Recently, in Nike Global Trading B.V., Singapore Branch v Pemungut Duti Setem [2024] MLJU 2087, the High Court dismissed the taxpayer’s challenge against a stamp duty assessment raised at ad valorem rate on a novation agreement.
This alert summarises High Court’s ruling in this matter which has a major impact on the stamp duty payable on novation agreements.
Brief Facts
A loan agreement was executed between a Dutch lender, Nike European Operations Netherlands and a Malaysian borrower, Nike Sales (Malaysia) Sdn Bhd for RM 41,257,000.00. The loan was fully disbursed and the agreement was duly stamped. Following this, a novation agreement was executed between the Dutch Lender and to the taxpayer, Nike Global Trading B.V. Singapore Branch. The purpose of the novation agreement was to transfer the original lender’s right to the taxpayer, which was the right of repayment of the debt. Additionally, the debt was transferred to the taxpayer without monetary consideration. The Collector of Stamp Duties (Collector) subsequently assessed stamp duty on the novation agreement based on the ad valorem rate by relying on Section 16 of the Stamp Act 1949 (SA 1949) read with item 32(a) of the First Schedule of the SA 1949. The taxpayer 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. Aggrieved by the assessment, the taxpayer filed an appeal under Section 39(1) of the SA 1949 and sought to set aside the disputed assessment.
Issue
The central issue was in this matter was whether the novation agreement should be subjected to stamp duty at ad valorem rate or nominal rate.
Legal Position
Section 16(1) of the SA 1949, which deals with the stamp duty payable on certain types of conveyances or transfers, reads: “Any conveyance or transfer operating as a voluntary disposition inter vivos shall be chargeable with the like stamp duty as if it were a conveyance or transfer on sale.” Item 32(a) of the First Schedule 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 as follows.
“CONVEYANCE, ASSIGNMENT, TRANSFER OR ABSOLUTE BILL OF SALE:
(a)On sale of any property (except stock, shares, or the marketable securities and accounts receives or book debts of the kind mentioned in paragraph (c))
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For every RM100 or fractional part of RM100 of the amount of the money value of the consideration or the market value of the property, whichever is the greater—
(i) RM1.00 on the first RM100,000; (ii) RM2.00 on any amount in excess of RM100,000 but not exceeding RM500,000; (iii) RM3.00 on any amount in excess of RM500,000. |
The Taxpayer’s Contention
The taxpayer argued that the novation agreement should not be subjected to ad valorem rate stamp duty under Section 16(1) and Item 32(a) of the First Schedule based on the following grounds:
(a) Section 16 of the Stamp Act did not apply because the novation agreement did not constitute a conveyance or transfer of property under the provision.
(b) The novation agreement, through clause 1.2, novated duties, obligations and liabilities from the original lender to the taxpayer, which were not legally assignable but could only be novated.
(c) Novation, assignment, conveyance and transfer were distinct legal concepts. The Collector erred in law and fact by treating the novation agreement as a transfer of rights and benefits rather than a novation.
The Collector’s Contention
On the other hand, the Collector argued that the novation agreement constituted a transfer of property, thus attracting stamp duty under Item 32(a) of the First Schedule for the following reasons:
(a) Instruments listed under the First Schedule of the SA 1949 were subject to stamp duty as per Section 4 of the SA 1949. The principle was that stamp duty applies to instruments and not transactions.
(b) The novation agreement, which transferred the debt from the original lender to the taxpayer without consideration, fell under Section 16(1) and should be charged as a transfer on sale under item 32(a) of the First Schedule.
(c) The substance of the instrument should be considered, not just its form. The novation agreement’s purpose was to transfer the debt arising from the loan to the taxpayer, as the original loan had been fully disbursed to the borrower and the taxpayer now held the debt.
The High Court’s Decision
The High Court dismissed the taxpayer’s challenge, emphasising that stamp duty was chargeable on the instrument and not the transaction. Reference was made to several precedents including BASF Services (Malaysia) Sdn Bhd v Pemungut Duti Setem [2009] 5 MLJ 348, the apex court focused on thr importance of examining the true nature of a transaction rather than just its form. The document must be assessed in its entirety to determine the appropriate stamp duty payable.
In the present matter, the High Court determined that the novation agreement transferred the debt from the original lender to the taxpayer without any monetary consideration. For stamp duty purposes, the substance of the transaction was more important than its form. Upon examining the novation agreement, the High Court found that the said agreement was deemed a voluntary disposition under Section 16(1) for the following reasons:
(a) A novation agreement, as defined under Section 63 of the Contracts Act 1950, allows for the transfer of all rights and obligations from the original party to a new party, resulting in the creation of a new contract with the consent of all parties involved. The Federal Court in Teoh Kee Keong v Tambun Mining Co Ltd [1968] 1 MLJ 39 described novation as a form of assignment where a new contract replaces the existing one.
Black’s Law Dictionary defined “assignment” as a transfer or conveyance of the entirety of any property, whether real or personal, in possession or in action, or of any estate or right therein.
In this matter, the novation agreement transferred the debt from the original lender to the taxpayer, with the taxpayer assuming all rights and obligations under the loan agreement. The agreement involved no monetary consideration but fulfilled the conditions of a debt transfer.
(b) Under Section 2, “debt” is classified as “property,” which includes a range of assets and rights.
In this context, the novation agreement’s primary function was to transfer the original lender’s right to receive repayment of the loan to the taxpayer. This right of repayment, now a form of property, was transferred without any monetary consideration. Since the novation agreement transferred the debt to the taxpayer, it was deemed chargeable under item 32(a) of the First Schedule, akin to a transfer or conveyance on sale as per Section 16(1).
(c) The Collector cited the case of PPB Group Bhd v Pemungut Duti Setem [2011] 9 MLJ 145 to support its argument that the novation agreement’s debt transfer is to be subjected to stamp duty. The case highlighted that under Section 16, a transfer made without monetary consideration can still be classified as a “voluntary disposition inter vivos.”
The High Court in this case provides the following relevant insight:
“The Novation Agreement transferred the debt from the original lender to the plaintiff without consideration. For stamp duty purposes the substance as opposed to the form is important. The substance is what is revealed by the rights and obligations of the parties. The true meaning of the instrument or its nature and effect is to be determined.”
Based on the foregoing, the Collector’s position that the debt transfer under the novation a qualified as a conveyance or transfer on sale, thus attracting stamp duty under item 32(a) of the First Schedule, was affirmed by the High Court.
Commentary
In essence, the High Court’s decision sheds light on how debt transfers under novation agreements are to be assessed for stamp duty. This decision underscores that the classification of such agreements is driven by their substance rather than their form, especially when monetary consideration is absent. By affirming that a debt transfer qualifies as a “voluntary disposition inter vivos” under Section 16(1) of the SA 1949, the High Court clarified that the nature of the transaction itself dictates the stamp duty obligations. This highlights the need for taxpayers and the Collector to closely examine the intrinsic value and characteristics of the agreement rather than relying solely on the nominal terms stated in determining the appropriate stamp duty.
26 September 2024
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