Australia: A refresher on lease duties in New South Wales

What you need to know

• While leases entered into in New South Wales after 1 January 2008 are not subject to stamp duty, there are certain events relating to leases that may still attract stamp duty
• Transactions such as the transfer or assignment of a lease, the surrender of a lease and the payment of premiums may create 'duty events'
• Landlords and tenants should carefully consider whether stamp duty may be payable on transactions relating to their leases, and take steps to ensure any payable duty is managed appropriately.

From 1 January 2008 stamp duty on lease instruments was abolished in New South Wales. A lease entered into after this date is not subject to stamp duty, including any variation made to a lease that was entered into before 1 January 2008.

However, in some lease transactions, stamp duty is still relevant. In this article we examine some of the situations which may create a 'duty event'.

Transfer or assignment of lease

Duty Event: In a situation where a tenant transfers its interests in a lease to an assignee:

• If money is being paid or other consideration for the transfer of lease is passing (or is deemed to be passing), duty is payable on the amount of the consideration.
• If there is no money being paid or other consideration passing (or deemed to be passing), then no duty is payable.

Regardless of which Duty Event arises, a Land and Property Information (LPI) 'Transfer of Lease' form must be submitted to NSW Office of State Revenue (OSR) for assessment. Even if no consideration is passing, the 'Transfer of Lease' form still needs to be stamped at a nominal sum of $10 per instrument.

The LPI will not accept the 'Transfer of Lease' form for registration unless it has been stamped by the OSR.

Surrender of lease

Duty Event: In a situation where a tenant's interest in a current lease is surrendered by agreement:

• Tenant seeking a surrender of lease

• Where a tenant voluntarily surrenders its interest in whole or part of the premises, then irrespective of whether or not any surrender fee payment is to be made by the tenant to the landlord, no duty will be payable on the surrender.

• Landlord seeks the tenant's surrender of its lease
• Where a landlord requires a tenant to surrender its interest in the premises and agrees to pay the tenant compensation, then duty is payable by the landlord on that compensation (being the consideration passing from the landlord to the tenant). The ADT decision in Eastmark Holdings Pty Ltd v Chief Cmr of State Revenue ¹ dealt with a landlord who induced the tenant to surrender its interests by paying the tenant a "vacancy fee". The Tribunal took the view that, in substance, the surrender of the lease and the vacancy fee were part of the same transaction, being payments made as consideration for the tenant vacating the premises. Accordingly, the vacancy fee was considered dutiable.

As with an LPI 'Transfer of Lease' form, an LPI 'Surrender of Lease' form must be submitted to OSR for assessment and stamping before being lodged at LPI. If no consideration is passing, or any consideration passes from the tenant to the landlord (rather than from the landlord to the tenant), then the 'Surrender of Lease' form will be stamped at a nominal sum of $10 per instrument.

Premiums

Duty Event: In a situation where a tenant makes a payment to induce a landlord to grant a lease, that payment may be considered a capital payment and may be subject to duty.

For example, a new building is being constructed in a busy neighbourhood with great exposure. If a tenant pays money to the developer to secure a lease (to which the Retail Leases Act 1994 (NSW) does not apply), this payment may be considered an inducement separate from the payment of rent and the developer may be liable to pay stamp duty on it. It should be noted that the Retail Leases Act prohibits the payment of key money (which is widely defined but essentially refers to any premium or benefit conferred on or at the direction of a lessor or its agent in connection with the granting, renewal, extension or assignment of a retail shop lease).

Readers should be aware that a pre-payment for a lease is not always dutiable, and whether or not duty must be paid can be dependent on the nature of the landlord's business. This is shown in Kosciusko Thredbo Pty Ltd v Federal Commissioner of Taxation ² which involved the sub-letting of apartment blocks in a ski resort and the consequent receipt of lease premiums. In that case, the court found that because the receipt of premiums were seen to be a repetitive and essential part of Kosciusko Thredbo's ordinary course of business, the premiums were considered ordinary income and not a character of capital payment.

It is important to note that leases of certain types of premises are exempted from duty. Under section 65(16)(d) of the Duties Act 1997 (NSW), premiums paid for leases of premises in retirement villages within the meaning of section 5 of the Retirement Villages Act 1999 (NSW) are not liable to duty.

Parties should also understand the distinction between a lease premium and a payment of rent up front or in lump sum instalments. The mere fact that a tenant pays the entire rent up front as consideration for the landlord entering into the lease, would not necessarily categorise that rent payment as a lease premium.

The general principle applies that:

• if a tenant makes payment which is of the character of a capital payment linked to access rather than use, that payment is a premium and duty is payable on that premium; and
• if a tenant makes payment for the use of the premises, that payment would be classed as an ordinary income of rent and no duty is payable.

This is significant because as noted above, no duty is payable on the rent in relation to leases entered into after 1 January 2008.

Incentives

Can an incentive be subject to duty?

As noted above, payments by the landlord to the tenant in consideration for the tenant surrendering its lease may be subject to duty. This may present a problem where a landlord and tenant negotiate lease terms which involve the surrender of the tenant's existing lease.

The question may arise as to whether any part of any incentive paid or allowed by the landlord in relation to the new arrangement is consideration for the tenant to surrender its existing lease. If it is, the landlord may be liable to pay duty. This will be of particular concern to the tenant if the relevant documentation providing for the incentive states that any duty is to be paid by the tenant.

It may be preferable to document the surrender of any existing lease separately from the new lease arrangements. Otherwise, it may assist to ensure the lease documentation contains acknowledgements that:

• the existing lease is surrendered at the tenant's request
• the landlord has agreed to the surrender at the request of the tenant
• the landlord has not sought to remove the tenant from the surrendered space
• no payment, premium or consideration is sought by the tenant or paid by the landlord in respect of the surrender, and
• any incentive provided under the new lease is specifically and wholly provided by the landlord in consideration for the tenant entering into the new lease.

Key takeaways

• Where no consideration is passing for the transfer or surrender of a lease, it might be tempting to assume that nothing needs to be done. However, it is important to remember that the LPI 'Transfer of Lease' or 'Surrender of Lease' form must still be submitted to the OSR for assessment and stamping before being lodged for registration at the LPI.
• Landlords should always be cautious in considering stamp duty implications of a surrender of lease, bearing in mind that if consideration passes from them to the tenant, stamp duty is payable.
• Tenants must be similarly cautious regarding the landlord's stamp duty liability if the relevant documentation provides that any such duty is to be paid by the tenant.
• In relation to lease premiums, landlords must be careful for two key reasons; firstly to ensure that they are not prohibited under any relevant legislation, and secondly to understand whether the landlord may be required to pay duty.
• Where parties are negotiating complex agreements around proposed new lease arrangements, which involve the surrender of existing leases or surplus space, they should pay particular attention to how any incentives are dealt with and documented.

Footnotes

¹Eastmark Holdings Pty Ltd v Chief Cmr of State Revenue [2004] NSWADT 41
² Kosciusko Thredbo Pty Ltd v. FC of T 84 ATC 4043; 15 ATR 165

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories