call option assignment duty nsw

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Revenue NSW has announced the following :

“From 19 May 2022, section 8(1)(b)(ix) of the Duties Act 1997 introduced duty on certain transactions that result in a change in beneficial ownership .

A put option and/or call option granted over dutiable property in NSW (such as over land or an interest in land) is a ‘change in beneficial ownership’. This means that duty is payable on any grant fee paid for a put and/or call option entered into from this date.

Ad valorem transfer duty is calculated on the option fee paid for the grant of the option. The fee (consideration) includes GST (if applicable) but does not include security deposits, performance payments and legal costs. A minimum duty of $10.00 will be applied as per Section 273 of the Duties Act 1997 .

Arrangements involving the grant of a Put Option and/or Call Option must be processed on Electronic Duties Returns (EDR) . The Declaration for the Grant of a Put Option and/or Call Option (ODA 081) and the relevant evidentiary requirements must be kept with the EDR records and retained for a period of five (5) years (see Part 8 of the Taxation Administration Act 1996 ).

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 option fee 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.”

No option but to pay duty: NSW now imposes duty on changes in beneficial ownership

Changes to the NSW Duties Act mean tried and tested transaction structures that worked prior to 19 May 2022 will need to be reviewed, and any transaction involving options will need tax advice to avoid an unfavourable duty outcome.

On 19 May 2022, substantial amendments were made to the Duties Act 1997 (NSW), including the introduction of a new head of duty which imposes duty on transactions which result in a change in beneficial ownership of dutiable property. This formulation of dutiable transaction broadened the duty base, and the wording captures an extremely wide range of transactions. In this article we set out the impact of this particular legislative amendments on some typical real estate transactions which involve the use of options in usually land-related transactions.

The transactions involving land now subject to the NSW Duties Act

The existing provisions will continue to affect transactions involving options to purchase land, and operate in conjunction with the new provisions imposing duty on changes of beneficial ownership.

The new amendments inserted an additional type of dutiable transaction: another transaction that results in a change in beneficial ownership of dutiable property other than an excluded transaction.

The term “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; and
dutiable property ceasing to be the subject of a trust.

These amendments were designed to capture transactions which were not previously caught under the existing heads of dutiable transactions (for example, under the transfer of dutiable property head of duty).

The NSW Duties Act also lists excluded transactions which will not be caught under this head of dutiable transaction (although none are relevant for the purposes of this article). This list can be expanded by the regulations, but so far regulations have not been published.

For those involved in options to purchase land, this will all mean factoring both the new provisions under the NSW Duties Act and the existing provisions relating to options:

the transfer, or an agreement for the sale of transfer, of dutiable property attracts duty as a dutiable transaction;
exercising a right of nomination under a call option or the novation of a call option for valuable consideration is taken to be a transfer of that call option;
dutiable property includes land and any interest in land except to the extent that, amongst other things, it is, or is attributable to, an option over dutiable property;
dutiable property specifically includes an option to purchase land in New South Wales;
the duty liability on the dutiable transaction is calculated on the greater of the consideration for the dutiable transaction and unencumbered value of the dutiable property;
the consideration for the transfer of land (including an agreement for the sale or transfer of land) that occurs as a consequence of the exercise of an option to purchase land is taken to include the amount or value of the consideration provided by or on behalf of the transferee for the option;
the duty chargeable in respect of the transfer of land (including an agreement for the sale or transfer of land) that occurs as a consequence of the exercise of an option to purchase land is to be reduced by the amount of duty paid by the transferee on the transfer of the option to the transferee;
the duty liability generally falls on the purchaser or transferee of the land; and
an additional type of duty known as call option assignment duty applies in respect of the assignment of a call option which is part of a put and call option arrangement. In this respect, exercising a right of nomination or novation of the call option for valuable consideration may be taken to be an assignment of that call option and as such may incur call option assignment duty. This duty is chargeable as if there were a transfer of the dutiable property which was the subject of the call option and this liability falls on the person who assigns the right under the call option.

Foreign purchaser surcharge

The foreign purchaser surcharge provisions have generally mirrored the dutiable transaction provisions such that, where a dutiable transaction involves residential-related land and the transferee is a foreign person, an additional surcharge (currently at a rate of 8%) was imposed. This would generally apply in respect of the existing provisions described above, including surcharge call option assignment duty.

However, the new change in beneficial ownership provisions were enacted without equivalent foreign purchaser surcharge provisions. Therefore, a transaction which results in a change in beneficial ownership of dutiable property of residential-related land to a foreign person, which is not otherwise charged to duty by the pre-existing provisions, does not appear to attract the foreign purchaser surcharge.

A typical transaction involving options to purchase land

Entering into the option

Most options are drafted as an irrevocable offer by the grantor to sell land to the grantee. The typical mechanism for the grantee to exercise the option is by providing the grantor of the option with an exercise notice together with a signed copy of the contract for sale of land, an unsigned draft of which is usually annexed to the option.

The grant of an option to purchase land creates an equitable interest in the land for the grantee of the option, and as such would be caught by the new change in beneficial ownership of land provisions thereby giving rise to a duty liability. The duty liability is calculated by applying the rate of duty (top rate of 5.5%) to the greater of the consideration for, and unencumbered value of, the option. In an arm's length transaction this will generally be the call option fee.

Other amounts may also be treated as consideration for the option, which may have varying descriptions within the document such as a security deposit. The general common law rules around what is, or is not, consideration will need to be considered in respect of each of those payments to determine the duty liability.

However, one of the most important aspect of this is that from 19 May 2022, the grant of all options over New South Wales land will need to be lodged for stamping, even if the call option fee is nominal only . This may mean that the cost of compliance for a taxpayer will in many cases, far exceed the amount of duty payable, which in the case of nominal consideration would be duty of $10 only.

Nominating a nominee

Some call options are drafted so that the grantee has the right to nominate a nominee to exercise the option. Typically, the nominee is required to pay the grantee an amount of consideration to reimburse the grantee for the amount of the call option fee which was paid by the grantee to the grantor. The NSW Duties Act deems this to be a transfer of the option which is a dutiable transaction. The duty liability is calculated by applying the rate of duty (top rate of 5.5%) to the greater of the consideration for, or unencumbered value of, the option. The duty in this instance will be payable by the nominee.

If, however, the option is part of a put and call option arrangement, then the nomination for consideration would also give rise to call option assignment duty. This duty liability is calculated by applying the rate of duty (top rate of 5.5%) to the greater of the consideration for, and unencumbered value of, the land which is the subject of the option, and would be payable by the grantee.

Exercising the option

The exercise of an option, which is essentially the acceptance of an irrevocable offer from the grantor, constitutes a contract for the sale of land (being an agreement for transfer of dutiable property). This is a dutiable transaction under the pre-existing provisions. The duty liability is calculated by applying the rate of duty to the greater of the consideration for, or the unencumbered value of, the land.

The NSW Duties Act requires that the consideration in these circumstances (ie. the creation of a contract pursuant to an exercise of option) includes any consideration that was provided for the grant of the option. However, it is not unusual for the parties to agree for the consideration payable under the contract for sale to be reduced by the consideration that was paid for the option. That contractual term would need to be taken into account for the purposes of calculating the duty on the contract for sale.

For the purposes of ascertaining the unencumbered value of the land, as a general proposition the consideration agreed upon for a sale of land between unrelated parties acting on arm's length should reflect the unencumbered value of that land. However, in the context of an option, the consideration for the sale of land was agreed upon when the option was entered into and, in practice, is usually already inserted into a copy of the contract of sale which is annexed to the option agreement. As the duty liability arising on the agreement for the sale of land arises at a different time, there is a possibility that the unencumbered value of the land may have changed since the time that the option agreement was entered into. This tends to be usual in land-banking types of arrangements. Where the unencumbered value of the land has changed substantially, a valuation report may be required to support the duty calculation. In this regard, the Chief Commissioner in his guidance note has made it an evidentiary requirement that a taxpayer provide a valuation report for any land which is the subject of an option which is exercised more than 12 months after the date on which the option was granted.

If the person exercising the option is the nominee, or otherwise a transferee of the option, a credit will be available to reduce the duty liability by any duty which was already paid by the nominee or transferee in respect of the nomination or transfer. However, this credit is not available where the option was never transferred or taken to be transferred. That is to say, the duty paid on a grant of an option is not credited against the duty payable on the contract that is created pursuant to the exercise of the option. This differentiates NSW from Queensland which has always provided a credit.

