This is Riscon Air by Law Cover. I'm talking today, duty calls navigating transfer duty on options. Welcome to Riscon Air. I'm Julian Morrow and our topic today is navigating transfer duty on options.
And we call it my bad duty is to leading Australian tax about our standard rider who has its strength and beauty to the law enforcement with the eyes on community between the tax institute and the staff of the office of state revenue and respect for entering our call to talk about duties on options for Riscon Air. Pleasure to join everybody. Now, one of the reasons for this discussion is changes to the NSW, Judy's Act of 1997 that will make back in May of 2022. And that's what major implications for what previously regarded as trying to test the transaction structures will come to those in a short way.
But let's get some terminology right first, Andrew. Judy goes to basic round down what an option to purchase is and in particular the difference between a production and a call option. Yeah, so probably an option is a rid of a lover. Typically, we'll have a call option to say option for someone to buy.
A put option is where the prospective purchase gives the vendor the option of putting the property to them in the inventory of the call options on exercise. Right. And what's the difference between an option and a right of a refusal? Good question.
As I say, options are rid of a lover. First of all, the refusal is something less than that. I guess if you put an option in the party, they're absolutely bound. Whereas they're not necessarily bound to it per se and this is the first right refusal to exercise.
But don't quite be on that. It's a fine distinction. And that's one of the things that emerges from some of the comforts that you put at the top of the document doesn't necessarily determine what the substance of the company is. Yeah, absolutely right.
I mean, I do often get past the question just puts in the difference between a first round of refusal and an option. And regardless of the label, you put on a document. It may be through chaos drafting. There's something that somebody supports again option may be a first round of refusal, but more concerning advice versa.
Anyways, this latter case, all that you're going to start talking about Judy on the round of when it happens may be an option. Another term in this sort of universe is a conditional contract and how that's different from an option. Could you speak to that little little on what the Judy consequences of that distinction? Yeah, so obviously, conditional contract is the parties are bound to facilitate the satisfaction of the condition.
And the key difference between a conditional contract and the grand of an option is an additional contract is due to a lot for up in the three months. If you're going to transact in the larger land, it's going to be a lot of what you're going to pay for the land or what it's market value is. With an option, the grand of a call option is also a jubil. But it's only due to the extent if it's an unplanned party's the option fee or generally other things that go towards consideration.
Or if it's not an unplanned party's, it's the value of the option. So what were these amendments in May 2022 and why has it gone on talking now? Yeah, well, it's interesting. They're actually terms of changing beneficial.
So it's not the most obvious thing you think of, when you had a jubil change of beneficial energy, there's definitions of what are changing beneficial energy. So that's include, remember the creation of jubil property and extinction of jubil property terminology and that sort of thing. The call option over land in New South Wales is a species of jubil property. And so therefore the creation of it, it was going to tax the grand of a call option to purchase land for the first time in New South Wales.
So again, not the most obvious terminology you think of the apply to options, but not long out of the lower change of the conditional capital practice nights. Not the one that came out recently, we'll talk about that maybe later, but earlier ones I think certainly might very clear it's a profession that the commission would be regardless of your duty as taxes. The grand of call option for the first time. Yes, there was the New South Wales State Commission as practice night, firstly on changing beneficial energy.
So that was directly addressing the terminology in the legislative of the written new one. Now came out in December 2024, practice night 37, which outlines common transactions involving options of purchase land, which the commission says now liable to duty. You mentioned consideration before Andrew. How do you work out the consideration for an option?
Well, that's a really good question. And then first of all, I will come into all practitioners whether they do options regularly or they will not be related to the instructions for the first time. They really do need to read commission's practice nights at the end of the day, three seven and quite themselves with the commission's views about the various due to the last big solve options. As part of that commission's practice night commission does, he's opinion on what constant situation but the high court tells us quite hopefully it might be not in terms of what consideration from the famous D.C.
case from the early 2000s, what's consideration? Anything that moves the transaction. The commission gives examples I think in the commission's practice night of things like non-refundable amounts are absolutely described as security deposits. And again, coming back to what you said, it doesn't matter what label you put on something.
The substance of whatever's occurring does really have the character of moving the transaction or being a reason why the parties are transacted. Then chances are it is going to be consideration, particularly where it's an amount of money that's changing hands for whatever reason. So obviously it's going to be the stated option. So you can't finish your consideration of consideration.
There you mentioned non-refundable security deposits. What about reimbursement for legal things? Yeah, so that's the big one. It might not be the amount of duty but it's only quarter load of people on the way.
That was actually brought to the public attention or the commission's attention in the commission's earlier practice night of change of membership. And I think quarter load of people by surprise that the commission said a little bit the person's been granted the option's going to pay the legal of the person's running the option to think it was more than $1,000. Well that's all part of consideration. Even if it's a non-lotion for the $16, you're still going to have to pay duty on $10 plus whatever the amount of the variable is legal for these work.
And also things like value in kind works? Yeah, absolutely. I think it's an individual as well. So yes, you do have to.
I think step back, take a deep breath and confront the reality that if anything's offered by the grantee to the ground door that moves the transaction, then change the assumption that it's consideration. It's an interesting thing that the way that these options get stamped, the grantee option itself gets stamped on what's called EDR, which is the system that doesn't go directly to the commission. I get to check by the commission after the event sometimes the event. So because of the risk that practitioners or registered for EDR and standing documents on behalf of the commission, if they don't get right, I can't emphasize enough.
When it comes to any amounts, regardless of how they characterize under the collection or the given kind works, that's something. Please go for commission's practice notes. I'm working through the commission's and you mentioned also whether or not it's an answer to the commission's. Yeah, absolutely.
Because the commission really importantly says in his commission's practice note, I'm looking through the parties are acting nicely. Then he'll generally accept that what the amount of money particularly the option fee is an answer linked to the amount and he will, I guess, be happy enough. But that's the duty bill now. Very important options, like individual transaction.
Duty's on the higher of the consideration or the only common value. So as a staff of arms and transaction, he will accept the parties. Obviously, through the engagement of the agreed option fee. Anything else that goes towards consideration.
And he won't get any further. He'll just look at those things and that will be the duty bill now. The other situation, which I think concerns a lot of practitioners generally when this new tax introduced in 2022 was whether or not you have your evaluation of the option in the nation in every case. Now again, hopefully the commission's practice note he says, it's only in situations where the parties are not acting nicely or if they're related that he will require evidence of evaluation.
Then in itself is actually a coronaan result of the action to put on textiles, not least of which because the commission expects evaluations when they perform to be done by people. We're actually actually recording value in those particular types of things. And I think as a practical manner, if you've ever got a value in the option, I think the number of values are also qualified to do that, whether in senior else, where it's pretty thin on the ground and it's going to be expensive. That's the valuation when you're putting together the option contract.
Yes. Okay, so well, it's a good question. It might depend upon where the underlying property is located. Commissions are all of revenue rulings at all of this.
One of the age for one of the words of the valuation comes around the rule in DUT12, I think it's going to be in our conversion fork. It doesn't specifically call that option, but it does call that land and makes a distinction between land and metropolitan area and use of wells and land outside metropolitan area. If you extrapolate that in an option, I believe an option that land in metropolitan area. He generally wants to have your questions to be known for three months old.
Conversely, and again, this is extrapolating what he says about direct dealings in land. If it's outside metropolitan area, he will often accept that if it's up to one month old, providing they have been any changes in zoning or other material changes, which is the difference between when you commission a valuation and how well it can be by the time you click into the commission. As opposed to the requirement of the interruption, he's exercised more than 12 months after you granted. Then the commission, when the option is exercised, we want to value actually underline land the subject of the agreement that comes into effect when the option actually exercises.
Now, again, it's something I think many practitioners are aware of, but not everyone, it's not an requirement. The commission of the CUT12 is already in the CUT12, and it's probably going to be the same version for several years ago. But that's what's suggesting to why now, transacting by way of options is actually pretty expensive from a G-point of view, why you proceed down a particular path. And that's because, with the conditional contract, you lock in the G-point value at the data exchange, presumably the time-point control accept the total price of the credit of the land.
What you've got an option, typically the reason that you granted option is because the perspective of the land wants something happen to the land, like, for example, a distribution approval or rezoning or that sort of thing. And so by the time those trigger events happen, just to be more than 12 months after the option was granted, that goes a substantial uplift in the value of the land, which means the contract becomes independent on the exercise of the option and it is after it granted. The value of the underlying land is normally substantial more than what was. Had you caught the G-point of the conditional contract, used before?
