Background
Section 8 of the Act operates to charge duty on certain specified transactions dealing with dutiable property. Section 8(1)(b)(ix) of the Act provides that duty will also apply to another transaction that results in a “change in beneficial ownership” of dutiable property unless it is an “excluded transaction”. Excluded transactions include “the grant, renewal or variation of a lease for no consideration” (paragraph (e)). Excluded transactions also include any transactions of a kind prescribed by the regulations (paragraph (k)) and a combination of transactions referred to in paragraphs (a) – (k). The Duties Regulation 2022 includes the following additional excluded transactions relevant to leases:
- the creation, variation, or surrender for no consideration, of a tenant’s interest in fixtures that are fit-out for commercial premises (paragraph (f))
- a change in tenancy under a lease for no consideration (paragraph (g))
- the expiry, extinguishment or merger of one of more leases for no consideration (paragraph (j)).
Commissioner's Practice Note
Section 8(3) of the Act defines the change in beneficial ownership to include the creation and the extinguishment of dutiable property. This will include the grant of a lease of land in NSW unless there is an exclusion or an exemption. Leases granted without a premium or other (monetary or non-monetary) consideration generally will not attract duty.
Note: Lease is defined in section 8(3) of the Act as a lease of land in NSW or an agreement for a lease of land in NSW.
What is consideration for the grant of a lease?
Consideration for the grant of a lease includes monetary consideration and/or the value of the non-monetary consideration. Monetary consideration includes any amount paid or payable by the lessee for the grant of the lease. This does not include amounts paid or payable for the right to use the land being rent or rent reserved. Outgoings such as rates, charges, taxes etc are not treated as consideration or premium for the grant of a lease.
Note: If the lease is granted for monetary consideration, the Chief Commissioner will generally not require a valuation. Duty will be calculated on the consideration paid or to be paid.
In Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143, Dixon,J stated that the word “consideration” should receive the wider meaning or operation that belongs to it in conveyancing rather than the more precise meaning of the law of simple contracts. Consideration is the money or value passing which moves the conveyance or transfer.
In Frazier v Commissioner of Stamp Duties (NSW) 85 ATC 4735, the Court considered that the question of whether a sum is premium or rent is to be determined by deciding firstly whether it is a payment required as a consideration for the granting of the lease or whether it is a payment for the use and enjoyment by the lessee of the land. Where a lump sum payment, even if described as rent in advance, is not proportionally refundable by reference to the unexpired term of a lease on an early termination of the lease, it is generally treated as a premium and not as rent.
Improvements constructed by the lessee can take the character of prepaid rent where they are credited against an obligation to pay rent or are accepted by the landlord in satisfaction of an obligation to pay rent, and there is a right of proportionate refund (payment) in the event of an early termination of the lease (other than through the default of the lessee.) [2]
Note: If the lease is granted for monetary consideration, the Chief Commissioner will generally not require a valuation. Duty will be calculated on the consideration paid or to be paid.
Example 1: ABC Pty Ltd as lessee enters into a 6-year lease of commercial premises in a regional city at a rent of $500 per week. At the commencement of the lease there is a non-refundable upfront payment made by ABC Pty Ltd of $160,000 for the grant of the lease. Duty will be payable on the premium of $160,000 under section 8(1)(b)(viii) of the Act. No duty is payable under section 8(1)(b)(ix) of the Act and no duty is payable on the rent.
Example 2: ABC Pty Ltd as lessee enters into a 6-year lease of commercial premises in a regional city at a rent of $500 per week. At the commencement of the lease ABC Pty Ltd makes an upfront payment of $160,000. This amount is characterised as a combination of a prepayment of rent, the unused portion of which is refundable upon termination of the lease (other than through the default of the lessee, and there are no “break fees” or penalty arrangements) and a “guarantee payment” of $4,000. In this case, the $156,000 ($500 x 52 x 6) attributable to the prepayment of rent will not attract duty and only the amount of the $4,000 guarantee payment will attract duty under section 8(1)(b)(viii) of the Act as premium. No duty is payable under section 8(1)(b)(ix) of the Act.
A grant, renewal or variation of lease for no consideration is generally not dutiable [3]. Rent is not consideration for the grant of a right to lease the property, but rather a payment for the use and enjoyment of the property by the lessee. It follows that leases where only rent is paid or payable will not be liable to duty. Examples include retail, commercial and residential leases entered into on ordinary commercial terms. Leases or agreements to lease where consideration other than rent is paid or payable for the grant of the lease or the agreement will be liable to duty calculated on that consideration.
A lease or an agreement for lease in respect of which a premium is paid or agreed to be paid is liable under section 8(1)(b)(viii) of the Act and will not be dutiable again under section 8(1)(b)(ix) on the premium. However, it could be liable under section 8(1)(b)(ix) of the Act on any other consideration other than premium[4].
