Background
Section 8(1) of the Act charges duty on transfers of dutiable property and other transactions. Section 8(1)(b)(ix) imposes duty on another transaction that results in a change in beneficial ownership of dutiable property (other than an excluded transaction).
Note: If the transaction falls within section 8(1)(a)(b)(i) to (viii) it is not necessary to consider any application of section 8(1)(b)(ix).This also applies to transactions that are exempt from duty or liable to concessional duty under any other section in the Act.
Section 8(3) of the Act defines beneficial ownership to include ownership of dutiable property by a person as trustee of a trust. A change in beneficial ownership includes:
- 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
- dutiable property ceasing to be the subject of a trust.
the Act also contains a number of excluded transactions; that is, although they effect a change in the beneficial ownership of dutiable property, they will not be chargeable with duty. These include:
- the purchase, gift, allotment or issue of a unit in a unit trust scheme,
- the cancellation, redemption or surrender of a unit in a unit trust scheme,
- the abrogation or alteration of a right relating to a unit in a unit trust scheme,
- the payment of an account owing for a unit in a unit trust scheme,
- the grant, renewal or variation of a lease for no consideration,
- the grant of an easement for no consideration,
- the grant of a profit a prendre for no consideration,
- the provision of a security interest within the meaning of the Personal Property Securities Act 2009 of the Commonwealth,
- a change in a trustee’s right of indemnity,
- the creation of an interest in dutiable property by statute,
- a transaction of a kind prescribed by the regulations,
- a combination of the transactions referred to in paragraphs (a)–(k).
The Duties Regulation 2022 applies retrospectively to transactions first executed on or after the 19th of May 2022. Section 4 of the Duties Regulation 2022 prescribes certain excluded transactions. The following transactions are prescribed:
- a change in default beneficial interests under a discretionary trust, including the following:
- a change to the default beneficial interests of the default beneficiaries,
- the addition or removal of a default beneficiary,
b change in beneficial ownership of dutiable property that occurs:
- under a testamentary instrument or the laws of intestacy, or
- otherwise by operation of law on the death of a person,
c. the grant or termination of a life estate in dutiable property for no consideration,
d. the variation or surrender of an easement for no consideration,
e. the grant, creation, variation or extinguishment of a mortgage, charge or other security over land,
f. the creation, variation or surrender, for no consideration, of a tenant’s interest in fixtures that are fit-out for commercial premises,
g. a change in tenancy under a lease for no consideration,
h. a change, for no consideration, in the holding of property:
- from joint tenants to tenants in common in equal shares, or
- from tenants in common in equal shares to joint tenants,
i. the grant, variation, cessation, revocation or cancellation of a water right,
j. the expiry, extinguishment or merger of one or more leases for no consideration,
k. the variation or extinguishment of a profit a prendre for no consideration,
l. the surrender of a security interest for no consideration.
Commissioner's Practice Note
Where a transaction that results in a change in beneficial ownership is a dutiable transaction, duty is payable by the person who obtains the beneficial ownership or whose beneficial ownership is increased. The expression “beneficial ownership” has a wide meaning and extends beyond merely equitable ownership: Woodfield Constructions v Commissioner of State Revenue (Taxation) [2005] VCAT 2518. A person may obtain beneficial ownership if the capacity in which a person holds dutiable property changes (e.g., where a person who holds dutiable property other than as trustee starts to hold the dutiable property as trustee). Duty may also be payable where a person’s interest in a trust increases, including as a result of the surrender of another person’s interest in a trust (unless the increase results from an excluded transaction).
Changes in beneficial ownership
A change in beneficial ownership can be categorised under any three of the following headings. Some of the transactions could fall within more than one category.
Creation or extinguishment of dutiable property
The creation of a dutiable transaction includes the acquisition of dutiable property or the acquisition of a right to acquire dutiable property. Some examples 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. For the purposes of the Act, each is liable to duty unless they fall within the excluded transactions or are exempt under any other section of the Act.