Settlement of the property

The transfer of the land will generally attract concessional duty of $10 on the basis that it is in conformity with the contract for sale.

Option lapses because it is not exercised

Where an option to purchase land is not exercised before the by the option end date, the only duty liability which should arise in the overall transaction should be the duty on the grant of the option (if the option was granted on or after 19 May 2022). No further duty liability should arise upon expiry of the option on the basis that there is no further transaction causing the grantee to cease to have an equitable interest in the land.

However, if the grantor and grantee of an option to purchase land agree between themselves to terminate the option earlier than the initially agreed option period, this may be a transaction resulting in a change in beneficial ownership of the dutiable property. Likewise, if the grantor and grantee of an option to purchase land agree to extend the period during which the option may be exercised, this too may be a transaction resulting in a change in beneficial ownership of the dutiable property. However, the duty payable in these scenarios would depend on whether any consideration is paid for the early termination of the option or the extension of time for the exercise period and whether these “arrangements” can be valued.

A typical transaction involving an option for the grant of an easement

The following section describes the duty implications at each step the grant of an easement pursuant to an exercise of an option for the grant of an easement.

The grant of an option for the grant of an easement creates an equitable interest in land for the grantee of the option. However, the interest in land arising for the grantee is attributable to an option over dutiable property, which is specifically excluded as an item of dutiable property. The option itself is also not an option to purchase land. On that basis, there is no creation of dutiable property in this instance, as distinct from the grant of an option to purchase land. Therefore, this grant of an option for an easement over land should not be a transaction which results in a change in beneficial ownership of dutiable property under section 8(1)(b)(ix). This should be the result regardless of whether a payment has or has not been made or the grant of that option.

For the same reason, extending the option exercise period will also not be a dutiable transaction.

The actual exercise of the option will result in the grant of an easement.

If the grant of the easement is for consideration, then this will be a transaction that results in a change in beneficial ownership of dutiable property because an easement is an interest in land. The duty liability is calculated by applying the rate of duty (top rate of 5.5%) to the greater of the consideration for, or the unencumbered value of, the easement.

If the grant of the easement is for no consideration, then that would be an excluded transaction and would fall outside the scope of section 8(1)(b)(ix) of the NSW Duties Act.

However, an excluded transaction may result in a change in beneficial ownership of dutiable property if it is part of a scheme or arrangement that, in the Chief Commissioner's opinion, was made with a collateral purpose of reducing duty otherwise chargeable.

Where consideration has been paid for the option to grant the easement (which was not a dutiable transaction – see above), and no consideration is paid for the grant of the easement itself, this should result in no duty liability.

However, if there was no option for an easement and consideration is paid for the grant of the easement, then a duty liability does arise under the NSW Duties Act. As such, there is a possibility that the Chief Commissioner may view the use of the option as a scheme or arrangement made with a collateral purpose of reducing the duty otherwise chargeable. Therefore, the parties should be prepared to show some commercial imperatives which required the use of an option arrangement.

Option which is not exercised

Where an option for the grant of the easement is not exercised before the option period expires, no duty liability should arise. While the grantee may cease to have an equitable interest in the land which was created by the option, this interest is not dutiable property due to section 11(1)(l)(ii).

For the same reason, even if the grantor and grantee of an option to grant an easement agree between themselves to terminate the option earlier than the initially agreed option period, or to extend the period during which the option may be exercised, no duty liability should arise.

What are your options with these newly dutiable transactions?

As outlined above, there are a number of instances where a duty liability will now arise which may not have arisen prior to 19 May 2022. Additionally, any action to unwind a pre-existing transaction structure so as to not fall foul of these provisions could also result in a duty liability if it is determined to be part of a scheme or arrangement that was made with the collateral purpose of reducing duty otherwise chargeable by the Chief Commissioner. This means that tried and tested transaction structures that worked prior to 19 May 2022 will need to be reviewed as a consequence of the enactment of these provisions. It is now even more crucial than ever to obtain tax advice prior to undertaking any transaction involving options to avoid an unfavourable duty outcome.

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NSW Duties Act amendments - Proposed duty on trans…

NSW Duties Act amendments - Proposed duty on transfer of call options under put and call arrangements

On 10 June 2005 the State Government introduced the State Revenue Legislation Amendment Bill 2005. This proposes a range of amendments to State revenue law. Here we focus on the proposal to impose duty on transfer of call options under put and call arrangements. These changes will be important to developers and others who use these arrangements.

The current law

Put and call options are extensively used to defer duty on purchases of land and other dutiable property. The owner has a right (put option) to require the optionee to buy. The optionee has a right (call option) to require the owner to sell.

Even though the parties are bound as if they had signed a contract of sale, no duty arises until one party exercises its option right. A call option to buy at around market value could be transferred (eg under a nomination clause) under existing law without material duty cost. In contrast, transfer of the benefit of an executed contract would usually be caught as a "sub-sale" under existing law.

Proposed "call option assignment duty"

If passed the proposed legislation will impose duty on the assignment or transfer of a right under a call option to purchase dutiable property.

Transfer duty will be payable only if the person from whom the dutiable property may be purchased also has a right, under a put option, to require the holder of the call option, or an associated person, to purchase the dutiable property.

Duty is payable as if the assignment or transfer were a transfer of the dutiable property (e.g. land) concerned. The person liable to pay the duty is the option holder or transferor of the call option.

The Bill provides for a reduction in duty if the option holder or transferor paid duty on the purchase of the call option. There is also provision for exemptions from duty in certain limited circumstances.

Special provisions are made for the stamping of instruments that effect or evidence a call option assignment.

An example of the operation of call option assignment duty is as follows:

B grants A a call option that confers a right on A (or any assignee of A) to purchase land from B. A also grants B a put option that confers on B a right to require A (or any assignee of A) to purchase the land from B. No duty is payable at this point.

A then transfers the call option to C. Duty is payable as follows:

(a) A (as the option holder) must pay call option assignment duty, as a consequence of this Part, as if the transfer of the option were a transfer of the land. Duty is payable on the dutiable value of the land,

(b) C (as the transferee of the option) must pay duty under Chapter 2 on the transfer of the option. Duty is payable on the dutiable value of the option.

C then transfers the option to D. 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 C will receive a credit for the duty paid by C on the transfer of the option to C. D (as the transferee of the option) is required to pay duty on the transfer.

Holders of call options under put and call arrangements should consider whether those arrangements can be transferred prior to the proposed legislation commencing.

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Finance & Capital

Property Law: Options and Stamp Duty in NSW

An option is created when a vendor (also called a “grantor”) grants a purchaser (also called a “grantee”) an option to enter into a contract to purchase property.

There are three types of options:

· Call Option – when the purchaser can compel the vendor to sell the property

· Put Option – when the vendor can compel the purchaser to buy the property

· Call and Put Option – involves a Call Option and a Put Option, exercisable in a staged manner

Vendors use options because they want to receive a higher price for their property, than if they sell the property at market price.

Purchasers use options because they want to aggregate properties for redevelopment and obtain development approvals. The purchasers are willing to secure a property at a higher price, because they believe the value will go up.

Some examples where options are used include: [1]

· A developer may want to buy a land, because the government wants to re-zone an area from rural to residential.

o The developer buys an acre of land for $1 million with an option period of 2 years.

o The developer pays $25,000 option fee to secure the option, followed by another $100,000 after 60 days due diligence period.

o The developer obtains development approval for a residential land subdivision, at their cost, during the option period.

· A developer may want to buy a few suburban blocks and redevelop some townhouses.

o The developer buys a land at 20%-25% above their market value for an option period of 12 months.

o The developer pays an option fee of 5% or 10%.

o The developer then obtains development approval for a few townhouses at their cost during the option period.

· A developer may want to buy old strata units or offices and redevelop into a high-rise apartment.

o The developer buys the units or offices at 50% to 80% above their market value for an option period of 3 years.

o At least 75% of the strata owners must grant an option to the developer. Under strata law, this means that the remaining owners can be forced to sell. [2]

o The developer pays an option fee of 10%.

o The developer obtains development approval for high-rise apartments or an office tower at their cost during the option period.

