On 19 May 2022, the State Revenue and Fines Legislation Amendment (Miscellaneous) Act 2022 (NSW) amended the Duties Act 1997 (NSW) (Duties Act) by expanding the scope of ‘dutiable transactions’, which, as the name suggests, are transactions that are subject to duty in New South Wales (NSW). Certain transactions that result in a ‘change in beneficial ownership of dutiable property’ (section 8(1)(b)(ix) of the Duties Act) are now dutiable transactions.
In December 2024, Revenue NSW issued a (long overdue) Commissioner’s Practice Note – CPN 037 (Practice Note) on the application of section 8(1)(b)(ix) of the Duties Act to the grant of options to purchase land in NSW, being a transaction that involves a change in beneficial ownership of dutiable property.
This article provides a summary of the Practice Note and the key practical takeaways.
Overview of Practice Note – change in beneficial ownership and options to purchase land in NSW
A ‘change in beneficial ownership’ includes the creation of dutiable property (section 8(3) of the Duties Act) and ‘dutiable property’ includes an option to purchase land in NSW (section 11(1)(k) of the Duties Act). When an option to purchase land is granted, it results in the creation of dutiable property and the grant to the option holder of an equitable interest in the land. Accordingly, a grant of an option to purchase land for consideration in NSW is a dutiable transaction.
The Practice Note outlines the circumstances in which the Chief Commissioner will consider certain common transactions relating to the grant of an option to purchase land in NSW to be liable to duty. It focuses on call options, noting that put options should not involve a change in beneficial ownership (as the holder of the option and property is the same) and are therefore not dutiable transactions. In this regard, a reference to an option in this article is to a call option.
Options vs conditional contracts (and other arrangements)
The Practice Note distinguishes options from conditional contracts. It explains that a conditional contract is an agreement to sell the property subject to the satisfaction of the relevant conditions in the agreement, whereas an option is an irrevocable offer to sell for the term of the option.
Entering into a conditional contract or an option will have different duty consequences. The duty imposed on a conditional contract (regardless of whether the condition is a precedent to formation or performance of the contract) is calculated on the greater of the consideration for, and the market value of, the property the subject of the contract (usually the purchase price of land including any applicable goods and services tax (GST)). In contrast, the duty imposed on an option is the greater of the consideration for and market value of the option (usually the option fee including any applicable GST).
The Practice Note emphasises that regard must be had to the precise rights and obligations created by the agreement or arrangement to determine its character for duty purposes.
The Practice Note also confirms that rights of pre-emption are not dutiable property as they are not captured by the concept of an ‘option to purchase land in New South Wales’.
Consideration for the grant of an option to purchase NSW land
The dutiable value of property subject to a dutiable transaction is the greater of the consideration for, and the market value of, the property (section 21 of the Duties Act). The Practice Note explains that for these purposes, consideration commonly includes:
A stated option fee.
Any other charges, fees or payments, whether to the grantee or another party.
Reimbursement of the landowner's legal fees for the preparation of the option documents.
Non-refundable security deposits (and the Practice Note clarifies that where security deposits would be refunded to the grantee / provider of the funds on the expiration of the option, they will generally not be treated as consideration for the grant of the option and not attract a liability to duty).
Break fees / charges (however characterised) paid out of otherwise refundable escrow / other funds.
The value of in-kind works that the grantee undertakes (or procures at the grantee's cost) for the benefit of the grantee, for example, the landowner.
Typically, the consideration for the grant of the option will be set out in the option agreement. However, consideration that is to be paid or provided under related documents or arrangements may also be consideration for the grant of an option.
Additional consideration – contingent consideration and extension fees
In addition to any consideration paid on the grant of an option, further consideration may be payable during the option term (if the option is not exercised before specified dates), or in the event the option period is extended.
The Practice Note distinguishes between the following payments:
Contingent consideration: where an option agreement specifies that payment of an amount is contingent on a future pre-agreed event during the option term (e.g anniversary fees/ milestone payments), the total of all anniversary payments potentially payable will be taken into account in determining the duty payable on the grant of the option, on the basis the anniversary payments are a contingent consideration (section 22(1)) of the Duties Act).
Extension fees: payments for the modification of rights under the option agreement (e.g., extension/variation fees) are generally not liable to duty on the basis the fees are not a consideration for the initial grant of the option and are not part of a tax avoidance scheme aimed at avoiding or deferring the payment of duty. An extension fee is generally consideration for the modification of the rights under the option such that it will continue for an extended period.
Arm’s length transactions
The Practice Note provides that, where the parties are acting at arm’s length, the consideration and value of the option should generally align. Where satisfied that this is the case, the Chief Commissioner will accept the dutiable value of the change in beneficial ownership is equal to the consideration for the grant of the option (which, in the case of most option arrangements, is equal to the option fee and other consideration listed above plus any applicable GST).
The Practice Note provides practical examples of when Revenue NSW will regard parties as acting at arm’s length, and notes the relevance of the following factors:
Whether the parties have pre-existing business dealings.
Any personal relationships.
Where there is commonality in the ownership structure of the parties, whether common directors recuse themselves from deciding to proceed with the transactions.
Whether the exercise price under the option, reflects the market value of the land at the time the option is entered into.
However, where the Chief Commissioner is not satisfied the parties are acting at arm’s length, a valuation of the option will generally be required.
Double duty
The Practice Note reaffirms Revenue NSW’s position that any duty payable on the grant of an option is not to be credited against the duty payable on the contract/ transfer entered into pursuant to the option.
Surrender or termination of an option
A ‘change in beneficial ownership’ includes the ‘extinguishment of dutiable property’ (section 8(3) of the Duties Act). In this regard, the Practice Note confirms the surrender or early termination of an option constitutes such an extinguishment and is therefore subject to duty. Duty is calculated on the higher of the consideration for the surrender or termination and the market value of the extinguished interest.
In contrast, the lapsing of an option at the end of its term should not be liable to duty on the basis that no action is taken by either party to cause the lapse and is solely as a consequence of the expiration of the grantee’s rights expiring.
It is important to note that if an option lapses or is terminated, no refund of the previous duty paid on the grant is available. This is because the change in beneficial ownership occurs when the option is granted.
Key practical takeaways
Accurately calculate consideration: When granting an option to purchase land, be aware that this is a dutiable transaction and ensure that all forms of consideration for the option are accounted for in the dutiable value (including the option fee, any additional charges, fees, payments, reimbursement of legal fees, non-refundable security deposits, break fees and the value of any in-kind works provided by the grantee).
Plan for contingent payments: Be prepared to include any contingent payments, such as anniversary fees, in the duty calculation. However, note that extension fees for modifying the rights under the option are generally not subject to duty.
Handle surrender or termination properly: If an option is surrendered or terminated early, understand this will be considered an extinguishment of dutiable property and will be subject to duty and ensure this is factored into any decision to surrender or terminate an option.