Landlords need to be careful to ensure they do not inadvertently trigger a substantial stamp duty liability.
Stamp duty may be payable on successive leases
If a tenant remains in the same premises over a long period under a series of lease arrangements you run the risk of a nasty stamp duty surprise.
Landlords need to be extremely careful about how ongoing arrangements are put in place to ensure that a liability for duty is not triggered.
The imposition of stamp duty on long term leases has serious financial implications for the landlord. The duty is calculated at ad valorem conveyance rates (ie up to 7.25%) on the greater of the consideration paid for the crown lease, or the unencumbered value of the crown lease - this can amount to millions of dollars.
Abolition of duty on leases – except long-term leases
Subject to some exceptions, duty on ordinary subleases in the ACT was abolished from 1 July 2009. However, the Duties Act imposes duty on the grant of a long-term lease or licence. A long-term lease is defined in section 10(1) of the Duties Act as a lease for more than 30 years. It also includes leases with an initial term less than the 30 year threshold where:
- options in the lease have the potential to extend the term beyond 30 years (regardless of whether these options are later exercised or not);
- there is one or more surrenders and new leases granted which together add up to more than 30 years; or
- there is one or more extensions of the lease to give a term of more than 30 years.
Why charge duty on long-term leases?
It is effectively an anti-avoidance measure.
Stamp duty is payable on transfer of land. The long-term lease exception exists to ensure that duty cannot be avoided by granting a long-term lease instead of transferring the crown lease. Otherwise, a person would be able to enjoy rights of “ownership” without paying duty.
These provisions represent anti –avoidance measures on two levels:
- firstly, long-term leases are considered dutiable to ensure that landowners do not effectively ‘transfer’ ownership of their property by way of a long-term lease in order to avoid conveyance duty; and
- secondly, the definition of long term leases has been extended to ensure that landowners do not effectively ‘transfer’ ownership by way of a series of short-term leases in order to avoid conveyance duty.
Successive, but discrete leases, should duty be payable?
Should duty be payable where there is a lease in existence which expires according to the term stipulated in the lease document, and the sitting tenant then enters into new negotiations with the landlord, resulting in a new lease over the same premises?
In our view, duty should not be payable on successive but discrete leases, as the lessee has, at no point in time, acquired “ownership” rights to the property for the required 30 year period. It is not a “back door” transfer.
In these situations, the tenant does not remain in the premises because they have been given control of the land but because the premises continue to suit their requirements over time and both parties have been able to negotiate a series of acceptable commercial terms on which they agree to remain. It is not a de facto transfer as there is no certainty for either party that acceptable terms will be reached again at the end of each lease term.
However, this type of arrangement can result in the imposition of duty at conveyance rates depending on the way the documents are structured.
The ACT Revenue Office is adopting a very robust interpretation of the long term lease duty provisions. Unless the new lease can be regarded as significantly different not to amount to a renewal, then it may be caught.
What does this mean for you?
This is relevant to:
- landlords who wish to retain existing long term tenants with leases which are coming to the end of their lease terms; and
- tenants who wish to remain in their existing premises (and may be liable for stamp duty under the terms of their lease).
Given the time that has elapsed since the Commonwealth sold and leased back many of its office premises in Canberra, this issue may arise in relation to these stable Commonwealth tenants. As many of these assets consist of very substantial leases the magnitude of the problem (and therefore the financial risk) is only heightened.
In the current market conditions, landlords are generally keen to retain their long term tenants - but you need to make sure that this will not inadvertently trigger a substantial stamp duty liability.