· A renovator may want to buy a run-down house or apartment and on-sell it after renovation.

o The renovator buys the property at 5% above its market value for an option period of 6 months.

o The renovator pays 5% or 10% option fee.

o The renovator is given immediate access to renovate and completes a cosmetic renovation.

o The renovator on-sells the option (called “flipping a property”) at a profit.

How Is Stamp Duty Assessed?

An option to purchase land is a dutiable property in NSW. [3]

1. The option is granted.

· Option Deeds are signed and exchanged.

· Option fee is paid and released to the grantor.

· If the property is residential, then the Option Deed must contain a non-exercise period of 42 days, a cooling-off rights statement and attach a contract for sale of land (“Contract”) with the purchase price and the statutory certificates. [4]

· No duty is payable on the grant of the option, whether it is a Call Option or a Put and Call Option.

2. The option is exercised.

· An option is exercised by the grantee, when:

i. it serves a notice of exercise of option;

ii. a signed Contract;

iii. pays the 10% deposit payable (less the option fee paid).

· The vendor signs and exchanges the Contract.

· Duty is payable by the purchaser on the Contract, within 3 months of the option exercise date.

3. A nominee is appointed.

· Most options permit the grantee to transfer the option by nominating someone else to exercise the option. In this case, a Nomination Deed is used.

· Alternatively, the grantee can request the grantor to enter into a Contract directly with the nominee. In this case, a Novation Deed is used.

· The nominee pays a nomination fee to the grantee.

· Duty is payable by the nominee on the nomination fee as of the nomination date or novation date. [5]

· If it is a Put and Call Option, duty is also payable by the grantee on the purchase price of the property, within 3 months from the nomination date or novation date. [6]

4. The option is assigned.

· Most options permit the grantee to transfer the option by assigning the option to someone else. In this case, a Deed of Assignment is used.

· The assignee pays an assignment fee to the grantee.

· Duty is payable by the assignee on the assignment fee as of the assignment date. [7]

· If it is a Put and Call Option, duty is also payable by the grantee on the purchase price of the property, within 3 months from the assignment date. [8]

5. The option lapses.

· If an option is not exercised before the option expiry date, it lapses.

· The option fee is not refundable and the option ceases to have legal effect.

· No duty is payable when an option lapses.

[1] CCH, Cordato - When is stamp duty payable on property options in NSW?

[2] Strata Schemes Development Act 2015 (NSW) Pt 10 Strata Renewal Process for freehold strata schemes

[3] Duties Act 1997 (NSW) s11(1)(k) definition of “dutiable property”

[4] Conveyancing Act 1919 (NSW) Div 9 Options for purchase of residential property.

[5] Duties Act 1997 (NSW) s9B – “purchaser duty”

[6] Duties Act 1997 (NSW) s107(3) – “call option assignment duty”; s108 persons liable

[7] Duties Act 1997 (NSW) s9B – “purchaser duty”

[8] Duties Act 1997 (NSW) s107(3) – “call option assignment duty”; s108 persons liable

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*

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Christine Sun

Partner | Public Notary

Special Counsel | Accredited Property Law Specialist NSW | Nationally Accredited Mediator

Call and Put Option Agreements on Sale and Purchase of Property in NSW Australia

Using Call and Put options, parties may negotiate the sale and purchase of property at a later date, requiring a minimal upfront commitment. An option is essentially a right granted by a seller to compel a buyer to purchase the property (the “call option”) or to force a seller to sell the property (the “put option”).

Call and put options allow parties to sell and buy the property later with minimal upfront commitment. The option agreement may benefit both parties (the buyer and seller), but one should draft and review it with care to avoid unintended tax and stamp duty consequences.

This article discusses the various features of Call and Put Option Agreements on Sale while Buying a Property in NSW Australia .

HOW DO CALL OPTIONS WORK?

A seller of property grants a call option in the buyer’s favour. An enforceable right requires the seller to sell the property subject to a call option to a buyer when exercised by the buyer.

An option to call is beneficial for the buyer for several reasons, including:

Before exercising the call option, the buyer can perform due diligence on the property, submit a DA, and secure approvals for the development of the property as well as financing.
Call options leave the buyer with a caveatable interest in the property; and
In a call option deed, the agreed price will not change regardless of fluctuations in market value (which, in the case of an increase in the property’s market value, is most advantageous to the buyer (see below)).

PUT OPTIONS: WHAT ARE THEY?

A buyer grants a put option against a seller, which is not the same as a call option. In exchange for the right to enforce the put option, the buyer grants the seller the right to require the buyer to purchase the property at a future date.

What Are Put And Call Option Documents?

A put and call option is a document based on a deed.

A party to an option deed is commonly known as:

The seller is the grantor; and
The buyer is the grantee.

In addition to other technical documents, a complete and valid contract for the sale and purchase of land should accompany the option deed. Therefore, the option deed must cover all relevant aspects of a transaction (e.g. purchase price, settlement, deposit period).

Once a party exercises an option, the obligation to sell the land annexed to the option deed becomes legal, and the transaction proceeds as a typical conveyance.

Sale and Purchase of Property OPTIONS – FEATURES

As an option deed relates to an interest in land, consideration is due at the time of its execution (i.e. on an exchange of the option deed).

According to the type of option agreed upon, consideration is either:

The buyer is paying the seller a “call option fee”;
The seller pays the buyer a “put option fee.”.

Both forms of consideration are payable if the agreement is for a put and call option. Nominal consideration is considered acceptable.

Option exercise period

An exercise period for call options is a period during which a buyer can exercise it. An exercise period for a put option specifies a timeframe within which a buyer can exercise a put option. After this timeframe has passed, the parties agree to the terms of an option deed. These two periods of time are generally sequential.

In the event that the call option period expires without the buyer exercising the call option, which would require the seller to dispose of the land, the buyer will be unable to exercise the call option. In other words, the seller can exercise its put option during the exercise period of the put option and require the buyer to acquire the land.

Either party doesn’t need to exercise their option during the exercise period. Following the last day of the option period, if neither party exercises their option, the option comes to an end. This means that both buyers and sellers lose their exclusive rights to the land (though the seller remains free to deal with it otherwise).

Buyers who have entered into a call option deed, but have not yet exercised the option, may assign their rights under the deed to a third party. After completing the assignment, the third party will act as the original buyer under the call option deed. Having complied with the call option agreement, the third party and seller proceed with the transaction.

Nominations

A buyer may also designate a third party to exercise the call option on their behalf as a nominee.

There is a difference between an appointment of a nominee and an assignment (through which the buyer transfers his rights under the call option deed). In the event that a nominee exercises the call option, the contract that arises is between the nominee and the seller rather than between the buyer and seller.

CONSIDERATIONS FOR STAMP DUTY for Sale and Purchase of Property

Upon exercising a put option or call option, the buyer is responsible for paying stamp duty as they would for a standard conveyance (i.e., at the point of exchange of contracts).

In addition, assigning options or appointing nominees to exercise options can also result in stamp duty implications. An assignment or nomination can result in significant stamp duty liability, and it is advisable to obtain expert stamp duty advice.

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Stamp Duty Implications of Call Option Agreements in NSW

Call Option Agreements have become increasingly popular amongst property investors and developers in New South Wales, providing an alternative method of transacting to the traditional contract for sale.

In essence, call option agreements provide a buyer (known as the grantee) with the right to acquire a property at a future point in time from the seller (known as the grantor) for an agreed price. This right usually involves the grantee paying the grantor a fee, known as a call option fee. Depending on agreed terms, call option agreements can provide grantees with an extended period of time to arrange their finances and carry out due diligence, and often involve smaller upfront financial obligations. If the grantee does not exercise its option to acquire the property, the call option fee is generally forfeited to the grantor.

Grantees often seek to assign/nominate/novate their interest in call option agreements for a premium, particularly given the current significant demand for real estate in New South Wales, sharply increasing property prices and potential value-adding exercises which may be undertaken by a grantee during the call option period in certain circumstances (such as obtaining a development approval for the property in question). However, it is critically important that grantees are aware of potential stamp duty implications of doing so, which are generally summarised as follows:

Transfers of Options to Purchase Land

Under the Duties Act 1997 (NSW) (‘the Act’), the transfer of an option to purchase land is considered a dutiable transaction.

Pursuant to the Act, a deemed transfer of an option to purchase land 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.

When is a party liable for duty?

The grant of an option to a grantee in and of itself is generally not a dutiable transaction. Ordinarily a duty liability will arise upon exercise of the option and will be payable within 3 months of the exercise/contract date.

