NGAI SAU YING v. COLLECTOR OF STAMP REVENUE

CACV 460/2018 AND CACV 461/2018

[2019] HKCA 1104

CACV 460/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 460 OF 2018

(ON APPEAL FROM DCSA NO 15 OF 2017)

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AND

CACV 461/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 461 OF 2018

(ON APPEAL FROM DCSA NO 16 OF 2017)

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________________________

(Heard together)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  These two appeals are brought by the Collector of Stamp Revenue (“the Collector”) against the judgments of His Honour Judge Leong handed down on 11 June 2018^[1]. The judge gave leave to appeal against his judgments on 13 September 2018^[2].

2.  The duty payers, Madam Ngai Sau Ying (“Ngai”) and Hung Ip Shing (“Hung”), are a divorced couple.  They acted in person in the court below and on appeal.  They each brought an appeal in the District Court against the assessments of stamp duty of the Collector in respect of two assignments of properties.  The judge allowed their appeals. The Collector appealed against his judgments to the Court of Appeal.

3.  The appeals first came before us on 4 April 2019.  We adjourned the hearing for the Collector to make a proper application to amend the Notice of Appeal to incorporate certain parts of the submissions lodged on his behalf as grounds of appeal.  We have since given leave to the Collector to amend the Notice of Appeal in each appeal.  In view of the points of law raised in these appeals, and as the duty payers have been acting in person, we have appointed Mr Stewart Wong, SC and Ms Esther Mak as amici curiae to assist the court.  The Collector appeared by Government Counsel Mr Suen Sze Yick and at the adjourned hearing with Mr Paul H M Leung as leading counsel.  We are obliged to all counsel involved for their comprehensive and helpful submissions.  Ngai and Hung have also responded to the further submissions of the Collector.

Background

4.  The relevant background matters, taken from the Case Stated of the Collector dated 17 January 2018 and the documents annexed thereto, may be stated as follows.

5.  Hung became the registered owner of a residential property at 8^th Floor, Block A, Cheung On Building, No 218 Yu Chau Street, Kowloon, Hong Kong (“8A Property”) in 1983 and Ngai became the registered owner of another residential property at 8^th Floor, Block B of the same building (“8B Property”) in 1988.  The 8A Property was the matrimonial home of Hung and Ngai.  In 2005, Hung petitioned for divorce in the District Court (FCMC 5647/2005).

6.  Deputy District Judge Chan Chan Kok (as he then was) gave judgment in the ancillary relief proceedings on 22 April 2008.  The order (“the Court Order”)^[3] was in these terms:

(1)   Within three months of the making of the decree absolute, Hung was to transfer the 8A Property to Ngai without monetary consideration^[4]. Ngai was to pay the related expenses for this transfer.

(2)   Hung was to move out of the 8A Property on the transfer of this property.

(3)   Within three months of the making of the decree absolute, Ngai was to transfer the 8B Property to Hung without monetary consideration.  Hung was to pay the related expenses for this transfer.

(4)   Within six months of the making of the decree absolute, Hung and Ngai were to sell the factory premises in Shunde, Guangdong Province, at the best market price and they were to share the net proceeds of sale equally (after deduction of tax, agent’s commission, legal fees and other reasonable expenses).  If there was rental income of the factory premises pending sale, the parties were to share such income equally.

(5)   Hung was to pay Ngai each month the amount stipulated for the maintenance of two of the children of the family, until they reached the age of majority or completed full time education, whichever was later.

(6)   No order was made as to costs.

7.  On 1 November 2013, Hung and Ngai each executed an assignment in respect of the transfer of the 8A Property (“Assignment A”) and of the 8B Property (“Assignment B”).  In Assignment A, the 8A Property was described as “the Property” and the 8B Property as “the Other Property”.  In Assignment B, the description of the two properties was interchanged.  The parties to each assignment were referred to as “the Assignor” and “the Assignee”.

8.  The recitals of each assignment contained inter alia these provisions:

“(C)   By an Order made by Deputy District Judge C K Chan on the 22^nd day of April 2008 in the District Court of the Hong Kong Special Administrative Region under Matrimonial Causes No 5647 of 2005 and registered in the Land Registry by Memorial No 08091001030018 (“the Court Order”), it was ordered, inter alia, that the Assignor shall transfer the Property to the Assignee and the Assignee shall transfer the Other Property to the Assignor; and

(D) The parties hereto have agreed to enter into this Assignment dealing with the Property and another Assignment also dated the 1^st November 2013 dealing with the Other Property pursuant to the terms of the Court Order.”

