It has been said that the only things you can be certain of are death and taxes and this statement has never been truer in light of recent changes to the Duties Act 1997 (NSW) (‘the Act’) imposing additional stamp duty on parties entering into call options for the purchase of property.
In a number of recent matters here at Green and Associates, we have seen several clients been caught out by the changes to the Act imposing duty on both the grant of a ‘call’ option to purchase property as well as the exercise of the option. Whereas previously, the cunning property investor could enter into an option deed for the purchase of a property and delay their payment of stamp duty until they had exercised their option and entered into the contract, now, the state government is able to hit the unaware investor with an immediate ad valorem duty on the grant of the option, payable within three months of the option being granted.
These changes to the act represent an increased taxation and administrative burden for property investors who may run afoul of Revenue NSW should they not properly lodge their option deeds and declaration forms for assessment of duty. A question we often get asked by clients whether this duty is still payable even when the option is not exercised, and the property is not purchased. As a dutiable transaction has occurred when an option is granted, the answer is unfortunately yes. In a further cruel twist, the Act provides that this duty will not be refunded if the option is not exercised.
This accursed ‘double duty’ came about due to the tweaking of the Act which now considers the grant of a ‘call’ option to a purchaser to be a change in ‘beneficial ownership of dutiable property’ and therefore a dutiable transaction.
This extra duty is calculated on the call option fee paid for the grant of an option. So if a grantee is granted an option to purchase land for $3,000,000.00 in consideration for an option fee of $50,000.00, the duty is payable on the option fee of $50,000.00. This duty must be paid within three months of the grant of option and is not credited towards the duty payable on the exercise of the option.
What we have seen in several matters is sneaky clauses inserted from the vendor which require further consideration for the grant of an option in the way of a security deposit in order to guarantee payment of the deposit under the contract when the option is exercised. Such clauses are not advisable as they increase the up-front cost of the option for purchasers and expose purchasers to greater risk should they not exercise the option.
If the option deed states that the security deposit will be forfeited if the call option is not exercised, then the security deposit will be treated as consideration for the granting of the call option and duty will be payable on the option fee plus the security deposit. If the deed provides that the security deposit is wholly refundable, then duty will only be assessed on the option fee.
We recommend that property investors think twice before entering into call options with long settlement periods due to the prospect of incurring double duty on the transaction and the increased administrative burden that this entails. Negotiating for a longer settlement period, ideally with only a smaller deposit (perhaps equivalent to what the option fee would have been) payable unless and until completion occurs, and for clauses in the contract requiring the vendor to assist in the purchaser’s zoning and development applications, may be a more prudent way for investors to enjoy the benefit of a delayed settlement without having to incur double duty on a property acquisition.
At Green & Associates Solicitors, we are experienced in drafting and negotiating option deeds and contracts for sale and can assist you in navigating the tricky world of delayed settlements and double duty. As always, we recommend that you speak to your accountant or financial planner for the tax implication of your property acquisitions as we are not financial experts and cannot give financial advice.
