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An option granted over dutiable property in NSW (such as over land) is a ‘change in beneficial ownership’. This means that ad valorem duty is payable on any call option fee (consideration) paid for a grant of an option entered into from this date.
Surcharge purchaser duty (chapter 2A of the Duties Act 1997) does not apply to transactions that are liable to duty under section 8(1)(b)(ix).
The Purchaser/ Transferee declaration Form is not required for the grant of an option.
Duty paid in NSW on the grant of an option is not credited toward the duty payable when the option is exercised.
If the call option is not exercised, a refund of duty will not be issued for any duty paid for the grant of the option.
Put option fee does not form part of the consideration.
Evidence of value will not be required for the grant of an option unless the parties are related persons, or there is a pre-existing arrangement between the grantor/grantee where the parties are not acting at arm’s length.
A transfer of an option to purchase land in NSW is a dutiable transaction under the Duties Act 1997. Also, under section 9B a deemed transfer is taken to occur if an option holder, for valuable consideration:
nominates another person to exercise the option; or
nominates another person as purchaser or transferee of the land the subject of the options on or before the exercise of the option; or
agrees to a novation of the option, or otherwise relinquishes rights under the option, so that another person obtains a right to exercise the option or to purchase the land.
The person liable to pay the duty is the transferee. In the case of a nomination or novation, a transferee includes a person who obtains the right to exercise the option or purchase the land.
Duty is calculated on the dutiable value of the option being transferred/assigned, being the greater of the consideration or the unencumbered value of the option.
When the option is exercised, duty is charged on the dutiable value of the dutiable property. The consideration for the transfer of the land will be taken to include the amount or value of the consideration provided by the transferee for the option (whether for its grant, transfer/assignment, exercise or otherwise – refer to section 22(4) of the Duties Act).
The duty payable on the transfer/assignment of the land will, however, be reduced by the amount of duty (if any) paid by the transferee on the transfer of the option (refer to section 64D of the Duties Act i.e. the assignee, nominee must be the same as the transferee who initially paid the amount of ad valorem duty (at the general rate under section 32) on the transfer/assignment/ novation of the land.
The grantee pays an option fee of $20,000 and obtains an option to purchase land from ABC Pty Ltd (the grantor) for $2,000,000.00.
Duty liability:
Duty is payable on the option fee of $20,000 that was paid to the grantor. A grant of an option is a change in beneficial ownership under section 8(1)(b)(ix) of the Duties Act 1997.
Example 2:
The grantee then transfers the call option to the purchaser (or nominates a nominee as the person who can exercise the option) and receives a nomination/transfer fee of $500,000 (which is equal to the unencumbered value of the option).
Duty liability under Chapter 2:
Duty on $500,000 is payable by the purchaser/nominee within three (3) months of the liability date (being the date the transfer/assignment or nomination is made).
Applying the general rate as at March 2021
Ad valorem duty on $500,000 = $17,835 (refer to section 9B)
The executed Deed of Assignment/Deed of Nomination or Nomination Notice (when the transfer or nomination was made) is the instrument liable to ad valorem duty.
Purchaser B then exercises the call option.
Duty liability under Chapter 2:
Duty is payable on the land transfer ($2,500,000 – the purchase price of $2,000,000 plus the nomination/novation/transfer fee of $500,000) by Purchaser B within three (3) months of the option exercise date. The amount of ad valorem duty at the general rate is to be reduced by the amount of duty paid by Purchaser B on the earlier nomination.
The executed Exercise Notice is the instrument liable to ad valorem transfer duty.
The section 64D credit would only apply if the option is exercised validly in accordance with the option deed. The section 64D credit is only in respect of the duty paid at the general rate for the nomination/novation/transfer of the option.
Call option assignment duty - Chapter 3 of the Duties Act
In addition to the duty payable by the transferee on a transfer (or deemed transfer) of an option, the transferor/assignor is liable to call option assignment duty where there is also a put option in place.
Where a person (A) has a right under a call option requiring another person (B) to sell dutiable property, and B has a right under a put option requiring A to purchase the dutiable property, an assignment or transfer by A to C, for valuable consideration (refer to section 107) will be liable to duty on the dutiable value of the dutiable property. A is the party liable to pay the duty.
The dutiable value of the dutiable property will be taken to include the amount or value of the consideration provided by A for the option.
The grantor grants the grantee a call option that confers a right on the grantee (or any assignee/nominee of the grantee) to require the grantor to sell the land. The grantee also grants to the grantor a put option that confers on the grantor a right to require the grantee (or any assignee/nominee of the grantee) to purchase the land from the grantor.
Duty is payable on any call option fee that was paid for the grant of the option. A grant of an option is a change in beneficial ownership under Section 8(1)(b)(ix) of the Duties Act 1997.
