Nominating a purchaser can have duty consequences - the detail that property developers and their advisors need to know

In Victoria, 'double duty' can be triggered if a nomination occurs under a contract of sale after the occurrence of 'land development' or if additional consideration is paid for the nomination. Recently, the Victorian State Revenue Office released a ruling setting out its interpretation of the definition of 'land development'.

In New South Wales, a nomination under a contract of sale may mean that duty is payable twice (on the contract and on the transfer at settlement), if the nomination results in the transfer not being 'in conformity' with the contract. Revenue NSW has issued a ruling which sets out its interpretation of what constitutes a transfer that is made 'in conformity' with a contract. This article focuses on the duty outcomes in Victoria and New South Wales.

How is double duty relevant in Victoria and NSW in the context of nominating under a contract?

It is common for a purchaser to sign a contract of sale with the words 'and/or nominee' after their name and subsequently nominate another party under a nomination clause in the contract of sale.

Whilst the ability to nominate an alternative purchaser allows a purchaser to sign a contract prior to finalising its ultimate land holding structure, the subsequent nomination can result in duty applying twice in Victoria and New South Wales if the parties do not carefully consider Victorian and New South Wales duty provisions.

What does 'in conformity' with the contract mean in a New South Wales context?

In New South Wales, double duty could arise (i.e. duty payable on the contract and payable on the transfer) if the transfer is not made 'in conformity' with the contract of sale.

The 'in conformity' requirement is contained in section 18(2) of the Duties Act 1997 (NSW) - i.e. the 'no double duty' provision. If the transfer is 'in conformity' with the contract, only $10 is payable on the transfer with the primary duty payable on the contract.

Revenue NSW's ruling, 'DUT 010 version 2' (Ruling) provides guidance as to when a transfer will be considered to be 'in conformity' with the contract. Generally a contract is in conformity with the transfer if the purchaser is the same (i.e. no nomination occurs).

The Ruling states that the circumstances where a transfer to a person who is not the purchaser named in the agreement (i.e. a transfer to a nominee) will be considered to be 'in conformity' with the contract are as follows:

• the contract states that the property will be transferred to a named person (i.e. a nominee) that is not the purchaser;
• the contract has been novated (and duty has been paid on the agreement created subsequent to the novation) and the transfer is to the substituted purchaser;
• the contract is signed by a purchaser acting on behalf of a named company yet to be formed, with the transfer from the vendor to the company after incorporation (i.e. the company to be formed is expressly named in the contract); or
• the contract is signed by a purchaser acting on behalf of a named unit trust yet to be formed (i.e. the unit trust be formed is expressly named in the contract).

It is therefore very important to name a subsequent nominee if it relates to a company or unit trust structure that is yet to be formed at the time of contract signing. The Ruling makes it clear that if nomination is made to an entity that was not named or identified in the contract, the nomination will not be in conformity.

There is also a ruling in relation to section 18(3) for related party nominations however both the purchaser and nominee must have been in existence at the time of contract signing.

How does double duty apply in Victoria?

In Victoria, double duty can arise (i.e. duty payable by the initial purchaser and by the nominee) if either additional consideration is paid or land development occurs prior to the nomination occurring.

Land development is defined in section 3 of the Duties Act 2000 (Vic) to mean any one or more of the following:

• preparing a plan of subdivision of the land or taking any steps to have the plan registered under the Subdivision Act 1988 (Vic);

• applying for or obtaining a permit under the Planning and Environment Act 1987 (Vic); (Planning and Environment Act) in relation to the use or development of the land (even if the building permit application was made prior to the contract of sale being entered into but was granted post contract signing);

• requesting under the Planning and Environment Act a planning authority to prepare an amendment to a planning scheme that would affect the land;

• applying for or obtaining a permit or approval under the Building Act 1993 (Vic) in relation to the land (including a permit to extend an existing permit if it leads to the enhancement of the value of land);

• doing anything in relation to the land for which a permit or approval would be required; or

• developing or changing the land in any other way that would lead to the enhancement of its value.

It is evident from the above definition that the concept of land development is broad and can occur without the land actually increasing in value as a result.

Based on the SRO ruling, developers and advisors should be mindful that even early stage activities such as engaging a surveyor or commissioning a review of existing plans can amount to land development.

The SRO does, however, list certain preliminary activities that would not generally constitute land development. This includes activities that would typically be undertaken as part of due diligence (such as preliminary research, routine searches and checks of plans and informal surveys and measurements etc).

The examples that the SRO provides for the catch-all 'enhancement of value' provision includes decontamination activities, removal of a covenant on title and rezoning of land. The development activities do not need to alter the physical characteristics of the land and each activity needs to be considered in isolation to determine whether it leads to the enhancement of value, notwithstanding other activities may result in a negative impact on value.

What this all means for property developers and their advisers

It is very important for developers and their advisers (such as accountants and lawyers) to be on the front foot and consider the risk of double duty before entering into a contract of sale and before nominating a nominee having regard to the matters discussed in this article if the land is in Victoria or New South Wales.

The consequences of getting it wrong can mean paying duty twice on an acquisition and there is scope for the respective revenue offices to review and investigate an acquisition up to 5 years after settlement.

It is important to note that the rules around nomination differ again if the land is in another State or Territory outside of New South Wales or Victoria so advisors will need to ensure they consider the applicable rules depending on which State or Territory the relevant land is located.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Revenue Practice Group.

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