New stamp duty will be imposed on a change in beneficial ownership or a trust acknowledgement, plus a welcome change to refund foreign purchaser duty for non-residential land.
Proposed reforms
On 23 March 2022, the Minister for Customer Service and Digital Government introduced the State Revenue and Fines Legislation Amendment (Miscellaneous) Bill 2022 (NSW) (Bill) into the New South Wales Legislative Assembly.
The objects of the Bill are relevantly to "make miscellaneous amendments" to the State revenue legislation; however, practically, the Bill proposes significant changes to the Duties Act 1997 (NSW) (NSW Duties Act). Three changes which will impact property transactions are the proposed introduction of:
- new charging provisions designed to capture changes in the beneficial ownership of dutiable property (when not otherwise dutiable);
- duty on an acknowledgement of trust which reverses the recent decision in Chief Commissioner of State Revenue v Benidorm Pty Ltd;1 and
- a refund from foreign surcharge purchaser duty where the acquired land is used by the transferee wholly or predominantly for commercial or industrial purposes.
Although the Bill introduces a number of welcome reforms, the proposed imposition of new taxes, particularly on a purported declaration of trust or acknowledgement of trust, is of concern. Care must be taken to properly draft documents to ensure there are no unintended duty consequences. The introduction of new stamp duties also seems inconsistent with the proposed reforms of property taxes in New South Wales, and the recent recommendations (to replace stamp duty with land tax) following the House of Representatives Standing Committee on Tax and Revenue's inquiry into housing affordability and supply in Australia.
This note summarises the key takeaways from the Bill, assuming it is passed in its current form. We will issue a further update with any key developments as the Bill progresses.
Change of beneficial ownership
The existing provisions under the NSW Duties Act already make many of the day to day transactions involving dutiable property dutiable (e.g. a sale, a transfer, a declaration of trust and a vesting under statute or court order relating to land). The proposed amendment, which is largely modelled on similar provisions in Victoria, will make any other transaction that effects a change in beneficial ownership dutiable. The proposed provision provides:
"This Chapter charges duty on:
...
another transaction that results in a change in beneficial ownership of dutiable property, other than an excluded transaction."
Beneficial ownership is not defined but it includes the ownership of property by a person as trustee of a trust. The list of "excluded transactions" is extensive,2 but is subject to an anti-avoidance rider.
The Minister's second reading speech suggests that the purpose of the provisions is to overcome structuring arrangements which are intended to be dutiable but may not be captured by the present charging provisions. The Minister gave this example of the kinds of arrangement that are being targeted:
"a fixed trust holding land in New South Wales that has two beneficiaries, each with an equal interest and one of these beneficiaries disposes of their 50 per cent interest to the other beneficiary. There is no change in the legal ownership of the land, which is held by the trustee, but the remaining beneficiary has now acquired an additional 50 per cent beneficial interest in the land, without any duty being incurred. This is obviously contrary to the intentions of the Act."3
Acknowledgment of trust
In Chief Commissioner of State Revenue v Benidorm Pty Ltd the New South Wales Court of Appeal held that in order for a declaration of trust over dutiable property to give rise to ad valorem duty it must actually effect a transaction, and not merely acknowledge an existing state of affairs.4 This was said to be consistent with the change in legislative policy behind the introduction of the modern NSW Duties Act which marked a shift from stamp duty being a tax on transactions rather than a tax on instruments.5
The proposed amendments reverse the effect of this decision and make clear that, at least in the context of declarations of trust, stamp duty remains an instruments tax. The proposed provision will provide:
(1) This Chapter also charges duty on the making of a statement that—
(a) purports to be a declaration of trust over dutiable property, but
(b) merely has the effect of acknowledging that identified property vested, or to be vested, in the person making the statement is already held, or to be held, in trust for a person or purpose mentioned in the statement.
Trustees must be particularly careful in executing any document that contains wording capable of being construed as a declaration of trust; even if the relevant trust is already constituted. The cost of getting this wrong, is additional ad valorem duty on the value of trust property, even when duty has already been paid on the acquisition of the property by the trustee.