9.  The operative part of each assignment contained inter alia these provisions:

“1. In pursuance of the Court Order and in consideration of the premises the Assignor as the Beneficial Owner hereby ASSIGNS to the Assignee the Property at nil monetary consideration TO HOLD the same unto the Assignee for the residue of the terms of years created by the Government Leases …”

“5. It is hereby certified that the transaction hereby effected does not form part of a larger transaction or of a series of transactions in respect of which the amount or value or the aggregate amount or value of the consideration exceeds HK$_________.”

10.  The Rating & Valuation Department assessed the value of the two property as at 1 November 2013 at $3,150,000 for the 8A Property and $2,450,000 for the 8B Property.

11.  On 12 November 2013, Ngai’s solicitors sent the assignments to the Collector for adjudication and stated in the covering letter that the assignments amounted to an exchange of the two properties in law, so in assessing the amount of stamp duty on the assignments, only the difference in value of the properties was chargeable for stamp duty.

12.  The Collector replied to Hung and Ngai by letters dated 21 July 2016, stating that as the assignments were executed in pursuance to the Court Order, the transactions effected thereby each formed part of a larger transaction in respect of which the amount or value, or the aggregate amount or value, of the consideration does not exceed $6 million. Accordingly, Assignment A should be chargeable with stamp duty of $94,500 and Assignment B should be chargeable with stamp duty of $73,500^[5].

13.  Ngai and Hung, through their respective solicitors, objected to the proposed assessments.  They maintained that the transfer of the two properties was akin to an exchange of the properties by the parties, that only the difference in value of $700,000 should be chargeable to stamp duty in the amount of $10,500[6] to be paid by Ngai as the transferee of the more valuable property and that Hung should not be required to pay stamp duty.

14.  By letters dated 20 December 2016, the Collector maintained the view that the transactions formed part of a larger transaction or series of transactions as each of the transfers was not fortuitously made but made pursuant to a court order and the transfers were “clearly interdependent and co-related” and “each transfer cannot be effected alone [without]^[7] the others being effected also”.  As stamp duty is a charge on instruments and as the properties were transferred under two separate instruments, stamp duty would be calculated based on the respective consideration or market value of the property transferred under each instrument and that a charge on equality money will only be applicable to an instrument under which properties are exchanged.

15.  After considering further response from the solicitors, on 2 May 2017, the Collector issued the notices of stamp duty assessment and demand for payment as proposed in the letters dated 21 July 2016.  Ngai and Hung lodged their appeals against the assessments to the District Court on 31 May 2017.

16.  The Collector submitted these two questions for the determination by the court in the Case Stated for each appeal: (a) whether the assignment is chargeable with any stamp duty; and (b) if so, the stamp duty chargeable thereon.

The judgments below

17.  The reasons of the judge in allowing the appeals of Ngai and Hung may be shortly stated as follows.

18.  He found that the nature of the two assignments was for the exchange of properties, even though the instruments did not state that the transaction was an exchange^[8]. As such, the Collector should have assessed the stamp duty liability in accordance with section 25(7) of the Stamp Duty Ordinance, Cap 117 (“the Ordinance”)^[9]. The judge did not however rule on the two questions submitted for determination in the Case Stated.

These appeals

19.  The Collector’s primary argument is that the two assignments do not constitute an exchange of properties under section 25(7) of the Ordinance^[10]. The true nature of these instruments does not indicate that the transfer of property therein was in exchange for another property.

20.  If this primary argument should fail, it is necessary to consider the interplay between section 25(7) and section 27^[11]. The Collector’s contention is that section 25(7) should have no application as the assignments did not stipulate any consideration is paid or given, or agreed to be paid or given, for equality, nor is it possible to identify a principal instrument between the two assignments chargeable with stamp duty.

21.  The Collector further contended that the judgments are not enforceable in law in that there was no determination of the questions submitted in the Case Stated as required by section 14(3)^[12]. The judge failed to determine the excess of stamp duty paid by Ngai and Hung and the amounts that should be repaid to them.

22.  The above issues will be considered in the order as mentioned.

If the assignments constitute an exchange under section 25(7)

23.  The question here is whether the true nature, meaning and legal effect of the assignments is that the consideration for the transfer of the 8A Property from Hung to Ngai was the transfer of the 8B Property from Ngai to Hung, and vice versa.

(1) Definitions

24.  Section 25(7) reads as follows:

“Where upon the exchange of any immovable property for any other immovable property, or upon the partition of any immovable property, any consideration is paid or given, or agreed to be paid or given, for equality, the principal or only instrument whereby the exchange or partition is effected shall, subject to sections 27, 29AO and 29AP be charged with the same stamp duty as a conveyance on sale for the consideration, and with that stamp duty only; and where in any such case there are several instruments for completing the title of either party, the instruments other than the principal instrument shall not be chargeable with any stamp duty.”