However, an earlier duty liability will arise when a transfer/assignment of the option occurs.

In the case of a nomination or novation, the liability date is:

Nomination : when the nomination is made; or
Novation : when the option holder agrees to the novation or otherwise relinquishes rights under the option.

When must duty be paid and who is responsible for payment?

Duty must be paid within three (3) months after the liability arises. At law, the party responsible for the payment of duty will be the transferee, which in the case of a novation or nomination will include the party who obtains the right to exercise the option or purchase the land.

How is Duty Calculated?

Where a nomination or novation of a call option occurs, duty is calculated on the value of the option being transferred/assigned, generally being the greater of the consideration provided or the unencumbered value of the option.

If the Call Option is later exercised, duty is payable on the dutiable value of the property and including the consideration provided by the transferee for the option. However, and subject to assessment by Revenue NSW, the amount of duty payable on the transfer of land will in many cases be reduced by the amount of duty paid by the transferee/purchaser under the earlier nomination/novation.

The above information is subject to the specific facts and circumstances of each particular call option arrangement. Some stamp duty exemptions may apply, however, these are case-specific and remain subject to assessment by Revenue NSW.

Rostron Carlyle Rojas Lawyers are experts in Option Agreements. If you require any assistance or have any questions in relation to option agreements, please contact Rostron Carlyle Rojas Lawyers on (02) 9307 8900 or by email at [email protected] .

**The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.**

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Changes to Duty Laws in NSW: options, anti-avoidance rules and promoter penalties now in force

Three wooden cubes spelling TAX stacked on coins

On 19 May 2022, the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW) received royal assent (the Amending Act ). The Amending Act made a number of amendments to the Duties Act 1997 (NSW) (the Duties Act ). These amendments impose duty on:

(a) any changes in beneficial ownership of dutiable property, except for certain excluded transactions; and

(b) acknowledgements of trust over dutiable property.

The effect of the amendments is to increase the number of transactions and actions that can potentially be liable to transfer duty. In particular, the granting of a call option to purchase land or a call option to purchase land together with a put option over the same land in New South Wales is now deemed to result in a change in beneficial ownership, and thereby constitute a dutiable transaction on which duty, even if only nominal, is payable.

The Amending Act also replaced the existing anti-avoidance regime for duty with new Part 10A of the Taxation Administration Act 1996 (NSW) ( TAA ) as well as introducing a new promoter penalty regime to deter the promotion of tax avoidance schemes. This means that taxpayers should carefully consider the amendments to the duty laws, as transactions that previously may have not been subject duty may now be dutiable transactions. The changes will take effect for transactions entered into on or after 19 May 2022. Certain transitional provisions apply for arrangements entered into prior to this date.

Changes in beneficial ownership

The Amending Act introduced new subsection 8(1)(b)(ix) into the Duties Act which imposes duty on “ another transaction that results in a change in beneficial ownership of dutiable property, other than an excluded transaction ”. This means that a transaction that does not constitute a transfer of property or is not one of the transactions listed at paragraphs (i) to (viii) of subsection 8(1)(b) of the Duties Act may still be dutiable if it results in a change in beneficial ownership and is not an excluded transaction.

The Amending Act introduced definitions for “ beneficial ownership ”, “ change in beneficial ownership ” and “ excluded transaction ” to subsection 8(3) of the Duties Act as follows:

“ Beneficial ownership ” includes ownership of dutiable property by a person as trustee of a trust.

“ Change in beneficial ownership ” includes the following:

(a) the creation of dutiable property,

(b) the extinguishment of dutiable property,

(d) dutiable property becoming the subject of a trust,

(e) dutiable property ceasing to be the subject of a trust.

“ Excluded transaction ” means the following:

(a) the purchase, gift, allotment or issue of a unit in a unit trust scheme,

(b) the cancellation, redemption or surrender of a unit in a unit trust scheme,

(d) the payment of an account owing for a unit in a unit trust scheme,

(e) the grant, renewal or variation of a lease for no consideration,

(f) the grant of an easement for no consideration,

(g) the grant of a profit a prendre for no consideration,

(h) the provision of a security interest within the meaning of the Personal Property Securities Act 2009 of the Commonwealth,

(i) a change in a trustee’s right of indemnity,

(j) the creation of an interest in dutiable property by statute,

(k) a transaction of a kind prescribed by the regulations,

(l) a combination of the transactions referred to in paragraphs (a) to (k).

Duty on the grants of options

An option to purchase land in New South Wales is defined to be dutiable property in subsection 11(1)(k) of the Duties Act. Accordingly, the grant of an option to purchase land in New South Wales is the creation of dutiable property. Pursuant to new subsection 8(3)(a) of the Duties Act, the creation of dutiable property constitutes a change in beneficial ownership and is therefore a dutiable transaction. This means that duty is now be payable on the grant of an option to purchase land in New South Wales.

Revenue NSW has published a guide [1] to the changes implemented by the Amending Act. Relevantly in relation to the imposition of duty on any changes in beneficial ownership, Revenue NSW states: [2]

Section 8(1)(b)(ix) of the Duties Act 1997 introduces duty on certain transactions that results in a change of beneficial ownership of dutiable property. This includes the creation of dutiable property. This means that duty will be payable on the grant of a put and/or call option.

In separate guidance that Revenue NSW has published specifically in relation to options and transfer duty, it similarly states: [3]

[Revenue NSW’s emphasis]

Accordingly, Revenue NSW considers that the granting of an option will be a dutiable transaction.

Put simply, the granting of a put and/or call option to purchase land in New South Wales is deemed to result in a change of beneficial ownership, being the creation of a dutiable property in the form of an option to purchase to land in New South Wales.

In such instances, Revenue NSW considers that ad valorem transfer duty is payable on the fee paid for the grant of the option. When an option is granted, the grantee/transferee (being the person to whom the option is granted) should be liable to pay the duty on the option fee. If no fee is paid for the grant of the option, nominal duty of $10 is payable. The grantee/transferee must complete Revenue NSW form ODA 081 – Declaration for the Grant of a Put Option and/or Call Option.

As well as additional costs in the form of duty, this will increase the administrative burden on all taxpayers, including those who are granted options for no consideration. Duty paid on the option fee is not credited towards the duty payable when the option is exercised. If the call option is not exercised, a refund of duty will not be issued for duty paid on the grant of option. A subsequent transfer or novation of an option to purchase land in New South Wales, or a nomination under the terms of an option, will remain a dutiable transaction.

We note that there is a question as to whether the grant of a put option by itself would be a dutiable transaction. Arguably, a put option, being an option to require another party to purchase land, is not the grant of an option to purchase land in New South Wales. Therefore, arguably it is not the creation of dutiable property, meaning it may not be a dutiable transaction. In that regard, Revenue NSW Form ODA 081 may support this contention, as it contains tick boxes for “call option” and “put and call option”, but no box for “put option” by itself. However, Revenue NSW’s consistent references in its guidance published so far to “put and/or call options” means that the position is unclear. It may be that further guidance will be issued.

Duty on acknowledgments of trust

The Amending Act introduced new section 8AA into the Duties Act which charges duty on the making of a statement that:

(a) purports to be a declaration of trust over dutiable property, but

(b) 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.

The amendments were introduced in response to the judgment of the Court of Appeal in Chief Commissioner of State Revenue v Benidorm Pty Ltd [2020] NSWCA 285 ( Benidorm ). In that case the Court of Appeal held, among other things, that a document that did not effect a transaction but merely acknowledged an existing legal position was not liable to transfer duty under the Duties Act.

While the legislature has stated [4] that the section 8AA is in direct response to the Benidorm case, we consider that there may be unforeseen consequences for taxpayers. Absent any administrative guidance to the contrary, the provision appears to impose duty on any statement that purports to be a declaration of trust, where that statement 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. In contrast, section 8(1)(b)(ii) of the Duties Act, which provides that “a declaration of trust over dutiable property ” is a dutiable transaction, contains no reference to the making of a statement. It remains to be seen whether the reference to the making of a statement in new section 8AA of the Duties Act widens the scope of dutiable transactions in respect of declarations of trust over dutiable property.

