The State Revenue Legislation Further Amendment Act 2014 (Act), and its imposition of transfer duty on nominations and novations involving options to purchase land in New South Wales, received royal assent on 23 October 2014 and is now law. The Act applies to options granted or created on and after 23 October 2014.
An option to purchase land is the right, but not obligation, to acquire or sell land for a fixed price at some future date.1 The Act provides that a transfer of an option to purchase land in New South Wales is taken to occur where, for valuable consideration:
- an option holder nominates another person to exercise the option;
- on or before the exercise of the option, an option holder nominates another person as purchaser or transferee of the land the subject of the option; or
- an option holder agrees to a novation of the option, or otherwise relinquishes its rights under the option, so that another person obtains the right to purchase the land.2
Section 11(1)(k) of the Duties Act 1997 (NSW) (Duties Act) provides that an option to purchase or sell land is dutiable property. Section 8 provides that duty is charged on the transfer or agreement for the sale or transfer of dutiable property. Section 8 provides that a transfer also includes an assignment.
Importantly, the Act effectively deems the actions listed above to be a transfer of dutiable property, and therefore a dutiable transaction, on which duty is payable.3 The transfer will be taken to occur when the nomination is made or when the option holder agrees to the novation or otherwise relinquishes his or her rights under the option.4
To date, nomination rights in option deeds have been drafted so as to be characterised as a novation rather than a transfer or assignment of an option in order to circumvent the requirement to pay stamp duty. The amendments introduced by the Act reflect the longstanding practice and view of the Chief Commissioner of State Revenue - that the acquisition of an option for valuable consideration by a third party should be subject to transfer duty, regardless of whether the transaction is considered a transfer or assignment of the option, or a novation of the option.
How is the Duty Calculated?
For the purposes of calculating duty on the transfer of land that occurs as a consequence of exercising an option to purchase land, duty is to be assessed on:
- the consideration paid for the land being transferred (provided that amount is greater than the unencumbered value of the property); and
- the value of any consideration paid by the purchaser for the transfer, assignment or novation of the option.5
In order to prevent the possibility that the same taxpayer will be required to pay duty on the value of the option twice, the amount of duty payable on the option holder’s purchase of the land (on the exercise of the option) will be reduced by the amount of duty already paid by the purchaser on the acquisition of the option.6
The changes introduced by the Act have the effect of imposing duty on transactions that result in a change of ownership of an option to purchase land. Duty is payable on the nomination fee regardless of whether the transaction is considered a transfer, assignment or novation. The Act provides that where an option is transferred to a nominee, including by way of novation, the nominee is required to pay duty at the time the option is transferred, irrespective of whether the option is exercised or the option holder’s rights crystallise at a future date.
Prior to the introduction of this Act, an option could be novated to a third party without attracting duty and duty would only be payable if the nominee exercised the option. Accordingly, the changed timing at which duty is payable where an option is novated to a third party highlights the need for careful consideration when determining who should be the holder of an option. Practically, there would not be many situations where a nominee would pay duty on the novation of the option, and not exercise the option.
The Act does not address the difficulties of drafting options so as not to be considered a conditional contract for sale. Unclear drafting may have adverse stamp duty consequences.