25.  As there is no definition of exchange of immovable property in the Ordinance, one therefore looks at the common law.  There is authoritative definition of “exchange” in Blackstone’s Commentaries on the Laws of England, Book II: Of the Rights of Things, edited by Simon Stern, (Oxford ed, 2016) at p 220:

“An exchange is a mutual grant of equal interests, the one in consideration of the other. The word “exchange” is so individually requisite and appropriated by law to this case, that it cannot be supplied by any other word or expressed by any circumlocution. The estates exchanged must be equal in quantity; not of value, for that is immaterial, but of interests; as fee-simple for fee-simple, a lease for twenty years for a lease of twenty years, and the like. …” (emphasis original)^[13]

26.  In Lord Portman v Commissioners of Inland Revenue [1956] TR 353 at 355, Danckwerts J accepted the following description as generally accurate regarding a deed of exchange:

“… it is the transfer of real property from one person to another, possibly with a consideration for equality; it is therefore, a transaction in which property belonging to one person is transferred to another person in consideration of that other person’s property being transferred to the first.”

27.  It is pertinent to note from the above extracts that the transfer of one property need not be the sole consideration for the transfer of the other.  As mentioned in Blackstone, the two properties exchanged need not be of equal value.  The wording of section 25(7) expressly contemplates the provision of consideration for equality in an exchange.  Although a sum of money is often made by the owner of the less valuable property to “equalise”, this is not required to be made as a matter of law for the transaction to be one of exchange, hence Danckwerts J said it was “possibly with a consideration for equality”.

28.  An exchange in this context must be distinguished from a sale, which is a transfer of property for a price in money.  As stated in Encyclopaedia of Hong Kong Taxation, by Willoughby and Halkyard, (2018 ed), vol 1, §II[1891], it is not always easy to distinguish clearly between an exchange and a sale.  If the consideration for the transfer of property is a sum of money, which is satisfied wholly or partly by the transfer of another property, that is not an exchange or a sale of the second property, but only a sale of the first property, because the second property is not conveyed for a price or as consideration for the transfer of the first, but merely to satisfy the contractual obligations of the owner of the second property to pay the price for the first property (Connell Estate Agents (a firm) v Begej [1993] 2 EGLR 35^[14]).

29.  Technically, an exchange of immovable property is also a conveyance^[15] but not a conveyance on sale (Encyclopaedia of Hong Kong Taxation, by Willoughby and Halkyard, vol 1, §II[174.3] and [226]). Section 25(7) provides that an exchange can be charged “as a conveyance on sale for the consideration”, and the consideration is that which is “paid or given, or agreed to be paid or given, for equality”.  Hence, an exchange, though not a conveyance on sale, is deemed as one for this purpose, and is chargeable with stamp duty only on the consideration paid for equality.

(2) Relevant principles

30.  The relevant principles for determining the true nature, meaning and legal effect of an instrument generally for the purpose of stamp duty, and, more particularly, whether an instrument is an exchange, are largely taken from Mr Wong’s submissions, which we accept.

31.  First, recognising that stamp duty is a charge on instruments and not on transactions does not mean that one should merely look at the form of the instrument and nothing else to decide on chargeability.  As stated by Lopes LJ in The Great Western Railway Co v The Commissioners of Inland Revenue [1894] 1 QB 507 at 513:

“It is an established rule in cases under the Stamp Acts that the substance of the transaction is alone to be looked at in determining the question whether an instrument is liable to stamp duty.” (emphasis supplied)

32.  Mr Leung sought to draw a distinction between the true nature, meaning and legal effect of the instrument as opposed to the true substance of the transaction and submitted that the essence of the exercise is to focus on the former, not the latter, as stamp duty is a charge on instruments not transactions.  We agree with Mr Wong that this distinction is a false dichotomy.  The objective is to ascertain the true substance of the transaction as effected by the instrument.  Where there is no suggestion of a sham, the true nature, meaning and legal effect of the instrument should give effect to the true substance of the transaction.  The essence of the exercise remains the true substance of the transaction.  See also the quotation from the judgment of the Lord President, Lord Clyde, in Cormack’s Trustees v The Commissioners of Inland Revenue (1924) SC 819 at 826 to 827 set out in the latter part of this judgment. 

33.  Second, the words or labels used by the parties in the instrument, although important, are not conclusive.  As Martin B said in Limmer Asphalte Paving Co Ltd v The Commissioners of Inland Revenue (1872) LR 7 Ex 211 at 214 to 215:

“In order to determine whether any, and if any what, stamp duty is chargeable upon an instrument, the legal rule is that the real and true meaning of the instrument is to be ascertained; that the description of it given in the instrument itself by the parties is immaterial, even although they may have believed that its effect and operation was to create a security mentioned in the Stamp Act, and they so declare.”

34.  Third, likewise although the form of the instrument chosen by the parties can play an important part in the determination of chargeability, this is not determinative.  As explained by the Lord Clyde in Cormack’s Trustees at 826 to 827:

“In determining whether a particular instrument falls within this, or that – or within any – of the categories enumerated in the schedule and defined in the Act, it has often been said that the substance and effect, rather than the precise terms, of the instrument should be regarded … No doubt this is so, but the question is nevertheless one both of form and of substance. Among the infinite variety of transactions, there are some which are not necessarily and in themselves sales, but which may conveniently and effectually be carried out under the form of sale; and if the parties select that form as the vehicle of their transaction in preference to some other (which might be equally competent and effectual, but is considered less convenient, for the purpose of carrying out the objects in view), the substance of the transaction may be determined by the form selected. It is not that the legal form into which a transaction is thrown alters its substance. It is that the substance of a particular transaction may be equally consistent with the adoption of either legal form. It would be in vain to seek to avoid liability for the stamp duty appropriate to the form selected merely because the substance of the transaction might have been carried into effect in another legal shape, the form of which would have attracted a stamp duty of inferior denomination.”

35.  To similar effect are these statements of Nicholls VC in Prudential Assurance Co Ltd v Inland Revenue Commissioners [1993] 1 WLR 211 at 216D to F:

“I must therefore identify what was the subject matter of the sale.  In so doing I must have regard to the commercial substance of the transaction.  I must also have regard to the shape, or form, which the parties have chosen for their transaction.  A given commercial result can often be reached by more than one route.  If the parties have genuinely chosen one route, with the legal incidents and consequences attendant upon that route, rather than a different route having different legal incidents and consequences, for better or for worse stamp duty will be assessable accordingly.  (I stress the word “genuinely” because I am leaving on one side transactions into which artificial steps have been inserted for the purpose of avoiding fiscal liabilities. … For the same reason I leave aside sham documents and provisions.)”

36.  Fourth, the true nature, meaning and legal effect of the instrument may be gathered with the assistance of matters outside the four corners of the instrument.

37.  In Lord Portman v Commissioners of Inland Revenue at 355, Danckwerts J took into account “the circumstances surrounding the document” to ascertain the substance of the transaction, and came to the view that “the real transaction” effected by the document purportedly described as a “deed of exchange” was “the completion by conveyance of two separate contracts of sale” and not an exchange.

38.  Another example in which the court considered the surrounding circumstances is Cormack’s Trustees. Lord Sands said at 834:

“In considering whether this transaction, whereby, on the one hand, the widow surrendered her legal rights, and, on the other hand, obtained an annuity, a liferent in a house, and the liferent of certain furniture, was a sale, the whole transaction must, I think, be considered in relation to the surrounding circumstances. The arrangement was not a sale in form, nor was it, in my view, a sale according to popular understanding and terminology. Those considerations, however, are not conclusive, if a transaction, though not in the form of a sale and, owing to some incidental peculiarity, not a sale according to popular terminology, is truly in substance a sale, that is, an exchange in which the consideration upon one side is money.”

39.  Lord Sands mentioned the great disparity in value between what was given and what was received to exclude the idea of sale as a commercial transaction and came to the view that the gross inadequacy in consideration was a legitimate element to be taken into consideration in determining whether, “in the light of the whole circumstances, the transaction was truly of the nature of a sale, or was, on the other hand, a family arrangement into which the considerations peculiar to sale of something for money did not largely enter” (at 835).

40.  This approach is consistent with the proposition that extrinsic evidence can be adduced to show the true nature, meaning or effect of the terms of an instrument, see for example, Oughtred v Inland Revenue Commissioners [1960] AC 206, and the modern approach in the interpretation of instruments where the nature, meaning and effect of the terms to be construed is gathered from the context.

41.  Sections 11 and 12 of the Ordinance also lend support to this approach. Section 11(1) requires “all the facts and circumstances affecting the liability of any instrument to stamp duty … to be fully and truly set forth in the instrument”.  Section 12 empowers the Collector, whenever any instrument is presented to him for stamping, to require to be furnished with evidence to satisfy him that all such facts and circumstances are fully and truly set forth.  The powers conferred on the Collector by these provisions are to enable him to ascertain the substance rather than the form of the transaction (Harvest Sheen Ltd & Anr v The Collector of Stamp Revenue [1997] 1 HKLRD 889 at 895J).

