The Duties Act 1997 (NSW) underwent significant changes back in May 2022 with the introduction of the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2002 (NSW) (Amending Act). One effect of the Amending Act was that it imposed a dutiable obligation on the granting, renewing or varying of leases for consideration.
Since May 2022, the industry awaited the release of guidance by the Chief Commissioner of Revenue NSW on when a grant of a lease would attract duty.
On 1 November 2022, Revenue NSW released ‘CPN 027: Leases and changes in beneficial ownership’ which sets out the Commissioner's interpretation of the new rules, insofar as they apply to leases.
The purpose of this article is extrapolate the principles within that guidance note. Any reference to a ‘lease’ within this article can be extended to apply to an ‘agreement to lease’.
A lease that is granted or varied without a premium or other consideration (monetary or non-monetary) generally does not attract duty.
The lessee’s obligation to pay rent, outgoings, taxes and charges is not treated as consideration for the grant of a lease.
If a lessee is required to pay rent upfront or any other upfront guarantee payment for the grant of a lease and that payment is non-refundable, duty will be payable. The dutiable amount will be calculated on the consideration paid or to be paid.
Example – At the commencement of the lease, a $150,000 non-refundable upfront payment is payable by the lessee for the granting of the lease. Duty will be calculated on $150,000.
Alternatively, in the event of early termination of the lease, if the upfront payment is proportionally refundable by reference to the unexpired term of the lease (other than through default of the lessee) then the consideration paid does not attract duty.
A dutiable liability arises where a lease is granted or an agreement to lease is made for non-monetary consideration. For instance, where a lessee undertakes to build improvements or additions on the land and such improvements or additions (excluding fit-out costs) are to become the property of the lessor at the end of the lease.
Duty on non-monetary forms of consideration are calculated by taking into account:
(a) the full cost of the construction of the improvements and/or additions. This value is determined on entry into the agreement for lease or lease and includes GST. If such construction costs increase or decrease after duty is assessed, generally a re-assessment will not be required.
(b) the effect of depreciation on those improvements and/or additions when the leased premises reverts to the lessor on expiry of the term of the lease, not including option periods. As a general rule, the longer the term of the lease, the lower the value of the improvements/additions that will pass to the lessor.
At the time of stamping, the lessee can procure evidence of the forecasted value of the improvements and/or additions on expiry of the lease to Revenue NSW.
Example – A lessor grants a 15 year lease. The lease is conditional on the lessee making improvements to the leased premises. The improvements cost $20 million. A valuation is prepared showing the estimated value of the improvements after 15 years to be $12 million. Duty will be calculated on $12 million.
If a valuation does not take into account depreciation or the value does not seem reasonable or appropriate, Revenue NSW will apply the following methodology to the cost of improvements and/or additions in order to calculate duty:
Term of Lease
Dutiable value will be the X% of the cost of improvements
10 years or less
Greater than 10 but less than 20 year
Greater than 20 but less than 30 year
Greater than 30 but less than 50 year
Greater than 50
Example - A lessor grants a 15 year lease. The lease is conditional on the lessee making improvements to the leased premises. The improvements cost $20 million. Dutiable value will be 75% of the $20 million. Duty will be calculated on $15 million.
Lessees will need to consider if they believe a valuation will support a lower value than the prescribed methodology and if so, provide this to Revenue NSW to form the basis of their assessment.
With more transactions susceptible to dutiable liabilities than ever before, it is important any terms of offer or heads of agreement are reviewed by your legal representative prior to entering into arrangements that could have you paying for more tax than is commercially feasible.
For assistance, please contact our people.
Ron Zucker 0410 590 111
Chelsea Woodward 0404 065 899
Eollyn Cortes 0478 727 395