By Jinny Chaimungkalanont and Mark Peters
The new “change in beneficial ownership” provisions (covered in our note here) have been in force in NSW since 19 May 2022 (State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW)). Almost six months on, Revenue NSW has released Commissioner’s Practice Notes (CPN) on the provisions generally and on their application to lease transactions. Revenue NSW had also previously issued a guide to the Amending Act which casts some additional light on the proposed administration of the new provisions.
We outline below a summary of the key changes and duty outcomes, noting also that careful consideration of the transaction structure and drafting of transaction documents are critical to ensure appropriate duty outcomes. For example, should a put and call option structure be used, rather than a contract for sale of land in a particular case? Is the amount payable under a call option properly characterised as an option fee or a security deposit? On the grant of a lease, what if anything should the parties agree to in relation to improvements at the end of the lease term?
The CPN has a significant impact on leasing transactions in NSW:
- the grant of a lease (which includes an agreement for lease) for consideration other than rent, will be dutiable at rates up to 5.5% (at general rates). The CPN indicates that outgoings such as rates, charges and taxes are not treated as consideration for the grant of a lease. If the lease is granted for monetary consideration (i.e. a premium) alone, a valuation report is not required (s 21(5)).
- the focus on the distinction between consideration for the grant of the lease and consideration for the right to use the land (i.e. rent) in the CPN means it is critical to ensure precise drafting, so that all benefits moving from the lessee to the lessor are clearly characterised.
- there are major changes to the way duty is assessed on leases where the lessee is obliged to, or does undertake, improvements:
- a lease may be dutiable on its grant where the lessee is under an obligation to undertake improvements and, under the terms of the lease, the improvements are to become the property of the lessor at the end of the lease (Revenue NSW indicates in the CPN it will monitor these transactions closely). Duty will be calculated on entry into the lease or agreement for lease on the value of the improvement to the lessor when the lease term concludes (discussed further below). This will significantly impact lease transactions in a PPP (Public-private partnership) context with a concession term of up to 50 years; and
- a lease may be dutiable on its expiry / extinguishment (i.e. the lease term ends) where the lessee has undertaken improvements and surrenders the rights in valuable fixtures and / or fit out to the lessor. Duty will be calculated on the value of the fixtures and fit out which the lessor acquires (unless it is surrender, for no consideration, of a tenant’s interest in fixtures that are fit out for commercial premises, as this is an excluded transaction).
- the CPN confirms that payments moving from a lessee to the lessor on termination of a lease (e.g. make good payments or compensation for lost rent) are not dutiable.
- a grant of a lease where the lessee pays or agrees to pay the lessor’s legal fees which are non-refundable and are greater than $1,000 will be dutiable. This means that most commercial leases in NSW which contain such a clause will need to be stamped with duty on the sum of legal fees paid by lessee.
Options to purchase land in New South Wales
- the grant of a call option to purchase land in NSW is dutiable on the greater of the consideration for the grant of the call option or the unencumbered value of the option. In the ordinary case, duty will be calculated on the option fee, and an independent valuation report will not be required. Where there is no consideration and the option is not valuable, the option must still be stamped for $10 duty. A process agent is able to stamp the option (i.e. it does not need to be lodged with Revenue NSW).
- double duty will be payable on any option fees. That is, in the usual case:
- duty will be payable on the grant of the option on the option fee; and
- duty will be payable on the contract on the total consideration which will be deemed to include any option fees.
- for this reason, taxpayers should consider whether it remains appropriate in a particular case to adopt a put and call option structure, rather than a contract for sale of land (subject to any required conditions precedent).
- a security deposit paid on the grant of a call option may be dutiable as an option fee depending on its features. In particular, duty will be payable on a security deposit that is non-refundable if the option is not exercised. The CPN suggests that Revenue NSW will treat a security deposit as non-dutiable where:
- the security deposit is wholly refundable if the option is not exercised;
- it is paid into an escrow account; and
- there are no break or other fees under the option.
In our view, the full value of the security deposit should not be dutiable if the security deposit is refundable and is applied towards to the contract price on exercise of the option (even if it is not held in escrow), as the value to the vendor (i.e. the consideration which “moves” the grant of the option) is at most the right to use the funds for the option period.
