June 2005

NSW Duties Act amendments - Proposed duty on transfer of call options under put and call arrangements

On 10 June 2005 the State Government introduced the State Revenue Legislation Amendment Bill 2005. This proposes a range of amendments to State revenue law. Here we focus on the proposal to impose duty on transfer of call options under put and call arrangements. These changes will be important to developers and others who use these arrangements.

The current law

Put and call options are extensively used to defer duty on purchases of land and other dutiable property. The owner has a right (put option) to require the optionee to buy. The optionee has a right (call option) to require the owner to sell.

Even though the parties are bound as if they had signed a contract of sale, no duty arises until one party exercises its option right. A call option to buy at around market value could be transferred (eg under a nomination clause) under existing law without material duty cost. In contrast, transfer of the benefit of an executed contract would usually be caught as a "sub-sale" under existing law.

Proposed "call option assignment duty"

If passed the proposed legislation will impose duty on the assignment or transfer of a right under a call option to purchase dutiable property.

Transfer duty will be payable only if the person from whom the dutiable property may be purchased also has a right, under a put option, to require the holder of the call option, or an associated person, to purchase the dutiable property.

Duty is payable as if the assignment or transfer were a transfer of the dutiable property (e.g. land) concerned. The person liable to pay the duty is the option holder or transferor of the call option.

The Bill provides for a reduction in duty if the option holder or transferor paid duty on the purchase of the call option. There is also provision for exemptions from duty in certain limited circumstances.

Special provisions are made for the stamping of instruments that effect or evidence a call option assignment.

An example of the operation of call option assignment duty is as follows:

B grants A a call option that confers a right on A (or any assignee of A) to purchase land from B. A also grants B a put option that confers on B a right to require A (or any assignee of A) to purchase the land from B. No duty is payable at this point.

A then transfers the call option to C. Duty is payable as follows:

(a) A (as the option holder) must pay call option assignment duty, as a consequence of this Part, as if the transfer of the option were a transfer of the land. Duty is payable on the dutiable value of the land,

(b) C (as the transferee of the option) must pay duty under Chapter 2 on the transfer of the option. Duty is payable on the dutiable value of the option.

C then transfers the option to D. C (as the option holder) is required to pay call option assignment duty as if the option were a transfer of the land. However, in this case C will receive a credit for the duty paid by C on the transfer of the option to C. D (as the transferee of the option) is required to pay duty on the transfer.

Holders of call options under put and call arrangements should consider whether those arrangements can be transferred prior to the proposed legislation commencing.