New anti-avoidance regime and promoter penalties regime

The Amending Act removed the anti-avoidance regime for duty, which was previously contained in Chapter 11A of the Duties Act and introduced Part 10A into the TAA. This means the anti-avoidance rules, which are broader than the previous rules, now apply to all state taxes, not just duties. The Amending Act has also introduced a promoter penalties regime in the form of Division 3 of Part 10A to the TAA, which prohibits the promotion of tax avoidance schemes.

The effect of the amendments is to impose duty on any changes in beneficial ownership of dutiable property and on acknowledgements of trust over dutiable property. We consider that many taxpayers may be affected by the amendments, and the administrative burden will now increase. It is likely that further administrative guidance will be issued by Revenue NSW. In the meantime, taxpayers should carefully consider any arrangements in respect of dutiable property in New South Wales and whether the amendments introduced by the Amending Act apply. Please contact us if you would like to discuss any existing or proposed transactions.

[1] Revenue NSW, Legislation Amendment Act 2022 guide (Web Page) <https://www.revenue.nsw.gov.au/electronic-duties-for-professionals/professionals-resources/duties-technical-guides/legislation-amendment-act-2022-guide> .

[2] Revenue NSW, ‘Change in beneficial ownership - Granting of an Option’ Legislation Amendment Act 2022 guide (Web Page) <https://www.revenue.nsw.gov.au/electronic-duties-for-professionals/professionals-resources/duties-technical-guides/legislation-amendment-act-2022-guide?result_396764_result_page=3> .

[3] Revenue NSW, ‘Transfer duty – Options’ Taxes, duties, levies and royalties (Web Page) <https://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/transfer-duty/options> .

[4] Explanatory Note, State Revenue and Fines Legislation Amendment (Miscellaneous) Bill 2022 (NSW) 2; see also Revenue NSW, ‘Acknowledgement of trust (new dutiable event)’ Legislation Amendment Act 2022 guide (Web Page) <https://www.revenue.nsw.gov.au/electronic-duties-for-professionals/professionals-resources/duties-technical-guides/legislation-amendment-act-2022-guide?result_396764_result_page=4> .

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Foreign surcharges are payable in addition to ordinary stamp duty or land tax. Victoria and Queensland offer exemptions from the foreign surcharges for certain large organisations.

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Put and Call Options

Put and call options are agreements that allow people to purchase or sell property at some point in the future. A property lawyer can assist you in drafting put and call option agreements in order to ensure they are legally effective and minimise the potential for a dispute between parties to the agreement.

Organising put and call option agreements can be confusing and stressful, a property lawyer can help you with this process and alleviate unnecessary stress and confusion. Option agreements also create various legal rights and obligations that a property lawyer can assist you in understanding. Option agreements are commonly used when a someone wants to secure some land or property for future development.

Option Agreements

An option agreement is a written agreement that allows people to buy or sell property at some point in the future. It will specify the rights and obligations of the parties to the agreement and outline the period in which the option can be exercised. There are various kinds of options agreements which parties can enter into. A call option is an agreement which affords a party the right to buy some specific property from a seller at some point in the future. A put option is an agreement which affords a party the right to compel a purchaser to buy a specific property at some point in the future. A put and call option is an agreement which affords both parties to the agreement the right to compel the sale or purchase of a specific property at some point in the future. The terms of exercising an option agreement will be specific to that particular agreement and these terms must be adhered to.

What are the benefits of option agreements?

There are various benefits associated with option agreements. One benefit of options agreements is that they provide people with time to consider whether they would like to a buy a property. For example, where a party may benefit from entering into an option agreement where they are unsure whether they will have sufficient finance to purchase a property or whether the development of a property will be approved. Alternatively, putting of the sale of a property may allow a seller the time to find another property to purchase to replace the one being sold. Another benefit of options agreements is that they allow parties to set in stone a price to be paid for property. This prevents the property being purchased or sold in an option agreement being subject to changes to the market price of the property. Options agreements also can be beneficial because they can defer tax obligations such transfer duty and capital gains tax.

Transfers of options to purchase land

An option to purchase land can be transferred if an option holder, for valuable consideration nominated another person to exercise the option or nominated another person as the purchaser or the transferee of the land subject to the options on or before the exercise of the option. The transferee, being the individual who has or obtains the right to exercise the option or purchase the land, is required to pay any duty owed on the land within 3 months of the purchase. For the transfer of options to purchase land, the duty arises when for nomination, when the nomination is made and for novation when the option holder agrees to the novation or relinquishes their rights through another means.

Why BSM Lawyers

Brander Smith McKnight’s expert conveyancing lawyers are experienced property and conveyancing lawyers. Our team of conveyancing lawyers can assist you in all legal matters relating to option agreements. We understand the anxiety and stress that property matters can cause. Our property and conveyancing lawyers work diligently to alleviate this stress and anxiety by keeping you well informed throughout your property matter and explaining legal concepts and processes to you in clear and simple english. For more information on Brander Smith McKnight’s services , you can contact us on 02 8539 7475.

Brander Smith McKnight has offices conveniently located in Sutherland , Parramatta , Wollongong and Sydney CBD.

Should I have a lawyer draft my option agreement?

You may want to consider having a lawyer draft your option agreement.

This is because a lawyer can ensure the agreement is drafted correctly and unambiguously in order to avoid complications between the agreement’s parties.

A lawyer can also follow your instructions and consider your circumstances when drafting an option agreement in order to create an option agreement that is sufficiently tailored to your situation.

For more information on how Brander Smith McKnight’s expert property lawyers can assist you with drafting option agreements, please contact us on 02 8539 7475 .

Does an option agreement include the contract for the sale of the property?

Yes, an option agreement will annex the contract for the sale of the property. You may want to consider having this contract reviewed by a lawyer so that your rights and obligations under the contract can be explained to you.

Can a third-party exercise rights under an option agreement? An option agreement can provide third parties with the power to exercise rights under an option agreement. An option agreement can allow third parties to participate in property transactions as if they were the purchaser or they can act on the purchaser’s behalf in the transaction.

Should I have a lawyer review my option agreement?

You may want to consider having a lawyer review your option agreement prior to signing it. A lawyer can assist you in understanding the rights and obligations that arise because of the agreement. In addition, a lawyer can help you negotiate the terms of an option agreement in order to protect your interests and ensure that the agreement is effective.

What is an option period?

In simple terms, an option period is the agreed period of time in which a party to an option agreement can exercise an option.

What happens if I do not exercise my option during the option period?

If neither party to an option agreement exercises their rights to buy or sell the relevant property within the option period, the option becomes invalid.

How can I resolve a dispute over an option agreement?

If a dispute arises out of an option agreement, it can be resolved in or outside of court.

Before commencing legal proceedings to resolve a dispute regarding an option agreement you should consider whether resolving the dispute outside of court.

Brander Smith McKnight’s lawyers can assist you with resolving a dispute outside of court through alternative dispute resolution. Resolving a dispute arising from a breach of contract outside of court can save both parties money and time.

For more information on how Brander Smith McKnight can assist you in resolving a dispute arising from an option agreement, please contact us on 02 8539 7475 .

What is an option fee?

An option fee is a non-refundable fee that is paid after parties enter into an option agreement, there is no set price for option fees. A call option fee may generally be between 5%-10% of the total purchase price, while a put option fee is generally nominal (e.g. $1).

Is stamp duty payable on a put or call option purchase?

No stamp duty is payable when the option is granted, regardless if it is a call or a put and call option. Stamp duty is payable when the option is exercised, being required within three months of the options exercised date.

Stamp duty is also payable when the grantee transfers the option through either nominating or assigning the option to someone else. In these cases the stamp duty is payable by the nominee or the assignee on the nomination, novation or assignment date. If the option is a put and call option, stamp duty is also payable by the grantee on the purchase price. These duties are due within three months.

Can a contract be rescinded after an option has been exercised?

It was recently seen in the New South Wales Supreme Court that after a put option was exercised on a residential property, the purchaser is entitled to rescind during the cooling off period. The purchaser was also granted a refund of the call option fee, as long as the purchaser had not waived their right to the cooling off period through s66W or through another means. It was noted that this right of rescission does not apply to a contract for a residential property which is created through the exercising of an option to purchase.

Are there any exemptions to the call option assignment duty?

Under the Duties Act 1997 (NSW) s111(1)(c) if the grantee who becomes the assignor or nominator is a licenced home builder, they may be exempt under s111(1)(c).