However, under section 8(2A) of the Act, 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 3: A lease between a landlord and ABC Pty Ltd has 4 years left to run. XYZ Pty Ltd agrees to purchase the business and assets of ABC Pty Ltd. Rather than agree to a transfer of the lease, XYZ Pty Ltd enters into an agreement with the landlord for a new lease and ABC Pty Ltd and the landlord enter into an arrangement such that the existing lease term is varied to expire in a day.
Depending on the circumstances, including the values of the leases involved, the Chief Commissioner may be of the opinion under section 8(2A) of the Act, that the grant of the lease to XYZ Pty Ltd and/or the variation of the lease to ABC Pty Ltd was made with a collateral purpose of reducing the duty otherwise chargeable on the transfer of the original lease such that the grant of the new lease to XYZ Pty Ltd and/or the variation of the original lease is a dutiable transaction. Penalties may also apply under Part 10A of the Taxation Administration Act 1996.
Other transactions that may be liable to duty
Certain transactions not already covered above or liable under section 8(1)(b)(iii) or (viii) could be liable to duty under other sections of the Act. If they are liable under another section of the Act, they will not be liable again to duty as a change in beneficial ownership. The following are some transactions that could trigger duty either under section 8(1)(b)(ix) or any other section in the Act.
- early termination of a lease by the lessor for various reasons including to grant a new lease to another lessee, or to sell the premises, involving consideration for the arrangements,
- grant of a lease where the lessee pays or agrees to pay the lessor’s legal fees which are non-refundable and is greater than $1,000. Payment of legal fees by way of or instead of rent will not be dutiable on an extension or renewal of the lease [5]
- an option to lease land in NSW for premium [6]
- an assignment of a lease [7]
- a novation of an agreement for lease [8]
- attornment of leases on sale[9].
Transactions that may be not liable to duty
Transactions that are not liable to duty and/or are exempt under other sections in the Act will also not attract a liability as a change in beneficial ownership. Examples include:
- the termination of a lease by the lessor before the expiry date where the lessee is facing hardship and there is no value passing to the lessor,
- early termination by the lessee for various commercial reasons and a payment is made to the lessor in compensation for the rent lost by the lessor,
- an option to a right to occupy/lease premises in a retirement village within the meaning of section 5 of the Retirement Villages Act 1999 [10],
- a lease or agreement for a lease of residential premises used, or intended to be used, exclusively as a residence [11]
- a lease or agreement for a lease of a movable dwelling site used, or intended to be used, as the principal place of residence of the lessee [12],
- an extension or renewal of a lease where the lessee pays legal fees as or instead of rent,
- an option to extend or renew a lease.
A lease granted for non-monetary consideration
A liability to duty will arise if a lease is granted or an agreement for a lease is made for non-monetary consideration. For example, where the lessee is under an obligation to undertake improvements to the land and, under the terms of the agreement for lease or leases, the improvements are to become the property of the lessor at the end of the lease. The value of the improvements passing to the lessor could be significant depending on the improvements at the time the property and the improvements pass on to the lessor. Revenue NSW will monitor these transactions more closely.
If a lease is granted for non-monetary consideration comprising improvements to the property, the full cost of the construction (including builder margins) undertaken or to be undertaken by the developer is taken to be the value of the improvements. This value is determined on entry into the agreement for lease or a lease.
Note: The lease or the agreement for lease will generally not require a reassessment if the cost increases or decreases after the lease or agreement for lease is assessed for duty.
Value of non-monetary consideration
The cost of the improvements and additions to the leased premises made or to be made by or on behalf of, or at the expense of, the lessee under an arrangement or covenant by the lessee (other than fit-out costs) will be the percentage attributed to the value that will be for the benefit of the lessor when the leased premises reverts back to the lessor. As a general matter, the longer the term of the lease, the lower the value of the improvements passing to the lessor. This is because the improvements will depreciate over time as will the value of the improvements that the lessor receives at the end of the lease.
Evidence of the value of the improvements must be provided by the lessee/developer at the time of stamping of the lease or agreement for lease. If a valuation is not provided or if the value does not seem reasonable or appropriate, the Chief Commissioner may assess duty on the basis of a valuation or other evidence.
However, in lieu of evidence of value, the Chief Commissioner is prepared to accept evidence of the cost of improvements and to use the following methodology 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 dutiable value of the improvements will be the cost of the construction activities including GST.
Term of Lease | % of cost of improvements |
|---|
10 years or less | 100 |
| Greater than 10 but not more than 20 years | 75 |
| Greater than 20 but not more than 30 years | 50 |
| Greater than 30 but not more than 50 years | 25 |
| Greater than 50 years | nil |
| Periodic lease or lease for a term that cannot be ascertained when the lease is made | 100 |
Note: For these purposes, improvements include the cost of public works constructed on the leased premises and surrounding areas, on the basis that these improvements enhance the amenity and income producing potential of the buildings constructed by the lessee.
Note: The term of the lease does not include option periods.
