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Focus: Stamp Duty – December 2008

Victoria tightens stamp duty law – Duties Amendment Bill 2008

In brief: Proposed changes to Victoria's stamp duty law will have far-reaching consequences that will impact on all taxpayers with dealings in dutiable property in Victoria. Partner Tony Sheehan (view CV) and Senior Associate Jennee Chan examine the proposed changes.

How does it affect you?

  • The due date for the lodgment of documents and payment of duty in Victoria will be reduced from three months to 14 days.
  • It is possible that the execution of a contract for sale and purchase of dutiable property will be subject to duty.  Victoria currently imposes duty on transfers of dutiable property but not on contracts for sale (ie agreements for transfer).
  • The proposed changes in relation to leases of land in Victoria will have significant duty consequences.  Duty will apply to:
    • the grant of a lease of land for a premium;
    • the grant of a lease of land with an option to acquire the freehold, where a fee is paid for the option; and
    • the transfer of a lease of land for any consideration, even if only $1.

In these situations, it is possible that duty will be charged on the full value of the underlying land, not just the value of the leasehold interest. 

  • While the breadth of the changes may be unintended, taxpayers who are negotiating any transaction involving any lease of land in Victoria (ie not just long-term leases) should seek advice on the duty implications.  Once enacted, the proposed changes relating to leases will apply to transactions occurring on or after 21 November 2008.

 

Background


The Duties Amendment Bill 2008 (Vic) (the Bill) has three main purposes:

  • to ensure that leases are not used as a mechanism for avoiding transfer duty;
  • to clarify when duty is payable in relation to changes in the beneficial ownership of dutiable property; and
  • to reduce the time period for the payment of duty from three months to 14 days.


The first two aspects are seen as anti-avoidance in nature – although given how broadly they are drafted, they go much further than that and may have significant unintended consequences – whereas the third is an administrative measure designed to ensure that revenue is collected by the government more quickly.


These measures will only impact transactions which are liable to duty in Victoria.

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Leases of land in Victoria


Current law


Under the existing law, the grant or transfer of a lease of land in Victoria is only subject to duty if it contains a covenant or agreement for the future transfer or sale of the freehold.


Since the abolition of lease duty in Victoria, a practice has evolved where the benefits associated with the effective ownership of land are transferred between parties under certain long-term lease arrangements.


For example, instead of transferring the freehold (which would be subject to duty), the parties may enter into a long-term lease of the land for, say, 299 years.  The lease would typically be granted for an up-front premium close to the market value of the freehold estate.  Such a lease essentially provides the lessee with the benefits of ownership of the land.  Unlike a transfer of land, however, the grant of a long-term lease on these terms would not be subject to duty provided there is no covenant for future transfer.


Proposed changes


The Bill extends the list of dutiable transactions to include the granting of a lease where a premium is paid for the lease, or where another payment is made for:

  • a right to purchase the land or a right to a transfer of the land;
  • an option to purchase the land or an option for the transfer of the land;
  • a right of first refusal in respect of the sale or transfer of the land; or
  • any other arrangement by which any right or interest in the land that is the subject of the lease is obtained.


In other words, duty will be payable on the grant of a lease where any consideration other than rent (for example, a premium) is paid for the lease or for various other rights, options or arrangements.  The new provision is intended to have a broad application.  The effect of this amendment, as stated in the Explanatory Memorandum to the Bill, is to 'impose duty on any lease for which any consideration other than rent ... is paid' (emphasis added).


The Bill also extends the list of dutiable transactions to include the transfer or assignment of a lease for which any consideration, even if only $1, is paid.  This represents a significant change from the current law, which imposes duty on a transfer of lease only if the lease has certain characteristics.


Under the proposed changes, duty will also be payable on the surrender of dutiable property (which will accordingly include the surrender of certain leases).


The amount of duty payable on the grant or transfer of a lease will be calculated based on the greater of the consideration (other than rent) paid for the grant or transfer of the lease (or paid for a right or option or other arrangement in respect of the freehold) and the unencumbered value of the land that is subject to the lease.  The Explanatory Memorandum states that 'the valuation of the land is to be made without regard to the lease itself'.


So, if any consideration at all, other than rent, is paid for the grant or transfer of a lease, or for a related right or option to acquire the freehold, the duty will be charged on the full unencumbered value of the land.


