On 2 December 2008, the Duties Amendment Bill 2008 (Bill) was introduced into the Victorian Parliament. The Bill gives effect to the Victorian Government's recent media release announcing that it had moved to close a loophole which allowed the use of complex long-term lease arrangements to escape stamp duty liability. The changes are, however, not limited to long-term leases and may have significant implications for all tenants in Victoria. The changes may also affect products offered by retirement village developers.

What types of long-term leases are affected?

The definition of "lease" in the Bill is not restricted to "long-term leases": lease is defined as "a lease of land in Victoria or an agreement for a lease of land in Victoria". No minimum lease term is required. "Lease" takes its common law meaning and may therefore include an arrangement that is called a licence but is in substance a lease.

The Bill proposes to make the following transactions "dutiable transactions":

  • "the granting of a lease for which any consideration other than the rent reserved is paid or agreed to be paid, either in respect of the lease or in respect of" a right or option to purchase the land, a right of first refusal in respect of the land or any other arrangement by which the lessee or an associated person obtains a right or interest in the land other than the leasehold estate;
  • "the transfer or assignment of a lease for which any consideration is paid or agreed to be paid" (irrespective of whether a lease premium was paid on the initial grant of the lease); and
  • "the surrender of dutiable property" (including a lease of a kind referred to in the above dutiable transactions).

It is not clear whether the phrase "any consideration other than the rent reserved" will be construed more widely than just lease premiums.

The Bill provides that where one of the above dutiable transactions occurs, duty will be payable on the greater of the consideration (other than the rent reserved that is paid or agreed to be paid) and the unencumbered value of the land that is the subject of the lease. This may be considered to be a harsh result given the range of dutiable transactions that appear to extend beyond the types of complex long-term lease arrangements (effectively amounting to economic ownership of the land) referred to in the media release.

The changes will apply to dutiable transactions occurring after 21 November 2008 (the date of the media release).

What other changes are contained in the Bill?

The Bill also reduces the time period within which taxpayers must pay stamp duty from 3 months to 14 days after a dutiable transaction (generally settlement) has occurred. This change was not foreshadowed in the media release. The reduced 14 day time period will apply to dutiable transactions occurring after the date the Bill receives royal assent (which should not be until Parliament resumes sitting in February 2009). Taxpayers will need to take care to meet the new deadline otherwise interest and penalties may be applied.

How could retirement village operators be affected by the changes?

Retirement village operators that lease units to residents may be affected by the Bill. Retirement village models commonly involve a 99 year lease of a unit to a resident in return for the payment of one or more of a premium, deposit, prepaid rent or a grant of a loan equal to the market value of the unit. On leaving the retirement village, the resident is entitled to repayment of the premium, deposit, prepaid rent (for the unexpired term) or loan less a deferred management fee.

Other models involve the resident, on leaving the retirement village, assigning the lease to an incoming resident in consideration for a payment representing the then market value of the unit, however, deferred management fees are still generally payable by both the original and new resident. A commission for assistance with finding the incoming tenant and assigning the lease is sometimes also payable by the original resident.

Operators of retirement villages under each model are also commonly provided with rights to communal facilities through long-term lease arrangements with the freehold owner.

Each of the above models involve leases that are granted for "consideration other than the rent reserved", assigned for "consideration" and/or surrendered and therefore may be subject to stamp duty if the Bill is passed in its current form. Specifically, under the Bill as currently drafted, new retirement village tenants will incur duty on the freehold value of the unit (even though the product is structured through a relatively low up front payment so as to make the accommodation affordable).

We will issue a further legal update when the Bill receives royal assent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.