(3) Application to the present situation

42.  The Collector laid much emphasis on the form of the instruments chosen by Ngai and Hung for the transactions, and the title and the words used.  The title of each instrument is “Assignment”, the instrument is referred to in the contents throughout as “Assignment” (clause (D) of the recitals, the last paragraph of the operative part, clause 1(b) of the schedule, and the title on the backsheet).  The parties to the instrument are referred to as “Assignor” and “Assignee”.  Clause 1 of the operative part specifically provides that the property was assigned “at nil monetary consideration”, not that the transfer was made as the quid pro quo for the other property.  It is stated in clause 5 that “the transaction hereby effected does not form part of a larger transaction or of a series of transactions”, and this reflects the intention to negate the possibility that any one of the two assignments should be considered as a whole with any other instrument, including the other assignment executed on the same day. Last but not least, the word “exchange” does not appear in the instruments.

43.  As for clauses (C) and (D) of the recitals, which made clear that the transactions effected by the instruments were entered into pursuant to the Court Order, Mr Leung submitted that the judge did not specifically order Ngai and Hung to exchange their properties, as there was no express provision in the Court Order requiring one party to transfer his or her property to the other in consideration of that other party’s property being transferred to the first.  The Court Order did not stipulate that the transfers must be effected by way of mutual exchange.  It merely ordered each of the parties to transfer his or her property within a timeframe of three months of the making of the decree absolute and that the transferee should bear the costs and expenses of the transfer.  It was made pursuant to section 6(1)(a) of the Matrimonial Proceedings and Property Ordinance, Cap 192, which provides that the court may order a party to the marriage to transfer to the other party such property as may be specified.

44.  Mr Leung contended that two consequences should flow from the Court Order.  First, Ngai and Hung could have chosen to effect the transfer at different times so long as this was done within the timeframe. Second, even though the two assignments were executed on the same day, this would not change the reality that the legal obligations of the parties under the Court Order took effect independently in that the legal obligation of one party to transfer to the other party was not dependent on a corresponding transfer of the property of the other party.  So if Ngai had failed to perform her obligation to transfer the 8B Property to Hung, Hung’s assignment of the 8A Property to Ngai would still be effective and binding.

45.  Mr Leung stressed that it was open to the parties to carry out the Court Order by a deed of exchange, but they genuinely chose instead to execute two assignments to effect the transfer of interest in each property to each other, with the legal incidents and consequences attendant upon that chosen route.  So for better or for worse, stamp duty should be assessed according to the instruments executed as effecting two voluntary dispositions inter vivos as expressly provided in clause 1 of the operative part of the instruments and chargeable with stamp duty as conveyances on sale pursuant to section 27(1)^[16].

46.  Notwithstanding the persuasive arguments advanced on behalf of the Collector, we do not think that is the correct view of the true substance of the transactions effected by the instruments.

47.  It is important to have regard not just to the title, the words and the form of the instruments but also the context and foundation of the transactions.  The context, as mentioned in clauses (C) and (D) of the recitals, is the Court Order, as well as the judgment which produced the Court Order.

48.  Mr Leung does not dispute the context is the Court Order but submitted that the reasoned judgment of the family court should not be regarded as part of the context, as it would be far too onerous for the Collector to consider the reasons for the Court Order when the circumstances surrounding the instruments are taken into account.  We do not think this would impose an onerous duty on the Collector.  As mentioned in the recitals, the Court Order was registered in the Land Registry and the case number of the matrimonial proceedings was given. The judgment of the family court is readily accessible in the website of the judiciary and is in the public domain.  It is clearly material as the facts, circumstances and reasons which gave rise to the Court Order are fully set out, and will shed light on the true substance of the transaction.  There is no good reason why the extrinsic materials that could properly be considered should be confined to the Court Order, stopping short of the reasoned judgment.  We have earlier rejected the submission that the focus should only be on the true nature, meaning and legal effect of the instrument rather than the true substance of the transaction.

49.  It is not in dispute that the assignments were made to implement the Court Order.  The context of the transactions was the distribution of family assets on the dissolution of a marriage.  It is apparent from the judgment^[17] that the Court Order was made to give effect to the fairness approach and the principle of equal sharing laid down by the Court of Appeal just over a month ago in DD v LKW [2008] 2 HKLRD 523^[18], having taken into account the matters set out in section 7(1) of the Matrimonial Proceedings and Property Ordinance. The transfers of properties stipulated in the Court Order were part of one whole package, under which Hung should receive 52.74% of their combined assets and Ngai was to receive 47.26%.  The effect was that Hung would receive $251,883.99 more^[19], but the judge noted he had earlier found that Ngai did not disclose some of her assets such as investments in shares and it would be reasonable to give Hung an additional 5%^[20].  Insofar as there was a difference between the values of the 8A Property and the 8B Property, which was set at $100,000^[21], this was addressed by the other provisions in the entire package.  In other words, by the Court Order, the judge sought to achieve substantial equality between the parties on the distribution of assets.

