There has been a recent important change to the law regarding the imposition of state duties on property options in NSW, which will impact option agreements in real estate acquisitions.

With effect from Friday 20 May 2022, the Duties Act 1997 has been amended to impose transfer duty on the fee paid to a property owner on the grant of an option to purchase the property.

Sometimes these option fees are negligible, in which case the change in law will make little difference. More often, the potential purchaser, or grantee, of the option pays a percentage of the purchase price as a fee on the signing of the option agreement – frequently ranging anywhere from 1% – 5%, depending on the duration of the option. Typically, if the option to purchase is subsequently exercised, the option fee is credited against the purchase price.

Before the recent change in law, that option fee, as such, did not attract transfer duty. Under the new law, the grantee will be required to pay duty on the fee itself. Moreover, if the option is subsequently exercised, even if the option fee is credited against the purchase price, the duty already paid will not be credited against the duty payable on the purchase price.

For example, take the situation where a property owner grants an option to a developer to buy the property for $5 million, and the developer agrees to pay a 2% option fee, or $100,000. The duty in that case will be $1,935, which is not too bad.

However, let’s say it is a big project, with a $30 million price tag, and still with a 2% option fee, or $600,000. The duty then is $22,305 – not a deal-killer, but an unwelcome upfront sting.

When the option is exercised, duty will still be charged on the whole $30 million purchase price, with no credit for the $22,350 already paid.

This recent change appears to be a continuation of a general policy in NSW of extracting more duty from property options. Since 1 June 2021 Revenue NSW has required that a grantee exercising an option more than a year after the option grant date obtain and provide to Revenue NSW a valuation of the property as at the date of exercise.

If, as is often the case, the grantee has obtained a change of zoning, or planning approval for a development on the property, the valuation must take that zoning change or development consent into account. Duty on the Contract for Sale and Purchase is then charged on the contract price, or the valuation, whichever is higher.

The clear intent is to ensure that Revenue NSW captures the benefit of any increase in value of the property, however it occurs, between the original option date and the date it is exercised.

Property options are an important tool for developers and property owners alike. However, these changes to the duty treatment of options will require a rethinking of the way these transactions are structured.

If you have any queries or would like further information please contact the team at Antcliffe Scott.