Yesterday, the Government introduced the State Revenue Legislation Amendment Bill 2013 into the NSW Parliament. The Bill proposes to introduce stamp duty and land tax reforms that will form part of the 2013-14 State Budget.
The NSW Treasurer will hand down the State Budget on Tuesday, 18 June 2013.
The proposed measures offer no relief for NSW taxpayers. The main losers will be:
- Property developers;
- Miners; and
Options to purchase land
The Bill proposes to tax nominations of options (including call options) over land.
The amendments are largely in response to a decision by the Supreme Court of NSW in CTI Joint Venture Company Pty Ltd v Chief Commissioner of State Revenue  NSWSC 20 (see Gadens update on 13 February 2013 here).
The following transactions involving options to purchase land will be taxed as transfers:
- the nomination of another person to exercise the option;
- the nomination of another person as purchaser or transferee;
- the novation of the option, or other relinquishment of the option holder’s rights so that another person obtains a right to purchase the land.
The duty under this new head of liability will be assessed on the amount or value of the consideration provided by the transferee of the option – ie, the nomination fee. The duty is payable by the nominee.
However, that duty will then operate as a credit against the duty payable on the sale or transfer of the land when the option is exercised.
Take for example the Chatswood Transport Interchange Development, which was the subject of legal proceedings in CTI Joint Venture Company Pty Ltd v Chief Commissioner. Call options were granted in consideration for the developer, CRI, paying a call option fee of $10, which entitled CRI to purchase the land for a price of $1 pursuant to a land contract. The call options specifically provided that CRI could at any time before exercise of the options, nominate another person to replace it as grantee under the call options or as purchaser.
For a nomination fee of approximately $60 million, CRI nominated a third party under the call option. On exercise of the call option, stamp duty was assessed on the land contract based on a dutiable value that included the $60 million nomination fee. In addition, the Chief Commissioner sought to assess duty on the nomination as a separate dutiable transaction, the consideration for which was the $60 million nomination fee. The court held that the nomination was not a separate dutiable transaction.
Under the proposed amendments, the nominee/purchaser would be liable for duty on the nomination based on the fee of $60 million. The nominee/purchaser would also be liable for duty on the purchase contract, but the duty payable on the purchase contract is reduced by the amount of duty payable on the option. So the purchaser nominated by CRI should only nominal duty on the purchase contract after a credit is allowed for duty paid on the nomination.
In that example, the proposed amendments do not materially change the end result (at least in terms of the total amount of duty payable), but the OSR is able to capture the developer’s uplift without resorting to an assessment of the purchase contract based on valuations.
If, for example, the call option stipulates a purchase price of $40 million and the nomination fee payable by the third party purchaser to the option holder is $20 million, the nominee/purchaser will need to pay duty on the nomination based on the nomination fee of $20 million. In addition, the nominee/purchaser will pay duty on the purchase contract. The consideration for the purchase contract includes the purchase price pursuant to the contract plus nomination fee (but a credit is allowed for duty paid in respect of the nomination).
Therefore, the duty will be:
Click here to view table.
Developers may now need to pay attention to the way uplifts are characterized, particular where the uplift is a genuine fee for services.
These amendments may apply to existing options and nominations made before the provisions become law.
A new exemption applies where an acquisition in a landholder is made as part of an arrangement involving several acquisitions of interests in the landholder. The Chief Commissioner is given a discretion to exempt an acquisition if satisfied that to charge duty in the circumstances would result in double duty.
With effect from 1 July 2013, the definition of ‘related person’ will be amended so that a natural person or private company is not a related person of a trustee of a discretionary trust merely by being a beneficiary of the trust. The Chief Commissioner will also have discretion to waive the general rule that land held by a discretionary trust is the property of each beneficiary of the trust.
However, these new concessions come at the cost of the removal of the Chief Commissioner’s discretion to allow an exemption where just and reasonable. In other words, the general exemption has been replaced by two narrow concessions.
Primary production concession for landholder duty
In another blow to farmers (and developers who acquire interests in entities that own farm land), the landholder duty concession for primary producers will be abolished.
However, this measure will be deferred for five years.
In the meantime, the acquisition of a majority interest in a landholder that is a primary producer only attracts landholder duty if the landholder is ‘land-rich’ (which requires at least 80% of the value of all its property to be land). There is a claw-back under the current provisions if the landholder ceases to be a primary producer within five years of the relevant acquisition.
The Bill proposes to make a raft of changes to the land tax laws including amendments to various concessions, such as, the exemption for land used for primary production. Property developers may regard the minor technical amendments to the definition of ‘rural land’ as a lost opportunity to provide clarification in an area bereft of sensible policy.
The Bill also introduces new requirements for unit trusts to qualify as ‘fixed trusts’ and enjoy the benefit of the tax free threshold. Fixed trusts will no longer include unit trusts with more than one class of units and the proportion of trust capital to which a unit holder is entitled on winding up or surrender must be fixed and must be the same as the proportion of income of the trust to which the unit holder is entitled. Trustees of unit trusts should review their trust deed.
The Government has also cracked down on life estates (other than life estates created by will and where the duration of the life estate is based on the life of the tenant). Land tax exemptions may now be lost where the remainder interest is held by a company.
Deferral of abolition of taxes
The Bill follows recent announcements by the State Government that it will defer the scheduled abolition of:
- Mortgage duty;
- Transfer duty on marketable securities; and
Transfer duty on non-real property business assets.