Significant stamp duty changes affecting property transactions

By Mark Peters.

New stamp duty will be imposed on a change in beneficial ownership or a trust acknowledgement, plus a welcome change to refund foreign purchaser duty for non-residential land.

Proposed changes now in force

On 19 May 2022 the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW) (Amending Act) received the Royal Assent. The amendments to the NSW Duties Act discussed below came into force on the date of Assent.

Revenue NSW has now issued a guide to the Amending Act which casts some additional light on the proposed administration of the new provisions. However, the provisions are complex and advice should be sought before entering any transaction which may fall within their scope. A few key takeaways from the Amending Act which have been crystallised by the guide include:

• the grant of an option over dutiable property that creates an interest in the dutiable property is a dutiable transaction. Alternatively, in the specific case of an “option to purchase land in New South Wales” (which is of itself dutiable property) the creation of the option may be dutiable regardless of whether it creates an interest in the underlying land. It unfortunately remains unclear practically how this will be administered and it appears duty will be levied twice in the case of options involving land.^[1] That is, duty could be imposed on the option fee on granting the option and again on the transfer of land pursuant to s 22(4) which aggregates any option fee with the consideration for the transfer for the purpose of determining dutiable value for duties purposes. However, not all payments will be dutiable option fees, for example a genuine security deposit should not attract duty under the new provisions.
• the grant of an easement for consideration will be dutiable on the greater of the consideration and the unencumbered value of the easement. This is a new head of duty. Previously, the grant of an easement (for consideration or otherwise) was not dutiable in NSW.
• the grant, renewal or variation of a lease (if it creates an interest in land) for consideration will be dutiable on the greater of the consideration and the unencumbered value of the lease. This language is unfortunate as it creates a mismatch between the imposition of duty on a lease in respect of which a premium is paid which is presently only dutiable on the premium (no market value test).

The unanswered questions remain manifold. For example, the meaning of “beneficial ownership” in the new change of beneficial ownership provisions is unclear; that is, what quality of right / interest must exist before one can be said to take beneficial ownership? The inclusive definition of “beneficial ownership” as including a trustee of a trust casts limited light of the intended scope.

In Kent v Vessel 'Maria Luisa' (No 2)^[2] Tamberlin and Hely JJ said (at [66]):

“Ownership, whether legal or equitable, therefore involves something greater than beneficial interest. Equitable ownership of property is commensurate with the right to relief in a Court of Equity … If a person has contractual rights in relation to a ship which, if performed will result in the person becoming the owner of the ship, then the person will be regarded as the equitable owner of the ship provided that specific performance of the contract would be decreed. Thus entitlement to a vesting order or equivalent relief would be necessary before AFE could be regarded as the equitable owner of the ship as at the relevant date.” (citations omitted).

Subsequently in Ellison v Sandini Pty Ltd[3] this view was affirmed and it was said “a ‘beneficial owner’ of an asset has more than a mere proprietary interest in the asset. To be a beneficial owner the person must have rights which a court of equity would enforce involving full dominion over the asset.”^[4]

Testing this in relation to the now dutiable grant of an option, it may be that if the option would not entitle the grantee to specific performance (such as where it is conditional on events outside the control of the parties / cannot be unilaterally waived) there would be no change in beneficial ownership for the purpose of the new provisions. However, in the case of an “option to purchase land in New South Wales” the question may be focused on whether there has been a change of beneficial ownership of the option, rather than the underlying land. In our view however, the grant of a put option only is not dutiable as it is not an “option to purchase”^[5] and it is clearly the case that a put option does not create an interest in land.

The guide to the Amending Act also confirms that an acknowledgement of trust^[6] will be dutiable as a declaration of trust and must be submitted to Revenue NSW for assessment (i.e. a process agent cannot stamp the transaction). However, it remains unclear what “purports to be declaration of trust” means and whether it invites interrogation of the (presumably) objective intention of the person “making [the] statement” or whether the inquiry is confined to the effectiveness of the words to be a “declaration of trust” (as that is understood post Chief Commissioner of State Revenue v Benidorm Pty Ltd).^[7]

It is to be hoped that Revenue NSW will continue to revisit the effect of the Amending Act to ensure the expansion to the duty base is fit for purpose and uniformly applied.

Below are further details on the Amending Act, in the form we had initially published.

