Contributed by Duncan Bedford, Lyndon Garbutt and Dung Lam, McCullough Robertson Lawyers
The State Revenue Legislation Further Amendment Bill 2014 (NSW) (Bill) received Royal Assent on 23 October 2014. This Bill makes important changes to NSW stamp duty, payroll tax and land tax which are of interest to business owners, property developers and persons with self managed superannuation funds (in respect of NSW property).
The changes apply from the date of Royal Assent.
Duty — nomination or novation of options
The stamp duty changes (first announced in July 2013) will apply to options granted or, otherwise, created after 23 October 2014.
Although an option to purchase land in NSW has always been dutiable property, prior to the latest amendments, it was possible for an option holder to nominate another person to be the purchaser under an option or, otherwise, pass the benefit of that option to a third party without triggering duty — even where a substantial fee was paid by the new purchaser to acquire the rights under the option.
Now, where a person acquires for valuable consideration, the right to become the purchaser of land in NSW under an existing option (whether by way of nomination, novation or otherwise) duty will be payable on the nomination or novation and will be calculated based on the higher of the consideration paid for the nomination, or the value of the option.
Duty will also be payable on the transfer of land to the purchaser (ie upon exercise of the option).
Consideration for the transfer of land pursuant to the exercise of an option will be taken to include the amount or value of the consideration provided for the option (ie the nomination fee), with a credit allowed for any duty payable as a result of the earlier nomination.
In summary, the changes are as follows:
• where an option is granted or created after 23 October 2014 and the benefit of that option is vested in a third party (whether by nomination, novation or otherwise), duty will be payable on that nomination or novation — even in circumstances where the option is not ultimately exercised, and
• duty will also be payable upon the transfer of land to the new option holder upon exercise of the option — with consideration for the transfer including both the nomination fee and purchase price. However, a credit will be available for any duty paid on the earlier nomination or novation.
In circumstances where a new purchaser is nominated and then the option is exercised, the only change to the current duty position will be one of timing. Duty will be payable on the nomination fee (or the value of the option) at the time of nomination, and duty on the transfer of the land will be paid upon exercise of the option. The aggregated amount of duty will remain the same due to the credit that is available for the duty previously paid on the nomination.
However, in circumstances where a third party obtains the benefit of an option to purchase land in NSW for valuable consideration, but subsequently fails to exercise the option:
• duty will be payable upon the nomination or novation of the option, but
• no refund is available if the option is not exercised.
Duty — novation of leases
Following these legislative changes, duty will also be imposed on the novation of an agreement for lease as if it were a transfer of the lessee’s interest under that agreement. This is essentially an anti-avoidance measure to ensure arrangements that have an effect substantially similar to the assignment of a lease are subject to duty, regardless of the structure used.
Duty — superannuation funds
In the context of superannuation funds, the changes increase the duty payable from $50 to $500 in the following two situations.
To comply with superannuation law, a superannuation fund wanting to borrow to acquire property must establish a custodian trust to hold the property while the loan remains outstanding (sometimes called an instalment warrant trust). Duty payable on stamping of the custodian deed, under the apparent purchaser provision, will now increase from $50 to $500 (under new s 62B of the Duties Act 1997 (NSW) (Duties Act)).
A superannuation fund will still have to rely on the apparent purchaser provision once it has repaid its loan, in order to transfer the legal title to the property from the custodian to the trustee of the superannuation fund. Accordingly, records need to be retained by the superannuation fund to show that it paid the full purchase price to acquire the property and in respect of any improvements made to the property.
Self managed superannuation fund transfer concession
Section 62A of the Duties Act provides a stamp duty concession allowing a member of a self managed superannuation fund to transfer business real property into the fund with nominal stamp duty payable on the transfer. The changes in the Bill increase the nominal duty payable from $50 to $500.
The Bill also rewrites s 62A to clarify that members who hold jointly owned property can transfer that property into the superannuation fund under this concession, provided that property is segregated to them in the superannuation fund’s accounts in the same proportions as they owned the property beforehand.
Most modern superannuation fund deeds contain provisions to segregate assets to particular members. However, it is important to check the deed before proceeding to claim this exemption.
These amendments will limit the circumstances in which payments to contractors will be exempt from payroll tax by repealing two exemptions previously available in NSW, applicable where payments were made to door-to-door sales persons and insurance agents.
Payments to insurance agents were exempt if they were made in accordance with contracts under which the principal was supplied with services solely for, or in relation to, the procurement of persons desiring to be insured. The exemption applied to contractors who sold general and life insurance on a commission basis for insurance companies.
Payments to door-to-door salesmen were also exempt if they were made in accordance with contracts under which services were provided in connection to the door-to-door sale of goods solely for domestic purposes. For this exemption to apply, the NSW Office of State Revenue had issued a ruling specifying certain additional criteria which had to be satisfied — including the sale not having been made to a body corporate, the agent having personally organised the direct sale of the goods to the end users of the goods and the original approach leading to the sale not having been made at the principal’s place of business. Similar rulings exist in other jurisdictions that recognise the exemption.
While the repeal of these particular exemptions will only impact on a small section of the business community, it raises interesting issues as to the administration of legislation intended to be harmonised across all states and territories, particularly when the payroll tax legislation applicable in NSW and Victoria was used as a basis to introduce harmonised contractor provisions in all states and territories other than Western Australia (WA).
Harmonisation of payroll tax legislation was intended to make it easier for businesses to comply with their payroll tax obligations. However, for businesses claiming these particular exemptions (which are available in all jurisdictions other than Western Australia (WA), the Australian Capital Territory (the ACT) and now New South Wales (NSW)) they will need to monitor if some, or all of the other jurisdictions in which they claim the exemption, will follow the lead of NSW. The repeal of these exemptions is a reminder that businesses and their advisors (particularly where payroll tax is paid in multiple jurisdictions) need to be vigilant to ensure they properly understand their obligations in each jurisdiction in which payroll tax is paid.
The amendments also clarify that the exemption available regarding payments to owner-drivers (the owner-driver exemption) is available where a person is “supplied with services solely for, or ancillary to, the conveyance of goods” by vehicle. The amendments seem to be in response to the decision issued by the NSW Supreme Court of Appeal in Smith’s Snackfood Company Ltd v Chief Commissioner of State Revenue (NSW) 2013 ATC ¶20-434;  NSWCA 470. In handing down this decision, the court noted the wording of the owner-driver exemption (by not containing any limitation words such as “solely for”) meant the owner-driver exemption was available even where services provided were not exclusively or solely ancillary to the conveyance.
Land tax — changes to the related companies grouping rules
The related company provisions in the land tax legislation are obscure provisions which group two or more companies that are commonly owned or controlled. The effect of the related company provisions is to prevent each related company from being able to claim the tax-free threshold for land tax as a group of related companies is only able to access the tax-free threshold once. The benefit of the tax-free threshold is currently $6,529.
Given that corporate taxpayers are unable to access the 50% capital gains tax discount, it is not common to find investors using company structures to invest in NSW land. However, business owners can sometimes fall foul of these provisions where excess cash held inside a company is used to acquire property.
The changes made by the Bill are beneficial to taxpayers because they ensure that two companies are not grouped for land tax purposes merely because the same person (or company) acting in a trustee or nominee capacity has a controlling interest in both companies. Such companies will only be grouped for land tax purposes if the trusts concerned are both “fixed trusts” with the same beneficiaries. A “fixed trust” for NSW land tax purposes has a very particular definition and most trusts will not meet this definition. This amendment will result in less companies being grouped as related companies under these rules.