New legislation has been enacted in NSW which makes some important changes to the NSW duties and land tax provisions. The State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (the Act), which received Royal Assent on 19 May 2022, has seen a number of taxpayer-unfriendly changes made to the Duties Act 1997 (Duties Act) and Land Tax Management Act 1956, which include but are not limited to:
changes in beneficial ownership (beyond those transactions already listed under current rules) will become subject to duty;
acknowledgements of existing trusts will become subject to duty; and
providing for a refund of foreign purchaser duty / surcharge land tax in relation to a transfer of land if, after the transfer, the land is used by the purchaser wholly or predominantly for commercial or industrial purpose
Changes in beneficial ownership
The most significant change is the introduction of duty on a transaction that results “in a change of beneficial ownership of dutiable property, other than an excluded transaction”. The provisions are modelled on similar provisions in Victoria, but they have a wider application because:
- of the broader concept of ‘land’ as a category of ‘dutiable property’ in NSW; and
- excluded transactions will be dutiable if part of a scheme or arrangement that, in the Chief Commissioner’s opinion, was made with a collateral purpose of reducing the duty otherwise chargeable under Chapter 2 of the Duties Act.
These provisions fundamentally change the tax base for duty in NSW, and change it from a tax on transfers of property to one on the creation, extinguishment or transfer of property. Accordingly, many previously non-dutiable transactions may now be dutiable. In particular, the granting of an option to purchase land is now deed to result in a change in beneficial ownership, and thereby constitutes a dutiable transaction on which duty, even if only nominal, is payable. Unfortunately, there is no crediting mechanism that allows for a credit for the duty paid on the grant of an option against the transfer duty payable on the agreement formed by its exercise. This gives rise to the potential for double duty on the same transaction. It is also noted that if the call option is not exercised, a refund of duty will not be issued, as the existing provisions which provide for a refund on a cancelled agreement have not been extended to options.
Acknowledgements of trust
Another significant change is to charge 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 that 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.
This change was made in response to the Supreme Court’s decision in Chief Commissioner of State Revenue (NSW) v Benidorm Pty Ltd , where it was determined that, amongst other things, that a document that did not effect a transaction but merely acknowledged an existing legal position would not attract duty.
The new provision means care should now be taken when entering into ‘routine’ documents that, for example, amend trust deeds, and in which a statement as to the trustee capacity of a contracting party is made (even where that statement has no substantive effect upon the interests of anyone). From a policy perspective, the ‘acknowledgement of trust’ change is concerning as its effect seems contrary to the overall purpose of the duties legislation which is to tax transactions / changes in rights, rather than documents.
Revenue NSW has indicated that further guidance is intended to be provided regarding examples of common situations in ‘routine’ documents that Revenue NSW will not be seeking to impose duty upon. However, this has not been included in the materials published to date.
Foreign purchaser surcharge duty / foreign surcharge land tax
The changes have introduced a refund mechanism which enables surcharge duty paid in relation to a transfer of land to be refunded if, after the transfer, the land is used by the purchaser wholly or predominantly for commercial or industrial purposes. A similar mechanism has been introduced into the land tax legislation so as to refund any surcharge land tax paid on land which is subsequently used for a commercial or industrial purpose.
These are welcome changes as they make it clear that residential land acquired for a future commercial or industrial use is not intended to be ultimately subject to surcharge taxes. The NSW Government has recognised the competitive disadvantage taxes of this type impose on foreign investors who want to develop land which may be better suited for commercial or industrial use, and the adverse impact it can have on the development of priority precincts in NSW.
The Duties Act also provides the Chief Commissioner a power to grant an exemption in advance (rather than requiring payment and refund) for particular transactions or classes of transactions where they are satisfied that the entitlement to a refund is likely to arise in the future (i.e. that the use of the land for commercial or industrial purpose will be achieved within 10 years after the transfer). Practically, the exercise of this power is likely to require the provision of sufficient evidence to satisfy the Chief Commissioner that the intended change of use will occur and an undertaking to refund the money if the intended change of use is not ultimately achieved.
Whilst the Act contains a number of other changes (including to the anti-avoidance provisions), the above changes are the most noteworthy. Due to the breadth of the changes, we recommend careful consideration of how they may impact any current transactions, including market-standard transactions that may not have previously given rise to duty implications.
DISCLAIMER: This article is provided to clients and readers for their general information and on a complimentary basis. It contains a brief summary only and should not be relied upon or used as definitive or complete statement of the relevant law.