The Act amends the Duties Act 1997 (Duties Act), the Land Tax Act 1956, and the Land Tax Management Act 1956. The amendments commenced on 24 June 2020.
These amendments operate to strengthen and expand the NSW revenue base.
1. Foreign Person – Discretionary Trusts
Previous
A trustee of a discretionary trust is taken to be a foreign trustee (and therefore liable for surcharge purchaser duty as the transferee of residential land) if the trust terms do not prevent a foreign person from being a beneficiary.
Amendments
New section 104JA. If a discretionary trust deed prevents a foreign person from being a beneficiary of the trust, the trustee of the trust is not a foreign person so the surcharge will not apply.
To prevent a foreign person from being a beneficiary, the trust deed must state that:
- no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement); and
- the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement).
2. Call Option Assignment Duty
Previous
Call option assignment duty is not enlivened when an existing put and call option deed is rescinded (including where the options are relinquished) and a third party enters into a contract of sale directly with the vendor.
Amendments
New section 107(2)(c). Call option assignment duty provisions are extended to deem an assignment to a third person of an option to purchase dutiable property where there is a relinquishment of the option with an agreement to sell to the third person.
3. Landholder Duty – Threshold Land Value Method
Previous
The method of determining the value of land that establishes the threshold for applying the landholder duty provisions is the unimproved value / registered land value for interests in estates in fee simple.
For other interests, eg leasehold interests, the methodology uses the unencumbered value.
Amendments
The method of determining the value of all land interests will be the unencumbered value.
4. Meaning of 'Land holdings' for landholder duty purposes
Previous
A land holding includes an interest in land other than the estate or interest of a mortgagee, chargee or other secured creditor, and is extended by clause 4 of the Dictionary which concerns the Mining Act 1992 (NSW).
Amendments
New section 147A. Changed to fixed to land model. 'Land' includes anything (whether or not a fixture) that is fixed to land.
5. Liability for Landholder Duty
Previous
The person who makes the relevant acquisition (ie the acquirer) is liable for the duty.
If a relevant acquisition results from an aggregation of the interests of associated persons, the person who made the relevant acquisition and the associated person or persons are jointly and severally liable for payment of the duty.
Amendments
Substituted section 154 extends the duty liability to the landholder itself.
The landholder will be jointly liable for the duty. The liability of the landholder can be a charge on the land for which a caveat can be registered.
Further details of the key Duties Act amendments
1. Foreign trustees of discretionary trusts
The Act clarifies when a trustee of a discretionary trust is liable for surcharge purchaser duty (and surcharge land tax).
Surcharge purchaser duty applies to acquisitions of NSW residential land by foreign persons. Where an interest in a property is acquired by or held on trust by a discretionary trust, the trustee of the trust may be liable for the surcharge if any of the potential beneficiaries is a foreign person. With a discretionary trust, each beneficiary to whom the trustee may distribute the income or property is deemed to have the maximum percentage interest in the income or property over which the trustee may exercise a discretion to distribute.
The Act provides that a trustee of a discretionary trust is taken to be a foreign trustee (and so is liable for surcharge purchaser duty) if the trust terms do not prevent a foreign person from being a beneficiary. If the terms prevent a foreign person from being a beneficiary, the trustee is not a foreign trustee for surcharge purposes.
Whilst subject to limited exemptions, a discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if (and only if) both of these requirements are satisfied:
- no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement); and
- the terms are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement).
Transitional provisions provide for retrospective effect so that if a trustee incurred the surcharge, they can claim an exemption/refund of the surcharge providing the trust deed is varied before 31 December 2020.
As most standard discretionary trust deeds include a broad class of discretionary beneficiaries for tax planning, the class may include a foreign person. It is critical that taxpayers attend to the amendments to the trust deeds before 31 December 2020 so as to not inadvertently be subject to the surcharge.
The Act introduces parallel provisions as to when trustees of discretionary trusts will not be liable for the land tax surcharge.