- contracts or transfers which are entered pursuant to an option must be lodged with Revenue NSW for stamping. This means that Revenue NSW will review the stamping of the original grant of the call option (which would likely have been completed by a process agent) and may seek to reassess duty on the grant of the call option if it is under-stamped. Note also that sufficient time must be factored into the transaction timetable to enable Revenue to finalise stamping of the contract before PEXA settlement can occur.
Options (other than option to purchase land)
- An option over dutiable property which is not “an option to purchase land in New South Wales” should not be dutiable on grant. For example, an option to be granted a lease or an option to be granted an easement, are not dutiable transactions.
- the grant of an easement or profit a prendre for consideration is dutiable.
- the conversion of a discretionary trust to a fixed trust and vice versa is considered dutiable as a change of beneficial ownership to the extent the beneficial interest in the dutiable trust property changes.
- trust cloning and a change of capacity in which a trustee holds dutiable property are addressed in the CPN. Revenue NSW has confirmed that these transactions will, in their view, be dutiable as a change of beneficial ownership.
- the landholder duty rules in respect of unit trust schemes are not affected; the usual rules and thresholds for making a dutiable relevant acquisition continue to apply.
Change of Beneficial Ownership – Refresh
The provisions under the NSW Duties Act prior to the amendments imposed duty on specified dutiable transactions involving dutiable property (e.g. a sale, a transfer, a declaration of trust and a vesting under statute or court order relating to land). The new regime, which is largely modelled on similar provisions in Victoria, makes any other transaction that effects a change in beneficial ownership dutiable. The provision provides:
“This Chapter charges duty on:
another transaction that results in a change in beneficial ownership of dutiable property, other than an excluded transaction.”
Beneficial ownership is not defined but it includes the ownership of property by a person as trustee of a trust. The concept of a “change in beneficial ownership” is defined inclusively as:
- “the creation of dutiable property,
- the extinguishment of dutiable property,
- change in equitable interests in dutiable property,
- dutiable property becoming the subject of a trust,
- dutiable property ceasing to be the subject of a trust.”
The list of “excluded transactions” is extensive and has been further expanded by the Duties Regulation 2022 (NSW), subject to an anti-avoidance rider. The present list is included below.
Significant impacts on NSW leasing practice
Why is the grant of a lease now dutiable in New South Wales?
Since the abolition of lease duty in 2008, the duty payable on the grant of a lease has been confined to circumstances where a premium is paid, being where monetary consideration is given by the lessee to the lessor for the grant of the lease (including consideration for an option and an agreement for lease). Under the new regime, the grant of a lease is a dutiable transaction (as it creates an interest in land), unless it is the grant of a lease for no consideration (monetary or non-monetary) other than rent (which is consideration for the right to use the land rather than for the grant of the lease).
This change means that significant complexity arises in respect of transactions where non-monetary consideration (which was previously not dutiable) is given as there is a need to quantify the value of that consideration when the lease is granted. Revenue NSW indicates in the CPN that a dutiable transaction will also arise if an agreement for lease is entered into for non-monetary consideration, but that would only be strictly correct if the agreement for lease is specifically performable. Prior to that time, the agreement for lease confers no interest in land. It is the creation of an interest in land which attracts duty under the new regime (cf s 8(1)(b)(viii)); not the creation of a lease as that term is defined in the NSW Duties Act.
Further, Revenue NSW expresses the view in the CPN that a transaction can be dutiable in respect of both monetary consideration (under the longstanding provisions which impose duty on a lease premium) and non-monetary consideration (under the new change of beneficial ownership provisions). There are technical complexities accompanying this view and there remains doubt as to whether this is the proper construction of the legislation.
Another significant change in practice is to impose duty on the grant of a lease if the lessee is under an obligation to undertake improvements to the land and, under the terms of the agreement for lease or lease, the improvements become the property of the lessor at the end of the lease. This is a reflection of the fact that the lessee is, potentially, adding significant value to the lessor’s reversionary interest in the land, as the land will be returned to the lessor in an improved state.
