Recent changes to the New South Wales Duties Act mean more transactions are dutiable in that State from 19 May 2022. In this article, Luke Hefferan (lawyer) outlines the key changes and sends a warning to tread carefully given the uncertainty surrounding some of the new provisions.

What are the effects of the amendments?

In short, transactions that may not have been subject to duty previously may now be dutiable. Amendments to the Duties Act mean duty is now imposed on—

• any changes in beneficial ownership of dutiable property (except for specified excluded transactions), and
• acknowledgments of trust over dutiable property.

Changes in beneficial ownership

The new provisions impose duty on certain transactions that result in a change in beneficial ownership of dutiable property. This includes—

• the creation or extinguishment of dutiable property
• a change in equitable interests of dutiable property, and
• dutiable property becoming, or ceasing to be, the subject of a trust.

Duty is calculated on the dutiable value of the property when the change in beneficial ownership occurs. Duty is payable by the party who obtains the beneficial ownership or whose ownership increases.

The grant of an option is now dutiable

Duty is now payable on the grant of an option to purchase land in NSW. This is because the grant of such an option is the creation of dutiable property and is a change of beneficial ownership under the new Duties Act provisions.

Duty is payable on the call option fee paid for the grant of the option. It is the grantee (ie the person to whom the option is granted) who should pay the duty. It should be noted:

• If no call option fee is payable for the grant of the option, nominal duty of $10 is payable.
• The duty paid will not be credited towards the duty payable when the option is exercised. Nothing excludes the option fee from being treated as consideration on the exercise of the option and as such, the option fee will be subject to double duty. 
• A refund of duty is not available if the option is not exercised.
• Any put option fee is not liable to duty.
• Premium transfer duty may also be payable if the grant of the option relates to residential land and the call option fee is greater than the relevant threshold (being $3,268,000 at 1 July 2022).
• A subsequent transfer or novation of an option, or a nomination under the terms of an option, will remain a dutiable transaction.

The position in relation to put option agreements (which do not include a call option) is unclear. A put option (being an option to require another party to purchase land) is arguably not the grant of an option to purchase land in NSW. Therefore, it is not the creation of dutiable property and may not be dutiable. However, Revenue NSW’s consistent references to ‘put and/or call options’ in the guidance notes published so far mean the position is unclear.

Some easement and lease transactions

The grant of an easement for consideration will now be dutiable in NSW. Duty will be assessed on the higher of the consideration and the unencumbered value of the easement. 

A grant, renewal, or variation of a lease (if it creates an interest in land) for consideration may also be caught by the amendments to the Duties Act. This is inconsistent with existing lease provisions in the legislation which provide for duty to be calculated and payable, on any premium paid and not on the unencumbered value. 

Acknowledgement of trusts

There is also a new provision imposing duty on the making of a statement that—

• purports to be a declaration of trust over dutiable property, but
• merely has the effect of acknowledging identified property vested, or to be vested, in the person making the statement is already held, or to be held, in trust for a person or purpose mentioned in the statement.

Duty is calculated on the dutiable value of the property (being the higher of the GST inclusive consideration or unencumbered market value of the dutiable property the subject of the trust) at the date of the acknowledgement of trust. Also:

• Surcharge purchaser duty will apply if the trustee of the trust is a foreign person and the dutiable property is residential-related property. 
• Premium transfer duty will be payable if the acknowledgement relates to residential property with a value greater than the premium duty threshold.

These amendments were introduced as a direct response to a NSW Court of Appeal decision which narrowed the scope of the existing declaration of trust provisions in the Duties Act. The Court said a document which did not effect a transfer but merely acknowledged an existing legal position was not liable to duty. That is, a mere acknowledgement of an existing trust was not a declaration of trust and therefore not dutiable. 

Arguably, the changes introduced have unintended consequences for taxpayers by widening the scope of dutiable transactions in relation to declarations of trust over dutiable property. In legal and financial services circles, there are two views on how these new provisions may operate. 

On a broad view, the breadth of the language of the new provision may capture a broad range of transaction documents, such as custodian or bare trust agreements that identify how the dutiable property is held. It may also include routine documents, such as minutes of meeting, which refer to the trust. There are concerns documents containing words that may be construed as a declaration of trust, even if the trust is already constituted, may result in additional duty even when duty has already been paid on the acquisition of dutiable property by the trustee. On a narrow view, the new provision may only capture trusts that were not subject to duty when they were first declared, such as resulting trusts.

Further guidance needed

Given the uncertainty surrounding some of these new provisions, calls are being made for Revenue NSW to provide clarification. It is expected Revenue NSW will issue further guidance to clarify these new provisions by issuing revenue rulings and commissioner practice notes. We will be monitoring this situation and issuing updates.

A warning

Tread carefully. The amendments to the Duties Act mean the scope of transactions liable to duty in NSW has widened. The changes will also result in an increased administrative burden for taxpayers in lodging documentation for assessment. 

It is likely Revenue NSW will issue regulations, guidance notes and public rulings to provide clarification and to address concerns and questions being raised. However, until then, taxpayers should carefully consider any proposed transactions in respect of dutiable property in NSW and whether such transactions will be subject to duty, even if only a nominal amount.

Reach out to Brooke Bostock or a member of our Real Estate team if you have any concerns or questions.