Example 1: A is granted an option to purchase NSW land from XYZ Pty Ltd for $3,000,000. The option fee is $50,000. The creation of this right to purchase dutiable property is liable to duty. The duty payable is on the option fee of $50,000.
Note: 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.
When the option is exercised, duty is payable on the consideration of $3,000,000 or the value of the dutiable property at the time of exercise whichever is greater. No credit will be available for the duty paid on the option fee. There is no refund of duty if the option is not exercised.
Note: The consideration for the transfer of land which occurs as a consequence of the exercise of the option to purchase land includes the amount or value of the consideration provided for the grant of the option[1]. Therefore, if the option fee of $50,000 does not form part of the deposit on the exercise of the option, then the consideration will be $3,050,000. If the option fee forms part of the deposit, then the consideration for the transfer will still be taken as $3,000,000.
Example 2: A Put & Call option arrangement is entered into in respect to dutiable property with a call option fee of $1 and a put option fee of $1. The option deed also includes a security deposit of $500,000. A clause in the deed states that the security deposit is forfeited if the call option is not exercised. This security deposit will be treated as consideration for the granting of the call option. Duty will be payable on $500,001.00. The put option fee is not liable to duty.
Example 3: A Put and Call option is entered into in respect to dutiable property with a call option fee of $100. The option deed also includes a security deposit of $1,000,000. The security deposit is wholly refundable, paid into an escrow account subject to securing finance. This is the condition for the grant of the option. No break or other fees attached.
In this case the security deposit will not attract duty. Duty will be payable on the option fee of $100.
Example 4: A grants a lease of NSW land to B for a term of 5 years. B defaults on the rental payments. At the end of the 5-year term, B surrenders their rights in some fixtures and fit out on the leased premises in exchange for the release of a debt equivalent in value to the surrendered items. The surrender of the fixtures and fit out will be liable on the value of the fixtures & fit out.
Example 5: A leases 3 floors of a commercial office tower in NSW from B for 10 years. The lease includes a provision that requires the lessee to remove all fit out and fixtures at the expiration of the lease. At the end of the lease the lessor allows the lessee to leave without removing the carpet, office partitions etc. No duty is payable on the expiry of the lease.
Example 6: A grants a lease of NSW land to B for a period of 10 years. Rent payable is $1.00 per annum. There is no premium payable on the lease. Instead of a premium payable, B will be required to fit out the premises. These improvements will become the property of A at the end of the lease. The value of the improvements is the non-monetary consideration for the grant of the lease and is made instead of paying a premium. Duty will be payable on the lease on the value of the improvements[2]. The value of the improvements will be the estimated market value including GST that pass on to the lessor at the date of expiry of the lease[3]and will be liable under section s.8(1)(b)(ix).
Example 7: A grants B a lease of vacant NSW land for a term of 99 years. The pre-condition for the grant of the lease is that B constructs a hotel on the land, including public areas which provide access to the hotel to improve the amenity of the leased area and surrounding precinct. The hotel business will be run by B for the term of the lease. The construction of the improvements will form part of the consideration but will be treated as not having any value because the of the 99-year term of the lease and as such, the lease will not be liable to duty under section 8(1)(b)(ix). However, any monetary consideration/premium paid or payable will be liable to duty under section 8(1)(b)(viii).
Example 8: A has agreed to grant an easement to B over NSW land for a consideration of $6,000. In addition to the consideration, B will also pay A’s legal costs and expenses. Duty will be payable on the total consideration of $6,000 plus the legal costs and expenses.
Change in equitable interest in dutiable property
A change in the equitable interests in dutiable property includes situations where a person starts to hold property in a different capacity. For example, if a person who holds property in their own name and then starts to hold it as trustee of a trust. Movement of dutiable property to a unit trust or discretionary trust from either a person, another trust or a company is dutiable. 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 identified dutiable property involved.
It cannot be disputed that a transfer of dutiable property between the trustees of two different trusts would give rise to a dutiable transaction that, subject to any applicable exemption, would be charged with duty. It follows that in the light of the extended definitions of “beneficial ownership” and “change in beneficial ownership” there is no good reason why such a change of trusts should avoid duty simply because the trustee of each trust is the same person: Rakmy Pty Ltd v Commissioner of State Revenue [2017] VSC 237.
