The Victorian lease duty provisions took effect from 21 November 2008. Although the provisions were stated to be an anti-avoidance measure, targeting duty avoidance schemes involving “long term leases”, the provisions as enacted contain no minimum term requirement. Potentially, leases of only 1 day can be caught. As a result, uncertainty has surrounded the introduction of the provisions. On 16 August 2010 the SRO issued Duties Revenue Ruling DA.052 - 'Lease Provisions - General Application'. The Ruling confirms that the Commissioner intends to give effect to the policy behind the provisions rather than the clear meaning of the words.
What is Victorian Lease Duty?
A lease granted on or after 21 November 2008 is subject to duty if any consideration other than the “rent reserved” is paid or agreed to be paid. The surrender of such a lease is also dutiable. Similarly, a transfer or assignment of a lease after 21 November 2008 is dutiable if consideration is paid or payable for the transfer or assignment. Unlike in other States and Territories where duty applies to “premiums” payable for the grant of a lease, or to amounts payable for the transfer or assignment of a lease, Victorian lease duty is calculated on the unencumbered value of the underlying land the subject of the lease. This could lead to extraordinary results where a lease premium is relatively low and the value of the land high – for example, a $10,000 premium for a lease, where the underlying land has a value of $1 million will result in duty being calculated on a “dutiable value” of $1 million.
Duties Revenue Ruling DA.052 - 'Lease Provisions - General Application'
The Ruling states that the lease provisions “are designed to apply to arrangements by which a lease of land in Victoria is used to effectively transfer rights in the underlying land and/or the economic benefits of the land, similar to a sale and purchase transaction”.
In line with this policy intent, the Ruling allows for concessions in the following specific scenarios:
Transfer of lease as part of a sale of business
The Ruling states that the lease provisions will generally not apply to the transfer or assignment of a lease for nominal consideration (eg $1) as part of a sale of business. However if the lease contains an option to purchase, duty could potentially apply.
Although a welcome conclusion, it is questionable whether the Commissioner, in administering the provisions, has the power to ignore the clear words of the provisions. Where $1 is paid for the transfer of a lease, a literal reading of the lease provisions requires duty to be paid. There is no scope for the exercise of discretion.
Duty payable when lease contains an option to purchase
The Ruling also contains a welcome concession in respect of leases where:
- consideration is paid in respect of an option to acquire the underlying property, and
- on exercising the option the lessee will be required to pay an additional amount equal to the market value of the land.
On a literal reading the lease provisions require duty to be paid within 3 months of the grant or transfer of such leases. However, the Ruling states that no duty will be imposed unless and until the option is exercised (although note that interest at the market rate may be applied).
Once again, this is a welcome concession for which no support can be found in the actual lease provisions. The Commissioner’s reasoning is that the lease provisions are designed to apply to arrangements where the lessee effectively gains the economic benefits of the property, and, if an option to purchase has not yet been exercised, the lessee has not gained those benefits.
One of the more controversial features of the lease provisions is that no credit is given for lease duty paid if the property is subsequently transferred to the lessee. Therefore double duty can arise. However, the Ruling indicates that in circumstances where full lease duty is paid, a subsequent transfer of the property to the relevant lessee, transferee or assignee would not be separately chargeable with duty.
The lease provisions apply where a lease is granted and a premium is payable for the lease in addition to market rent. However, Example 4 in the Ruling indicates that where a premium is payable but the lessee does not obtain any rights or benefits in relation to the underlying land (other than those usually acquired by a lessee under a lease), the Commissioner will regard the payment of the premium as being part of the “rent reserved” and accordingly no duty liability will arise.
Arguably the lease provisions can be interpreted in this way as the words “rent reserved” are not defined in the lease provisions. However, the alternative view is that the Commissioner is ignoring the clear words of the provisions in order to give effect to the policy, and it is questionable if this is a correct use of his administrative power.
The Ruling indicates that the Commissioner is adopting a very liberal interpretation of the provisions in order to give effect to the policy behind the provisions. If the provisions come before the courts in future it must be questioned whether the Commissioner’s administrative treatment could be upheld. However, unless and until this occurs, the Commissioner’s concessions are a welcome interpretation of the law.