50.  Viewed in this light, it is clear that the transfer of the 8A Property was ordered as the quid pro quo for the transfer of the 8B Property, even though the judge did not expressly stipulate in the judgment or the Court Order there was to be an exchange of these properties or specify that the mode in which the Court Order should be implemented was by way of an exchange.  The statement in clause 1 of each assignment that the property was assigned at “nil monetary consideration” only meant that the transfer was not a sale and that the consideration for the transfer was not for a price in money.  When this clause is looked at with regard to all the surrounding circumstances, it is plain that the transaction was not for “nil consideration”.

51.  We consider it wholly artificial to view the instruments as separate transactions or that independent legal obligations were assumed under each instrument without regard to the other.  It is telling that this was not the earlier view of the Collector in his letters dated 20 December 2016, in which he stated that the transfers made pursuant to the Court Order were “clearly interdependent and co-related” and “each transfer cannot be effected alone without the others being effected also”.  If one party had failed to effect the transfer of his property pursuant to the Court Order, it cannot be suggested that that party who was in breach of the Court Order can compel the other party to transfer the other property to him.  As rightly submitted by Mr Wong, the ability of one party to enforce the transfer to him or her depends on his or her own performance of the Court Order.

52.  There is nothing in the form or legal shape chosen by the parties to implement the transactions that would be in conflict with the substance being an exchange of properties.  As an exchange is technically also a conveyance, it is not inappropriate that the conveyance be effected in the form of an assignment.  The fact that the transaction was effected by two assignments rather than a single instrument does not affect the analysis.  Clauses (C) and (D) of the recitals made clear that the assignments were executed on the same date.  The express reference to the Court Order and the mutuality of the transactions showed clearly that each assignment was to be part and parcel of one entire package.

53.  Reference was made in the court below^[22] to Encyclopaedia of Hong Kong Taxation, by Willoughby and Halkyard, vol 1, §II[271], in which the authors expressed the view that on the authority of the interpretation of the equivalent English provision^[23] of section 25(7), “it appears that it is necessary to enter into a single deed (or agreement) for an exchange, rather than two separate agreements for sale and purchase, if the transaction is to be an exchange, although the effect in substance may be the same”.  The authority mentioned was Lord Portman v Commissioners of Inland Revenue.  As mentioned earlier, having taken into account the circumstances surrounding the document purportedly described as a “deed of exchange”, Danckwerts J held that the real substance of the transaction was two separate conveyances on sale and should be stamped as such.  It does not appear that this case is authority for the proposition mentioned in the work.  The authors also acknowledged that “the effect in substance may be the same” where two instruments are used instead of one.

54.  More importantly, on the wording of section 25(7) – “the principal or only instrument whereby the exchange … is effected shall … be charged” – it is contemplated by the legislature that an exchange can be effected by more than one instrument.  Hence, where there is more than one instrument, only the principal instrument is chargeable with stamp duty.

55.  Mr Leung submitted that the wording in section 25(7) is only to cater for the situation where there is an exchange instrument coupled with a supplemental instrument for “completing the title of either party”, and does not apply to the situation where there the exchange is effected by two separate instruments of conveyance.  He prayed in aid section 25(3) which deals with the situation “where there are several instruments of conveyance for completing the purchaser’s title” (emphasis supplied) and provides that “the principal instrument of conveyance only shall be chargeable”.  Section 25(7) provides that “where upon the exchange of any immovable property for any other immovable property, … the principal or only instrument whereby the exchange … is effected shall … be charged with the same stamp duty as a conveyance on sale for the consideration, and with that stamp duty only; and where in any such case there are several instruments for completing the title of either party, the instruments other than the principal instrument shall not be chargeable with any stamp duty” (emphasis supplied).  He submitted that sections 25(3) and 25(7) should be construed in the same way and be confined to the situation where a supplemental instrument is deployed to rectify an error or omission of the principal instrument to complete the title to property.

56.  We are not persuaded section 25(7) should be construed in such a restrictive manner.  Section 25(3) deals with the situation of a conveyance on sale where there are several instruments “for completing the purchaser’s title”, whereas section 25(7) deals with the situation of an exchange where there are several instruments “for completing the title of either party”.  Where two instruments of conveyance are executed to effect an exchange of properties, such that the property belonging to one party is transferred to another in consideration of that other person’s property being transferred to the first, it could fairly be said that there are several instruments for completing the title of either party.

57.  As for clause 5 of the assignments, we agree with Mr Wong that this provision does not affect the analysis.  It is obviously a boilerplate provision inserted in assignments to satisfy section 29 of the Ordinance.  The point is not so much whether the transaction is part of a larger transaction or a series of transactions, but whether certain value is exceeded bringing the instrument into a higher bracket of charges.  The value in that clause was not even filled in.

