NSW duties net substantially expanded
Do you need to pay duty on transactions that were not previously dutiable in NSW? From 19 May 2022, the answer could be yes.
From 19 May 2022, the New South Wales duties net has been considerably widened. While the scope of the changes is not yet fully known, it is clear that duty is now imposed on at least the following transactions that were not previously dutiable in New South Wales:
a grant of an option over dutiable property. This could be in the form of a call option or a put option. For an arrangement involving both a put and call option, there will be two dutiable transactions;
a grant of an easement for consideration; and
a creation of a life interest in land, other than under a will or testamentary instrument.
The expansion of duties in New South Wales means extreme caution should be exercised in any transaction involving dutiable property in New South Wales (usually land, or land and buildings) as there is a risk that a duty liability could be inadvertently triggered. You should make sure that any transaction that is not clearly dutiable is "double checked' against the new law to make sure that duty is not payable.
What was the change?
On 19 May 2022 the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW) (the Amending Act) received Assent. The Amending Act made a series of changes to NSW revenue laws. Some of the other changes will be outlined in later e-Alerts.
The duties changes included the introduction of 2 new dutiable transactions, being the "change in beneficial ownership in dutiable property" and "acknowledgment of trust over dutiable property".
Revenue NSW has also issued a "technical guide" on its website to accompany the Amending Act (the Technical Guide).
A change in beneficial ownership of dutiable property
The introduction of a change of beneficial ownership in dutiable property as a dutiable transaction has wide-reaching consequences for a number of transactions, including potentially the removal of a default beneficiary of a discretionary trust, the grant of options, the creation of a life tenancy and the grant of an easement in land.
It is unclear whether change of beneficial ownership is intended to capture a grant of a mortgage over land. A grant of a mortgage does create an equitable interest in the land but it would be surprising if these changes were intended to reintroduce mortgage duty, which was abolished in New South Wales on 1 July 2016.
There are some transactions which result in a change of beneficial ownership but which are excluded from being dutiable. For example, some dealings with units in a unit trust scheme; the grant, renewal or variation of a lease for no consideration; grant of an easement for no consideration; or the creation of an interest in dutiable property by statute. There may also be other transactions that are later excluded by regulations.
Grants of options
In relation to the grant of an option, which was not previously a dutiable transaction, Revenue NSW states in the Technical Guide that duty is calculated on the option fee paid for the grant of the option but that the option fee does not include security deposits, performance payments and legal costs. Surprisingly, there is no mention in the Technical Guide that the dutiable value would be the greater of the option fee and the unencumbered value of the option, which is how dutiable value is ordinarily calculated. There does not appear to be anything in the Amending Act that modifies this ordinary rule.
Importantly, the approach of Revenue NSW now means that the duty impact of a person paying an option fee for the grant of an option needs to be considered.
Revenue NSW notes in the Technical Guide that there is no credit for the option fee when the option is exercised. Previously, the option fee was subject to duty as part of the purchase price on exercise of the option as it was considered that it formed part of the "consideration". It is unclear whether Revenue NSW now considers that the option fee will not form part of the consideration on exercise. There is nothing in the Amending Act that excludes the option fee from being treated as consideration on exercise of the option. As a result, there is potentially double duty in these circumstances.
If the call option is not exercised, there is no refund of the duty paid on the grant of option.
Acknowledgment of a Trust
If you make a statement which purports to be a declaration of trust but merely acknowledges that property is already held, or is to be held, on trust for a person, then the mere acknowledgment of a trust is now dutiable.
A trust acknowledgment can be best understood from the case that caused the NSW Government to introduce this new duty rule, being Chief Commissioner of State Revenue v Benidorm Pty Ltd [2020] NSWCA 285, where the trustee of a pre-existing "bare" trust of real property executed a document with the beneficiary in which it declared that the real property was held on trust for the beneficiary. The Chief Commissioner was unsuccessful in claiming that the execution of this document was a declaration of trust for duties purposes as the NSW Court of Appeal held the document was not a declaration of trust within the NSW Duties Act as, despite the words in the document, it merely acknowledged an existing trust.
Where a trust acknowledgement is dutiable, the duty will be calculated on the dutiable value of the dutiable property at the time of the acknowledgment of the trust.
This new dutiable transaction means that whenever a document is prepared to confirm or acknowledge a trust, it is extremely important that it be drafted with care and precision to ensure it does not constitute a "declaration" of the trust.
Should you wish to discuss the potential implications for you or your clients, please contact us.
The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.