Duties Alert: Reforms to NSW State Taxes

By Jinny Chaimungkalanont and Mark Peters

The New South Wales Government introduced yesterday (1 August 2023) the Revenue, Fines and Other Legislation Amendment Bill 2023 (NSW) which proposes to implement a range of miscellaneous changes to the state taxes legislation in New South Wales. The changes include:

• broadening the application of aggregation rules which apply to dutiable transactions;
• introducing clear rules for when a duty liability arises for PEXA transfers;
• providing for the circumstances in which an electronically executed trust deed will be liable to $500 fixed trust duty;
• specifying the circumstances in which the cost of a valuation report commissioned by Chief Commissioner may be passed on to the taxpayer; and
• providing the Chief Commissioner with a power to reassess a transaction (without time limit) if not all relevant facts and circumstances were disclosed to the Chief Commissioner at the time of the initial assessment. This emphasises the importance of making full and frank disclosure when lodging transactions for assessments.

We outline some of the key proposed changes below.

Duties Reforms

The key duty reforms include:

• Aggregation of Dutiable Transactions: under the proposed changes the requirement that dutiable transactions occur within 12 months of each other in order to be aggregated for the purpose of calculating duty will be removed. This has the effect that dutiable transactions which occur more than 12 months apart, but nevertheless meet the other requirements to be aggregated, will now be aggregated.

Under the former provisions, it was relatively straightforward to exclude the application of the aggregation provisions for long running transactions where the 12 month requirement was not met. Now it will be necessary to undertake the often complicated analysis as to whether the transactions comprise substantially one arrangement (which is generally less likely where the transactions are not temporally linked).

• Managed Investment Schemes (MIS): the concessions available for transfers of dutiable property between the trustee of a MIS and its sub-trusts have been expanded to include wholly owned structures which did not strictly meet the previous requirements. Under the former provisions, a trust would only be treated as a sub-trust of a MIS where the trustee of the MIS wholly owned the trust or where it was wholly owned by a trust which was itself wholly owned by the trustee of the MIS.

The new provisions introduce flexibility so that, provided that 100% of the ownership of the trust can be indirectly traced back to the trustee of the MIS, it will be treated as a wholly owned sub-trust, For example:

Managed Investment Scheme A owns 100% of the units in Sub-trust B. Managed Investment Scheme A owns 80% of the units in Sub-trust C. Sub-trust B owns the remaining 20% of units in Sub-trust C. Sub-trust C is a wholly owned sub-trust of Managed Investment Scheme A.

There is also proposed to be a new concession for certain transfers of dutiable property consequent on the deregistration of an MIS.

• Electronic Execution: to address complexities associated with PEXA transactions, amendments are proposed to deem a transfer of real property to occur for the purpose of charging duty when information regarding the PEXA instrument is provided to the Chief Commissioner. The Second Reading Speech indicates that the amendments are directed at resolving uncertainty:

Uncertainty has arisen as to when and where an electronic instrument is first executed. When an electronic instrument is first executed determines when duty is due and whether interest and penalty tax apply. Currently, the Act provides that an electronic registry instrument is first executed when it is digitally signed by a subscriber to the Electronic Lodgment Network, such as a legal practitioner. However, there are instances where an instrument is not digitally signed and is uploaded without a digital signature. To address that, the bill deems the time and date when an unsigned electronic instrument is first executed to be when information relating to it is received.

The changes will provide clarity in particular for stamping of corporate reconstruction transactions, as there has been uncertainty in the administrative process for stamping a transfer of real property where the only document which evidences the transaction is within the PEXA workspace and is not created until the time the transaction is implemented.

• $500 Trust Duty – a declaration of trust over unidentified property or non-dutiable property is subject to fixed duty of $500, if the trust instrument is executed in New South Wales. To address complexities associated with determining whether the instrument was “executed in New South Wales” in the context of electronic execution, a new provision is proposed to be introduced which will deem an instrument to be executed in New South Wales in the following circumstances:

(a) for a trustee of the trust that is a corporation—the trustee’s registered office or principal place of business is in New South Wales, or

(b) for a trustee of the trust that has an ABN—the trustee’s registered business address is in New South Wales, or

(c) otherwise—the principal place of residence of the trustee of the trust is in New South Wales.

• Divisions / Split-ups: under the law of certain foreign jurisdictions it is possible for a single company to split into two or more new corporations (one of which may, but not necessarily, be the same entity as was split). These transactions often result in a movement of dutiable property in a way which may not be chargeable with duty as a transfer of dutiable property. The Bill proposes to introduce new charging provisions which will deem there to be a vesting of the dutiable property of the splitting / dividing corporation in certain circumstances.

The duty implications of these transactions vary significantly across each State and Territory, and specialist advice should be obtained to confirm the duty outcomes.

Taxation Administration Reforms

There have also been changes to the administration of state taxes in New South Wales:

• Valuation Reports: section 305 of the Duties Act 1997 (NSW) presently empowers the Chief Commissioner to commission a valuation report or require the taxpayer to obtain a valuation report for the purpose of assessing duty. The costs of preparing a report can be recovered from the taxpayer. This provision is proposed to be replaced with a general valuation provision in the Taxation Administration Act 1996 (NSW). The new provision largely mirrors the previous provision except the Chief Commissioner can only recover the costs of preparing a valuation report where:
  • the value of the property in the valuation obtained by the Chief Commissioner differs from the value of the property provided by the taxpayer by at least 10%; or
  • the taxpayer fails to comply with a written notice given to the taxpayer to obtain a valuation report within 60 days after the notice is issued.

• Reassessments: generally, the Chief Commissioner can only make a reassessment within 5 years of the initial assessment being made. The proposed amendment will enable a reassessment to be made after this time if not all relevant facts and circumstances were disclosed to the Chief Commissioner at the time of an assessment. This proposed change emphasises the importance of making full and frank disclosure when lodging transactions for assessment.
• Objections: the bill proposes to limit the time period for which an objection can be made to an assessment out of time. Presently, the Chief Commissioner has a discretion to allow an objection to be made out of time, however a hard 5 year limit after the notice of assessment is served is proposed to be introduced.
• Tax Evasion:the bill also proposes a new tax evasion offence which provides that “a person must not, by a deliberate act or omission, evade or attempt to evade tax”. The maximum penalty is 2 years imprisonment or 500 penalty units ($55,000) or both.