The CPN indicates that evidence of the value of the improvements must be provided by the lessee at the time of stamping of the lease or agreement for lease (which is generally prior to construction and will generally require a degree of estimation). However, in lieu of evidence of value, Revenue NSW will accept evidence of the cost of improvements and use the following methodology to calculate the proportion of the value attributable to the improvements, as the dutiable value for the grant of the lease. The dutiable value of the improvements will be the cost of the construction activities including GST:
|Term of Lease (excluding option periods)||% of cost of improvements|
|10 years or less||100%|
|Greater than 10 but not more than 20 years||75%|
|Greater than 20 but not more than 30 years||50%|
|Greater than 30 but not more than 50 years||25%|
|Greater than 50 years||0%|
|Periodic lease or lease for a term that cannot be ascertained when the lease is made||100%|
Revenue NSW provides this example as to the intended operation of the formula:
“The Landlord grants XYZ Pty Ltd a 15-year lease of an industrial building. The lease is granted for a peppercorn rent. The lease is conditional on the lessee making improvements to the currently dilapidated industrial estate. The improvements cost $20 million. However, as per the above table, the dutiable value will be 75% of the cost of the improvements, and duty will be calculated on $15 million.”
It should be remembered that the use of this formula is not mandatory. Revenue NSW indicates in the CPN that it will accept a reasonable valuation from a qualified valuer engaged by the taxpayer at the time of entering into the lease or agreement for lease which supports a different value from that produced by the formula.
Duty on expiry of a lease / surrender of interests in fixtures / fit out
The CPN indicates that a dutiable transaction may arise on the expiry of a lease if valuable fixtures and fit out are not severed from the property (common law fixtures) or otherwise removed from the property (common law chattels). As the definition of “change in beneficial ownership” includes the extinguishment of dutiable property, this would include the expiry of a lease unless it is for “no consideration” (in which case it would be an “excluded transaction” under new Duties Regulations).
The CPN provides two examples:
“Example 4: A grants a lease of NSW land to B for a term of 5 years. B defaults on the rental payments. At the end of the 5-year term, B surrenders their rights in some fixtures and fit out on the leased premises in exchange for the release of a debt equivalent in value to the surrendered items. The surrender of the fixtures and fit out will be liable on the value of the fixtures & fit out.
Example 5: A leases 3 floors of a commercial office tower in NSW from B for 10 years. The lease includes a provision that requires the lessee to remove all fit out and fixtures at the expiration of the lease. At the end of the lease the lessor allows the lessee to leave without removing the carpet, office partitions etc. No duty is payable on the expiry of the lease.”
This new head of duty adds substantial complexity to arrangements where a lessee leaves behind fixtures and fit out of substantial value at the end of a lease. It also remains unclear how these provisions will interact with the provisions discussed above, in respect of a lessee’s obligation to make improvements which may make a lease dutiable in the hands of the lessee on its grant.
Options in NSW
Why are “Options to Purchase Land in NSW” dutiable?
Section 11(1)(k) of the NSW Duties Act provides that “an option to purchase land in New South Wales” is dutiable property. Accordingly, the grant of a call option is a dutiable transaction, as a “change of beneficial ownership” includes the creation of dutiable property.
Section 21(1) provides that duty is levied on the greater of the consideration for the grant of the call option or the unencumbered value of the option. In the case of a call option which is granted for no consideration it will ordinarily be the case that the option is of no value (e.g. where market consideration is payable on exercise of the call option) and duty will be confined to the statutory minimum of $10 (s 273(1)). In the ordinary case a valuation report will not need to be obtained to substantiate the unencumbered value of the option.
Any duty paid on the grant of a call option is not credited against the duty payable on exercise of the option and duty will be imposed on the option fee again when the contract is entered into (s 22(4)). Taxpayers should consider whether it remains appropriate in a particular case, to adopt a put and call option structure rather than a contract for sale of land (subject to any required conditions).
Security deposits for “Options to Purchase Land in NSW”
Following the introduction of the new provisions, there has been considerable uncertainty as to the circumstances where a “security deposit” will be dutiable as consideration for the grant of the call option. Security deposit is not an exact term and there are a myriad of payments which could attract the description of “security deposit”.
The CPN indicates that a “security deposit” with the following features will not be treated as a dutiable option fee:
- the security deposit is wholly refundable if the option is not exercised;
- it is paid into an escrow account subject to an objective condition for the grant of the option (e.g. securing finance); and
- there are no break or other fees under the option.
