers the ownership of any property in exchange of any debt or stock or marketable security, or if a transfer of property has a charge/encumbrance upon said property which is subject to the transfer of any money or stock, then ad valorem duty should be imposed.

Meanwhile, item 32(a) of the First Schedule of the SA prescribes stamp duty at ad valorem rate for various transfers including conveyances and assignments, which is calculated based on the value of the consideration or market value of the property.

The Taxpayer’s Case

The taxpayer’s appeal can be summarised as follows:

(a)        Section 17(1) of the SA was not applicable as there was no conveyance or transfer of property in this case.

(b)        A novation is not assignment and neither does a novation transfer or convey any property. A novation agreement merely substitutes one party for another in an existing obligation.

(c)        The novation agreement, only novated duties, obligations and liabilities from the original lender to the taxpayer. Thus, the taxpayer will take up both the rights and obligations of Petronas (the original lender).

(d)        The Original Loan Agreements remain the instrument for the loans. Accordingly, the novation agreement was not the instrument for the provision of the loans. The instrument which provides the loans was the Original Loan Agreements, which have been duly stamped.

The Collector’s Reply

The Collector argued that the novation agreement attracted stamp duty at ad valorem rate for these reasons:

(a)        The effect of the novation agreement was only for the purpose of transferring the debt to the taxpayer since the amount of loan under the Original Loan Agreements had been fully disbursed to the borrower. Thus, it was an instrument to transfer the outstanding debt to the taxpayer with a consideration.

(b)    The novation agreement was a conveyance on sale pursuant to Section 17(1) of the SA and was chargeable with ad valorem stamp duty under item 32(a) of the First Schedule of the SA.

The High Court’s Decision & Commentary

The High Court allowed the taxpayer’s application and ruled that novation agreement ought to be stamped at the nominal rate of RM 10.

The High Court’s decision is much welcomed, as first, it reminds us that an aggrieved taxpayer is not left without any recourse. When a stamp duty assessment is raised by the Collector, it can be challenged especially when an error of law has been committed by the Collector. Whilst the Collector has the power to collect stamp duty from taxpayer, the Collector cannot arbitrarily raise a notice of assessment for stamp duty.

Currently, there are two conflicting High Court decisions (namely the GSB case and Nike Global Trading B.V., Singapore Branch v Pemungut Duti Setem [2025] 7 MLJ 215) on the applicable stamp duty rate for a novation agreement. In the earlier case of Nike Global, the High Court held that the novation agreement in that case attracted ad valorem stamp duty on the basis that the novation agreement transferred the debt from the original lender to the taxpayer without any monetary consideration. Thus, the actual effect of the instrument was to shift the debt rather than effectuate a novation of the parties to the contract.

Both these decisions are now pending appeal before the Court of Appeal.

14 May 2025