Proposed reforms

On 23 March 2022, the Minister for Customer Service and Digital Government introduced the State Revenue and Fines Legislation Amendment (Miscellaneous) Bill 2022 (NSW) (Bill) into the New South Wales Legislative Assembly.

The objects of the Bill are relevantly to “make miscellaneous amendments” to the State revenue legislation; however, practically, the Bill proposes significant changes to the Duties Act 1997 (NSW) (NSW Duties Act). Three changes which will impact property transactions are the proposed introduction of:

• new charging provisions designed to capture changes in the beneficial ownership of dutiable property (when not otherwise dutiable);
• duty on an acknowledgement of trust which reverses the recent decision in Chief Commissioner of State Revenue v Benidorm Pty Ltd;^[8] and
• a refund from foreign surcharge purchaser duty where the acquired land is used by the transferee wholly or predominantly for commercial or industrial purposes.

Although the Bill introduces a number of welcome reforms, the proposed imposition of new taxes, particularly on a purported declaration of trust or acknowledgement of trust, is of concern. Care must be taken to properly draft documents to ensure there are no unintended duty consequences. The introduction of new stamp duties also seems inconsistent with the proposed reforms of property taxes in New South Wales, and the recent recommendations (to replace stamp duty with land tax) following the House of Representatives Standing Committee on Tax and Revenue’s inquiry into housing affordability and supply in Australia.

This note summarises the key takeaways from the Bill, assuming it is passed in its current form. We will issue a further update with any key developments as the Bill progresses.

Change of beneficial ownership

The existing provisions under the NSW Duties Act already make many of the day to day transactions involving dutiable property dutiable (e.g. a sale, a transfer, a declaration of trust and a vesting under statute or court order relating to land). The proposed amendment, which is largely modelled on similar provisions in Victoria, will make any other transaction that effects a change in beneficial ownership dutiable. The proposed 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 list of “excluded transactions” is extensive,^[9] but is subject to an anti-avoidance rider.

The Minister’s second reading speech suggests that the purpose of the provisions is to overcome structuring arrangements which are intended to be dutiable but may not be captured by the present charging provisions. The Minister gave this example of the kinds of arrangement that are being targeted:

“a fixed trust holding land in New South Wales that has two beneficiaries, each with an equal interest and one of these beneficiaries disposes of their 50 per cent interest to the other beneficiary. There is no change in the legal ownership of the land, which is held by the trustee, but the remaining beneficiary has now acquired an additional 50 per cent beneficial interest in the land, without any duty being incurred. This is obviously contrary to the intentions of the Act.”^[10]

Acknowledgment of trust

In Chief Commissioner of State Revenue v Benidorm Pty Ltd the New South Wales Court of Appeal held that in order for a declaration of trust over dutiable property to give rise to ad valorem duty it must actually effect a transaction, and not merely acknowledge an existing state of affairs.^[11] This was said to be consistent with the change in legislative policy behind the introduction of the modern NSW Duties Act which marked a shift from stamp duty being a tax on transactions rather than a tax on instruments.^[12]

The proposed amendments reverse the effect of this decision and make clear that, at least in the context of declarations of trust, stamp duty remains an instruments tax. The proposed provision will provide:

(1) This Chapter also charges duty on the making of a statement that—

(a) purports to be a declaration of trust over dutiable property, but

(b) 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.

Trustees must be particularly careful in executing any document that contains wording capable of being construed as a declaration of trust; even if the relevant trust is already constituted. The cost of getting this wrong, is additional ad valorem duty on the value of trust property, even when duty has already been paid on the acquisition of the property by the trustee.

Unfortunately, the Bill does not specify a transitional regime for the introduction of the new acknowledgment of trust provisions. Given the Minister’s view that the proposed amendments are designed to “ensur[e] that a declaration of trust continues to be taxed in the same way that it was taxed prior to the decision”,^[13] trustees and beneficiaries should seek advice to the extent that any acknowledgment has been executed, or is proposed to be executed.

Refund of foreign surcharge purchaser duty

The Bill also introduces a proposed refund from foreign surcharge purchaser duty (FSPD) where the acquired land is used by the transferee wholly or predominantly for commercial or industrial purposes. The NSW Duties Act presently imposes FSPD at an additional rate of 8% on the dutiable value of any residential-related property that is acquired by a foreign person.