It is not clear whether Revenue NSW intends by this list that a “security deposit” will only be non-dutiable if it has all the characteristics above (although the CPN does indicate that a non-refundable security deposit will be dutiable as an option fee).
In our view, the question is whether the security deposit secures performance of the option or contract (if the option is exercised) or whether it “moves” the grant of an option. Where a security deposit is refundable but released to the vendor (i.e. not held in an escrow account), what “moves” the grant of the option is having the use of the security deposit until it is refunded; it is the value of having use of the funds which is the consideration (e.g. the interest saved by not having to obtain arm’s length debt). It is difficult to see how duty could be levied on the entirety of the security deposit amount in such circumstances.
Options (other than options to purchase land)
The interest in dutiable property conferred by an option to acquire that property is not of itself dutiable property (s 11(l)(ii)), in contrast to “options to purchase land in New South Wales” considered above. On this basis, for example, an option to be granted a lease, easement or another land interest will not be dutiable on the grant of the option.
That being said, in the case of a lease, any consideration paid for the grant of the option will form part of the dutiable value when the lease is granted, as there is a deeming provision which treats such consideration as a premium for the grant of a lease (s 8(3)).
The transactions which are presently excluded (subject to an anti-avoidance rider) from the change of beneficial ownership rules under the NSW Duties Act and the Regulations are:
NSW Duties Act
- the purchase, gift, allotment or issue of a unit in a unit trust scheme,
- the cancellation, redemption or surrender of a unit in a unit trust scheme,
- the abrogation or alteration of a right relating to a unit in a unit trust scheme,
- the payment of an account owing for a unit in a unit trust scheme,
- the grant, renewal or variation of a lease for no consideration,
- the grant of an easement for no consideration,
- the grant of a profit a prendre for no consideration,
- the provision of a security interest within the meaning of the Personal Property Securities Act 2009 (Cth),
- a change in a trustee’s right of indemnity,
- the creation of an interest in dutiable property by statute,
- a transaction of a kind prescribed by the regulations,
- a combination of the transactions referred to in paragraphs (a)–(k).
- a change in default beneficial interests under a discretionary trust, including the following—
- a change to the default beneficial interests of the default beneficiaries,
- the addition or removal of a default beneficiary,
- a change in beneficial ownership of dutiable property that occurs—
- under a testamentary instrument or the laws of intestacy, or
- otherwise by operation of law on the death of a person,
- the grant or termination of a life estate in dutiable property for no consideration,
- the variation or surrender of an easement for no consideration,
- the grant, creation, variation or extinguishment of a mortgage, charge or other security over land,
- the creation, variation or surrender, for no consideration, of a tenant’s interest in fixtures that are fit out for commercial premises,
- a change in tenancy under a lease for no consideration,
- a change, for no consideration, in the holding of property—
- from joint tenants to tenants in common in equal shares, or
- from tenants in common in equal shares to joint tenants,
- the grant, variation, cessation, revocation or cancellation of a water right,
- the expiry, extinguishment or merger of one or more leases for no consideration,
- the variation or extinguishment of a profit a prendre for no consideration,
- the surrender of a security interest for no consideration.
In addition, as noted in the CPN, transactions that are otherwise not dutiable under other sections of the NSW Duties Act are also not dutiable as a change in beneficial ownership, including:
- the termination of a lease by the lessor before the expiry date where the lessee is facing hardship and there is no value passing to the lessor,
- early termination by the lessee for various commercial reasons and a payment is made to the lessor in compensation for the rent lost by the lessor,
- an option to a right to occupy / lease premises in a retirement village within the meaning of section 5 of the Retirement Villages Act 1999 (NSW),
- a lease or agreement for a lease of residential premises used, or intended to be used, exclusively as a residence,
- a lease or agreement for a lease of a movable dwelling site used, or intended to be used, as the principal place of residence of the lessee,
- an extension or renewal of a lease where the lessee pays legal fees as or instead of rent,
- an option to extend or renew a lease.
 Assuming the unencumbered value is not greater.
 The grant of a put option only is not dutiable as it is not an “option to purchase” – BP7 Pty Ltd v Gavancorp Pty Ltd  NSWSC 265 at  (Darke J).