Example 9: Amy holds dutiable property in her own name. Amy is also the trustee of a discretionary trust. Amy decides to hold the dutiable property in the capacity as trustee of the discretionary trust. The change in beneficial ownership is liable to duty on the value of the property.
Example 10: David & Sarah are the trustees of a self-managed superannuation fund with both David and Sarah as the fund members. The asset of the fund includes land in NSW. David and Sarah decide to transfer the land to themselves in their own right and out of the superannuation fund. As David & Sarah are on title as trustees of the superfund and will be on title in their own right after the transfer, there will be no transfer to change title. However, this transaction will be liable to duty on the value of the land.
Example 11: The trustee of ABC Trust, a fixed trust holds land in NSW. The trust has two beneficiaries P & Q, each with 50 percent interest. P disposes its 50 per cent interest to Q. There is no change in the legal ownership of the land, which is held by the trustee, but Q has now acquired an additional 50 per cent beneficial interest in the land. The value of 50 percent interest is $1,500,000. Duty is payable on $1,500,000.
Example 12: A, B, C and D each have a 25% interest in a fixed trust which has NSW dutiable property. D disclaims her interest, such that A, B & C have 1/3 interest each. Duty will be payable by each of A,B & C on the 8.33% interest they each acquire.
Becoming or ceasing to be the subject of a trust
A change in a beneficiary’s interest in a fixed trust or change in the entitlement of beneficiaries is dutiable. Another example is if a trust is terminated and the trustee holds property in its own right.
In some instances, a new trust is created which replicates the old trust (cloned trust). The beneficiaries are the same as the original trust. A movement of dutiable property from one trust to the other will be liable to duty even if the legal title does not change (because both trusts have the same trustee).
Example 13: XYZ Trust was executed on 20 May 2000 with P Pty Ltd as the trustee and A & B as beneficiaries. The trustee of XYZ Trust owns dutiable property in NSW. A new trust is executed that is exactly the same as XYZ Trust with the same trustee or substantially the same terms and conditions. Having the trustee cease to hold the dutiable property as trustee of the XYZ Trust and start to hold it as trustee of the new Trust will be liable to duty.
Example 14: XYZ Pty Ltd is the trustee for RN unit trust. The trustee holds dutiable property with a total value of $3,000,000 for the RN unit trust. XYZ Pty Ltd is also the trustee for PQ unit trust. XYZ Pty Ltd declares that it now holds the dutiable property the subject of the RN Unit Trust for the PQ unit trust.
In this instance the legal title does not change, and the declaration is not a “declaration of trust” within section 8(1)(b) of the Act. There is however a change in the beneficial ownership of the dutiable property and this transaction will be liable to duty on $3,000,000.
Part of a scheme
Section 8(2A) states that an excluded transaction that results in a change in beneficial ownership of dutiable property is a dutiable transaction if it is part of a scheme or arrangement that, in the Chief Commissioner’s opinion, was made with a collateral purpose of reducing the duty otherwise chargeable.
Example 15: A grants a lease to B for a term of 10 years. At the end of 5 years A and B agree to vary the lease to reduce the remaining term from 5 years to 1 day as part of an arrangement that will see a new lease of the same premises being granted to C.
The lease is not terminated but expires earlier than was originally the case. Any consideration passing from A to B to reduce the term of the lease will be liable to duty.
Note: If a change in beneficial ownership is not effected by an instrument, a written statement in an approved form must be submitted to the Chief Commissioner within three months from the date on which the dutiable transaction occurred (Section 15 statement).
Note: You can apply for a private ruling if a transaction is not covered under this note or if there is any doubt that a transaction could be liable to duty.
Footnotes
[1] Sec. 22(4) of the Act
[2] For more information on lease see Commissioner’s Practice Note CPN 027 on Leases and change in beneficial ownership.
[3] See CPN 027 Leases and change in beneficial ownership for more details on the value of the improvements.