So the practice I came out in December, 2020, knew laws of being operation for the best time of two years. And how does being sung with duties that they weren't expecting and occurring more often than they were expecting in the transaction process and capital higher amounts? Yeah, absolutely. I know I got a lot of people to come to me always after the event.
When they're upset with either they had an EER order and the commission released the mortgage, it was probably not. For example, we're options on foot-based exercises yet. And for example, parties wanted to modify, for example, the option by extending its firm by paying option extension phase. Now, that was a big issue for a long time about what was the effect of the payment or the payment agreement to pay an option extension fee.
It means it crystallized a liability within three months of the agreement to pay the fee, which meant to have an option option or due to have some other duty thinking of thankfully in the commission's page. Now, I'll take plugging this out of the paper, remember it's CUNC-37. What he says the commission says is very clearly about option extension fees. The way they manifest themselves in terms of the duty outcome is you add the option extension fees to the, for example, purchase price under the contract.
When it's exercised, it grosses up the consideration side of the jubilee value of the contract. Now, the exception of these other commission's practice and I don't say as much as those option extension fees, where, for example, credit it was the purchase price. It seems based on what the commission said in an earlier practice note, that maybe that you don't need to actually price up the purchase price. If, for example, call option fees or any option fee for that, it's actually credited towards the purchase price.
So your answer to your answer to your answer to your answer is where under the change of financial rules now they'll be duty on the grant of the option. What happens if the option's not exercised? Yeah, so it was not exercised by like you're not getting money back. But actually, in this exercise, you're not getting credit for the duty pay on the grant.
But, but, but, but, but, but, but, but, but, but, but, but, but, but, but, but, but, I think, I think, I think, I think, pretty much as I've already known, but perhaps it was in the back of the mind. If you've got an option on the page, I'm getting out of it. So rather than laying it left through the option of time, they take your answer actually into an additional position. Unbelievably, that's actually a jubilee transaction.
It's an element of the definition of change of financial energy extension. The only thing that you're going to do probably coming back into the factor of a call option, I've put it just laying it in yourself. Well, he's not a bit self-ep of a jubilee property. So, when I determine how to eliminate it, again, if there are an answer length and there's consideration, then I guess the person who granted the option is going to be liable with getting back something that they gave and then they paid.
I guess so. The mind bottles. The mind bottles. The mind bottles.
And you mentioned this already, but if you paid the duty for the option and there's an exercise, you're not getting credit. No, unfortunately. So again, that's another reason why transacting in relation to the land using options as a place in the contract. So, I'm just landing it on advocating.
So, if there's any particular position, I'm just here to think about one people that a conditional contract has a certain type of duty on the outcome. Options, if you track through all the jubilee steps, including the fact that it's exercise one performance after getting the evaluation, invariably going to be paying a lot higher land value at the time the exercise the option in the land value was, if you take contracted by a conditional agreement. The thing about it is that you pay duty on the grantee option. You don't get credit for it when you exercise it, but worse when you exercise it, you can go home higher than consideration, which can include the option for the opposite.
And any option extension phase of the end of the land, but I think in fact it's invariably most people end up paying on the land and bearing mine. It's not even expensive to have the evaluation. And the adequacy of otherwise, if any of the various people have any new self-wise, for example, the value hasn't been instructed properly on the track regularly, but in particular, probably the subject of the option. So, for example, if you're an industrial property or commercial property, and that value is regimented, that's a short record here, the commission can say, who's this person?
I'll plan on the value of the industrial commercial land. Go back, we don't like to pay the value, I should not accept you and get another one from somebody who is qualified. No, that was not paid enough. Andrew, what's call option assigned?
Oh, well, I'm glad you asked. OK, it's not new, but the fact is it has basically got zero recognition in the professional effort. The duty system has been with us for about 20 years, and it is very pernicious and disastrous type of duty that applies. It's an interesting type of duty as well.
So, what do we do with our walk-through at case data, it's probably the easiest way to do it. So, imagine I've been granted a call option, and I've granted a pull option over the under of the land. OK, so we've got a pull and call. One of the prerequisites for call option assigned to you to have replies, they must be put in call option over the same land.
So, just like, you come along to me and say, listen, call option, I'll do that land, I reckon I can do, I can make a money on that. Would you sell me? You'll call option, I'll say, yeah, sure. If you've been in dollars for an hour, happy days, really happy days.
We're very happy, so I'm very happy, so I'm very happy. So, I think that is your giving me a million dollars, that's why it's the second and third part of the equation. I've invested myself in my option rights to you, and I've done so for valuable consideration. Just holding it for me, it's called call option assigned to you, but it's not merely an assignment.
In this example from there to you, it's anyway that I can confer, and I'll use that word very generically. My right to the call option for you, again, the prerequisites are, it's got to have a pull and call around the same land, secondly, when you confer, you're option right to somebody else, then they've got to be valuable consideration. What's valuable consideration? It's not defined in the duty-text, it's never been considered as far as my way in call to a tribunal.
But I think instinctively, if you've got to ask ever, in the last transaction, is this available consideration? You're probably only answering questions, which is yes, it probably is. But in any event, so let me explain how this position is going to be worse. Unusually, for stamp duty, I'm the person in this example giving away the rights.
And as we all know generally, the stamp duty is the person that requires something that's transferred to something, or is granted something there traditionally, the person that's got a paid duty. But we call option assigned a duty, the duty's on me. The person that's giving away the rights, not just acquiring the rights, they also have to pay duty in their own special way, but it's different than it's not called option assigned duty. But I have to pay it.
So, that's an unexpected thing, and it's falling apart, you wouldn't, you wouldn't, I say, say, I'm having a paid duty. The finish is saying that it is as well. My liability duty, as somebody who sold or signed my call option rights to you for $1,000, when I work out my duty liability, as with all types of duties, there are two sides of the duty value equation. What's the consideration?
And what's the duty value? So on consideration side, this is my liability duty, whatever you've paid me for me, if you're making firm rights on you. What I would have normally paid had I held the option to purchase a land under the call option. If I'd exercised it, so that's one side of it.
One I paid plus the purchase price under the contract, that's consideration side. It is the same in the title. The other side of the question is the duty value of the underlying land, the subject of the option. No, I never exercised the option.
I had to pay duty and I imagine practices will be probably most of the time when this option call option as I'm duty plies. When I have to pay duty because I can firm my option rights on you invariably, I'm going to end up paying duty at what the value of the underlying land was. But there's a really bad thing that's out for you because you so came to deal with me to get my option rights. You were listening about the same.
Yeah, you were great. And the solicitant pick is that you would pick up any same duty arising from my control margin rights on you. So while I remain technically liable to pay the duty, you have actually my contract undertaken to pay my duty. You probably didn't even know there was this type of duty.
But very early, you think of pay duty. I'm working for a lot of contracts to you, picking up my liability by contract. So you're paying the same duty as if you actually bought the land and in addition to that, you've also got to pay the normal duty to apply to anyone who applies to the option rights. It's a different regime that goes back to the normal rules about horrifying cover value consideration and that sort of thing.
I completely confused you, but if I have, you're not wrong with the grosser. Any discussion to be honest of duty options cannot be complete without discussion call option signage. Even though it's been for this for 20 years, as I say, it literally has zero recognition in the profession. Well, something else is transaction.
But I think, and to be honest, I think maybe that's the commission's idea all along with imposing duty option related transactions. I think the commission or anything's probably not so good is trying to guide people towards contracting from away from a traditional government. He gets his duty up from the insurance. The interesting thing is he actually needs to be out of the whole scheme of things because he's not just as I say, they're only going to pay them value of the when you exercise it on the application value for land fees down the track.
You mentioned before this area of simultaneous put and call arrangements, but how often does that happen? Well, the risks that the commission flags about that situation. Okay. Well, they're really common.
They just be relatively common when options were property developers friends and I longer probably build this rent. That's a pretty good thing. But it's got a little bit of cheap and they'll run it. Put and call typically put in place because to some extent they in substance or property condition contract is the party's a lot in a similar way.
The implications of put and call arrangements are still going to discuss one of them. And that is the potential liability of any dealings in the call option, the liability for the person who's referring to the call option. We're really talking about that. But at the absolute outset, the issue is whether or not commission might choose to apply a different relative or institution.
And so the commission does apply in these commission's practice. That's your answer. Two scenarios. One reason we'll apply one reason why do I apply in terms of the general entity or distribution?
Just sitting back, though, as to, well, how's the commission going to become aware that the thing actually preceded my way of a contract had an end to see put and call option around behind it? And the reason is because every practitioner should notice the purchase of decoration now is the question that says, did this transaction arise from a political option arrangement? Check it out. Check it out.
Check it out. So what happens to the unfortunate party's in practitioners? Now, if you thought of the end of the weekend, the time that thought the point falls in quite a thing. It's going to further pay the duty, which of course, if there's no plan of duties within the definition of tax points.
And so, like, the contract is after the point falls into the two. And the answer gets from a rise from a point and call. And the commission looks through it and says, OK, can we send commercial rationale for why you did it this way? I mean, the relevant counterfactual, which is sort of the language of anti-avoidance, thanks to me.
You probably would have reasonably been expected to go by the way of the conditional agreement of contract if you had that means you should have paid the duty year before. And so, I'm now going to issue you with an anti-avoidance assessment back data to when the point falls into two. I'm saying that the reasonable counterfactual is a weird and conditional agreement. Obviously, then I look at the duty of value at what was back then, but the thing in the time it is, it is after the event 25 cent minimum penalty tax and the interest, which is around 40 percent per end of the July 7th of July 7th of July 7th.
It will be a killer because we're only back to a liability that there are many, many years before. And the commission says it's not going to be all circumstances that can be genuine commercial purposes. We're putting call around for a bar. Any single time you're putting call arrangements.
Chief commission says we'll be examined closely through the anti-avoidance perspective. We'll be an arm in practice. We mentioned, obviously, the importance of going to that CPN 0 3 7. It not necessarily to be ready to come up with the other practice that you mentioned earlier, the general initial ownership one.
There's also a little flag at the end of CPN 0 3 7 that says that that practice note doesn't deal with the duty implications of transactions involved options that have been granted. What's that getting at? So that's the sort of counter side of the example that I just gave you about call option sign at duty. And that is we talked about my own usual liability in person for anyone.
So now I said in that example, you have always been liable to duty based on the relative regime to do with you acquiring those call option rights. The commission is back to something that I think is talking about your liability to duty. It's different to the way call option sign at duty is calculated. So the normal case is coming back to the call option purchase land in your files is not itself a type of duty property.
As we know, a dutyable transaction in the normal course includes a transfer which includes a sign. So in the example where I confirm my rights on you say we did my way transfer you were being liable to duty anywhere based on what you paid which is an end dollars or what the value of the option was. But because we were transiting an answer and commission which you know except you've got paid transfer to duty on the end dollars. Remember the way that I would have my liability was completely different and call option.
So I think it's just a flag the same don't forget in addition to what the practice note is really the end of the duty on the grant option. Once an option's been granted and it's dealt with by my say, a sale of what the sign for a party for the federal consideration. That other person has paid their own lot of duty which is separate to what I talk about in terms of call option. The only as well is in the case of a call option that's been granted and it's acquired by someone else of any consideration.
It doesn't you don't have a production for you to be liable to duty isn't of its office liable to duty anyway. So there isn't that pre-condition of also required for that's not needed. Well I've won't have to advance this scenario that pre-conditioning they take right here in just a finish up Andrew. What's pre-order to give us a list of two dealing with this new regime or examples of traps that's as well fall into in this area.
I think probably while crunching numbers is probably not every noise I'm going to tell you strength. I think if a client of a consumer says well I'm interested in blocking land and maybe should have a point to call. I think probably you should try not all the numbers are in terms of all right. We'll be able to be quite conditioned contract that the duty would be ex if we go down the option route the duty would be why on the brand of the option and then it would be Z on the exercise.
You're going to be paying the money on the train line value down the track on the option exercise and so do you want to call for smaller amount of duty up front or kick a hole out of a high amount of duty down the road. You're going to be able to take any of those in the system so that you should have an entry amount. So you're going to have a whole lot of kind of a tax in addition to the duty that you would have paid anyway in three months. So yeah I think calculation stimulating what the likelihood of the reason areas are I think improving the advice as to do that now.
I'll clear that to be modeling those scenarios up front and frankly calling Andrew right away. Come on, come on, come on, come on, absolutely. Well Andrew thank you so much for doing your duty on risk on air today and navigating us through the transfer duty on options. Thank you, join.
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