NSW Revenue Changes - Some Implications for Deceased Estates and Trusts
Practice and Risk Management
The recent changes to NSW state revenue legislation significantly impact on practice and procedure. Executors and trustees are now faced with the possibility of liability for GST, income tax, capital gains tax, vendor duty, purchase duty, premium property duty and land tax. Prudent risk management dictates the formulation of checklists to ensure liability or exemption/concession/discount issues are identified and acted upon.
This bulletin reviews some of the implications stemming from the NSW state revenue legislative changes for deceased estates and trusts under the following headings:
Commencing 1 June 2004, duty at a rate 2.25% of the dutiable value is now payable by vendors on a transfer or an agreement for the sale or transfer of "land-related property". The duty also applies to declarations of trust of such property.
Other aspects of this legislation were covered in the Bartier Perry revenue bulletin "New South Wales Vendor Duty - A Moving Target"
The scope for the new duty on vendors is broad and affects both residential and commercial properties. However, exemptions may apply.
Liability to pay vendor duty arises when a transfer occurs, or on first execution of an agreement for sale or a declaration of trust. Vendors must pay the duty on or prior to settlement if the transfer is effected by a sale agreement for consideration. In all other cases, vendor duty is payable within three months of imposition of liability.
To be registrable by the Land and Property Information NSW, an instrument that effects a vendor dutiable transaction will need to be stamped to indicate that vendor duty has been paid. Even where an exemption applies, the relevant document must be stamped to show that it is not chargeable with duty.
The dutiable value on which vendor duty is payable will be determined on the same basis as ordinary transfer duty which remains payable by purchasers - the greater of the sale price or the unencumbered value.
There is a profit threshold that applies to vendor duty. Duty only starts to be imposed on vendors where the sale price of the property exceeds the acquisition price by more than 12%. Discounts on duty are available for profit between 12% and 15%.
Principal Place of Residence Exemption
See previous bulletin for details of this exemption.
Sales by Executors or Trustees
Executors or trustees will need to establish if vendor duty is payable or if an exemption applies and have relevant documents stamped accordingly. If vendor duty is payable, consideration will need to be given on how the duty will be funded.
Vendor duty is not payable in deceased estates where:
land-related property is transferred to a beneficiary of the deceased regardless of whether the property was the deceased's principal place of residence or not;
the deceased's principal place of residence is subsequently disposed of by a beneficiary provided it was sold within 12 months from the date of the grant of probate or letters of administration but if probate or letters of administration were granted before 1 June 2004, the 12 months will date from 1 June 2004;
executors sell the deceased's principal place of residence within 12 months from the date of the grant of probate or letters of administration unless probate or letters of administration were granted before 1 June 2004 in which case the 12 months will date from 1 June 2004 (vendor duty is payable if the property sold was not the deceased's principal place of residence); and
a Will provides for a life tenancy in respect of the deceased's principal place of residence, the exemption will continue for a period up to 12 months after the termination (by expiry or surrender) of the life estate (this exemption does not extend to a mere right of residence).
Other general exemptions under Chapter 2 (eg. change of trustee) and Chapter 11 (eg. charitable institutions) of the Duties Act 1997 will also apply for vendor duty. Generally speaking, a transaction that is not chargeable with purchase duty under Chapter 2 is not chargeable with vendor duty.
There is now a duty exemption/discount for first home buyers provided eligibility conditions are met. Homes valued up to $500,000 are exempt from stamp duty. Discounts on duty are available on homes valued between $500,000 - $600,000. Different rules apply for vacant residential land. The duty exemption/discount applies to first home buyers in NSW.
The duty exemption/discount will only apply to natural persons. Purchases made by executors or trustees on trust for a beneficiary will not qualify. However, purchases made by a private financial manager of a protected person can qualify for the exemption/discount.
Executors or trustees also need to be aware of the new premium property duty when purchasing residential land where the dutiable value exceeds $3,000,000. The present premium rate of duty is 7% of the dutiable value in excess of $3,000,000. The premium property duty must be paid within 3 months of the date of exchange of contracts, except in the case of off-the-plan purchases.
The previous unpopular premium property tax has now been abolished by repeal of the Premium Property Tax Act 1998 (NSW). The other land tax changes come into effect from midnight on 31 December 2004 for the 2005 and subsequent land tax years. The changes remove the tax free threshold that currently applies. The following scale for calculating land tax will be introduced:
Land owned by a non-concessional company or subject to a special trust will be taxed at the highest rates from the first dollar of value. An exemption from land tax will continue to apply to the principal place of residence. The land tax exemption for deceased estates currently available will also continue to apply.
Executors and trustees still need to carefully consider land tax. The changes will result in more land tax returns being lodged.