New South Wales grows its duty base with significant expansion of landholder duty

The State Revenue Further Amendment Bill 2019 (NSW), introduced into Parliament last week, incorporates a number of significant and unexpected stamp duty changes, including:

• the expansion of the definition of "land" in relation to landholder duty to include "fixed goods", regardless of whether those goods are fixtures at law.
• broadening duty on put and call options; and
• an amnesty for discretionary trusts who may have foreigners as beneficiaries or potential beneficiaries.

These proposed changes are a clear indication that New South Wales is seeking to strengthen and in fact broaden its revenue base. The revenue-related sections of the Bill are set to commence on the date of Royal Assent, so we expect the changes to be in effect very soon. ^[1]

Landholder duty

Removal of "threshold value" of land

Currently, a company or trust is a landholder if it holds land with a "threshold value" (being the unimproved value of the land) of $2 million or more in New South Wales. This means for example that an entity can acquire a company or unit trust which holds land with a market value (without having regard to any encumbrances) of $10 million and not pay any landholder duty on that acquisition if the unimproved value of that land was less than $2 million.

Once the Bill becomes law, the acquisition of the same company will give rise to duty liability of approximately $550,000. This cost will be in addition to the administrative costs associated with compliance including obtaining and producing valuation reports.

Things which are fixed to land

Under the current landholder duty regime, New South Wales applies the common law definition of "fixtures" for the purposes of determining whether a chattel is a fixture and therefore "land" for landholder duty purposes.

Once the Bill receives Royal Assent, a chattel or "thing" as its referred to in the Bill, will be deemed to be land if the "thing" is fixed to land in any way. This will be the case regardless of whether that "thing" is a fixture at law.

Consequently, if a "target" (ie. a company or unit trust) only has land with an unencumbered value of $1 million in New South Wales, but has "things" valued at $2 million which are fixed to land in New South Wales, (even if those "things" are removable and not intended to form part of the land, and so would not ordinarily be a fixture under common law), then that "target" will be a landholder. This means that, instead of no duty being payable on the acquisition of the "target", duty of $165,000 (being duty on $3 million) will become payable in New South Wales. Again, this duty will be in addition to the administrative costs associated with compliance, including obtaining and producing valuation reports.

A trap would be where:

• the target company leases land on market terms, and also leases valuable plant or equipment from an equipment finance company;
• the target then affixes the plant or equipment to the leased land in New South Wales for the purposes of using that plant or equipment (for example, it bolts it to the floor of its factory).

If the value of the New South Wales plant or equipment that is affixed by the target to the leased land is $2 million or more, then the acquisition of that target company (which, remember, has a leasehold interest of nominal value) will give rise to landholder duty in New South Wales. The acquisition of the target would not be dutiable under the current landholder duty provisions in the Duties Act 1997 (NSW).

A further trap could be where:

• the target company has no land, but which owns and leases out valuable plant or equipment to a lessee;
• the lessee then affixes the plant or equipment to land in New South Wales that the lessee owns for the purposes of using that plant or equipment (for example, it bolts it to the floor of its factory).

If the value of the New South Wales plant or equipment that is affixed to the lessee's land is $2 million or more, then the acquisition of that target company (which, has no interest in the underlying land) could give rise to landholder duty in New South Wales ^[2]

The proposed section 147A provides the Chief Commissioner with a discretion to not levy duty on a "thing fixed to land" if the thing is not owned by the landowner and the thing is not used in connection with the use of the land. In the example above, even if the equipment were leased or owned by a third party, it would still be included in the definition of land if the landowner uses that equipment in connection with the use of the land.

More people will be liable for landholder duty

Under the current landholder duty regime, only the acquirer of the interest in the landholder is liable for landholder duty. Post-amendments, both the landholder (where the landholder is a unit trust, this will be the trustee of that trust) and the acquirer will be jointly and severally liable for any landholder duty payable on that acquisition.

Charge on the land

Under the Bill it is proposed that on the basis that the landholder will now be jointly and severally liable for any landholder duty, the Chief Commissioner will be able to register a charge on the land to recover any unpaid landholder duty. This charge will enable the Chief Commissioner to register a caveat in relation to that land.

Transactions involving put and call options

Currently, section 107 of the Duties Act 1997 (NSW) seeks to levy duty where:

• a person for valuable consideration relinquishes a right under a call option so that another person can then take a call option over the same dutiable property; and
• a person for valuable consideration (in connection with the exercise of the call option) enters into an arrangement or agreement to nominate another person as the purchaser or transferee of the duty property to which that call option relates.

In the above situations, the option is deemed to have been assigned and two lots of transfer duty become payable.

Under the Bill, section 107 will be extended so that where

• person A, for valuable consideration, relinquishes a right under a call option to require the grantor of the call option to sell dutiable property; and
• the grantor then sells that dutiable property to a third person, C;

then A will be deemed to have assigned that right under the call option to C, resulting in two lots of duty being payable: one lot by A and the other by C.

And in other news: land tax crackdown

Revenue NSW has initiated a new crackdown on land tax compliance.

Landowners in New South Wales with aggregate taxable landholdings above the tax-free threshold of $692,000 are required to pay land tax for the 2019 year. For landowners, this is important news if you invest in rental properties or commercial property which is not your principal place of residence or is not otherwise exempt.

Revenue NSW is also offering a three-month amnesty period up to 31 January 2020. As such, landholders who were unaware of their land tax liabilities but voluntarily disclose their landholdings will not incur any additional penalty over their existing liability.

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^[1]Transitional provisions in the Bill provide that the amendments will not apply to a relevant acquisition under Chapter 4 of the Duties Act 1997 (NSW) which is made before the commencement of the amendments under the Bill or, which is made after the commencement but pursuant to an agreement entered into prior to Royal Assent.^{Back to article}

^[2] In this type of situation, a taxpayer would have to look towards the decision in Epic Energy (Pilbara Pipeline) Pty Ltd v Commissioner of State Revenue (WA) [2011] WASCA 228 to argue that the "thing" (i.e. plant and equipment) is not fixed to the land and therefore should not be caught within the duty net.^{Back to article}

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