Vendor duty in NSW - threshhold changes & new exemptions
Further legislative changes have been made in July 2004 to vendor duty to clarify provisions relating to the various vendor duty concessions. In addition, the amended legislation has created a new exemption from vendor duty for sales by mortgagees exercising a power of sale. This bulletin updates and replaces our May 2004 bulletin on New South Wales vendor duty.
Commencing 1 June 2004, vendors must pay duty in New South Wales at a rate of 2.25 per cent of the dutiable value on a transfer or an agreement for the sale or transfer of 'land-related property'. The duty also applies to declarations of trust of such property. The exercise of an option entered into before
7 May 2004 will not attract the duty.
Essentially, 'land-related property' is defined to mean land in New South Wales or a 'land use entitlement', which covers interests such as company title units. The definition also covers any 'interest in land', and can therefore apply to leasehold interests and easements and other interests less than the freehold. Given this wide definition, the scope for the new duty on vendors is broad and affects both commercial and residential properties alike. However, exemptions do apply. As with purchase duty, the grant of an option is not dutiable.
Dutiable value
The dutiable value on which vendor duty is payable is determined on essentially the same basis as ordinary transfer duty which remains payable by purchasers ? the greater of the sale price or the unencumbered value.
The vendor can pass on vendor duty to the purchaser through the sale contract. Where this occurs, the legislation excludes from the dutiable value any amount payable by the purchaser to discharge the vendor's liability to vendor duty. If a dutiable transaction relates to land-related property and other property, vendor duty will be apportioned and chargeable only to the extent that it relates to the
value of the land-related property.
Profit threshold
There is a profit threshold that applies to vendor duty. Duty only starts to be imposed on vendors where the sale price of the property exceeds the acquisition price by more than 12 per cent. Discounts on duty are available for profit between 12 per cent and 15 per cent. The legislation does not account for improvements made on the property, transaction costs or inflation in calculating the profit margin. 'Profit' is simply the difference between the original purchase value and the sale value.
If GST is payable in respect of a vendor duty transaction but was not payable in respect of the acquisition, the legislation allows for the acquisition cost to be increased by 10 per cent.
Principal place of residence exemption (amended)
This exemption does not apply unless at least 50% of the ownership interest is held by one or more individuals who reside in the home as their principal place of residence. The vendor must have used and occupied the property as the principal place of residence for a continuous period for the previous two years or a total of three years in the last five years.
If the vendor has owned the land for less than two years, an exemption applies if the Commissioner is satisfied that the land has been used and occupied as the principal place of residence since ownership. Exemption is also available if a vendor sells a principal place of residence within six months (or a period as the Commissioner may allow) of leaving the property. Duty can be apportioned for land partly used as a principal place of residence and partly used for business purposes.
New and substantially new buildings exemption
Agreements or transfers of a new building constructed by or on behalf of the vendor that is unoccupied before the first sale and is suitable for use or occupation will not attract vendor duty. This includes the first sale of commercial or residential premises as well as 'off-the plan' sales. Other conditions apply.
An additional exemption applies where a new building has been tenanted. In effect, a developer is given 12 months from completion of construction to sell the premises in order to obtain the benefit of the exemption. Other conditions apply.
Transactions relating to 'substantially new buildings' (as defined) are also exempt from duty. A sale of vacant land that has been substantially improved (such as re-zoned land) is also exempt from vendor duty.
Sales by mortgagees under power of sale (new)
An exemption for mortgagee sales was not incorporated in the original legislation introducing vendor duty. However, the legislation was amended less than two months after it was introduced by the State Revenue Legislation Further Amendment Bill 2004 to create an exemption for sales by mortgagees and receivers, liquidators or trustees in bankruptcy in exercise of a power of sale, provided that the power is exercised "bona fide". The intention appears to be to prevent avoidance of duty where there is no real default.
Other exemptions
An exemption applies if the agreement or transfer of property forms part of a going concern transaction involving a sale of business and the dutiable value of the property comprises less than 60 per cent of the total dutiable value of the transaction. Stock in trade and book debts would not to be counted towards dutiable value as those assets are not dutiable property.
An agreement for the sale or transfer of a farm (land used for primary production) is exempt from vendor duty, provided certain time conditions are met. General exemptions under Chapter 2 (change of trustee, deceased estate, relationship break-ups) and Chapter 11 of Duties Act 1997 (corporate reconstruction, charitable institutions) will also apply for vendor duty. Generally speaking, a transaction that is not chargeable with purchase duty under Chapter 2 is not chargeable with vendor duty. No vendor duty applies in respect of compulsory acquisitions under State legislation.
Some implications
- Vendors will need to be sure they can fund duty. Special contractual provisions will be needed if the purchase money is to be made available at settlement or before settlement.
- In settling new advances, purchasers and their financiers will need to be sure that vendor duty has been paid.
- In many cases, particularly the exemption for land sold as part of a business sale, the application of the duty will depend on the valuation of assets. It may be necessary to value land as at dates well in the past. The duty will generate plenty of work for valuers.
- There are interactions between the GST and the vendor duty. Interestingly, the acquisition cost base for vendor duty can be increased by 10 per cent in every case if GST is payable on the sale but was not payable on acquisition. However GST may be payable at less than 10 per cent ? for example if the margin scheme is applied.
- Compulsory acquisitions are exempt from the duty. A side effect of that exemption may be to discourage owners from entering into agreements with State authorities, but instead to wait for compulsory acquisition process to occur.
- Financiers and other creditors of insolvent companies and individuals will be glad that vendor duty need not be paid on genuine enforcement of mortgage security or on sales by certain insolvency appointees. However, the concession does not appear to apply to sales by administrators. Questions may also arise whether exercise of power of sale is "bona fide" in certain cases.
The new tax is complex and this is a brief summary only.