58.  Nor do we think it would affect the analysis that the Court Order provided for a timeframe of three months for the transfers to be carried out instead of a specific date.  The possibility that the assignments could be executed at different times does not alter the substance of the transactions, which was that the transfer of one property was the quid pro quo for the transfer of the other property.

59.  Mr Wong submitted there is nothing in section 25(7) to suggest that the exchange has to be contractual in nature and cannot be made pursuant to a court order.  He pointed out that section 25(7) is not subject to section 29AN^[24], which provides inter alia that a conveyance on sale is chargeable with stamp duty under Scale 2 of head 1(1) in the First Schedule if the conveyance is made pursuant to a court order.  Mr Leung has not argued to the contrary.  We are inclined to agree with Mr Wong.

60.  In our judgment, the true substance of the transactions effected by the assignments was an exchange of the two properties, with an equality consideration of $100,000, which was the accepted difference in value between the properties at the time the Court Order was made.  We therefore reject the primary contention of the Collector.

If section 25(7) is inapplicable for other reasons

61.  Despite reaching the conclusion that the Collector should have assessed the stamp duty liability in accordance with section 25(7), the judge did not make any determination of the basis upon which the equality consideration was calculable, nor did he find which of the assignments was the principal instrument chargeable with stamp duty.

62.  The Collector’s subsidiary argument is that section 25(7) is inapplicable even if the transactions effected by the assignments was an exchange of properties for two reasons.  First, on a proper construction of the assignments, no consideration has been paid or given, or agreed to be paid or given, for equality, so section 25(7) should be read subject to section 27(4).  Second, it is not possible to identify a principal instrument between the two assignments that should be chargeable with stamp duty.  

63.  Mr Leung pointed out that the assignments not only did not stipulate “any consideration is paid or given, or agreed to be paid or given, for equality”, as provided in section 25(7), clause 1 expressly stated that the properties, which are of different values, were assigned “at nil monetary consideration”.  Given that there is no or inadequate consideration paid or given, or agreed to be paid or given, for equality in an exchange, the application of section 25(7) is rendered subject to section 27, which governs voluntary dispositions.  The relevant provision is section 27(4) and this provides as follows:

“Any conveyance or transfer (not being a disposition made in favour of a purchaser or incumbrancer or other person in good faith and for valuable consideration) shall for the purposes of this Ordinance be deemed to be a conveyance or transfer operating as a voluntary disposition inter vivos, and (except where marriage is the consideration) the consideration for any conveyance or transfer shall not for this purpose be deemed to be valuable consideration where the Collector is of opinion that by reason of the inadequacy of the sum paid as consideration or other circumstances the conveyance or transfer confers a substantial benefit on the person to whom the property is conveyed or transferred.”

64.  The effect of this provision is that the exchange operates pro tanto the difference in values^[25] as a voluntary disposition inter vivos, by reference to the substantial benefit arising (Tan Kay Thye & Ors v Commissioner of Stamp Duty [1991] 1 SLR(R) 306 at §3, 36, 37, 42^[26]). The adequacy of consideration for this purpose is to be assessed on an objective basis and not by reference to the parties’ subjective intentions (Lap Shun Textiles Industrial Co Ltd v Collector of Stamp Revenue [1976] AC 530 at 534B to C; Thorn & Ors v Inland Revenue Commissioners [1976] 1 WLR 915 at 923C to D).

65.  Mr Leung submitted that the difference in value of the two properties of $700,000 as at the date of execution of the assignments in November 2013 would appear to confer a substantial benefit to one of the duty payers.  To the extent of the substantial benefit, either of the assignments should be deemed to be a conveyance operating as a voluntary disposition inter vivos under section 27(4), and be chargeable with stamp duty on the difference in values of the properties.  Section 25(7) provides that only the principal instrument shall be charged.  As the two assignments are almost identical in terms, it is virtually impossible to identify which is the principal instrument.  This impracticality demonstrates that section 25(7) is not applicable to the present situation. 

66.  Mr Leung further drew the court’s attention to the fact that the English equivalent to section 27(4)^[27] was repealed by the Finance Act 1985^[28] and a new provision was enacted^[29] to provide that an instrument by which property is conveyed or transferred in pursuance to a court order made on granting a decree of divorce or other orders of similar effect shall not be chargeable to stamp duty.  He made the point that in the UK an express statutory provision was needed to exempt instruments effecting conveyance of property upon a divorce from stamp duty.  There is no such provision in the Ordinance.

67.  For the reasons mentioned in the earlier part of this judgment, we have rejected the contention that the transactions effected by the instruments were for “nil consideration”.  As pointed out by Mr Wong, section 25(7) refers to the situation where “consideration is paid or given, or agreed to be paid or given, for equality”, not that consideration is “stated” to be paid or given for equality.  It is good practice to state the equality consideration in the instrument to avoid the risk of section 27(4) being invoked, but it is not a requirement under section 25(7) or section 27 that the equality consideration must be stated for the transaction to qualify as an exchange of properties.  This is consistent with the position at common law, which is that an exchange of properties of unequal value without giving equality consideration can be an exchange.  It is immaterial that the equality consideration was not expressly stated in the assignments.

