On 19 May 2022, the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW) (‘the Act’) received Royal Assent.
The Act operates to broaden the current duty coverage in NSW, introducing significant changes to the Duties Act 1997 (NSW). One of these significant changes include the imposition of duty when granting put and/or call options over NSW dutiable property resulting in a change in beneficial ownership.
To comprehend these perplexing amendments, you need to be familiar with the following terms:
- A duty is a payment levied when one purchases a property.
- A call option gives the buyer a right but not the obligation to buy an asset at the set price within the set time period.
- A put option gives the seller a right but not the obligation to sell the asset at the set price within the set time period.
Changes in Beneficial Ownership
In the Act, ‘beneficial ownership’ is not defined. With this wide scope, this allows new types of transactions to be captured.
According to the Act, transactions that result in a change in beneficial ownership of dutiable property includes:
- the creation of dutiable property (including the granting of an option (except for a put option) over dutiable property);
- extinguishment of dutiable property;
- a change in equitable interests in dutiable property;
- dutiable property becoming the subject of a trust; or
- dutiable property ceasing to be the subject of a trust.
These provisions extend the current duty coverage of NSW as it includes a tax on the creation, extinguishment or transfer of a property. This means that non-dutiable transactions prior to the introduction of these changes are now dutiable.
Following the introduction of the Act, Revenue NSW has published the ‘Legislation Amendment Act 2022 guide’ (‘the Guide’) that provides further clarity relating to how its new provisions are implemented and its impact on dutiable transactions.
In particular, the Guide has detailed how the ad valorem duty is calculated with the grant of an option. The duty will be calculated on the option fee, however, not all payments will be dutiable option fees such as performance payments, legal costs and genuine security deposits.
* Please refer to some published examples from Revenue NSW at the end of the article for greater understanding.
Lastly, it is important to note that double duty may arise such as in the instance of premium transfer duty (if applicable). Premium transfer duty may be payable if the value of an option of a residential property is greater than the relevant premium duty threshold. Unfortunately, there is no crediting mechanism that allows for the duty to be credited on the grant of an option if the premium transfer duty was payable by its exercise. Further, the duty paid on the grant of an option is non-refundable if a call option is not exercised.
Therefore, those who are involved in property transactions must be familiar with the recent changes to NSW’s duty regime as former non-dutiable transactions such as the use of options are now captured by the amended duty regime.
Example 1
1. The grantee pays an option fee of $20,000 and obtains an option to purchase land from the grantor for $2,000,000.
Duty is payable on the option fee of $20,000 that was paid to the grantor.
Example 2
2. The grantee then transfers the call option to the purchaser and receives a transfer fee of $500,000 (the unencumbered value of the option).
Duty on $500,000 is payable by the purchaser within three months of the liability date.
Applying the general rate as at March 2021
Ad valorem duty on $500,000 = $17,835
3. Purchaser B then exercises the call option.
Duty is payable on the land transfer ($2,500,000 – $2,000,000 + $500,000) by Purchaser B within three months of the option exercise date.
Applying the general rate as at March 2021
Ad valorem duty on $2,500,000 = $122,505
$122,505 – $17,835 = $104,670