NSW “change in beneficial ownership” stamp duty reforms: Significant changes to leases, trusts and option transactions

The changes were made pursuant to the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW), and significantly broadened the duty base in New South Wales. The amendments apply retrospectively to transactions first executed on or after the 19 May 2022.

The Chief Commissioner has now issued two Practice Notes setting out the circumstances when certain transactions will be subject to duty under the new rules, and in what circumstances the change in beneficial ownership provisions apply to the grant of a lease:

• Commissioner’s Practice Note CPN 025: Change in Beneficial Ownership
• Commissioner’s Practice Note CPN 027: Leases and change in Beneficial Ownership

CPN 027 must be read in conjunction with CPN 025.

Some key examples from the practice notes are set out below. 

As duty outcomes for transactions will be heavily impacted by the drafting of transaction documents, now is the time for taxpayers and their advisers to review their NSW transaction structures and documentation and determine whether any practice or procedures need to be changed to accommodate the amendments.

While CPN 025 and CPN 027 provides a number of examples to assist taxpayers in providing certainty to their transactions, the ability to apply for a private ruling if there is any doubt as to the application of the provisions remains.

Change in Beneficial Ownership – Overview

Historically, transfer duty (particularly in NSW) has been concerned with imposing duty on certain dealings in land which amount to a change in legal interest. From 19 May 2022, a new category of dutiable transaction was introduced to extend the tax base to changes in “beneficial ownership”.

The concept of “change in beneficial ownership” is defined to include:

• The creation of dutiable property
• The extinguishment of dutiable property
• Change in equitable interests in dutiable property
• Dutiable property becoming the subject of a trust
• Dutiable property ceasing to be the subject of a trust

The Duties Act and the Duties Regulation 2022 (NSW) also includes an extensive number of “excluded transactions”.  

More detail around the legislation is available in our article, NSW state taxes changes to commence shortly.

CPN 025: Chief Commissioner’s examples

CPN 025 provides a number of examples for the types of transactions that will fall within the scope of the new provisions.

Creation of extinguishment of dutiable property

Examples of transactions that are a “creation or extinguishment of dutiable property” include the grant of an option to purchase dutiable property, the grant of a life estate, the grant of a lease, or the grant of a mining lease. 

Key takeaways from the Chief Commissioner’s examples include:

• In respect of the grant of options, the Chief Commissioner will generally assess duty on the consideration paid for the option assuming the parties are unrelated and acting at arm’s length. A valuation may be required in circumstances where the parties may not be acting at arm’s length, or there is a question as to whether the transaction is part of a scheme to avoid duty.
• Where an option arrangement involves a security deposit, if that security deposit is not refundable, it will be consideration for the grant of an option.
• An obligation on a tenant to undertake construction or fit out works or improvements on land, will be non-monetary consideration for the grant of a lease on which duty is chargeable.

Change in equitable interest in dutiable property & becoming or ceasing to be the subject of a trust

CPN 025 specifically provides that trust cloning and a change of capacity in which a trustee holds dutiable property as examples of where duty becomes chargeable under the new rules. Varying a trust in such a way that the interests become fixed after being discretionary, or where a fixed trust becomes a discretionary trust, will also be dutiable to the extent of the change in interest in the dutiable property.

CPN 027: Leases and changes in beneficial ownership

Prior to the introduction of the new legislation, the grant of a lease in NSW has only been subject to duty where a premium by way of monetary consideration has been provided by the lessee for that grant.  Under the new rules, the duty base is broadened to include circumstances where non-monetary consideration is provided.

CPN 027 provides a number of significant changes to the way leases are assessed, particularly where the lessee has an obligation or undertakes improvements.

The practice note provides that a lease may be dutiable on its grant where under the terms of the lease, the lessee has an obligation to undertake improvements and where the improvements become the property of the lessor at the end of the lease. Similarly, a lease may be dutiable on its surrender where valuable improvements are surrendered to the lessor.

Importantly, the Chief Commissioner has released a methodology that the Commissioner is prepared to accept to calculate the proportion of the value attributable to the improvements as the dutiable value for the dutiable transaction that is the grant of the lease.

The methodology is based on the principle that the longer the term of the lease, the lower the value of any improvements passing to the lessee. In accordance with the table released by the Chief Commissioner, where the term of a lease is more than 50 years, where a lessee has an obligation to undertake improvements under the terms of the lease, the Commissioner will accept the dutiable value of the lease to be nil and no duty will be payable in respect of the grant of the lease.

In contrast, where the term of the lease is 10 years or less, subject to any other valuation evidence, the dutiable value is 100% of the cost of improvements undertaken.  

CPN 027 also addresses the duty treatment of a number of common leasing arrangements, the outcome of which can vary depending on the specific circumstance including:

• Upfront lessee payments and pre-paid rent
• Lessee’s obligation to undertake works in lieu of rent
• Lessee’s obligation to pay lessor’s legal fees

As the new legislation is complex and untested, care should be given in drafting transaction documents, particularly where there are changes to the nature of rights and interests in New South Wales property.

If you require assistance with understanding the new provisions and the Chief Commissioner’s practice notes, please get in contact with a member of our State Taxes team.