18 November 2022
Following the introduction of the NSW change in beneficial ownership provisions to the Duties Act 1997 (NSW) (Duties Act) on 19 May 2022 pursuant to the Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW), Revenue NSW has recently issued:
- Commissioner’s Practice Note CPN 025 which sets out circumstances when certain transactions will be dutiable as a change in beneficial ownership; and
- Commissioner’s Practice Note CPN 027 which sets out the circumstances when the grant of a lease will be dutiable and in what circumstances the change in beneficial ownership provisions will apply to the grant of a lease.
Importantly both practice notes are effective from 19 May 2022. We have set out below a summary of the key takeaways from each note.
CPN 025 - Change in Beneficial Ownership
CPN 025 provides a raft of examples of where transactions may be considered to constitute one of the following types of change of beneficial ownership and attract the application of the new provisions:
- creation or extinguishment of dutiable property
- change in equitable interest in dutiable property, and
- becoming or ceasing to be the subject of a trust.
In particular, CPN 025 addresses the treatment of the grant of options for consideration, how security deposits under options may be treated, the surrender of fitout and fixtures at the expiration of a lease, the treatment of trust cloning and changes in the capacity in which property is held.
A couple of the key takeaways include:
- Security deposits under option arrangements need to be refundable to ensure they are not treated as consideration for the grant of the option.
- It is important for any option fee to form part of the deposit under the land sale contract, otherwise the amount of the option fee may be subject to duty twice, as the option fee will form part of the consideration for the acquisition of the land.
- The cloning of trusts (i.e. where property starts to be held by a trust with the same trustee and same beneficiaries as the previous holding trust) is expressly listed as an example where the provisions would apply.
- The construction of works which pass to the landlord at the expiry of the lease will constitute non-monetary consideration for the grant of the lease but are treated as having the value they would have at the time of transfer by reference to a prescribed methodology in the absence of a valuation (CPN 027 provides further guidance - see below).
While CPN 025 provides some helpful and much needed clarity in some areas, there are still a few areas of uncertainty that haven’t been addressed. For example, the treatment of the rescission of an option to acquire land and how duty may apply where there is no consideration for the rescission but there was an original option fee.
CPN 027 - Leases and Change in Beneficial Ownership
CPN 027 was released in conjunction with CPN 025 and it is important that the two are read together. CPN 027 addresses:
- What constitutes consideration for the grant of a lease and how upfront payments, guarantee payments and legal expenses may be treated.
- How the different provisions of the Duties Act apply to monetary consideration and non-monetary consideration.
- Examples of transactions involving leases that may be liable to duty and may not be liable to duty.
- How the value of non-monetary consideration will be treated and dutiable value determined.
Key takeaways from CPN 027 include:
- Clarification on the interrelationship between section 8(1)(b)(viii) (lease premiums) and 8(1)(b)(ix) (changes in beneficial ownership). Section 8(1)(b)(viii) will apply to any monetary consideration for the grant of a lease and section 8(1)(b)(ix) will apply to any non-monetary consideration.
- Leases granted for non-monetary consideration (such as an obligation to undertake improvements to the land that become the property of the lessor at the end of the lease) will be dutiable under the new provisions and will be more closely scrutinized by Revenue NSW. In the absence of a valuation, Revenue NSW has released a table setting out a methodology that the Commissioner is prepared to accept to calculate the proportion of value attributable to the improvements for the purposes of determining the dutiable value. This will be a specified percentage applied to the full goods and services tax (GST) inclusive cost of the construction (including builder margins), with the percentage determined based on the length of the term of the lease. Importantly, the longer the term of the lease, the less value the improvements will be treated as having, with leases over 50 years treated as having no value and leases of ten years or less treated as having full value. Periodic leases or terms that are unascertainable when the lease is made will also be treated as having full value.
- Various examples are provided, including a public private partnership project in which the Chief Commissioner confirms that construction of a hospital in exchange for a lease of 50 years will not attract duty and no evidence of value or cost will need to be produced. The examples also confirm that payment for the grant of a construction licence would not be dutiable as it is not a premium for the grant of lease, whereas payment for the grant of a lease (rather than licence), would be dutiable.
- Taxpayers will need to consider if they believe a valuation will support a lower value than the prescribed methodology and if so, provide this to RevenueNSW to form the basis for assessment instead. An example may be where a lease is for less than ten years but the asset has a very short useful life or leases for say 15 or 40 years which fall in the middle of the prescribed lease term ranges.
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Cherie Mulyono
Partner, State Taxes & Shine (PwC's LGBTIQ+ network), PwC Australia
Tel: +61 2 8266 1055