That is, if the call option is assigned by an individual who is authorised to be contracted to do residential building work under the home building act 1989 (NSW), who is building or has built residential premises on the land for the purposes of sale, or has an agreement with the individual who the call option is assigned to build residential premises on the land, s111(1)(c) may apply.

Under the Duties Act 1997 (NSW) s111(1)(d) if the call option is transferred or assigned by a corporation that is a member of a group of corporations to another corporation that is a member of the same group. They may be exempt under s111(1)(d).

How can a call option or a put and call option be used?

Call options or put and call options can be used in a number of ways, such as: A developer may identify a number of suburban blocks of land which they may be able to obtain development approval for, so they place a call option upon the blocks at 20% higher than the current market value for the blocks of land, paying the option fee upfront for the option. If the developer is able to obtain the development approval to develop the land (e.g apartments or townhouses), they may exercise their call options.

A renovator may identify a property which had been left in poor condition, place an option slightly above market value (e.g. 5%) for 12 months and pay a 5% to 10% option fee. This grants the renovator to immediate access to the property to renovate and improve the condition which the property had been left in. The option may then be sold on at a profit.

A developer may identify old strata apartments or offices which have potential to be granted development approval over. The developer can place a call option over the property for a significant percentage (e.g 40%) above the current market value and pay the option fee upfront. If the developer is able to obtain the development approval they can exercise the option and develop the property accordingly.

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Head Office

Stamp Duty – a summary on the existing framework and proposed future changes

In this article, we will:

provide a quick refresher on how and when transfer duty and call option assignment duty is assessed under the Duties Act 1997 (NSW) ( Duties Act ); and
provide an update on the proposed changes on transfer duty after announcement of the 2021-2022 State Budget.

PART 1 – A SUMMARY ON THE EXISTING FRAMEWORK

When does the payment liability occur?

Liability of transfer duty payment kicks in immediately on transfer of a dutiable property. In land contracts, this liability arises once the parties enter into a contract for sale. In land option transactions, a transfer of dutiable property is taken to have occurred when the option is exercised by the party entitled to the option and a binding contract for sale is created simultaneously.

If a call option holder has a right to assign its interests in or nominate a third party under a put and call option deed and exercises that right with valuable consideration, then call option assignment duty and transfer duty will arise in different stages of the transaction.

When is duty payable?

Duty is payable within three months from the date of the transaction.

If settlement of a transaction occurs before the 3 months period expires and a dealing is required to be registered, then duty is payable on or before settlement so that the dealing can be registered.

Who pays duty?

The transferee is the party liable for payment of transfer duty.

Call option assignment duty is payable by option holder.

What is the amount payable?

In land transfers, the amount of transfer duty payable will generally be assessed based on the following:

If the transaction involves different types of land, apportionment of the dutiable property may apply under s27 of the Duties Act so they will be treated as different and separate transactions.

Nomination under put and call option deed with valuable consideration

When a call option holder in a put and call option deed enters into an agreement to assign its interest or nominate a third party to exercise that option for valuable consideration, call option assignment duty and transfer duty (and surcharge call option assignment duty if applicable) will apply at different stages of the transaction. This gives rise to complex and potentially onerous duty obligations on both the call option holder and the nominee.

The amount of duty payable will depend upon the way in which the nomination is structured and any such proposed transaction should be subject of specific legal advice prior to the transaction being entered into.

Note that if the nomination is made and the call option holder and the nominee are corporations within the same group of corporations, an exemption from call option assignment duty may apply under s111(1)(d) of the Duties Act.

PART 2 – PROPOSED CHANGES TO THE EXISTING FRAMEWORK

Under the NSW property tax proposal published by the NSW Government on 11 June 2021, local purchasers may have the option to:

continue paying stamp duty on purchase and land tax during ownership (if applicable); or
pay an annual property tax ( APT ) rather than stamp duty and land tax (if applicable). The APT is calculated based on the unimproved land value (as opposed to the market value or capital value of the land) and will not be aggregated and will “run with the land”. This means that it will apply to incoming purchasers which is something that will need to be adjusted on completion.

From a developer’s perspective, implementation of the APT may mean that developers can contribute more capital per unit of land encouraging building construction to move upwards rather than outwards.

These proposed changes remain in the assessment phase and were under consultation until 30 July 2021. No further steps have been publicly announced as at the time of publication of this article.

MOVING FORWARD

Duty is an important factor when assessing transaction and project costs and cash flow. A simple mistake may be very costly and potentially unrectifiable. We highly recommend developers, fund investors and other purchasers to carefully structure the transaction and seek specific legal advice before entering into any binding agreement.

Given the proposed changes to the duty framework, developers and fund investors should also consider carefully its impact on the supply and demand in the housing market on different types of housing if any.

If you would like to discuss this article or its implications on your project or development, please contact our Property and Real Estate Projects Partner , Mike Ellis or Senior Associate, Yanlie Leung .

The contents of this publication do not constitute legal advice and are for general information purposes only. No reader is entitled to entitled to rely on it as legal advice. You should seek legal advice regarding your particular circumstances.

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NSW stamp duty changes now in force, guidelines issued

The new stamp duty provisions and proposed administration, based on the guidelines, are extremely complex.

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The State Revenue and Fines Legislation Amendment ( Miscellaneous ) Act 2022 (Amending Act) received Royal Assent on 19 May 2022.

The changes affecting the New South Wales (NSW) Duties Act became law at the same time.

As detailed in our previous article , the Amending Act makes a number of key changes in relation to stamp duty and land tax among other state taxes.

Subsequently to our article, Revenue NSW has now issued guidelines which we discuss below.

In our view, these new provisions and the proposed administration, based on the guidelines, are extremely complex.

For example, great care will need to be taken when dealing with put and/or call options over NSW dutiable property as duty triggers may arise at multiple points over the life of a transaction (i.e. grant, transfer and exercise of the put and/or call option), and instances of double duty can arise.

Revenue Office guidelines

Revenue NSW has issued the ‘ Legislation Amendment Act 2022 guide ’ (Guide) which provides an insight into how it will administer the new provisions.

We set out below an overview of the key stamp duty aspects of the Guide.

Change in beneficial ownership

The most significant change introduced by the Amending Act is the imposition of duty on certain transactions that result in a change in beneficial ownership of dutiable property.

This 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 Guide states that, as a result of the Amending Act, the following transactions are now dutiable:

the grant of a put and/or call option
transfers granting easements
transfers creating a life tenancy (other than by a will or testamentary instrument).

The Guide lists the statutory excluded transactions under this limb.

In terms of transitional measures, the Guide states the new provisions do not extend to changes in beneficial ownership transactions arising after the commencement date if the transaction occurs in accordance with an agreement or arrangement entered into before the commencement date.

Grant of an option

The Guide states that ad valorem duty will be calculated on the option fee paid for the grant of the option. Not all payments, however, will be dutiable option fees, for example a genuine security deposit should not attract duty under the new provisions.

Premium transfer duty (if applicable) can also apply but not surcharge purchaser duty. When an option is exercised, duty on the option fee is imposed again because the option fee already forms part of the dutiable value where there is a transfer of land that occurs as a consequence of the exercise of an option. The duty paid on the option fee cannot be credited towards the duty payable when the option is exercised.

Further, if a call option is not exercised, the duty paid on the grant of an option will not be refunded.

This scenario is not to be confused with the duty credit available under section 64D of the NSW Duties Act for duty paid on the transfer of an option to purchase land when that option is later exercised.

In addition, these provisions are separate to the complex ‘call option assignment duty’ provisions.

Grant of an easement for consideration

The grant of an easement for consideration will be dutiable on the greater of the consideration and the unencumbered value of the easement.

Grant, renewal or variation of a lease for consideration

The grant, renewal or variation of a lease in land for consideration will be dutiable on the greater of the consideration and the unencumbered value of the lease.

This position is inconsistent with the existing lease provisions which, in the event a premium is paid or payable for the grant, the duty is calculated on the premium (and not by reference to the unencumbered value of the lease).

New forms and lodgement requirements

The Guide lists the various new forms corresponding to the new provisions which in some circumstances replace the existing Purchaser/Transferee Declaration.

In addition, the Guide sets out different lodgement requirements (e.g. eDuties vs EDR) depending on the transaction.

Acknowledgement of trust

The Amending Act creates a new ‘dutiable event’ being an ‘acknowledgement of trust’.

The new provisions aim to tax a ‘statement’ that purports to be a declaration of trust 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.

