A common issue our taxation team encounters in relation to a property transaction is the imposition of double stamp duty on purchasers. This occurs as a result of a second sale of land to a subsequent purchaser, often referred to as the nominee. As a result of this, the State Revenue Office will charge duty on the first transfer between the vendor and first purchaser as well as the subsequent purchaser, or nominee/s, meaning duty is imposed twice. As such, it is important for prospective purchasers of land to understand their stamp duty implications when they agree to a sub-sale to avoid the double duty implications imposed by the Duties Act 2000 ("The Act").
This article will highlight:
- When double duty will arise in a property transaction; and
- How to prevent the SRO imposing double duty on your property transaction.
Circumstances that will lead to double duty
Section 32J and 32C of the Act outline the circumstances in which duty will be payable in a property transaction which involve a nomination. Broadly speaking, double duty will arise in two circumstances:
- A subsequent purchaser or nominee gives or agrees to give additional consideration (nomination fee) to obtain the transfer right; and
- There is land development before a nomination occurs.
Additional Consideration
This is defined under section 32B of the Act to mean any consideration given by a nominee in order for the nominee to obtain the transfer right (i.e. the right to purchase the property following the contract of sale) if:
- The nominee obtained the transfer right from the initial purchaser and the consideration provided by the nominee exceeds the consideration given or agreed to be given to the vendor by the first purchaser; or
- If a subsequent nominee obtained the transfer right from the nominee that exceeds the consideration provided by the nominee.
For example, if a property transaction was valued at $100,000 and the nominee paid $120,000 with a $20,000 premium for the property, duty will be due and payable on the $100,000 sale as well as the $120,000 sale.
It is also important to note the application of section 32B to parallel arrangements. This is defined as an arrangement where the nominee or associate of the nominee obtains a transfer right under a sale contract where the first purchaser of the property enters into a construction contract with the nominee to build a home on the land. Under section 32B(5) of the act, a parallel arrangement is deemed to be additional consideration and would be considered under the ambit of section 32B.
Land Development
While the ordinary definition of land development may suggest a physical change to the land (e.g. construction of a house or demolition of fixtures), land development under the Act has a very wide definition. We have frequently seen developers, purchasers, and other parties inadvertently caught under section 32J when applying for a building permit, due to the broad definition of land development.
Under section 3 of the Act, land development means, in relation to land, any of the following:
- Preparing a plan of subdivision of the land or taking any steps to have the plan registered under the Subdivision Act 1988;
- Applying for or obtaining a permit under the Planning and Environment Act 1987 in relation to the use or development of the land;
- Requesting under the Planning and Environment Act 1987 a planning authority to prepare an amendment to a planning scheme that would affect the land;
- Applying for or obtaining a permit or approval under the building Act 1993 in relation to the land;
- Doing anything in relation to the land for which a permit or approval referred to in paragraph (d) would be required;
- Developing or changing the land in any other way that would lead to the enhancement of its value.
A common scenario (our taxation team encounters) in the context of a property transaction where double duty is imposed can be seen in the example below:
Example -
The taxpayer has entered into a Contract of Sale of Real Estate for the purchase of the property for $1,000,000. Following this, the taxpayer lodges an application for a planning permit with their local council.
Through a nomination form provided for under the Contract of Sale, the taxpayer nominates a corporate trustee as the substitute purchaser of the property under the contract. By a transfer of land instrument, the property was transferred to the corporate trustee for the stated consideration of $1,000,000.
Because the nomination occurred after the land development took place (i.e. the application for the planning permit), the property transaction is liable under section 32J on both the transaction between the vendor and taxpayer as well as the taxpayer and corporate trustee. The total dutiable value here would then be $2,000,000.
If land development is planned, it is crucial that applications for permits or subdivision plans are made after the nomination. Otherwise, parties should ensure that nominations are made as soon as possible to avoid the imposition of a second round of duty on the transaction. Helpfully, the Commissioner has provided guidelines in determining whether an action taken would constitute land development in its Ruling DA-064.
In considering whether an activity would constitute land development for the purposes of the Act, the Commissioner will consider the following:
- Facts, circumstances and contexts of each matter;
- Tangible and intentional actions associated with developing and changing the use of the land; and
- Overall effect and consequence of the activity.
Points 1 and 6 above bear considerable importance due to the confusion that they may cause.
Under the first point, the Commissioner views that initial activities undertaken to prepare a plan of subdivision or measures towards registering a plan of subdivision or consolidation under the Subdivision Act 1988 will constitute land development. These activities consist of:
- Drafting or re-drafting a plan of subdivision or consolidation;
- Commissioning a professional review of a plan of subdivision or consolidation for the purpose of amending the plan or preparing a new plan;
- Lodging a plan of subdivision or consolidation for council for certification;
- Undertaking any other works required to obtain a Statement of Compliance;
- Submitting the plan of subdivision or consolidation for registration.
Activities that the Commissioner does not consider to be land development includes:
- Preliminary research and analysis on the market and the area in
order to identify the general development potential of the
property, including:
- consulting with real estate agents and reviewing sales data
- reviewing and considering any planning scheme zoning, schedules, overlays, and other council/state planning guideline, policy or requirement that applies to the property
- looking into the costs involved in the process of subdividing a property.
- Performing routine property searches or checks against title or an existing plan of subdivision commissioned by another party.
- General and preliminary inquiries about the process for preparing a plan of subdivision or an amendment to an existing plan.
- Informal surveys and measurements of a property.
Point 6 is a catch-all limb that is focused on activities that enhance the value of the property. The Commissioner's ruling states that even if the first 5 points are not met, the activity may constitute land development under this point if it leads to the enhancement of the value of the land. This would purportedly include:
- Decontamination of land
- Purchaser replacing certain parts of the property (e.g. roof or windows) and etc.
Interestingly, the Commissioner also notes in the ruling that activities that do not alter the physical characteristics of land may still amount to land development if they lead to an enhancement of the value of the land. This purportedly includes changes in legal obligations in relation to the land such as the removal of a covenant as well as rezoning of land where:
- A Minister rezones land as a result of submissions from any parties to the contract; or
- Any of the parties to the contract made a submission in support of a proposed rezoning of land.
Avoiding Double Duty
Under section 32J, duty is only charged separately and distinctly between the vendor/purchaser and purchaser/nominee in circumstances where the land development occurs prior to the nomination. Subsection 5 excludes duty from being charged separately and distinctly if the land development did not occur before the nomination.
This is particularly important given that the standard contract of sale of land provided by the LIV provides for the purchaser to nominate an entity. Due to this, it is of particular importance for purchasers and nominees to understand that if they want to avoid falling into the double duty trap, they should plan accordingly.
If land development is being entertained for the property, it is important that any applications for a permit or plan of subdivision ought to occur following a nomination.
Otherwise, the parties should ensure that any nominations should occur as soon as possible to avoid any possibility of a second tranche of duty being imposed on the transaction.
If you intend to use the nomination clause in a contract we recommend that you note the above and nominate as early as possible prior to any development activities.
Should you wish to discuss the above, please contact Tony Pointon and Andrew Pointon of our Taxation Team.
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.
