‘Nothing to see here’? Significant shift in the NSW duties regime

Don’t be fooled by the inconsequence suggested by its title. The ‘miscellaneous amendments’ made to the Duties Act 1997 (NSW) (Duties Act) and Taxation Administration Act 1996 (NSW) (Tax Administration Act) are substantial:

• Changes in beneficial ownership of dutiable property are now dutiable.
• ‘Acknowledgments’ of trust are now dutiable.
• The anti-avoidance provisions have been remodelled.
• Penalties have increased for significant global entities (SGE).

These ‘miscellaneous amendments’ even require their own guide, which was recently issued by Revenue NSW.

There are, however, some small mercies, including an expansion of the circumstances in which a taxpayer can apply for a refund of surcharge duty paid.

This article considers some of the more significant – and somewhat controversial – changes.

Changes in beneficial ownership

Duty will now be charged on transactions (other than excluded transactions) resulting in a change in beneficial ownership of dutiable property, as if the legal right in the underlying property had been transferred.

A ‘change in beneficial ownership’ is defined to include:

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

The term ‘beneficial ownership’ is not defined. Its meaning and intended scope remain unclear.  However, what we do know from Revenue NSW’s guide is that the following will be dutiable:

• Granting options over dutiable property – see our comments below.
• Granting, renewing or varying leases for consideration – it will be interesting to see how this amendment interacts with the existing rules imposing duty on leases for which a premium is paid.
• Granting of easements for consideration – which was previously not dutiable.

Granting options

Revenue NSW has made it clear that the granting of a put and/or call option over dutiable property attracts duty (but not surcharge purchaser duty).

Importantly, it appears that the grant and the exercise of an option are considered two separate transactions and duty will be chargeable on each transaction. Duty paid when granting an option will not be credited or taken into account when determining the duty payable on the exercise of the option. This also means there is no entitlement to a refund of duty paid merely because an option is not exercised. Given Revenue NSW’s approach, parties will need to be diligent when structuring transactions that involve options to ensure that they are not subjecting themselves to material amounts of additional duty.

The amount of duty payable is calculated by reference to the option fee, subject to minimum duty of $10. This will include GST payable on the option fee, but should not include security deposits, performance payments or legal fees. Premium transfer duty can apply to the grant of an option over residential property with a value in excess of the premium duty threshold (currently, $3.131 million).

Other observations

Although ‘change in beneficial ownership’ is not exhaustively defined, the term ‘excluded transaction’ is. Transactions that are excluded from this head of duty include purchasing units in a unit trust scheme, a change in a trustee’s right of indemnity and granting or varying a lease for no consideration (noting that the term ‘consideration’ is broadly defined).

The NSW duty regime has shifted. Unsurprisingly, as a result of these changes, taxpayers will now need to be more vigilant when dealing with dutiable property to ensure that they do not inadvertently trigger a duty liability. Examples of common transactions that may now be subject to duty include the grant of an option, transfers granting easements for consideration, and transfers creating a life tenancy (other than by a will or testamentary instrument).

Revenue NSW has indicated Revenue Rulings and a Commissioner Practice Note will be available ‘at a later date’ regarding these changes. Clarity cannot come soon enough!

Duty on acknowledgment of trust

An equally controversial change is the introduction of section 8AA of the Duties Act. This provides that duty will now be charged on an ‘acknowledgement’ of trust, as a declaration of trust.

Duty will be charged on the making of a statement that:

• purports to be a declaration of trust over dutiable property, but
• merely has the effect of acknowledging that identified property vested, or to be vested, in the person making the statement is already held, or to be held, in trust for a person or purpose mentioned in the statement.

These changes are in direct response to the NSW Court of Appeal’s decision in Chief Commissioner of State Revenue v Benidorm Pty Ltd [2020] NSWCA 285 (Benidorm). In Benidorm, it was held that a document that merely acknowledged an existing legal position (ie an existing trust) could not amount to a declaration of trust, and therefore no duty was chargeable.  Revenue NSW believes Benidorm ‘narrowed the scope of the declaration of trust charging provisions’, as previously any declaration of trust which fell within the definition at section 8(3) of the Duties Act was considered dutiable (absent a concession applying).

This is a controversial change as it appears to give the Chief Commissioner of State Revenue (Commissioner) the ability to ‘double dip’ – charging duty on existing arrangements that would have been or were subject to duty when the arrangement was first created. An alternative view is that the provision only applies to acknowledgements of trust that were not subject to duty when they were originally formed or declared – such as resulting trusts. It is difficult to identify the mischief or gap in the duties regime addressed by this amendment.