Unfortunately, the Bill does not specify a transitional regime for the introduction of the new acknowledgment of trust provisions. Given the Minister's view that the proposed amendments are designed to "ensur[e] that a declaration of trust continues to be taxed in the same way that it was taxed prior to the decision",6 trustees and beneficiaries should seek advice to the extent that any acknowledgment has been executed, or is proposed to be executed.
Refund of foreign surcharge purchaser duty
The Bill also introduces a proposed refund from foreign surcharge purchaser duty (FSPD) where the acquired land is used by the transferee wholly or predominantly for commercial or industrial purposes. The NSW Duties Act presently imposes FSPD at an additional rate of 8% on the dutiable value of any residential-related property that is acquired by a foreign person.
On the terms of the proposed amendment the refund will be available where:
- an Australian corporation (being a corporation incorporated, or taken to be incorporated, under the Corporations Act 2001 (Cth) that is a foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975 (Cth)) has paid FSPD on a transfer of residential-related property;
- the land has been used by the Australian corporation or a related body corporate, after completion of the transfer, wholly or predominantly for commercial or industrial purposes; and
- an application is made for a refund of FSPD:
- within 12 months after the start of the use of the land wholly or predominantly for commercial or industrial purposes; and
- no later than 10 years after completion of the transfer of the residential-related property to the Australian corporation.
This amendment is an excellent addition to the exemptions from FSPD that already exist (e.g. the relatively recent Build to Rent concessions) in recognition of the significant contribution Australia-based developers (albeit foreign for duties purposes) make to the New South Wales economy. The change is also consistent with the policy underlying FSPD, which is for FSPD to apply to residential land. The proposed amendment will ensure that there is no unintended duty outcome, where a foreign person for example acquires an industrial site for industrial purposes – whether or not the site happens to have a house on it.
FSPD, as recognised by the Minister in the Second Reading speech, "can dissuade potential investment or affect the nature and scale of investment".7 The introduction of a concession like this one will level the playing field and encourage industrial and commercial development that was never meant to be captured by the FSPD regime.
Penalty tax and tax avoidance
The Bill also proposes to:
- double penalty tax from 25% to 50% for a tax default (relating to stamp duty and other State taxes) by a significant global entity as defined by the Income Tax Assessment Act 1997 (Cth); and
- extend the general anti-avoidance provisions to more broadly apply to other State taxes (in addition to stamp duty), with new provisions also prohibiting promotion of tax avoidance schemes.
Footnotes
1 (2020) 101 NSWLR 729; [2020] NSWCA 28.
2 excluded transaction means the following— (a) the purchase, gift, allotment or issue of a unit in a unit trust scheme, (b) the cancellation, redemption or surrender of a unit in a unit trust scheme, (c) the abrogation or alteration of a right relating to a unit in a unit trust scheme, (d) the payment of an account owing for a unit in a unit trust scheme, (e) the grant, renewal or variation of a lease for no consideration, (f) the grant of an easement for no consideration, (g) the grant of a profit a prendre for no consideration, (h) the provision of a security interest within the meaning of the Personal Property Securities Act 2009 of the Commonwealth, (i) a change in a trustee's right of indemnity, (j) the creation of an interest in dutiable property by statute, (k) a transaction of a kind prescribed by the regulations, (l) a combination of the transactions referred to in paragraphs (a)–(k).
3 New South Wales, Parliamentary Debates, Legislative Assembly, 23 March 2022, (Mr Victor Dominello).
4 Chief Commissioner of State Revenue v Benidorm Pty Ltd (2020) 101 NSWLR 729; [2020] NSWCA 28 at [55], [79], [82]-[83], [109] (Leeming JA; Meagher JA agreeing) and [120] (Payne JA).
5 Chief Commissioner of State Revenue v Benidorm Pty Ltd (2020) 101 NSWLR 729; [2020] NSWCA 28 at [53] (Leeming JA; Meagher JA agreeing) and [118]-[120] (Payne JA). Compare, for example, DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) (1982) 149 CLR 431 at 449 (Mason J).
6 New South Wales, Parliamentary Debates, Legislative Assembly, 23 March 2022, (Mr Victor Dominello).
7 New South Wales, Parliamentary Debates, Legislative Assembly, 23 March 2022, (Mr Victor Dominello).
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