30 May 2022
In Brief
New legislation has been enacted in New South Wales (NSW) which makes some important amendments to the NSW duties, land tax and tax administration provisions. The State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (the Amending Act), which amends the Duties Act 1997 (NSW) (Duties Act), Land Tax Management Act 1956 (NSW) and Taxation Administration Act 1996 (NSW) (Admin Act) received Royal Assent on 19 May 2022.
Some of the significant amendments, which commenced on the date of assent include:
- Imposing duty on certain transactions that result in a change of beneficial ownership of dutiable property;
- Charging duty on an acknowledgement of trust;
- Providing for a refund of foreign purchaser surcharge duty / surcharge land tax in relation to a transfer of land if, after the transfer, the land is used by the transferee wholly or predominantly for commercial or industrial purposes;
- Introducing a new anti-avoidance regime into the Admin Act that will cover a range of NSW taxes; and
- Increasing the base rate of penalty tax for ‘significant global entities’ from 25% to 50%.
These amendments represent some of the most important changes we have seen in NSW in relation to State Taxes in recent years. The amendments will significantly broaden the types of transactions subject to stamp duty, and this increased breadth has the potential to create uncertainty in relation to exactly which additional transactions will now be dutiable. However, it is not all bad news for taxpayers, as there is a helpful amendment that should assist foreign purchasers of residential land.
A Legislative Amendment Act 2022 Technical Guide has been released on the Revenue NSW website to accompany the changes (the Technical Guide). This provides a useful guide to the way in which Revenue NSW will administer these new laws in practice.
In Detail
Change of beneficial ownership - the grant of an option is now dutiable
A key amendment is the introduction of a broad new type of dutiable transaction which captures any other transactions 'that result in a change in beneficial ownership of dutiable property.’ A change in beneficial ownership’ is widely drafted to include the creation or extinguishment of dutiable property, a change in equitable interests in dutiable property, and dutiable property becoming or ceasing to be the subject of a trust. Because this new dutiable transaction is so broad, there are a series of specifically identified transactions that are excluded from its ambit, including (but not limited to) certain transactions related to units in unit trust schemes (noting that these may be subject to the separate landholder duty regime) and the grant of certain interests in land for no consideration. There is also the ability for additional classes of transactions to be subsequently excluded by regulations. Surcharge purchaser duty (which applies to foreign purchasers of residential land) will not apply to transactions that are taxed as a ‘change in beneficial ownership’.
The new provision seems largely modelled off the Victorian equivalent. However, unlike in Victoria there is no exclusion for the grant of an option. That the grant of an option will now be dutiable in NSW has been confirmed by the Technical Guide, which states that such a transaction is required to be lodged and duty paid, calculated with reference to the option fee. Furthermore, premium transfer duty may be payable if the option relates to residential property with a value greater than the relevant premium duty threshold.
Unfortunately, there is no crediting mechanism (such as the type that exists in other State jurisdictions) that allows for a credit for the duty paid on the grant of an option against the transfer duty payable on the agreement formed by its exercise. This gives rise to the potential for double duty on the same economic transaction (i.e. the acquisition of the land). It is also noted that the Technical Guide provides that if the call option is not exercised, a refund of duty will not be issued for duty paid on the grant of option. Whether or not a refund of duty would be available where an option is cancelled or rescinded before exercise remains to be seen, as the existing provisions which provide for a refund on a cancelled agreement have not been extended to options.
Taxpayers should also be aware that an alteration in the entitlements of beneficiaries of fixed non-unitised trusts that hold dutiable property may now attract duty, to the extent that such alterations effect a change in the equitable interests in the trust property. There are numerous other examples of transactions which previously may not have been thought to attract duty that may be captured by the new provisions.
Finally, for this measure there is a transitional rule which provides that the new provisions should not apply to a transaction following commencement if it occurs in accordance with an agreement or arrangement entered into before commencement. As noted above, the date of commencement of the new provisions was the date that Royal Assent was received, being 19 May 2022.
Acknowledgement of trust
Another amendment is the introduction of a new type of dutiable transaction, whereby 'an acknowledgement of trust' in relation to dutiable property will be a dutiable transaction. An 'acknowledgement of trust' broadly means a statement that purports to be a declaration of trust, but merely has the effect of acknowledging that identified property vested / to be vested is already held. This goes beyond the type of 'declaration of trust' of dutiable property that is currently subject to duty and could, by virtue of its broad application, tax situations where there is no change in the rights of any party relating to the property. This amendment was made in response to the Supreme Court decision of Chief Commissioner of State Revenue (NSW) v Benidorm Pty Ltd [2020] NSWCA 285, where it was determined that although a declaration of trust is identified as a dutiable transaction, it will not attract duty unless it actually effects a transaction.
