On 11 May 2022 the State Revenue and Fines Legislation Amendment (Miscellaneous) Bill 2022 (NSW) (Bill) passed through both houses of New South Wales (NSW) Parliament. The Bill is to commence from the receipt of Royal Assent.
Although innocently introduced away from the relative fanfare of the NSW Budget (which is due to be handed down next month), the Bill will, once rubber-stamped by the Governor, see a broadening of both the tax base and administration of NSW taxes.
Specifically, once assented to, the Bill will result in the following taxpayer-unfriendly amendments being made:
- changes in beneficial ownership (beyond those transaction specifically listed under current rules) will become subject to NSW duty;
- acknowledgments of existing trusts will become subject to NSW duty;
- anti-avoidance provisions have been re-written to capture more activity; and
- a ‘promotor penalties’ regime will be introduced.
We discuss each of these amendments, and what they mean for business, in greater depth below.
Changes in beneficial ownership
The Bill will introduce a catch-all provision, imposing duty on a ‘transaction that results in a change in beneficial ownership of dutiable property’, unless it is an excluded transaction. Notably, this will bring the creation or extinguishment of an interest in land into the duty net, unless such an interest is specifically excluded.
At this point exclusions will apply for:
- the purchase, gift, allotment, issuance, cancellation, redemption or surrender of a unit in a unit trust scheme, together with the abrogation or alteration of a right relating to such a unit and the payment of an account owing for a unit in a unit trust scheme;
- the grant, renewal or variation of a lease for no consideration;
- the grant of an easement for no consideration;
- the grant of a profit a prendre for no consideration;
- the provision of a security interest (within the meaning of the Personal Property Securities Act 2009 (Cth));
- a change in a trustee’s right of indemnity; and
- the creation of an interest in dutiable property by statute.
It is unclear whether Revenue NSW will, as a matter of administrative practice, accept ‘nominal consideration’ as falling within the meaning of ‘no consideration’.
Transactions prescribed by regulation will also be excluded and accordingly we anticipate additional excluded transactions will be provided in the accompanying regulations (which are not yet available).
Liability to duty will rest with the person who obtains the beneficial ownership or whose beneficial ownership increases (as the case may be). Liability will arise from when the beneficial ownership changes and duty will be payable on the dutiable value of the property the beneficial ownership of which has changed.
Perhaps of concern, NSW appears to now be taking the legislative approach previously implemented in Victoria – i.e. to draft the operative provisions very broadly, and to then leave the details to the Commissioner to provide administrative guidance on what is not caught.
This amendment will result in many previously non-dutiable (and ‘market’) transactions being caught. Notably, the grant of a security interest over land (as this is not a ‘security interest’ within the meaning of the Personal Property Securities Act 2009 (Cth)) or an option over land will become dutiable, unless the Commissioner intends a different administrative practice.
As flagged above, these provisions will only apply to transactions occurring from the date of assent. Transitional provisions apply to transactions that are the subject of an agreement or arrangement that was entered into before the date of assent. Resultantly, there is perhaps a small window in which to enter into transactions that might otherwise be caught going forward.
Acknowledgements of existing trusts
Duty will become chargeable on ‘the making of a statement that:
- purports to be a declaration of trust over dutiable property; but
- merely has the effect of acknowledging the identified property vested, or to be vested, in the person making the statement is held, or to be held, in trust for a person or purpose mentioned in the statement.’
The person making the statement will be liable to pay duty on the dutiable value of the property vested or to be vested in that person and liability to duty will arise at the time that the statement is made.
This legislative change follows decisions like Chief Commissioner of State Revenue v Benidorm Pty Ltd  NSWCA 285 (Benidorm), where the Court of Appeal unanimously held that a document which does not effect a transaction, but merely acknowledges an existing legal position, is not liability to duty under the Act.
Specifically, Benidorm considered whether the definition of ‘declaration of trust’ applied to a document which merely acknowledged an existing trust. The proposition that was accepted was that if no new equitable rights are created, then the acknowledging deed would not be a dutiable transaction.
It is not yet clear what these provisions will mean in practice, however it is a potential minefield given the various acknowledgements of existing trusts under transaction document.
Tax avoidance scheme re-write and the introduction of a promotor penalties regime
The current duty anti-avoidance regime will be replaced by a new regime under the Taxation Administration Act 1996 (Cth) (TAA). The placement of anti-avoidance provisions in the TAA fits well with the intention for such provisions to apply to all state taxes and not just to stamp duty.
However, the new rules also lower the threshold of what amounts to avoidance, potentially capturing more activity. Specifically, the object of these provisions is no longer to deter ‘artificial, blatant or contrived’ schemes, rather setting a lower bar of seeking to merely ‘defer schemes to avoid tax liability.’
- a tax avoidance scheme is a scheme that a person, whether alone or with others, enters into, makes or carries out for the sole or dominant purpose of enabling a tax liability to be avoided; and
- ‘avoid’ includes reducing or postponing a tax liability.
Resultantly, many standard market practices may fall foul of these new rules. Particularly, we query whether entering into a put and call option instead of a conditional contract may be construed as a tax avoidance scheme.
The anti-avoidance provisions also include a new promotor penalty regime. While stated by the NSW Government to be equivalent to the Commonwealth regime, it would appear that NSW’s version will have a broader application than its federal counterpart.
This is because under the NSW regime a person will be a promotor of a tax avoidance scheme if they market the scheme or otherwise encourage the growth of the scheme, or interest in it. Contrastingly, the Commonwealth’s version also requires that, for liability to arise:
- the promotor (or associate) must have received consideration in respect of the marketing or encouraging of the scheme; and
- the promotor must have taken a substantial role in marketing or encouraging the uptake of the scheme.
The promotor penalty regime will attract large potential penalty, with maximum civil penalties A$1,109,900 for individuals and A$5,549,500 for corporations.
Finally, it is noted that significant global entities (as defined in the Income Tax Assessment Act 1997 (Cth)) are subject to double the standard penalty tax in the event of a tax default.
The good news?
There is however one piece of good news for taxpayers in the proposed changes. Broadly, foreign persons will be allowed a refund of duty and land tax surcharges if, after the transfer, the Commissioner is satisfied that the land is used wholly or predominantly for commercial or industrial purposes (and not for residential purposes, which is the use that the surcharge is intended to catch).
This renewed focus on expanding the duty net is somewhat surprising given the NSW Government’s broadly flagged desire to shift away from the imposition of stamp duty towards a more general property tax.
However, ultimately when it comes to assessing the full impact of the amendments the devil will be in the detail, and we note that the anticipated accompanying regulations and Revenue NSW public rulings and practice statements are not yet available.
Nonetheless, those in the property transactions space in particular should be alive to these impending changes, seeing as market-standard structures could be caught in the impending storm.