The Act provides that ‘the making of a statement is taken to be a declaration of trust’. Read broadly, this could apply to any document that acknowledges the existence of a trust. The Explanatory Memorandum sheds no further light regarding the circumstances that the amendment is attempting to target.

Further guidance is needed – and quickly – to provide much needed insight into how Revenue NSW intends for this provision to apply.

Refund of surcharge purchaser duty: land used for commercial or industrial purposes

Section 104L of the Duties Act imposes surcharge purchaser duty on various transactions involving the transfer of residential-related property to a foreign person. The surcharge purchase duty is 8% of the dutiable value of the residential-related property.

The amendments allow Australian corporations considered ‘foreign persons’ to apply for a refund of surcharge purchaser duty when the land is used by the Australian corporation, or a related body corporate, wholly or predominantly for commercial or industrial purposes.

The application for the refund must be made (a) within 12 months after the start of the use of the land wholly or predominantly for commercial or industrial purposes, and (b) no later than 10 years after the completion of the transfer.

This is a welcome expansion of the exemptions in section 104ZJA of the Duties Act, and is consistent with the intent of imposing the surcharge on residential land – rather than land used for commercial or industrial purposes.

Revenue NSW has indicated it is updating Revenue Ruling G13 as a result of these changes.

Anti-avoidance provisions

The Act removes Chapter 11A of the Duties Act and inserts a new anti-avoidance regime under Part 10A of the Tax Administration Act. Consequently, the anti-avoidance regime will apply to all NSW state taxes rather than just duty.

For the most part, the anti-avoidance provisions have been directly transplanted from the Duties Act into the Tax Administration Act. However, the objective of the new Part 10A appears broader, aiming to ‘to deter schemes to avoid tax liability’. This is in contrast to the objectives under the existing regime, which aimed ‘to deter artificial, blatant or contrived schemes to reduce or avoid liability for duty’.

A ‘tax avoidance scheme’ is a scheme which is entered or carried out for the dominant purpose of enabling a tax liability to be avoided. ‘Scheme’ is defined very broadly. It captures written, oral and implied arrangements, contracts, understandings, as well as schemes which have not been implemented. The new provisions expand the definition of ‘avoiding tax’ to include postponing payment of tax, and ‘avoiding a tax liability’ to include reducing or postponing a tax liability.

This expansion of the avoidance regime to other NSW taxes has significantly increased the firepower in the Chief Commissioner’s regulatory arsenal. While previously the relevant state tax regimes have prevented exemptions and concessions from applying where transactions have been undertaken with a tax avoidance purpose, the Chief Commissioner can now apply this to any and all transactions undertaken.

Promoter penalties regime

Taking a leaf out of its federal counterpart’s book, the Act also introduces a new promoter penalty regime. Under this regime, a person must not market or otherwise encourage the growth of (or interest in) a tax avoidance scheme. A person will not be considered a promoter merely because they provide advice about the scheme, or distribute information or material about the scheme prepared by another person.

Civil penalties of up to 10,090 penalty units ($1,109,900) for individuals and 50,450 penalty units ($5,549,500) for corporations can apply. The factors that will be considered when determining the appropriate amount of civil penalties include (among others) the deterrent effect the penalty may have, the consideration received by the person or their associates from the scheme, and the nature and extent of the contravention. The new regime also provides the Court with the ability to order injunctions in relation to proposed breaches and accept voluntary undertakings in connection with tax avoidance schemes.

The Chief Commissioner will be prevented from seeking civil penalties against a taxpayer where the relevant scheme is based on the application of a taxation law in a particular way that is consistent with advice given by the Chief Commissioner, by someone on the Chief Commissioner’s behalf, or by a publication approved by the Chief Commissioner.

Increase in penalty tax for significant global entities

The Act amends the existing penalty regime by inserting new provisions that deal specifically with penalties for SGEs. Consistent with the federal approach, the amendments impose a higher penalty rate to SGEs. By way of example, the base penalty tax rate for a taxpayer is 25%. Under the amended provisions, the base penalty rate applicable to SGEs is 50%.

The term ‘SGE’ is as defined by the Income Tax Assessment Act 1997 (Cth), being a global parent entity which has an annual global income of more than $1 billion, or the Federal Commissioner of Taxation has made a determination to that effect.

Final observations

The NSW state taxes landscape has certainly become more complex with the introduction of these new measures.

Now, more than ever, taxpayers need to carefully consider their duty (and other state taxes) obligations when undertaking transactions – including those transactions not previously triggering duty, or raising concerns from an avoidance perspective.

There continues to be a lack of clarity on the application of a number of these measures. It is hoped that further practical – and sensible – guidance is provided soon.