The Technical Guide provides that the new provision will capture the “making of a statement that has the effect of acknowledging that identified property vested, or to be vested, in the person making the statement is already held, or to be held, in trust for a person or purpose mentioned in the statement.”
Surcharge purchaser duty will be payable if the trustee of the trust is a foreign person and the dutiable property is residential-related property.
The new provision means care should now be taken when entering into ‘routine’ documents that, for example, amend trust deeds, and in which a statement as to the trustee capacity of a contracting party is made (even where that statement has no substantive effect upon the interests of anyone).
Revenue NSW has indicated that further guidance is intended to be provided regarding examples of common situations in ‘routine’ documents that Revenue NSW will not be seeking to impose duty upon. However, this has not yet been included in the materials published to date.
From a policy perspective, the ‘acknowledgement of trust’ amendment is concerning as its effect seems contrary to the overall purpose of the duties legislation (as identified in recent Supreme Court decisions including Benidorm) which is to tax transactions / changes in rights, rather than documents.
Foreign purchaser surcharge duty / foreign surcharge land tax
Helpfully, the amendments introduce a refund mechanism which enables surcharge duty paid in relation to a transfer of land to be refunded if, after the transfer, the land is used by the transferee wholly or predominantly for commercial or industrial purposes. Any such surcharge duty paid can be refunded if the application is made within 12 months after the 'entitling event', being 'the start of the use of the land wholly or predominantly for commercial or industrial purposes'. A similar mechanism has been introduced into the land tax legislation so as to refund any surcharge land tax paid on land which is subsequently used for a commercial or industrial purpose.
These are welcome amendments as they make it clear that residential land acquired for a future commercial or industrial use is not intended to be ultimately subject to surcharge taxes. The Second Reading speech to the Amending Act recognises the competitive disadvantage taxes of this type impose on foreign investors who want to develop land which may be better used or intended for commercial or industrial use, and the adverse impact it can have on the development of priority precincts in NSW.
For refund mechanisms of this type, the Duties Act also provides the Chief Commissioner a power to grant an exemption in advance (rather than requiring payment and refund) for particular transactions or classes of transactions where they are satisfied that the entitlement to the refund is likely to arise in the future (i.e. that the use of the land for commercial / industrial purpose will be achieved within 10 years after the transfer). Practically, the exercise of this power is likely to require the provision of sufficient evidence to satisfy the Chief Commissioner that the intended change of use will occur and an undertaking to refund the money if the intended change of use is not ultimately achieved.
Penalty tax
Amendments to the Admin Act to double the base rate of penalty tax payable for a tax default by a significant global entity as defined by the Income Tax Assessment Act 1997 of the Commonwealth from 25 percent to 50 percent. A ‘significant global entity’ is broadly an entity that has an annual global income of $1 billion or more or is a member of a group of entities that is actually consolidated for accounting purposes or would be required to consolidate for accounting purposes as a single group if the members of the group were assumed to be a listed company and were not affected by the accounting exceptions for consolidation or materiality, whose annual global income for the period is $1 billion or more.
The Chief Commissioner will publish guidelines outlining circumstances in which no penalty tax is payable for a tax default.
General anti-avoidance provisions
The duty avoidance provisions in the Duties Act which deter schemes to avoid duty have been broadened and migrated to the Admin Act so that they now extend to schemes for the avoidance of all kinds of State tax liabilities (including payroll tax and land tax) rather than only a liability to pay duty. Notably, the definition of ‘avoid’ in the amended provisions has been broadened to include the postponement or deferral of tax.
New provisions have also been introduced to prohibit the promotion of tax avoidance schemes, and which provide for the ordering of civil penalties and the making of injunctions in relation to proposed breaches of the prohibition. These provisions are similar to the anti-tax promoter provisions enacted by the Commonwealth.
It remains to be seen how these broadened avoidance provisions will be actively administered. It is noted however that the Second Reading Speech to the Act stated that "it is not the intention of the Government to start chasing large numbers of taxpayers for avoidance. The chief value of such provisions lies in their deterrent effect".
The Takeaway
The Amending Act represents a significant broadening of the types of transactions subject to stamp duty in NSW, as well as making important changes to the anti-avoidance and penalty tax provisions that apply to all NSW State taxes.
Taxpayers and their advisors need to be aware of the effect of these changes, and to properly understand the impact they have on transactions entered into on or after 19 May 2022.
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Contact us
Cherie Mulyono
Partner, State Taxes & Shine (PwC's LGBTIQ+ network), PwC Australia
Tel: +61 2 8266 1055