Update on NSW Land Purchase Options and Beneficial Ownership Provisions
Since May 2022, Revenue NSW “change in beneficial ownership” provisions have been in effect. A Practice Note was released by Revenue NSW providing guidance in relation to the circumstances that duty would apply to the grant of an option. The Practice Note was issued due to a duty on transactions giving rise to a change in beneficial ownership. Now, Revenue NSW has issued an updated Practice Notice that clarifies how these rules apply to Land Purchase Options, prompting a review of established practices.
The Duties Act 1997 (NSW) (NSW Duties Act) imposes duty on transactions that result in a change in beneficial ownership of dutiable property. Section 11(1)(k) of the NSW Duties Act confirms that dutiable property includes an option to purchase land in NSW. This means that the grant or extinguishment of an option in NSW is a dutiable transaction.
The updated Practice Note gives guidance on the approach Revenue NSW takes when determining duty that may be payable on options relating to land in NSW. A key takeaway is an option to purchase is dutiable on the greater of the consideration given for the option (such as the option fee, if any) and the unencumbered value of the option. This differs to a conditional contract which is liable for duty on execution of the contract assessed on the greater of the consideration given in the contract and the unencumbered value of the land. We have set out some key takeaways from the updated Practice Note:
Option vs Conditional Contracts: As noted above, conditional contracts are dutiable at execution, based on the value of the underlying land. True options are assessed on the value of the option itself, leading to different duty outcomes.
Contingent vs Modification: The total of all payments potentially payable under an option will be considered when determining the duty payable on the grant of an option. This applies where an option specifies an amount payable on certain anniversary dates during the option term. This differs to circumstances where there is an extension fee payable if a party elects to extend the term or if the parties agree to modify the rights under an option and a fee is payable by the grantee for such variation. Please note however that fees relating to modifications or variations may be captured when the option is exercised if the fee does not form part of the purchaser price at the exercise of the option.
Broad Consideration: Consideration extends beyond a simple option fee. It may include anniversary fees, legal fee reimbursements, non-refundable deposits, break fees and even in-kind works. In arm’s length transactions, the market value is assumed unless a formal valuation is required.
Duty on Grant: A call option or put / call option (generally not a bare put option) is dutiable. Duty is based on the greater of the consideration paid or the option’s market value.
Contract/Transfer: Duty payable on the grant of an option is not credited against duty payable on the contract or transfer that is entered into pursuant to that option.
Surrender or Termination: Early surrender or termination is subject to duty, while a mere lapse (expiration) of the option is not.
Anti-avoidance Measures: The updated Practice Note confirms that anti-avoidance rules will not apply when a put/call option is used alongside the formation of a new unit trust for capital raising. This applies if the primary purpose is to secure funding.
Other Options: Options relating to leases or easements are not dutiable as “options to purchase land” unless they involve acquiring an existing lease.
Key Takeaways
The updated guidance from Revenue NSW brings much-needed clarity to the duty implications for Land Purchase Options under the revised beneficial ownership provisions. Taxpayers, advisors and legal practitioners should promptly review and update their agreements and drafting practices to ensure they accurately capture the parties’ true commercial intentions while complying with the new regulatory framework. This proactive approach is essential for mitigating potential duty liabilities and avoiding future disputes.
For assistance on duty implications of put and/or call options in NSW, please contact one of our people.
Ron Zucker 0410 590 111
Eollyn Cortes 0478 727 395
Sagang Chung 0431 435 333
Julia Zou 0426 670 202
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