__________________________________________________________________________
7 February 2011
The Treasurer
8th Floor, State Administration Centre
200 Victoria Square
ADELAIDE SA 5000
Dear Treasurer:
SUBMISSION BY THE AUSTRALIAN SECURITISATION FORUM RELATING TO THE
SOUTH AUSTRALIAN STAMP DUTIES ACT 1923
We respectfully enclose the above document and would be delighted to discuss any
or all of its contents.
Regards,
CHRIS DALTON
Chief Executive Officer
Chris Dalton, CEO
SUBMISSION BY
THE AUSTRALIAN SECURITISATION FORUM relating to the
SOUTH AUSTRALIAN STAMP DUTIES ACT 1923
1. Introduction
This submission is divided into the following sections:
(a) Section 2 contains an Executive Summary of the submission; (b) Section 3 provides an introduction to the ASF;
(c) Section 4 outlines the background to the submission; (d) Section 5 describes the process of securitisation;
(e) Section 6 describes the current stamp duty position in South Australia as it effects securitisation;
(f) Section 7 describes the impact of the Personal Property Securities Act on Clayton's contracts;
(g) Section 8 contains the ASF's specific submissions in relation to the Stamp Duties Act.
2. Executive Summary
Securitisation confers substantial benefits for Australian consumers and to the financial system generally. These benefits are most evident in (but not confined to) the home-lending market. Over the last 2 decades, this market has witnessed intense competition amongst home lenders, due principally to the arrival of independent mortgage originators. These are funded
predominantly by securitisation vehicles. Also traditional home-lenders, such as banks, building societies and credit unions, employ securitisation to obtain access to cheaper funds and to manage their capital and balance sheet positions more efficiently than would otherwise be the case, thus enabling them to provide cheaper home loans to the public. These benefits have been recognised by various State Governments and the Federal Government.
The past decade has seen the parallel growth in the asset backed securitisation market. In this market other receivables such as those under leases, hire purchase contracts, credit cards and similar have been securitised. The two states of Queensland and New South Wales have each included asset backed securitisation exemptions in their Duties Acts, alongside their mortgage backed securitisation exemption. Victoria has a mortgage backed securitisation exemption but given its narrower tax base did not need an asset backed securitisation exemption.
The ASF is concerned about the fact that South Australia has retained its broad conveyance duty base and not yet introduced mortgage and asset backed security exemptions in order to make securitisation affecting South Australian assets easier. Its concern is heightened at this time by the commencement of operation of the Personal Property Securities Act (Cth) 2010 (PPS Act) later this year which will have an impact on the drafting of securitisation
documentation and may cause securitisation transactions affecting South Australian property to attract duty when previously they did not.
subject to formal approval by COAG). The amendments may either be the inclusion of an asset backed securitisation and a mortgage backed securitisation exemption along the lines of sections 130H and 130I of the Queensland Duties Act 2001 or a more general amendment to remove receivables and ancillary rights from the conveyance duty base.
3. The Australian Securitisation Forum
The ASF was established in 1989 and is the peak body representing the securitisation industry in Australia. Its role is to promote the development of securitisation in Australia.
The ASF is comprised of a national committee of 10 members, 6 task specific sub-committees and a national membership of over 300. Its members include representatives of all of
Australia's banks, many of Australia's investment banks, building societies and credit unions, the major non-bank mortgage originators, many other participants in the Australian financial system, as well as organisations that provide professional services to the securitisation industry (such as trustee companies, mortgage insurers, ratings agencies and the major legal and
accounting firms). 4. Background
In 1995 the Australian Securitisation Forum made a submission to the revenue authorities in each jurisdiction of Australia, and particularly the five jurisdictions participating in the
cooperative "Rewrite" process and Queensland, which had stated an intention to independently rewrite its legislation. Eventually the Duties Act in various States came to reflect many of ASF's submissions. Yet as you will appreciate, South Australia did not remain part of the Rewrite process and retains its Stamp Duties Act 1923.
The Duties Act in New South Wales contains concessions specifically in respect of mortgage backed and asset backed securitisations (ss282-284 Duties Act 1997), as well as provisions which are generally favourable to debt markets and dealings in debt (such as the omission of debts from the definition of "dutiable property" (s11) and the comprehensive transfer of mortgage exemption in New South Wales: s65(1)(d)). The Queensland Duties Act contains similar mortgage and asset backed securitisation exemptions (Sections 130C to 130H Duties
Act 2001 (Qld). Also note section 148(1)(b) exempting the transfer of corporate debt
securities, section 24(1), a concession for transfers of mortgage and section 149, the debt factoring exemption. Victoria included a mortgage back security exemption in its Duties Act
2000: ss251A and 251B).
The inclusion of exemptions and concessions for securitisations, transfers of mortgage and transfers of corporate debt securities in the Duties Acts was not new. By the mid 1980s most jurisdictions had introduced broadly based corporate debt security exemptions allowing duty free transfers of marketable debt: notes, bonds, debentures ... etc. (so that the securitisation and capital markets industries could have a secondary market for their debt). They also exempted transfers of mortgages (so that the securitisation structures could acquire them). The Stamp
Duties Act 1923 (SA) contains exemptions such as these (Items 3(2) and 4(2) of Schedule 2).
The first "securitisation specific" exemptions appeared in 1985 (in New South Wales). They were highly detailed and specific. The government's thinking was expressed as follows:
"This government is now taking another positive step in the continuing process of financial reform with the abolition of further stamp duties. ... The purpose of these proposals is to promote the development of a fully fledged secondary mortgage market dealing in mortgage-backed securities and to facilitate the expansion and growth of the secondary mortgage market in corporate debt securities. ... I believe it is wrong to inhibit creativity in the market. ... The intent of the amendments is to promote the development of the
providing funds for such purposes through a developed secondary market."1
New South Wales, Victoria and Queensland developed "securitisation specific" exemptions2
5. What is Securitisation?
which focused on the key elements of the mortgage-backed securitisation market, as it was understood at the time. This understanding was based to a large extent on the experience in the United States (where the first securitisation took place in 1970 when the Government National Mortgage Association developed the "Ginnae Mae"). In the United States there was a heavy emphasis on equity securitisations. These exemptions also focussed on the types of stamp duty that existed at the time, not all of which exist today.
Securitisation essentially involves the repackaging of illiquid receivables into liquid securities. The securities either represent equity (ie. a beneficial interest in the underlying assets) or debt. The repackaging is achieved by the sale of the portfolio of receivables into a securitisation vehicle, usually a special purpose trust or company. The trust or company is the issuer of the securities, which are rated by a rating agency and priced accordingly. Various "credit enhancements" are added to make the securities more marketable.
The majority of securitisations in Australia are "debt pass throughs", in that the principal on the securitised receivable is passed through to the holder of the investment as it is received progressively through the term.
6. Stamp Duty Considerations in more detail
The typical securitisation structure involves a number of elements which in turn raise the potential for application of the following heads of duty:
(a) (Declaration of Trust): All securitisations involve the creation of a special purpose vehicle, which usually is either a company or a trust. Where the proposed vehicle is a trust, this raises the potential application of conveyance duty.
(b) (Conveyance duty on transfer of mortgages and/or receivables into vehicle): Most securitisations involve the transfer of various types of financial assets to the special purpose vehicle. This raises the potential application of conveyance duty. (c) (Mortgage duty): Usually, as a result of the requirements of the rating agencies,
investors have the benefit of a security over the assets of the securitisation vehicle (this includes creation of a charge over the relevant assets and/or the creation of a security trust deed under which such securities are held for investors and other creditors). This gives rise to potential mortgage duty in States, such as New South Wales, that have retained mortgage duty. In the case of South Australia mortgage duty has been abolished.
(d) (Conveyance duty on transfer of securities): Finally, all programmes involve the issue and subsequent transfer of the securities (ie. notes) issued to investors. This gives rise to potential conveyance duty and/or transfer of marketable securities duty, subject to the exemptions for corporate debt securities.
If ad valorem stamp duty were imposed on any of these elements the structure would be rendered non-viable and could not proceed in the relevant jurisdiction.
Under present South Australian law it has been possible to keep stamp duty costs under control, so that South Australian assets could be securitised.
1
New South Wales Legislative Assembly Hansard of 1 November 1984.
2
However the Stamp Duties Act potentially impacts on securitisations in the way described below.
Legal assignments in writing
Items 3(2)1 and 4(2)2 of the Schedule 2 contains an exemption for conveyances and transfers of mortgage in the following terms:
"Conveyance or transfer of a mortgage or an interest in a mortgage (including such a conveyance or transfer under which a chose in action consisting of a debt secured by that mortgage or part of that debt is also conveyed or transferred)".
This exemption enables mortgages to be transferred to the securitisation vehicle without conveyance duty being attracted.
Item 3(2)2 of Schedule 2 provides a similar exemption from conveyance on sale duty in the following terms:
"Conveyance or transfer of any debenture, debenture stock, bond, note or other security of a similar kind of a government or of any municipal or other corporation, company or society (whether constituting a charge on the assets of the government, or of the municipal or other corporation, company or society or not)."
This exemption enables some corporate debt to be transferred (by way of conveyance on sale) to the securitisation vehicle without conveyance duty being attracted. It also enables the bonds or notes issued by the vehicle to be transferred without conveyance on sale duty being
attracted.
No exemption however is included covering:
(a) conveyances of receivables/debts owed by individuals or companies which do not fall within the above quoted exemptions, including any conveyance operating as a voluntary disposition inter vivos.
(b) conveyances of ancillary rights and documents which are transferred with the mortgages or the receivables.
