On 25 June 2009, the controversial Duties Amendment Bill 2008 (Bill) was passed by the Upper House of the Victorian Parliament with minimal amendments. The Bill, now awaiting royal assent, gives effect to the Victorian Government's 2008 media release announcing that it would close a loophole which allowed the use of complex long-term lease arrangements to escape stamp duty liability. The changes, which apply retrospectively from 21 November 2008, are however not limited to long-term leases. Subject to how the changes are administered by the State Revenue Office, products offered by property developers may be affected and a wide range of Victorian tenants may be affected.
What types of long-term leases are affected?
The definition of "lease" in the Bill is not restricted to "long-term leases": lease is defined as "a lease of land in Victoria or an agreement for a lease of land in Victoria". No minimum lease term is required.
The Bill makes the following transactions "dutiable transactions":
- "the granting of a lease for which any consideration other than the rent reserved is paid or agreed to be paid, either in respect of the lease or in respect of" a right or option to purchase the land, a right of first refusal in respect of the land or any other arrangement by which the lessee or an associated person obtains a right or interest in the land other than the leasehold estate;
- "the transfer or assignment of a lease for which any consideration is paid or agreed to be paid" (irrespective of whether a lease premium was paid on the initial grant of the lease); and
- "the surrender of dutiable property" (including a lease of a kind referred to in the above dutiable transactions).
"Rent reserved" is defined to mean "the rent paid or payable during the term of the lease and any amount paid or payable for the right to use the land under the lease". It appears that consideration "for the right to use land" is to be contrasted with consideration for the grant of the lease. The Bill provides the following examples of consideration "for the right to use land": rates, charges, taxes, maintenance, utilities, legal costs required to be paid by the lessee on behalf of the lessor in relation to the grant of the lease, insurance premiums, marketing costs and car park contributions. However, the wide drafting and limited examples leave open questions as to the treatment of other forms of consideration such as:
- an agreement to pay other types of outgoings or to make good the premises at the end of a lease term;
- an agreement for lease whereby the tenant agrees to undertake work on the land (e.g. construct a building) in consideration for the grant of a long term lease over all or part of that land; or
- the purchase price in the case of business sale transactions which include the transfer or assignment of leased business premises.
It is noted that the Government's media release stated that the changes "will not affect those entering into ordinary commercial leases". Despite extensive lobbying by industry and professional associations, this approach is not reflected in the Bill.
How will duty be charged?
The Bill provides that where one of the above dutiable transactions occurs, duty will be payable on the greater of the consideration (other than the rent reserved that is paid or agreed to be paid) and the unencumbered value of the land that is the subject of the lease. This may be considered to be a harsh result given the range of dutiable transactions that appear to extend beyond the types of complex long-term lease arrangements (effectively amounting to economic ownership of the land) referred to in the Government's original media release.
The Bill also does not contain an anti-overlap provision to prevent duty being charged on both an agreement for lease and again on the lease itself.
When do the changes apply from?
The changes will apply to dutiable transactions occurring on or after 21 November 2008 (the date of the Government's media release).
Are there any exemptions?
The Bill contains an exemption for the following transactions:
- the granting, transfer, assignment or surrender of a lease creating or giving rise to a residency right in a retirement village; and
- the granting, transfer, assignment or surrender of a lease for a site or a site and caravan in a registered caravan park where a caravan is located or to be located on the site and is used or intended to be used as the principal place of residence of the lessee or intended lessee.
Who could be affected by the changes?
Tenants entering into lease structures where a premium is paid will be affected by the changes. Developers should also consider the implications of the changes and their impact on the products offered to the market.
The changes, depending on how they are administered by the State Revenue Office, may affect lease arrangements in a range of circumstances.
Retirement village operators will need to consider whether their products fall within the exemption that has been provided for retirement villages.
It is not uncommon for a commercial property vendor to enter into a short leaseback (for 6 months or a year) commencing on settlement of a freehold sale subject to the payment of a premium that is deducted on settlement. In that situation, the vendor/tenant may be subjected to duty on the freehold value.
Affordable housing arrangements, where struck on a leasehold basis, may also be adversely impacted.
Landlords contemplating accepting a surrender of a lease should only do so after confirming that the lease is not dutiable property.
Purchasers of shares or units in a company or unit trust that holds leasehold property may need to consider the impact of the land-rich provisions on the basis that leases the subject of the changes are expected to constitute land holdings under the land-rich provisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.