The Explanatory Memorandum also states that 'normal commercial leases for which market rent is payable and no premium is paid should not be effected by these provisions'.  However, the proposed changes have been cast extremely widely and would appear to extend well beyond the stated purposes of the Bill.


For example, the proposed changes would appear to bring to duty the grant of an ordinary commercial lease with an option to purchase the freehold, if a premium or fee is paid for the option.  Such a lease would not be subject to duty under the existing law.  Given the drafting of the new provisions, it seems that technically duty would be charged on the full value of the underlying land even if a nominal amount is paid for the option.


Once enacted, these measures will apply retrospectively from 21 November 2008.  Given their wide-ranging impact, taxpayers who have entered into or are negotiating a lease of land in Victoria should seek urgent advice.

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Change in beneficial ownership


The Bill also proposes to amend the Duties Act to 'clarify' the application of duty to any transaction that results in a change in beneficial ownership of dutiable property (other than an excluded transaction).


Background


These amendments are a response to the decision in Trust Company of Australia Ltd (atf the Clayton 3 Trust) v Commissioner of State Revenue [2007] VSC 451, which considered the meaning of 'beneficial ownership' for the purposes of the Duties Act.


In the Trust Company case, the vendor and the purchaser, acting in their capacity as trustee for different trusts, entered into a contract for the sale of land for valuable consideration.  In the ordinary case, upon payment of the purchase price, the sale would have been effected by a transfer of the land.  In this case, however, the purchaser did not obtain a transfer of the land but instead, rested upon the equitable obligations created between it and the vendor upon payment of the purchase price.  At a later stage, the vendor resigned as trustee of the existing trust and the purchaser then acquired all of the shares in the vendor for nominal consideration.  The purchaser thereby acquired the effective control of the land, although the vendor remained the registered proprietor of the land.


Justice Mandie held in Trust Company that duty was not payable on the transaction as there was no 'change in beneficial ownership' of the land.  In summary, this was because:

  • neither the vendor nor the purchaser (both of whom were acting as trustees) could be described as being the 'beneficial owner' of the relevant land;
  • having regard to the terms of the relevant trusts, the beneficiaries of neither trust could be described as the 'beneficial owner' of the relevant land; and
  • as there was no person that could be identified as the 'beneficial owner' of the land either before or the after the transaction, there could not be any 'change in beneficial ownership'.

Proposed changes


To prevent the potential leakage of revenue, the Bill proposes to insert a statutory definition of 'beneficial ownership', which would include the ownership of dutiable property by a person as trustee of a trust.  This overcomes one aspect of the Trust Company decision by effectively deeming the trustee of a trust to be the beneficial owner of trust property.


'Change in beneficial ownership' will also be statutorily defined to include:

  • the creation of dutiable property;
  • the extinguishment of dutiable property;
  • a change in equitable interests in dutiable property;
  • dutiable property becoming the subject of a trust; and
  • dutiable property ceasing to be the subject of a trust.


Coupled with the proposal to extend the list of dutiable property to include an 'interest' in land or certain leases, these provisions will have far-reaching (and possibly, unintended) consequences.


For example, it is settled law that a purchaser under a contract for the sale of land which is specifically enforceable acquires an equitable interest in the land subject to the payment of the purchase price (see KLDE Pty Ltd v Commissioner of Stamp Duties (Qld) (1984) 155 CLR 288).  On this basis, the creation of an equitable interest upon execution of a contract to acquire land would appear to fall within the definition of 'change in beneficial ownership'.


Once enacted, these measures will apply retrospectively from 21 November 2008.  Taxpayers who have entered into, or are negotiating a transaction to acquire land in Victoria should seek urgent advice.

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Reduction in time period for payment of duty


The third main feature of the Bill is the reduction of the period for the lodgment of documents and the payment of duty.


At present, documents which effect a dutiable transaction must be lodged with the Office of State Revenue, and the duty liability must be paid, within three months after the liability to pay the duty arises (broadly, the date of the dutiable transaction).


Under the proposed amendments, the lodgement period will be reduced to only 14 days after the liability to pay duty arises.  To avoid potential interest and penalties for late payment, taxpayers making submissions that duty is not chargeable on a transaction will need to consider paying the duty liability under protest.


The reduced lodgement period will only apply to dutiable transactions that occur on or after the date that the Bill receives Royal Assent.


For further information, please contact:

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