Home > News > A timely reminder that duty applies to certain leasing arrangements

A timely reminder that duty applies to certain leasing arrangements

Spread the love

The State Revenue Office did not want leasing arrangements to be used as a mechanism to avoid duty. From 21 November 2008 certain Victorian leases will trigger duty.

If a lease provision gives the tenant the right to purchase or obtain a transfer in the land or the economic benefits of the land and the tenant pays for this right (over and above the rent paid), then the transaction will be dutiable.

The law

Under the Duties Act, duty is payable on the grant, transfer or assignment of a lease if consideration (other than the rent reserved on the grant of the lease) is paid or agreed to be paid for:

  1. A first right of refusal to buy the land
  2. An option or right to buy the land
  3. A right to a transfer of the land
  4. Any other lease, licence, contract or arrangement that the tenant or assignee, obtains a right or interest in the land the subject to the lease.

When is duty payable?

Duty is payable within 3 months upon the grant, transfer, assignment or surrender.

Duty is charged on the greater of the amount of the consideration paid or agreed to be paid and the unencumbered market value of the land that is subject to the lease.

Exemptions, concessions and exclusions

The following leases will not attract duty:

  1. A lease (commercial or residential) which only requires the payment of rent
  2. A residency right in a retirement village
  3. The exercise of an option for the further term granted before 21 November 2008 and the tenant is required to pay consideration for the exercise of option
  4. A site and a caravan in a caravan park
  5. Section 153 of the Property Law Act which provides a procedure by which a lease can be enlarged into a freehold estate if the lease was originally created for a term of 300 years, and has at least 200 still to run. (However, the procedure for enlargement is outdated).

The exemptions under the Act also apply to lease provisions.

Guidance on when duty may apply

Assignment of lease

If the lease only gives the tenant the right to use and occupy the land at a market rental but not the right to buy the property, then the assignment of the lease would not be dutiable.

Surrender old lease and grant new lease

A tenant of a shop in a shopping centre may at the expense of the landlord be relocated to another shop. If no consideration (other than the rent) was paid or agreed to be paid in respect of the surrender and grant of the new lease then this transaction will be duty free. In these circumstances, the Commissioner would not consider the landlord’s payment of the relocation costs as dutiable.

Lease with an option to purchase the land for full market value

If a lease gives the tenant an option to purchase the land, then the Commissioner will defer payment of duty until the option to purchase is exercised. This means that if the tenant exercises the option and pays market value for the land, then the tenant will have 3 months from when it exercised its option to pay stamp duty. If the duty is paid when the option is exercised, then the subsequent transfer of land from the landlord to the tenant will not be chargeable with duty again.

Lease with an option to purchase the land for less than market value

If the tenant has exercised its right to purchase the land but pays less than the market value, then duty will be payable at the time the lease was entered into not when the option was exercised.

Tenants should be aware that penalty interest may be charged for duty that is not paid within 3 months of when the liability for duty arises. For example if the lease was entered into on 1 March 2009 and the tenant exercises its option to purchase the land for less than market value on 1 September 2010, then the tenant will be liable for stamp duty from 1 March 2009 until 31 May 2009. Penalty interest may be calculated from 1 June 2009 until 1 September 2010.

What next?

Anyone considering assigning or surrendering a lease, exercising an option to purchase or wanting to negotiate a right of first refusal must ensure that they turn their minds to duty. This also applies to a tenant who is considering selling its business and transferring the lease.

Our Commercial Property team is always happy to assist anyone who has a query on whether a leasing transaction could be dutiable.  Please feel free to contact us.

Author: Anastasia Tsiounis

Send an email to Anastasia