The Victorian lease duty provisions take effect from 21 November
2008 and have the potential to create a headache for
advisors. If applicable, duty is calculated not on the rent
payable under the lease, or the value of any premium, transfer fee,
or surrender fee. Instead, duty is calculated on the
value of the underlying land the subject of the
lease. If advisors get it wrong, the duty liability could be
huge. Read on for tips and traps associated with Victorian
lease duty, together with an update on the recently expressed views
of the Victorian State Revenue Office (SRO).
What Is Victorian Lease Duty?
Leases granted on or after 21 November 2008 are subject to
duty if any consideration other than the "rent reserved"
is paid or agreed to be paid. The surrender of such a lease
is also dutiable. Similarly, a transfer or assignment of a
lease after 21 November 2008 is dutiable if consideration
is paid or payable for the transfer or assignment. Unlike in
other States and Territories where duty applies to
"premiums" payable for the grant of a lease, or to
amounts payable for the transfer or assignment of a lease,
Victorian lease duty is calculated on the value of the
underlying land that is the subject of the lease.
This could lead to extraordinary results where a lease premium is
relatively low and the value of the land high – for
example, a $10,000 premium for a lease, where the underlying land
has a value of $1 million will result in duty being calculated on a
"dutiable value" of $1 million.
What Has The SRO Said?
On 17 September 2009 the SRO released guidelines on its website
dealing with the administration of the new provisions.
Importantly, the SRO indicated:
Lease duty applies to "leases" and therefore will not
apply to licences to occupy, provided there is no grant of
Lease duty does not apply if the only consideration is the
"rent reserved" under the lease. The Duties Act
gives examples of payments that are part of the "rent
reserved" such as rates, charges, taxes, maintenance,
utilities, the lessor's legal costs, insurance premiums,
marketing costs and car park contributions. The SRO confirms
that these are examples only and other payments may also come
within "rent reserved", such as a bond, amounts paid to
upgrade services and common area expenses
Make good payments on conclusion of a lease will generally not
be regarded as consideration under the lease
The transfer or assignment of a lease as part of a sale of
business for nominal consideration (eg $1) will generally not give
rise to duty. However, if the lease contains an option to
purchase, duty could potentially apply
Where a lease requires a tenant to undertake structural work,
construct improvements (such as buildings) or undertake a tenancy
fit out and the improvements become the property of the lessor at
the end of the lease, the value of the improvements may be regarded
as consideration. The Commissioner will look at all
circumstances to determine whether lease duty should apply,
including the term of the lease and expected date of reversion to
Prepayments of rent will not trigger lease duty provided the
Commissioner is satisfied that the payment 'comprises the
net present value of a bona fide market rental over the term of the
lease and is not referable to the value of the
freehold'. The Commissioner will have regard to all
circumstances, including the value of the land, the amount paid,
how the payment is calculated and the duration of the lease.
The Commissioner states that 'it would not be usual for a
lessee to pay 'rent' in advance on a long term lease such
as a lease for 99 years.'
What Are The Traps?
The drafting of the lease duty provisions in the Victorian
Duties Act is extremely broad. There is no minimum lease term
and no minimum consideration required in order to trigger the
provisions. The SRO appears to have recognised that the
provisions as drafted exceed the stated intention. However,
in the publications on its website the SRO uses the word
"generally" a lot. This gives the SRO latitude in
any particular case to argue that the "general" rule
should not apply.
How Can We Help?
At present, the only way to achieve absolute certainty regarding
the application of the lease duty provisions is to seek a private
binding ruling from the SRO. Deacons can assist with advice
regarding the potential application of the provisions and can
assist in obtaining a private ruling. In our experience the
SRO is currently processing private binding ruling applications in
1 to 2 weeks.
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.
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