Example 4: The Landholder grants XYZ Pty Ltd a lease for 99 years. The lease is conditional on XYZ Pty Ltd constructing an office building, public works on the leased area and surrounding areas. Ordinarily all of the value would accrue to the builder/ lessee, and unlikely to be any value of the building passing to the lessor. As the lease is more than 50 years, the Chief Commissioner will accept the dutiable value to be nil and no duty will be payable and no evidence of value or cost will be required to be produced.
Example 5: The Landlord grants XYZ Pty Ltd a 15-year lease of an industrial building. The lease is granted for a peppercorn rent. The lease is conditional on the lessee making improvements to the currently dilapidated industrial estate. The improvements cost $20 million. However, as per the above table, the dutiable value will be 75% of the cost of the improvements, and duty will be calculated on $15 million.
Example 5A: The Landlord grants XYZ Pty Ltd a 15-year lease of an industrial building. The consideration for the use of the premises under the lease is a prepaid rent of $15 million. There is no separate consideration for the grant of the lease. The lessee can satisfy the obligation to pay rent by either the payment of cash, or by the construction of improvements with an agreed value of $20 million. In either case, if there is an early termination of the lease (other than through the default of the lessee), the lessee is entitled to a proportionate refund. No duty is payable even if the lessee constructs the improvements, as it takes the character of prepaid rent.
Example 6: The Landlord grants XYZ Pty Ltd a 15-year lease of an industrial building. The lease is granted for a peppercorn rent. The lease is conditional on the lessee making improvements to the currently dilapidated industrial estate. The improvements cost $20 million. A valuation is prepared showing that the evidence of value of the improvements after 15 years is $12 million. The lessee submits a valuation on this basis and after analysis of the valuation, this is accepted by Chief Commissioner and duty will be calculated on $12 million.
Example 7: Goodhealth Pty Ltd was awarded the contract by the NSW Health under a Public Private Partnership project to build a hospital in Southwestern Sydney. The lease for 60 years is conditional on Goodhealth Pty Ltd planning, developing and constructing a hospital. Goodhealth Pty Ltd will lease the hospital for less than market/arm’s length fee. The cost of the construction will be the consideration for the grant of the lease. However, as the lease is for 60 years, the Chief Commissioner will accept the dutiable value to be nil and no duty will be payable and no evidence of value or cost will be required to be produced.
Example 8: Prodev Pty Ltd, a development company, has an agreement with the owner of the land to develop the land. Prodev Pty Ltd pays $5 million for the grant of a 4-year construction licence to enter the land and the adjoining land to undertake the approved works. The development includes site works, public works and building works consisting of new residential development. The development costs are estimated to cost $95 million. When the building is completed, Prodev Pty Ltd is granted a 99-year lease over the development.
The 4-year construction licence with an upfront payment of $5 million for the grant of the licence is not liable as it is not a premium for the grant of a lease. The 99-year lease is granted with building works (non-monetary consideration) of $95m will not be liable to duty under section 8(1)(b)(ix) of the Act.
However, if the lease is for 20 years, then the duty payable will be on 75% of $95 million i.e., duty on $71.25 million.
Example 9: Prodev Pty Ltd is a development company which has an agreement with the owner of the land to develop the land. Prodev Pty Ltd pays $5 million upfront as premium for the grant of a 4-year lease to enter the land and the adjoining land to undertake the approved works. The development includes site works, public works and building works consisting of a new residential development. The development costs are estimated to cost $95 million. When the building is completed, Prodev Pty Ltd is granted a 99-year lease over the development.
The upfront payment of $5 million for the grant of the lease is a premium and is liable to duty as a premium under section 8(1)(b)(viii) of the Act. The 99-year lease granted with building works (non-monetary consideration) of $95m will not be liable to duty under section 8(1)(b)(ix) of the Act.
However, if the lease is for 20 years, then the duty payable will be on 75% of $95 million i.e. duty on $71.25 million.
Duty under sections 8(1)(b)(viii) & 8(1)(b)(ix) of the Act could be aggregated under section 25 of the Act.
Footnotes
- ^ The terms “beneficial ownership” and “change in beneficial ownership” and “excluded transactions” are defined in section 8(3) of the Act.
- ^ See example 5A.
- ^ Section 8(2A) applies to arrangements that, in the Chief Commissioner’s opinion, are made with a collateral purpose of reducing the duty otherwise payable.
- ^ See example 9 in the CPN.
- ^ See transactions that may not be liable to duty.
- ^ An amount paid or payable for the grant of an option to lease is taken to be a premium under section 8(3). Duty is payable when the option is exercised.
- ^ Liable under section 9B of the Act or as a transfer of lease. Transfer includes an assignment.
- ^ Liable under section 9C of the Act.
- ^ Duty will only be payable in cases where the lessee seeks compensation from the lessor as a result of an early termination.
- ^ A lease of premises in a retirement village is exempt under section 65(16)(d) of the Act.
- ^ Section 53A(a) of the Act.
- ^Section 53A(b) of the Act.