Finally, the Act also includes special provisions about when a trustee of an Australian testamentary trust will not be a foreign person.
2. Call option assignment duty
Certain dealings of rights under transactions involving both a put and a call option are subject to 'call option assignment duty' where the options are over dutiable property (eg land). Where there is a deemed assignment of the call option, duty is imposed on the option holder as if there was a transfer of the underlying land.
There is no crediting for the duty to the transferee unless there is a further assignment of the call option.
In Oak Brick Investment Pty Ltd & Anor v Chief Commissioner of State Revenue [2016] NSWSC 1039, the Court held that the call option assignment duty provisions did not apply. The facts were that a put and call option arrangement was entered into, then for valuable consideration the option deed was rescinded, and a third party entered into a new contract directly with the vendor for the purchase of the properties. The Court held that the plaintiffs did not assign their rights under the call option to the third party, nor did they nominate the third party as the purchaser on or in connection with exercising their call option, and as such were not liable to call option assignment duty.
The Act includes a new provision which directly addresses this 'gap' in the Duties Act. It deems an assignment to a third person of an option to purchase dutiable property as a transfer of the property for duty purposes where it is part of an arrangement for the relinquishment of the option with an agreement to sell to the third person.
The transitional provisions provide that new section 107(2)(c) does not apply to an agreement or arrangement entered into before the commencement date (24 June 2020).
3. Landholder duty – threshold land value method
An entity can be a landholder if it has landholdings in NSW with an unimproved value of $2,000,000 or more for interests in estates of fee simple (other than a strata lot).
The Act provides that the value test will be the "unencumbered value" rather than the unimproved value (which is the registered land value). The new test therefore matches the test already in operation for interests in fee simple for strata lots and leasehold interests, and the test also more closely aligns with the value tests in other jurisdictions.
The amendments will cause more taxpayers to obtain valuations of the unencumbered value of their properties (in contrast to relying on the registered land values). However, acquisitions of land with high values, whether determined on an unimproved or unencumbered value, will not be affected by this change as the $2,000,000 value is easily surpassed.
4. Meaning of 'Land holdings' for landholder duty purposes
The meaning of 'land holdings' in NSW includes freehold, leasehold, buildings, and fixtures at common law (as well as certain fixed to land items in connection with mining operations). The landholder duty regime applies the common law definition of "fixtures" to determine whether a chattel is a fixture and therefore "land" for landholder duty purposes.
The Act extends the meaning of 'land' to include anything fixed to the land whether or not:
- the thing constitutes a fixture at law;
- is owned separately from the land; or
- is notionally severed or considered to be legally separate from the land as a result of the operation of any act or law.
The Commissioner will have certain discretions to determine that land does not include such a thing if the thing is owned by a person who is not the person who owns the land or an associated person and the thing is not used in connection with the use of the land.
This extension of 'land' will result in many more entities who are not currently 'landholders' to become landholders. For example, where an entity holds a commercial lease only but it has affixed valuable infrastructure to the leased property (including office fitout or industrial machinery and equipment), the fixed to land items may cause the entity to become a landholder and duty would apply to relevant acquisitions in the entity.
The amendments are similar to the 'fixed to land' model in Victoria and Western Australia, for example.
The changes to landholder duty apply from 24 June 2020. However, acquisitions made under agreements or arrangements made before that date are not subject to the amendments.
5. Liability for landholder duty
The acquirer (and each of them if there is more than one) is liable for the landholder duty.
The Act provides that the landholder itself and the acquirer(s), will be jointly liable for the duty payable.
The Act also includes a significant amendment in that the liability of the landholder can be a charge on the land for which a caveat can be registered. The landholder can recover as a debt the duty paid from the acquirer(s). However, and unlike other jurisdictions, this charge power is not coupled with a power or sale.
Importantly, the charge on the land can secure the payment of interest and penalties. Therefore a landholder can have its land caveated for transactions it is not a party to and with potentially no knowledge of.
Please get in touch if you would like to discuss the amendments and what it means for your business.