The Guide, however, does not provide any further guidance as to what "purports to be declaration of trust".

The Guide states that such acknowledgement will be subject to transfer duty as a declaration of trust and must be submitted to Revenue NSW (e.g. eDuties and not EDR) for assessment.

In terms of the duty calculation, the Guide states:

the duty is calculated on the dutiable value of the property as at the date of the acknowledgement of trust (i.e. the higher of the GST-inclusive consideration or unencumbered market value of the dutiable property the subject of the trust); and
an acknowledgement of trust can attract both premium transfer duty and surcharge purchaser duty if the relevant criteria are satisfied.

The changes will take affect for acknowledgments occurring on or after 19 May 2022.

Remaining items

We refer to our earlier alert concerning the further details on provisions of the Amending Act. The Guide does not provide any additional information in respect of these other items.

For example, in respect to refunds for land used for commercial or industrial purposes, the Guide

does not provide any new information. We are still awaiting clarification as to what the word ‘predominantly’ means in this context in addition to other key details.

Revenue NSW has indicated that Ruling G013: Exemption from surcharge for new home development by Australian-based developers that are foreign persons will be updated to provide further detail on the operation of the refund.

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108 Person liable to pay call option assignment duty

(1) The call option assignment duty chargeable on a call option assignment is payable by the person who assigns the right under the call option to require another person to sell dutiable property ( "the option holder" ).

(2) Accordingly, the option holder is taken, for the purpose of charging duty under Chapter 2, to be the transferee of the dutiable property .

(3) The call option assignment duty payable by the option holder is additional to the duty (if any) payable under Chapter 2 by a transferee on the transfer of an option to purchase land in New South Wales.

(4) However, the call option assignment duty payable by the option holder as a consequence of this Part is to be reduced by the amount of duty (if any) paid by the option holder under Chapter 2 on the transfer of the call option to the option holder .

Note : The following is an example of how this Part operates-- B grants A a call option that confers a right on A (or any assignee of A) to require B to sell land . A also grants B a put option that confers on B a right to require A (or any assignee of A) to purchase the land from B. A must pay duty on the dutiable value of the option, as determined under Chapter 2 A then transfers the call option to C. Duty is payable as follows-- (a) A (as the option holder ) must pay call option assignment duty , as a consequence of this Part, as if the transfer of the option were a transfer of the land . Duty is payable on the dutiable value of the land (determined as provided for by this Part),

(b) C (as the transferee of the option) must pay duty under Chapter 2 on the transfer of the option. Duty is payable on the dutiable value of the option (determined as provided for by Chapter 2).

Australia: Stamp duty changes in NSW: options and development contracts

The State Revenue Legislation Further Amendment Bill 2014 received royal assent and came into effect on 23 October 2014, amending amongst other legislation the Duties Act 1997 . The amendments have significant implications for how stamp duty is assessed on assignments, novations, nominations and other transfers of options in NSW.

Option agreements are widely used by developers and other property industry stakeholders in transactions for the acquisition and sale of land, particularly to defer stamp duty and to otherwise manage the tax consequences of their transactions.

In short, the amendments have the effect that:

transfers (including novations, assignments and nominations) of any option that includes an option to purchase land will be subject to duty;
the amount of duty payable by the transferee on the transfer or assignment of an option to purchase land will be the consideration for the transfer or assignment (i.e. a nomination fee or assignment fee payable by the transferee) plus ad valorem duty on the value of the underlying land; and
purchasers of land under a contract for sale that arises as a consequence of the exercise of a call option (whether it was a Call Option or the call component of a Put and Call Option) will receive a credit for duty paid by the transferee on the transfer or assignment of the option when stamping the contract for sale.

How does this affect Call Options?

Before the latest round of amendments transfers of or nominations under Call Options were not dutiable transactions unless they formed part of a Put and Call Option. These transactions will now be caught by the new Section 9B and subject to duty payable by the transferee if the transferee subsequently transfers or nominates under the Call Option.

How does this affect Put and Call Options?

While transfers and nominations under a Put and Call Option had previously created a stamp duty liability for the transferor of the Put and Call Option, the transferee will now also have a stamp duty liability.

Under the amendments:

The transfer or nomination under a Put and Call Option will attract duty on the part of the transferee under Section 9B of the Act; and
The transferor under a Put and Call Option will be liable for "call option assignment duty" under Section 107 of the Act.

In effect, the transfer or nomination of a Put and Call Option is treated as an effective sale of the property, and is dutiable in the hands of the transferor in the same way an on-sale of dutiable property would. Developers, industry stakeholders and other parties dealing with options to purchase land will need to keep the above changes in mind when structuring and costing their projects or selling their option to a nominee.

Stamp Duty on Development Agreements

In December, the High Court handed down its decision in the matter of Commissioner for State Revenue v Lend Lease Development Pty Ltd & Ors [2014] HCA 51. The decision has emphasised the importance of clearly identifying and establishing the whole consideration moving the sale of the dutiable property under a development agreement (usually being land) and the consideration attributable to non-dutiable aspect of the transaction, including in circumstances where the transaction is completed through a series of inter-related contracts. As all state and territory duties acts are drafted on substantially similar terms, this decision will have implications in every Australian jurisdiction.

Summary of Relevant Details

Lend Lease entered into a development agreement and various supplementary agreements with VicUrban for the staged development and sale of a particular site. Under the development agreement, the land was transferred to Lend Lease, who was then to develop and sell the land and remit a portion of the proceeds of sale back to VicUrban. Lend Lease is also required to pay VicUrban a fixed amount on the transfer of title to each stage of the land release. Lend Lease was further to fund and install a number of pieces of artwork to be erected on the land, as well as contribute to various infrastructure works on the land and surrounding areas exterior to the land. The development agreement also provided for various other payments to be made by Lend Lease to VicUrban in respect of the transaction.

Lend Lease submitted that the consideration for the dutiable transaction (being the transfer of the stages of the land) was only the fixed payment due in respect of the release of each stage of the land. The Commissioner for State Revenue argued that a broader interpretation of 'consideration' be adopted when assessing duty payable in respect of the development agreement.

High Court's Judgment

The High Court determined that the correct interpretation of 'consideration' for the purpose of assessment of duty should take account not just of the amount designated in the development agreement as being consideration for each stage of the land, but instead the consideration moving the dutiable transaction as a whole.

The High Court deemed that the consideration payable for the transfer of the land and the consideration payable in part satisfaction of Lend Lease's other obligations under the development agreement formed part of one single indivisible transaction, and that it was only if Lend Lease complied with each of its obligations to make contributions under the development agreement that VicUrban was willing to transfer the land to Lend Lease.

It was therefore determined that the payments made in respect of the infrastructure works, the artworks and various other payments due under the transaction documents were the consideration payable by Lend Lease in respect of the dutiable transaction, and that duty should be assessed on the cumulative sums of these amounts.

What does this mean for the stamp duty treatment of development agreements?

As a minimum, developers and other stakeholders should take care to ensure that the consideration payable under development agreements and agreements interrelated with development agreements in respect of dutiable property is clearly defined and separated from consideration payable in respect of non-dutiable aspects of the transaction.

It should be noted that regardless of whether interdependent obligations are imposed by one document or a series of interrelated documents, it is possible that the NSW Office of State Revenue or equivalent interstate body will deem the scheme created by the interrelated contracts as one indivisible transaction and may as such consider the total consideration payable under the development agreement as a whole to be the actual consideration moving the transfer of the dutiable property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Is transfer duty payable on a put and call option?

by Melina Costantino
21 July 2022

KEY TAKE-OUTS

What is a Put & Call Option Deed?
Transfer duty (formerly called stamp duty) is now payable on the granting of an option over dutiable property

Put and call option explained

A Put and Call Option Deed is an agreement between an owner of a property and a potential purchaser. The agreement gives the potential purchaser the exclusive right to buy the property or nominate a third party of their choosing to do so. This is the ‘Call’ component of the Option Deed. The ‘Put’ component allows the property owner to require the potential purchaser to enter into a Contract for Sale to purchase the property.

The Deed contains terms and conditions, usually the most critical of which are the option fees and option expiry dates – Call Option expiry date and Put Option expiry date. The Call Option expiry date is the latest date that the potential purchaser or their nominee has, to exercise the option and enter into a Contract for Sale of Land. The Put Option expiry date is the latest date that the property owner has, to require the potential purchaser to enter into the Contract for Sale. The Option fee is the amount paid by the potential purchaser to the owner of the property for granting them the option.