The grantee then transfers/assigns the call option to a nominee/assignee. Ad valorem duty is payable as follows:
The grantee/nominator (as the option holder) must pay call option assignment duty on the dutiable value of the transfer of the land (refer to section 109).
The nominee (as the transferee of the option) must pay duty on the transfer of the option. Duty is payable on the dutiable value of the option being transferred.
If a nominee/C then transfers the option to anther nominee/D. Nominee/C (as the option holder) is required to pay call option assignment duty as if the option were a transfer of the land. However, in this case nominee/C will receive a credit for the duty paid by nominee/C on the transfer of the option to nominee/C. Nominee/D (as the transferee of the option) is required to pay duty on the transfer.
Example 2
ABC Pty Ltd enters into a put and call option with the grantee, XYZ Pty Ltd. XYZ Pty Ltd pays a call option fee of $50,000 and obtains the right to purchase commercial land from ABC Pty Ltd for $5,000,000.00.
Duty liability: Duty is payable by XYZ Pty Ltd on the call option fee of $50,000. A grant of an option is a change in beneficial ownership under section 8(1)(b)(ix) of the Duties Act 1997.
XYZ Pty Ltd being the grantee/nominator then transfers/assigns the call option to the nominee, EFG Pty Ltd, and receives a nomination fee of $900,000.
Duty liability under Chapter 3: Call option assignment duty is payable by XYZ Pty Ltd on the transfer/assignment of the option to EFG Pty Ltd. Ad valorem transfer duty is calculated on the dutiable value of the land. If the unencumbered value of the land does not exceed $5,900,000 as at the transfer/assignment date, ad valorem transfer duty is payable on this amount.
Applying the general rate as at February 2022
Ad valorem duty on $5,900,000 = $309,375
Ad valorem duty is also payable by the nominee (being EFG Pty Ltd) on the transfer of the option to the nominee. Ad valorem duty is payable on the dutiable value of the option.
The nominee/purchaser then exercised the call option.
Duty liability:
Ad valorem duty is payable on the land transfer ($5,900,000 – the purchase price plus the nomination fee – refer to section 22(4)) by the nominee/purchaser within three 3 months of the option exercise date. The nominee/transferee will receive a credit for the duty paid by the nominee/transferee on the earlier transfer of the option (refer to section 64D). If the transferee is not the same as the nominee the section 64D credit will not apply to the duty payable on the exercise of the option.
The exemptions from call option assignment duty are contained within section 111 of the Duties Act.
Section 111(1)(c) – Builder’s exemption
If the Grantee who then becomes the Assignor/Nominator is a licenced home builder, consider if the builder’s exemption under section 111(1)(c) applies to determine if the call option assignment is exempt from call option assignment duty.
If the call option is assigned by a person authorised to contract to do residential building work under the Home Building Act 1989 (NSW) who has built or is building residential premises on the land for the purposes of sale, or has an agreement with the person to whom the call option is assigned to build residential premises on the land, consider if the builders exemption under section 111(1)(c) applies.
Section 111(1)(d) – Members of a ‘group of corporations’
If the call option is transferred/assigned by a corporation that is a member of group of corporations to another corporation that is a member of the same group, consider the exemption under section 111(1)(d).
When requesting this duty exemption, please also refer to sections 111(2A) and 111(2B). Note that the test for members of the same ‘corporate group’ under Chapter 3 is different to the definition under Chapter 11 (section 273E) of the Duties Act. Chapter 3 does not define a corporation to include a unit trust scheme.
Transactions which must be lodged with Revenue NSW and the supporting evidence required
For an acquisition arising from an arrangement involving an option, put option and/or call option, the below evidentiary requirements must be provided:
Cover letter - include full consideration paid including option fees, performance payments, legal costs, GST etc
Complete Grant of Option and Annexures including complete Draft Contract
Any amendments/variations to the grant of the option
Exercise of Option (executed and dated)
Complete executed Agreement/Contract
Valuation where option was exercised more than 12 months after the date of the grant of option. The valuation should include value of any development application approvals, improvements to the land or rezoning (if any) which have occurred after the date of grant of option
Cover letter - include full consideration paid including option fees, performance payments, legal costs, GST etc
Complete Grant of Option and Annexures including complete Draft Contract
Any amendments/variations to the grant of the option
Nomination/assignment/novation of option signed by the grantee (executed and dated)
Exercise of Option Notice (executed and dated)
Complete executed Agreement/Contract
Valuation where option was exercised more than 12 months after the date of the grant of option. The valuation should include value of any development application approvals, improvements to the land or rezoning (if any) which have occurred after the date of grant of option
When no valuable consideration is paid for assignment/nomination, statement confirming no consideration was paid for the nomination of option
When valuable consideration is paid for assignment/nomination, statement confirming the valuable consideration paid for the nomination of option