68.  In any event, equality consideration was given in this situation.  As we have explained, the transfer of the 8A Property and the transfer of the 8B Property were part of an entire package encompassed in the Court Order which was designed to achieve substantial fairness and equality. Insofar as there was a difference of $100,000 between the values of the properties at the time, equality consideration had been given by Ngai in taking the transfer of the more valuable property.  Hung was compensated by the other provisions made in the financial distribution.  He received 52.74% of the combined assets whereas Ngai received 47.26%.

69.  This is not the proper situation for invoking section 27(4), as equality consideration was given by Ngai and there were no other circumstances by which a substantial benefit was conferred on her by the conveyance.  Nor did Hung obtain substantial benefit from the transactions having regard to the fact that they were made to give effect to the Court Order which provided for substantial equality.  It is inappropriate to have regard to the difference in value of the properties in the sum of $700,000 at the time the assignments were executed in November 2013.  The material date for drawing the line for equality consideration was in April 2008 when the Court Order was made and consideration was in fact given.  The subsequent increase in the values of the properties when the instruments were executed to give effect to the Court Order is immaterial.  The Court Order did not provide for any adjustments to be made for any fluctuation in property prices when the transfers were made to implement the Court Order.

70.  Unlike the English legislation^[30], there is no equivalent provision in the Ordinance to the effect that the parties may determine which is to be the principal instrument for the purpose of stamp duty.  Nor is there any provision stating how the principal instrument is to be ascertained, where the parties have not made a determination.  We do not regard this as an insuperable difficulty.  We are inclined to agree with Mr Wong that since section 25(7) imposes stamp duty on the equality consideration if paid, the principal instrument should be the instrument which provides for the equality consideration.  In this instance, absent express provision, this would be Assignment A, by which the more valuable 8A Property was assigned to Ngai.

The questions submitted for determination in the Case Stated

71.  The judge did not answer the questions submitted for determination in the Case Stated, or assess the stamp duty chargeable if the instrument is chargeable with stamp duty, as he is required to do under section 14(3) of the Ordinance.  Nor did he make an order under section 14(4), if the amount of stamp duty assessed by the court is less than the assessment of the Collector, that the excess of stamp duty paid shall be repaid to the duty payer.

72.  The Collector is correct that no enforceable order was made by the judge dealing with the stamp duty paid, or the assessments made by the Collector.

73.  On an appeal from a judgment of the District Court, the Court of Appeal has all the authority and jurisdiction of the District Court^[31], and may make any order as it thinks proper to ensure the determination on the merits of the real question in controversy between the parties^[32].  It is not in dispute that this court has the authority and jurisdiction to answer the questions submitted for determination in the Case Stated and to assess the stamp duty chargeable.

74.  The questions for each appeal in the Case Stated are: (a) whether the assignment is chargeable with any stamp duty; and (b) if so, the stamp duty chargeable thereon.

75.  We have ascertained from Ngai and Hung further information relevant to the rates on which stamp duty is chargeable in the First Schedule to the Ordinance. Section 29AP, which provides for ad valorem stamp duty at Scale 2 rates for certain instruments effecting exchange between residential properties, does not apply, as the parties do not come within section 29AP (3)^[33] or (4)^[34].

76.  Since this case does not fall within any other provisions which apply the more advantageous Scale 2 rates, the stamp duty chargeable is governed by the default provision in section 29AI. The applicable version of section 29AI at the time of execution of the assignments in November 2013 stated that except as provided in sections 29AS and 29AJ to 29AR and Notes 1B and 1C to head 1(1) in the First Schedule, a conveyance on sale is chargeable with stamp duty under Scale 1 of head 1(1) in the First Schedule, which is 1.5% of the amount or value of the consideration[35] .

77.  In respect of CACV 460/2018, which concerns Assignment A for the conveyance of the 8A Property to Ngai, for question (a), we would answer: “Yes” but only as an exchange of properties and on the equality consideration of $100,000.  For question (b), we would answer: $1,500, being 1.5% on the equality consideration of $100,000.

78.  In respect of CACV 461/2018, which concerns Assignment B for the conveyance of the 8B Property to Hung, for question (a), we would answer: “No”. Question (b) does not arise.

79.  We order the excess of stamp duty paid by Ngai and Hung be repaid to them by the Collector.

80.  As Ngai and Hung have indicated that they would not seek costs against the Collector, we make no order as to the costs of these appeals.