Changes expand the types of transactions that will be subject to duty in NSW

The bill was released on 23 March 2022 and is expected to come into law in May 2022.

The proposed changes outlined in the bill include:

• Imposing duty on a change of beneficial ownership of dutiable property
• Imposing duty on the acknowledgement of trusts
• Introducing a refund for surcharge duty and surcharge land tax for Australian developers where the residential related land purchased was subsequently used for commercial or industrial purposes
• Introducing general anti-avoidance provisions that now will cover all NSW state taxes and introduce promoter penalties
• Increase the penalty tax for significant global entities (SGEs).

Given this bill significantly expands the scope of transactions or arrangements that are subject to duty, whilst broadening the anti-avoidance provisions, care must be taken to properly draft documents so there are no unintended duty consequences.

Changes in beneficial ownership

The significant amendment proposed by the bill, which is modelled on similar provisions in Victoria, is the introduction of duty on another transaction that results in a change in beneficial ownership of dutiable property, other than an excluded transaction.

A change in beneficial ownership can include:

• A creation of dutiable property
• The extinguishment of dutiable property
• A change in equitable interests in dutiable property
• Dutiable property becoming or ceasing to be the subject of a trust
• The person obtaining the beneficial ownership, or whose beneficial ownership is increased, will be liable to pay duty on the dutiable value of the property whose beneficial ownership has changed

The proposed amendments significantly increase the number of arrangements that will be subject to duty. These provisions fundamentally change the tax base for duty in NSW and change it from a tax on transfers of property to one on the creation, extinguishment or transfer of property.

Acknowledgement of trust

Another significant amendment proposed by the bill is a result of the decision in Chief Commissioner of State Revenue v Benidorm Pty Ltd (“Benidorm”). It was held by the NSW Court of Appeal in Benidorm that for a declaration of trust over dutiable property to give rise to ad valorem duty, it must actually affect a transaction, and not merely acknowledge an existing state of affairs.

The proposed amendments outline duty will be charged on the making of a statement that:

• Purports to be a declaration of trust over dutiable property
• Has the effect of acknowledging that identified property vested, or to be vested, in the person making the statement is already held, or to be held, in trust for a person or purpose mentioned in the statement
• The proposed amendments mean the making of a statement may be taken as a declaration of trust over dutiable property and a dutiable transaction. Care must be taken when drafting documents to ensure no unintended duty costs arise.
• Refund of foreign surcharge purchaser duty

The bill expands the foreign surcharge regime to allow a refund from foreign surcharge purchaser duty when acquired land is used by the transferee wholly or predominantly for commercial or industrial purposes.

The foreign surcharge purchaser duty refund will be available to Australian corporations that paid foreign surcharge duty on the acquisition of residential-related property, but the land has been used wholly or predominantly for commercial or industrial purposes.

Applications for a refund must be made within 12 months of the land being used for commercial or industrial purposes and no later than 10 years after completion of the transfer of the residential-related property to the Australian corporation.

This is a welcome amendment and is now in line with the overall intention of the foreign surcharge regime.

Rewrite of anti-avoidance provisions

Existing anti-avoidance rules in the Duties Act 1997 (NSW) have been replaced with a broader regime in the Taxation Administration Act 1996 (NSW) (“TAA”). The change will apply more broadly to all state taxes.

Proposed amendments remove the “artificial, blatant or contrived” requirement as part of any scheme. The removal of these words broadens the reach of the provisions, capturing more schemes entered into, made or carried out for the sole or dominant purpose of enabling a tax liability to be avoided (or deferred).

Included in new anti-avoidance rules are provisions prohibiting the promotion of tax avoidance schemes. A “promoter” is taken to be any person who markets the scheme, encourages the growth of the scheme or interest in the scheme. The bill outlines a person is not a “promoter” if they provide advice about the scheme or distribute material prepared by someone else in relation to the scheme.

Penalty tax

Penalty tax payable has doubled for a tax default by significant global entities (SGEs). The standard penalty tax rate will rise from 25 per cent to 50 per cent.

The proposed amendment means late lodgement or failure to lodge may attract significant penalties for SGEs, so it’s crucial they are aware of this new state-based obligation.