Australia: Leases and stamp duty in NSW

Revenue NSW issues practice note on the interpretation of the new beneficial ownership rules in the context of leases

In brief

Since the amendment of the Duties Act 1997 (NSW) ("Duties Act") on 19 May 2022, industry have awaited the release of guidance on the interpretation of the change in beneficial ownership rules. The Chief Commissioner ("Commissioner") of State Revenue issued a new practice note (CPN 027) in November 2022 setting out the Commissioner's interpretation of the new rules, insofar as they apply to leases (CPN 027: Leases and change in beneficial ownership | Revenue NSW).


In depth

Key points to note are as follows:

  • Leases: Leases for premiums are already dutiable. However, grants of leases other than those for premiums can now also be dutiable. This is because the new 'change in beneficial ownership' rules encompasses the creation an extinguishment of dutiable property, which in turn includes the grant of a lease in land in NSW (unless there is an exclusion or an exemption). The Commissioner takes the view consideration for the grant of the lease includes monetary consideration and/or the value of the non-monetary consideration.
  • Monetary consideration includes any amount paid or payable by the lessee for the grant of the lease. This does not include amounts paid or payable for the right to use the land being rent or rent reserved. Therefore, leases for rent only will remain outside the duty net. The Commissioner will generally not require a valuation where the lease is granted for monetary consideration and the duty will be calculated on the consideration paid or to be paid.
  • Non-monetary consideration is very fact dependent and will ultimately depend on a proper characterisation of the form and substance of the arrangement. The Commissioner indicates it can extend to obligations to undertake improvements.
  • Improvements: The Commissioner considers that non-monetary consideration can be provided by a lessee where the lessee is under an obligation to undertake improvements to the land and the improvements are to become the property of the lessor at the end of the lease. Where a lessee undertakes to build on the lessor's land, duty may be assessed on the value of the improvements. In this context, the Commissioner sets out a scale referable to the length of the lease, determining the proportion of the construction cost which will be subject to duty. Where the term of the lease is less than 10 years, 100% of the cost of improvements will be taxed. If a taxpayer does not wish to use the scale, they may tender evidence of value.
  • Works in lieu of rental payments: Where a lessee agrees to undertake landlord's works in lieu of rental payments, the Commissioner may treat that non-monetary consideration as taking on the characteristic of a non-dutiable payment of 'rent reserved'.

Example 5A: The Landlord grants XYZ Pty Ltd a 15-year lease of an industrial building. The consideration for the use of the premises under the lease is a prepaid rent of AUD 15 million. There is no separate consideration for the grant of the lease. The lessee can satisfy the obligation to pay rent by either the payment of cash, or by the construction of improvements with an agreed value of AUD 20 million. In either case, if there is an early termination of the lease (other than through the default of the lessee), the lessee is entitled to a proportionate refund. No duty is payable even if the lessee constructs the improvements, as it takes the character of prepaid rent.

  • Transfer of a business: Where in a transfer of business, a lease over the business premises is not simply transferred to the new owner of the business but there is a cancellation of the old lease and the grant of a new lease, the Commissioner indicates that duty will be payable as if there were an assignment. 
  • Early termination of a lease: Duty will apply where there is early termination of the lease by the lessor if the lessor pays the lessee in order to have the lessee vacate the premises.
  • Lessee agreeing to pay lessor's legal fees: Where in consideration for the grant of a lease, the lessee agrees to pay the lessor's legal fees which are non-refundable and greater than AUD 1,000.00, duty will apply. 
  • Attornment: The attornment of leases on a sale, is also potentially dutiable.  Where land is sold subject to leases and under the law of real property, the leases are attorned such that they become leases between the new owner and the lessee, duty potentially applies. This is quite a radical change, the legal basis of which is not clear. We expect that industry would welcome further guidance on the basis of the position put forward by the Commissioner.
  • Expiration of a lease: Where fit out and fixtures of value are not removed/severed from the property at the end of the lease, they can be subject to duty unless provided for no consideration. The Commissioner provides the following examples in this regard:

Example 4:  A grants a lease of NSW land to B for a term of five years. B defaults on the rental payments. At the end of the 5-year term, B surrenders their rights in some fixtures and fit out on the leased premises in exchange for the release of a debt equivalent in value to the surrendered items. The surrender of the fixtures and fit out will be liable on the value of the fixtures & fit out.

Example 5:  A leases three floors of a commercial office tower in NSW from B for 10 years. The lease includes a provision that requires the lessee to remove all fit out and fixtures at the expiration of the lease. At the end of the lease the lessor allows the lessee to leave without removing the carpet, office partitions etc. No duty is payable on the expiry of the lease.

  • Taxpayers can apply for a private ruling if a transaction is not covered under the CPN or if there is any doubt that a transaction could be liable to duty. This may be a prudent pathway for some taxpayers given the potential uncertainties raised by the CPN.

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