Landlords and tenants will need to take
exceptional care in drafting leases since the Upper House of the
Parliament of Victoria passed the Duties Amendment Bill 2008
(Vic) on 25 June 2009. The Bill was first introduced to the
Legislative Assembly on 4 December 2008. In its original form it
had three aims:
- to ensure leases are not used as a mechanism for avoiding
duty;
- to clarify when duty is payable on changes in beneficial
ownership; and
- to reduce the time period for payment of duty from the
liability date to 14 days.
The original Bill did not pass the Legislative Council. However, on
25 June an amended version was passed and has now become law. The
major difference between the Bill in its original form and the one
passed by the Legislative Council is that the time for payment of
stamp duty was not reduced to 14 days and will remain at the
existing period of 90 days. That means stamp duty remains payable
on a transaction 90 days after the date on which the transaction is
given effect.
Operative date
Notwithstanding the date Parliament
passed the Bill, most of the operative provisions in the Duties
Amendment Act (Act) will be deemed to have
come into operation on 21 November 2008. Accordingly, the Act will
retrospectively impact on any transactions after that date.
Imposition of duty on granting of leases
Duty will be imposed on the granting of
a lease for which any consideration, other than 'rent reserved', is
paid or agreed to be paid either in respect of the lease or
for:
- a right to purchase the land or a right to a transfer of the
land;
- an option to purchase the land or an option for the transfer of
the land;
- a right of first refusal on the sale or transfer of the land;
and
- any other lease, licence, contract, scheme or arrangement by
which the lessee or an associated person of the lessee obtains any
right or interest in the land that is the subject of the lease
other than the leasehold estate.
A dutiable transaction will occur when
there is a transfer or an assignment of a lease for which any
consideration is paid in the same circumstances.
The new sections are anti-avoidance in nature and are intended to
apply broadly. The liability for duty will arise where leases are
used to effectively transfer rights in the underlying land and/or
the economic benefits of the land. The rights and benefits obtained
by the lessee in those circumstances are seen as equivalent to the
rights and benefits obtained by a person who acquires property
rights by way of transfer of land.
Rent reserved on a lease is said 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. The Act includes examples of
amounts paid or payable for the right to use the land under the
lease as follows:
- Paragraph (a) - Rates
- Paragraph (b) - Charges
- Paragraph (c) - Taxes
- Paragraph (d) - Maintenance
- Paragraph (e) - Utilities
- Paragraph (f) - Legal costs required to be paid by the lessee
on behalf of the lessor in relation to the grant of a lease
- Paragraph (g) - Insurance premiums
- Paragraph (h) - Marketing costs
- Paragraph (i) - Car park contributions.
Accordingly it is intended that most
ordinary commercial leases will fall outside the scope of dutiable
transactions covered by the Act unless additional consideration is
paid.
Duty payable
Duty will be calculated on the higher
of the consideration paid (other than the rent reserved) and the
unencumbered value of the leased land. The duty payable will be at
the same rate as that payable for a transfer of land.
Exemptions
The Act specifically excludes the
operation of the Act for leases, licences or other documents
creating residency rights in a retirement village within the
meaning of the Retirement Villages Act 1986.
The Act also exempts the granting, transfer, assignment or
surrender of a lease if the lease is for a site or a site and
caravan in a registered caravan park in circumstances where a
caravan is located or is to be located on the site which is then to
be used or intended for use as a principal place of residence of
the proposed lessee.
The granting of a lease as a result of the exercise of an option
for a further term where the option required the payment of
consideration for the exercise is not a dutiable transaction
provided that the option was granted before 21 November 2008.
In the event that duty is paid on a lease, under the provisions set
out in the Act, no further duty will be paid for a subsequent
transfer of the land to the lessee or a conversion of the term into
fee simple.
Changes in beneficial ownership
The Act also seeks to make dutiable the
transactions like those referred to in the case of Trust Company of
Australia Limited (ATF the Clayton Three Trust) v The Commissioner
for State Revenue [2007] VSC451. The amendments are said to clarify
the operation of the ability to charge duty in transactions where
there is a dutiable change in beneficial ownership.
To establish a dutiable transaction, beneficial ownership is now
defined to include, but is not limited to, the ownership of
dutiable property by a person as trustee of a trust. A change of
beneficial ownership now includes, but is not limited to:
- the creation of dutiable property;
- the extinguishment of dutiable property;
- a change in equitable interests in dutiable property;
- dutiable property becoming the subject of a trust; or
- dutiable property ceasing to be the subject of a trust.
Ordinary transactions in the operation of unit trusts are exempted
from the provisions. These are:
Time for payment of duty
The proposed Part 3 of the Act reducing
the period for payment of duty after liability arises was removed
from the Act before its passage through the Legislative Council
and, accordingly, those time periods have not been changed.
What it means for landlords and tenants
Landlords and tenants will now need to
take exceptional care in drafting leases to ensure they do not,
either knowingly or inadvertently, include a provision in a lease
which would make the lease subject to duty under the terms of the
Act. The granting of options to purchase and rights of first
refusal have regularly been features of commercial leases. If these
provisions are to be included in a lease then the lease should
expressly state that no additional consideration is imposed other
than the rent reserved and amounts paid for the right to use the
land under the lease. We think the parties should be careful to
ensure it is not left open to the Commissioner of State Revenue to
argue that the rent has been artificially increased above the
ordinary market rent to include such consideration.
Concerns with the legislation
It is difficult to argue with the
policy of the Act as an instrument to close an anti-avoidance
loophole. The legislation as drawn, however, does leave open
certain areas of concern including:
- How will the Commissioner treat obligations on tenants to
undertake works or surrender tenant's fitouts on expiry of leases?
Again, these provisions are commonly included in leases but now
could be seen to be additional consideration.
- How will the Commissioner deal with transfers of a lease as
part of the sale of a business where payment is made by the
transferee to the transferor?
- If duty is to be levied then it would be fairer to calculate
duty on the value of the right being acquired by the lessee rather
than based on the full value of the property.
- Is it fair to pay duty in circumstances where the premium paid
is a minor amount or in circumstances where an option or right of
first refusal is never actually exercised?
Time will tell how the Commissioner of State Revenue chooses to
enforce the legislation but meanwhile extreme care needs to be
taken by both landlords and tenants when entering into lease
arrangements.
For more information, please
contact:
Ian Tuszynski, Partner
Ph
(direct): +61 3 9608 2224
Email:
i.tuszynski@cornwalls.com.au
or
Peter Window, Partner
Ph
(direct): +61 3 9608 2109
Email:
p.window@cornwalls.com.au
or
Gordon Bell, Partner
Ph
(direct): +61 3 9608 2209
Email:
g.bell@cornwalls.com.au