Australia: Victorian Lease Duty – The SRO Speaks

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 exclusive possession
  • 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 the lessor
  • 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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