On the terms of the proposed amendment the refund will be available where:

• an Australian corporation (being a corporation incorporated, or taken to be incorporated, under the Corporations Act 2001 (Cth) that is a foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975 (Cth)) has paid FSPD on a transfer of residential-related property;
• the land has been used by the Australian corporation or a related body corporate, after completion of the transfer, wholly or predominantly for commercial or industrial purposes; and
• an application is made for a refund of FSPD:
• within 12 months after the start of the use of the land wholly or predominantly for commercial or industrial purposes; and
• no later than 10 years after completion of the transfer of the residential-related property to the Australian corporation.

This amendment is an excellent addition to the exemptions from FSPD that already exist (e.g. the relatively recent Build to Rent concessions) in recognition of the significant contribution Australia-based developers (albeit foreign for duties purposes) make to the New South Wales economy. The change is also consistent with the policy underlying FSPD, which is for FSPD to apply to residential land. The proposed amendment will ensure that there is no unintended duty outcome, where a foreign person for example acquires an industrial site for industrial purposes – whether or not the site happens to have a house on it.

FSPD, as recognised by the Minister in the Second Reading speech, “can dissuade potential investment or affect the nature and scale of investment”.^[14] The introduction of a concession like this one will level the playing field and encourage industrial and commercial development that was never meant to be captured by the FSPD regime.

Penalty tax and tax avoidance

The Bill also proposes to:

• double penalty tax from 25% to 50% for a tax default (relating to stamp duty and other State taxes) by a significant global entity as defined by the Income Tax Assessment Act 1997 (Cth); and
• extend the general anti-avoidance provisions to more broadly apply to other State taxes (in addition to stamp duty), with new provisions also prohibiting promotion of tax avoidance schemes.

^{[1] The guide to the Amending Act provides that “duty paid on the option fee is not credited towards the duty payable when the option is exercised”.}

^{[2] (2003) 130 FCR 12; [2003] FCAFC 93.}

^{[3] (2018) 263 FCR 460; [2018] FCAFC 44.}

^{[4] Ellison v Sandini Pty Ltd (2018) 263 FCR 460; [2018] FCAFC 44 at [99]. See also Chief Commissioner of Stamp Duties v ISPT Pty Ltd (1998) 45 NSWLR 639 at 654-655 (Meagher JA) and 659-660 (Fitzgerald AJA).}

^{[5] BP7 Pty Ltd v Gavancorp Pty Ltd [2021] NSWSC 265 at [55] (Darke J)}

^{[6] The making of a statement which purports to be declaration of trust over dutiable property but merely has the effect of acknowledging the property is held or to be held on trust.}

^{[7] (2020) 101 NSWLR 729; [2020] NSWCA 28.}

^{[8] (2020) 101 NSWLR 729; [2020] NSWCA 28.}

^{[9] excluded transaction means the following— (a) the purchase, gift, allotment or issue of a unit in a unit trust scheme, (b) the cancellation, redemption or surrender of a unit in a unit trust scheme, (c) the abrogation or alteration of a right relating to a unit in a unit trust scheme, (d) the payment of an account owing for a unit in a unit trust scheme, (e) the grant, renewal or variation of a lease for no consideration, (f) the grant of an easement for no consideration, (g) the grant of a profit a prendre for no consideration, (h) the provision of a security interest within the meaning of the Personal Property Securities Act 2009 of the Commonwealth, (i) a change in a trustee’s right of indemnity, (j) the creation of an interest in dutiable property by statute, (k) a transaction of a kind prescribed by the regulations, (l) a combination of the transactions referred to in paragraphs (a)–(k).}

^{[10] New South Wales, Parliamentary Debates, Legislative Assembly, 23 March 2022, (Mr Victor Dominello).}

^{[11] Chief Commissioner of State Revenue v Benidorm Pty Ltd  (2020) 101 NSWLR 729; [2020] NSWCA 28 at [55], [79], [82]-[83], [109] (Leeming JA; Meagher JA agreeing) and [120] (Payne JA).}

^{[12]  Chief Commissioner of State Revenue v Benidorm Pty Ltd  (2020) 101 NSWLR 729; [2020] NSWCA 28 at [53] (Leeming JA; Meagher JA agreeing) and [118]-[120] (Payne JA). Compare, for example, DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 at 449 (Mason J).}

^{[13] New South Wales, Parliamentary Debates, Legislative Assembly, 23 March 2022, (Mr Victor Dominello).}

^{[14] New South Wales, Parliamentary Debates, Legislative Assembly, 23 March 2022, (Mr Victor Dominello).}