Paragraph (a) leaves a significant proportion of asset backed securitisation receivables exposed to ad valorem conveyance duty at the point where they are legally transferred to the
securitisation vehicle. Paragraph (b) means that for a legal assignment of mortgages or receivables and ancillary rights and documents, the agreement or transfer document must be lodged and the Commissioner satisfied that if mortgages are transferred, the exemption for transfer of mortgages applies, and the ancillary rights and documents have no monetary value. The Queensland and New South Wales Duties Acts recognise the following types of
receivables for the purposes of their asset backed securities exemptions: (a) a loan;
(b) a credit card account; (c) a hire purchase agreement;
(d) a chattel lease, whether finance or operating; (e) a vehicle dealer floor plan agreement;
(f) a contract under which insurance or any other financial service or product is provided (New South Wales only); and
The legal assignment in writing of any of these types of receivables would attract ad valorem conveyance duty under the Stamp Duties Act 1923 (SA).
Equitable assignments without a written agreement
Conveyance duty is not, however, levied on equitable assignments of receivables, debts, ancillary rights or documents achieved by written offer/acceptance by conduct (the so called "Clayton's contract")). As a result, the Clayton's contract has been, and is currently, the predominant method for transferring assets in securitisations, although legal assignments in writing are not unknown. (Legal assignments particularly occur if the securitisation trust needs to perfect its title because the transferor becomes insolvent).
It is no overstatement to say were it not for the effectiveness of the Clayton's contract, South Australian assets would not be securitised.
7. The impact of PPSA on Clayton's contracts
A Clayton’s contract depends for its stamp duty efficacy on the notion that the written offer is not converted into a written agreement by acceptance in writing by the offeree; rather, the written offer is accepted and an agreement formed other than by means of writing, typically by the conduct of the offeree (most usually payment of the purchase price stipulated in the written offer). Accordingly, the contract exists “outside” the offer.
After the assignment of receivables, care is exercised by the parties to avoid confirming by an agreement or other executed instrument that the offer has been accepted or an agreement created, as this could attract conveyance duty as a memorandum of concluded agreement. Section 31(3) of the Stamp Duties Act levies duty on any receipt for payment of purchase money under a contract unless there is a written contract or document evidencing the contract. The parties to securitisations over South Australian assets therefore avoid creating receipts for payments.
Section 71E of the Stamp Duties Act, although aimed at Clayton's contracts, does not apply to securitisations because they do not involve, in particular, a transfer of all or part of a business. Section 20(1) of the PPS Act provides that in order for a security interest (which includes a transfer of a receivable) to be enforceable against third parties the security interest must have attached and there must be possession or control of the collateral by the secured party or "a security agreement that provides for the security interest covers the collateral in accordance with subsection (2)". Subsection (2) then provides:
"20(2) A security agreement covers collateral in accordance with this subsection if: (a) the security agreement is evidenced by writing that is:
(i) signed by the grantor (see subsection (3)); or
(ii) adopted or accepted by the grantor by an act, or omission, that reasonably appears to be done with the intention of adopting or accepting the writing; and
(b) the writing evidencing the agreement contains:
(i) a description of the particular collateral, subject to subsections (4) and (5); or
(ii) a statement that a security interest is taken in all of the grantor’s present and after-acquired property; or
and after-acquired property except specified items or classes of personal property."
The question this raises is this: is a Clayton's contract capable of satisfying these requirements? Firstly does the written offer "provide for the security interest"? The essence of the Clayton's contract is that it does not amount to an agreement to transfer; it is a mere offer. Once accepted it gives rise to an agreement to transfer and it sets out its terms. Does it therefore "provide for" the security interest? There are doubts as to whether the security interest itself is "provided for".
Section 20(2) describes what "cover" collateral means. The security agreement must be "evidenced by writing". Is a document which does not evidence the existence of the
agreement, but only sets out its potential terms, "evidencing the agreement"? There is a good argument that it is not.
It seems that in order for a transferee of receivables to take a security interest under the PPS Act capable of enforcement against third parties and perfection, the Clayton's contract method may need to be discarded in favour of an agreement for sale by one or more signed
instruments. This was probably unintended but if it remains a feature of the PPS Act at the time it commences it will probably lead to a revision of the documents for every active securitisation program and all factoring programs. Such a revision, involving the use, for the first time, of written agreements for sale will mean that all those programs are thereafter exposed to ad valorem conveyance duty in South Australia, insofar as they relate to South Australian receivables which are not covered by the existing exemptions.
In practice, if securitisers do feel compelled by the PPS Act to amend their documentation they will also need to consider whether this will result in a stamp duty liability. The likely result is that if the Stamp Duties Act 1923 is not amended as suggested in this paper, South Australian assets will be excluded from national securitisation programs.
8. The Submissions
The ASF urges Treasury and RevenueSA to consider making one or more of the following amendments to the Stamp Duties Act 1923:
(a) including an exemption for asset backed securitisation along the lines of the exemption found in the Queensland Duties Act (Sections 130C to 130H). This could be coupled with an exemption for mortgage backed securitisation (Sections 130I and 286 to 289); or
(b) making a more general amendment by removing receivables and ancillary rights from the conveyance duty base. This could be achieved either by including some further exemption or exemptions or by adopting the Rewrite approach of setting out a list of "dutiable property", which would not include receivables, ancillary rights and documents, and only levying duty by reference to this list.
Given the relative complexity of the asset and mortgage backed securitisation exemptions it is our submission that the second of these two alternatives is the preferable one.
