When buying property in Australia, stamp duty (transfer duty/stamp duty) is one of the most important concerns. The amount payable depends on the buyer’s status and the value of the property. Overseas buyers must additionally pay an 8% surcharge purchaser duty. In recent years, the relevant laws and policies have continued to change, so buyers need to stay on top of updates to avoid costly pitfalls. Today we take a look at NSW’s latest stamp duty reforms and how they will affect property buyers.
Who is not required to pay surcharge purchaser duty?
• If you are an Australian citizen.
The following situations are also exempt from the surcharge:
• You are an Australian permanent resident (PR)
• You are a New Zealand citizen holding a 444 visa, or
• You hold a 309 / 820 partner visa
Apart from Australian citizens, the above categories of buyers must satisfy an Ordinarily resident requirement, meaning you must have lived in Australia for at least 200 days within the 12 months before the date the contract is signed.
If you are a PR and do not satisfy the Ordinarily resident requirement above, you can still be exempt from the surcharge if you meet the following conditions:
• You must live in Australia for at least 200 consecutive days within 12 months after the contract is signed.
• As a PR, you must use the property as your principal place of residence,
• and purchase it in your personal capacity, not through a company or trust
However, before 19 May 2022, signing an Option deed could help some buyers save a significant amount.
What is an Option deed?
An Option deed is an option agreement signed between the two parties, rather than a formal contract of sale. In other words, the parties agree that they may choose, at a certain point in the future, to enter into a formal contract of sale for the property at a pre-agreed price, but whether the option will be exercised remains to be determined.
• A call option means the buyer can require the seller to sell the property to the buyer at the agreed price at a certain point in the future.
• A put option means the seller can require the buyer to purchase the property at the agreed price at a certain point in the future.
If the parties agree only on a call option, they sign a call option deed. If they agree on both a call option and a put option, it is called a put and call option deed.
Typically, under an option agreement, the parties can agree on a period during which the buyer or seller may exercise the option, and the buyer generally pays a call option fee to acquire the option. If the parties choose to exercise within the period, they then sign a formal contract of sale; if they choose not to exercise, the option agreement lapses.
Why sign an option deed?
• An option deed helps lock in the property price
An option deed allows the buyer and seller to lock in the property price from the day the option deed is signed. In other words, regardless of how the market moves afterwards, as long as both parties exercise the contract within the period, the sale price will be the price agreed under the option deed.
• Overseas buyers who have not yet obtained PR
Option deeds are particularly useful for buyers who can foresee obtaining PR in the short term. Because overseas buyers must pay an additional 8% surcharge purchaser duty, many wait until their PR is granted before officially purchasing property in order to avoid the hefty surcharge. For those who want to lock in the property and its price while waiting for their PR, signing an option deed is a good choice.
• PR holders who have not met the 200-day residency requirement
Similarly, if for various reasons a PR has not met the residency day requirement at the time they want to secure a property purchase, and therefore cannot meet the surcharge-exemption conditions mentioned above, signing an option deed and then entering into a formal contract of sale once the residency requirement is met can help reduce costs for these PRs.
• Deferring stamp duty
Since stamp duty must be paid within 3 months of signing the formal contract, before the new law took effect, no stamp duty was payable at the time the option deed was signed. Option deeds were therefore also a boon for buyers whose funds were not yet ready, giving them more time to prepare.
How do the new NSW laws and policies affect buyers?
From 19 May 2022, NSW law and policy underwent significant changes. Under the Duties Act 1997, certain transactions that result in a change in beneficial ownership are now dutiable.
The new law extends the definition of a change in ownership to include:
a. the creation of dutiable property, such as the grant of an option
b. the extinguishment of dutiable property
c. a change in equitable interests in dutiable property
d. dutiable property becoming the subject of a trust
e. dutiable property ceasing to be the subject of a trust
This means that, from the moment the parties pay consideration to enter into an option agreement, ad valorem duty will also be payable.
For example, if A pays AUD 1 million as a call option fee to acquire an option to buy land from B at a price of AUD 10 million, option duty must first be paid. If the option is later exercised, stamp duty must again be paid on the full AUD 10 million property price.
This creates a double-taxation issue for option deeds. Because when the option is later exercised, the option duty paid upfront will not be refunded or credited. Likewise, if the option is later not exercised, the duty paid when the option was granted will not be refunded either.
Similarly, a transfer of an option to purchase land is also dutiable in NSW.
Final thoughts
Property buyers naturally want to save where they can, and option deeds previously offered many buyers considerable convenience and savings. In recent years, however, NSW’s property policies have been changing constantly, and buyers need to keep track of legal and regulatory updates before they purchase. If you are unsure how to best protect your interests under the new stamp duty rules, please feel free to contact our team of lawyers for help.
