Stamp Duty Implications of Call Option Agreements in NSW

Stamp Duty Implications of Call Option Agreements in NSW

Call Option Agreements have become increasingly popular amongst property investors and developers in New South Wales, providing an alternative method of transacting to the traditional contract for sale. 

In essence, call option agreements provide a buyer (known as the grantee) with the right to acquire a property at a future point in time from the seller (known as the grantor) for an agreed price. This right usually involves the grantee paying the grantor a fee, known as a call option fee. Depending on agreed terms, call option agreements can provide grantees with an extended period of time to arrange their finances and carry out due diligence, and often involve smaller upfront financial obligations. If the grantee does not exercise its option to acquire the property, the call option fee is generally forfeited to the grantor.

Grantees often seek to assign/nominate/novate their interest in call option agreements for a premium, particularly given the current significant demand for real estate in New South Wales, sharply increasing property prices and potential value-adding exercises which may be undertaken by a grantee during the call option period in certain circumstances (such as obtaining a development approval for the property in question). However, it is critically important that grantees are aware of potential stamp duty implications of doing so, which are generally summarised as follows:

 

Transfers of Options to Purchase Land

Under the Duties Act 1997 (NSW) (‘the Act’), the transfer of an option to purchase land is considered a dutiable transaction. 

Pursuant to the Act, a deemed transfer of an option to purchase land is taken to occur if an option holder, for valuable consideration: 

  • nominates another person to exercise the option; or
  • nominates another person as purchaser or transferee of the land the subject of the options on or before the exercise of the option; or
  • agrees to a novation of the option, or otherwise relinquishes rights under the option, so that another person obtains a right to exercise the option or to purchase the land.

 

When is a party liable for duty?

The grant of an option to a grantee in and of itself is generally not a dutiable transaction. Ordinarily a duty liability will arise upon exercise of the option and will be payable within 3 months of the exercise/contract date. 

However, an earlier duty liability will arise when a transfer/assignment of the option occurs.

In the case of a nomination or novation, the liability date is:

  • Nomination: when the nomination is made; or
  • Novation: when the option holder agrees to the novation or otherwise relinquishes rights under the option.

 

When must duty be paid and who is responsible for payment?

Duty must be paid within three (3) months after the liability arises. At law, the party responsible for the payment of duty will be the transferee, which in the case of a novation or nomination will include the party who obtains the right to exercise the option or purchase the land.

 

How is Duty Calculated? 

Where a nomination or novation of a call option occurs, duty is calculated on the value of the option being transferred/assigned, generally being the greater of the consideration provided or the unencumbered value of the option.  

If the Call Option is later exercised, duty is payable on the dutiable value of the property and including the consideration provided by the transferee for the option. However, and subject to assessment by Revenue NSW, the amount of duty payable on the transfer of land will in many cases be reduced by the amount of duty paid by the transferee/purchaser under the earlier nomination/novation.

 

The above information is subject to the specific facts and circumstances of each particular call option arrangement. Some stamp duty exemptions may apply, however, these are case-specific and remain subject to assessment by Revenue NSW. 

 

Rostron Carlyle Rojas Lawyers are experts in Option Agreements. If you require any assistance or have any questions in relation to option agreements, please contact Rostron Carlyle Rojas Lawyers on (02) 9307 8900 or by email at [email protected]

 

**The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.**

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