Is transfer duty payable on a put and call option agreement?

To help prevent the avoidance of duty, from 19 May 2022 the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 which makes changes to the Duties Act 1997, requires duty be paid on the granting of an option over dutiable property i.e. the Option Deed.

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How is transfer duty calculated for a put and call option agreement?

Ad valorem duty is payable on the greater of the call option fee or the value of the option (including any GST), within 3 months of the date of the Option Deed. The minimum amount of duty payable is $10 irrespective of the amount of the call option fee.

For clarity, please note:

evidence of value is only required if the parties are related persons or there is a pre-existing arrangement between the parties where they are not acting at arm’s length; and
duty is not payable on the put option fee, just the call option fee

Example 1. The parties entered into a put and call option deed on 1 July 2022 with a call option fee of $1. The amount of duty payable is $10 (even though this is more than the ad valorem duty calculated on $1). Payment is due by 1 October 2022.

Example 2. The parties entered into a put and call option deed on 20 June 2022 with a call option fee of $1,000. The amount of duty payable is $22.50. Payment is due by 20 September 2022.

Acting for a foreign person/entity? For the purposes of duty on this transaction, don’t worry, it doesn’t attract surcharge purchaser duty.

What happens when the Option is exercised?

Once the Option is exercised in a put and call option agreement, the Purchaser is required to pay duty on the transfer of the option and the Contract for Sale. Duty paid on the grant of the option does not entitle the Purchaser to get a credit on the duty payable when the option is exercised.

What if the Option is not exercised?

In the instance that the option is not exercised, you are not entitled to a refund of the duty paid on the grant of the option.

Requirements for processing the transfer duty for a put and call option agreement?

Duty on the granting of an option is available to process via Electronic Duties Return (EDR) under the document type ‘grant of option’. Whilst a Purchaser/Transferee Declaration Form is not required, you are required to keep a completed ‘Declaration for the Grant of an Option’ together with the evidentiary requirements (as set out by Revenue NSW ) with the EDR records.

ABOUT MELINA COSTANTINO

Melina joined the Coutts team in 2010 working as a Licenced Conveyancer within our Property & Conveyancing team, based out of our Campbelltown lawyers office. Her commitment to client services saw her progress further and into the role of a Senior Licensed Conveyancer in July 2022.

She graduated with a distinction in the Advanced Diploma of Conveyancing and is accredited with the Australian Institute of Conveyancers NSW .

For further information please don’t hesitate to contact:

Melina Costantino Senior Licensed Conveyancer & JP [email protected] 1300 268 887

Contact Coutts today .

This blog is merely general and non-specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.

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COMMENTS

Options
Grant of an option. From 19 May 2022, section 8 (1) (b) (ix) of the Duties Act 1997 introduced duty on certain transactions that result in a change in beneficial ownership. 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 ...
What are the duty implications on put and call options?
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 ...
Key Stamp Duty Changes for Grant of a Put Option and/or Call Option
Revenue NSW has announced the following: "From 19 May 2022, section 8 (1) (b) (ix) of the Duties Act 1997 introduced duty on certain transactions that result in a change in beneficial ownership. A put option and/or call option granted over dutiable property in NSW (such as over land or an interest in land) is a 'change in beneficial ...
No option but to pay duty: NSW now imposes duty on changes in
Taxation. On 19 May 2022, substantial amendments were made to the Duties Act 1997 (NSW), including the introduction of a new head of duty which imposes duty on transactions which result in a change in beneficial ownership of dutiable property. This formulation of dutiable transaction broadened the duty base, and the wording captures an ...
DUTIES ACT 1997
DUTIES ACT 1997 - SECT 107. "C" ), duty under Chapter 2 is chargeable on that assignment as if the assignment were a transfer of the dutiable property concerned. The duty chargeable on that assignment is referred to in this Part as. "call option assignment duty" . (1A) Duty under Chapter 2A is also chargeable on the assignment if A is a foreign ...
NSW Duties Act amendments
Proposed "call option assignment duty" If passed the proposed legislation will impose duty on the assignment or transfer of a right under a call option to purchase dutiable property. Transfer duty will be payable only if the person from whom the dutiable property may be purchased also has a right, under a put option, to require the holder of ...
Property Law: Options and Stamp Duty in NSW
The option is exercised. ·An option is exercised by the grantee, when: i. it serves a notice of exercise of option; ii. a signed Contract; iii. pays the 10% deposit payable (less the option fee paid). ·The vendor signs and exchanges the Contract. · Duty is payable by the purchaser on the Contract, within 3 months of the option exercise date.
Call and Put Option Agreements on Sale and Purchase of Property
An option is essentially a right granted by a seller to compel a buyer to purchase the property (the "call option") or to force a seller to sell the property (the "put option"). Call and put options allow parties to sell and buy the property later with minimal upfront commitment. The option agreement may benefit both parties (the buyer ...
Stamp Duty Implications of Call Option Agreements in NSW
Some stamp duty exemptions may apply, however, these are case-specific and remain subject to assessment by Revenue NSW. Rostron Carlyle Rojas Lawyers are experts in Option Agreements. If you require any assistance or have any questions in relation to option agreements, please contact Rostron Carlyle Rojas Lawyers on (02) 9307 8900 or by email ...
Changes to Duty Laws in NSW: options, anti-avoidance rules and promoter
On 19 May 2022, the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW) received royal assent (the Amending Act).The Amending Act made a number of amendments to the Duties Act 1997 (NSW) (the Duties Act).These amendments impose duty on: (a) any changes in beneficial ownership of dutiable property, except for certain excluded transactions; and
Examples
Duty liability under Chapter 3: Call option assignment duty is payable by A on the transfer/assignment of the option to B. 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.
Put and Call Options
If the option is a put and call option, stamp duty is also payable by the grantee on the purchase price. These duties are due within three months. ... Are there any exemptions to the call option assignment duty? ... (NSW) s111(1)(d) if the call option is transferred or assigned by a corporation that is a member of a group of corporations to ...
Stamp Duty
Stamp Duty - a summary on the existing framework and proposed future changes. 11 October, 2021. In this article, we will: provide a quick refresher on how and when transfer duty and call option assignment duty is assessed under the Duties Act 1997 (NSW) ( Duties Act ); and. provide an update on the proposed changes on transfer duty after ...
Stamp Duty
In this article, we will: provide a quick refresher on how and when transfer duty and call option assignment duty is assessed under the Duties Act 1997 (NSW) (Duties Act); and provide an update on the proposed changes on transfer duty after announcement of the 2021-2022 State Budget.
NSW stamp duty changes now in force, guidelines issued
The duty paid on the option fee cannot be credited towards the duty payable when the option is exercised. Further, if a call option is not exercised, the duty paid on the grant of an option will not be refunded. This scenario is not to be confused with the duty credit available under section 64D of the NSW Duties Act for duty paid on the ...
DUTIES ACT 1997
108 Person liable to pay call option assignment duty. (1) The call option assignment duty chargeable on a call option assignment is payable by the person who assigns the right under the call option to require another person to sell dutiable property (. "the option holder" ). (2) Accordingly, the option holder is taken, for the purpose of ...
Examples
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 ...
The implications of NSW's stamp duty base expansion
Revenue NSW's guide says the duty will be based on the option fee, with the minimum payable being $10. This infers duty will not be payable on the value of the call option (if higher).
When is stamp duty payable on property options in NSW?
Cordato Partners. Australia February 9 2020. An option to purchase land is dutiable property in NSW [1] which means that when a dutiable transaction takes place, stamp duty is payable. This ...
Australia: Stamp duty changes in NSW: options and development ...
Stamp duty changes in NSW: options and development contracts. The State Revenue Legislation Further Amendment Bill 2014 received royal assent and came into effect on 23 October 2014, amending amongst other legislation the Duties Act 1997. The amendments have significant implications for how stamp duty is assessed on assignments, novations ...
How is duty calculated?
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 ...
Is Transfer Duty Payable On Put & Call Option?
How is transfer duty calculated for a put and call option agreement? Ad valorem duty is payable on the greater of the call option fee or the value of the option (including any GST), within 3 months of the date of the Option Deed. The minimum amount of duty payable is $10 irrespective of the amount of the call option fee. For clarity, please note: