Vendor Duty - Deceased Estates and the Principal Place of Residence Exemption - A Moving Target
A sale of a deceased's 'principal place of residence' by the legal personal representative is generally exempt from payment of vendor duty if the sale is completed within 12 months from the date of the grant of probate...or is it? Many deceased estates have had to pay vendor duty on the sale of the deceased's 'principal place of residence'. In this Bulletin, we examine why and review the numerous changes that have proven necessary to correct the law as originally enacted.
How vendor duty works
Commencing 1 June 2004 vendor duty is payable in respect of a transfer of, an agreement for sale, or a declaration of trust over 'land related property' in NSW.
'Land related property' is defined to mean land in NSW or a 'land use entitlement' which covers interests such as company title units. The definition also covers any interest in land and can therefore apply to leasehold interests, easements and other non-freehold interests in land.
Vendor duty is calculated as 2.25% of the dutiable value of the land related property, where the dutiable value is the greater of the sale price or the unencumbered value. An exemption applies if the dutiable value does not exceed the acquisition price by more than 12%. Discounts in duty apply where the dutiable value exceeds 12% but not 15%.
The vendor, transferor or person declaring the trust is liable for payment of vendor duty. Vendor duty must be paid by the settlement date in the case of an agreement for sale (including off-the-plan purchases) or three months from the date on which the transfer or declaration of trust was made.
The Principal Place of Residence Exemption
The principal place of residence exemption applies to land used and occupied by the vendor as his/her principal place of residence for a continuous period of at least 2 years, or 3 of the last 5 years. If the property has been owned by the vendor for less than 2 years, an exemption will apply if the Chief Commissioner is satisfied that the land has been used and occupied as the principal place of residence of the vendor since ownership commenced.
Concessions are available for the sale of the former residence or absences from a residence provided certain conditions are met. Duty can also be apportioned for land partly used as a principal place of residence and partly used for other purposes.
Deceased's Principal Place of Residence
The exemption also extends to the sale or transfer of a deceased's principal place of residence. Initially, the exemption only applied if the property was sold or transferred to a beneficiary within 12 months from the date of death.
The State Revenue Legislation Further Amendment Act 2004 ("the June 2004 Amending Act") extended the exemption to a sale or transfer within 12 months from the date of the grant of probate or letters of administration. For grants of representation issued from the Court prior to the introduction of vendor duty, the transitional provisions deem the date of the grant of representation to be 1 June 2004.
Also, no vendor duty is payable on a transaction involving the sale or transfer of a property which has been the subject of a life estate provided the property is sold within 12 months from the date the life estate ceases to operate.
Some controversy has arisen over the application of the concession for deceased estates because the relevant section stipulates that the concession only applies to a property that was used and occupied by the deceased as his/her principal place of residence immediately prior to his/her death. Therefore, if the deceased had vacated the property to reside in a nursing home or was admitted to hospital, in some instances, the concession would not apply.
Initially, the approach adopted by the Office of State Revenue was that the legal personal representative of the deceased could claim the exemption on the basis that the period of vacation from the property by the deceased was deemed an 'absence from a former residence' and covered by one of the existing concessions for absences.
In October 2004, this approach was abandoned and the Office of State Revenue adopted the view that the deceased estates concession could only apply in these circumstances upon an application to the Chief Commissioner to exercise his discretion to grant the exemption. Many estates were successful with their applications. However, the Duties Amendment (Land Rich) Act 2004 ("the December 2004 Amending Act") abolished the section which gave the Chief Commissioner his discretionary power and as a consequence many sales of the 'principal place of residence' by the legal personal representative were vendor duty liable.
The Relief Available
Following the 2005 State Budget it was announced that retrospectively from 1 June 2004, any period where the deceased vacated the property to reside in a nursing home, hospital or other approved premises may be disregarded, provided the other conditions are met. Vendors who have paid vendor duty in past transactions as a result of the deceased vacating the property to reside in a nursing home, hospital or other approved premises may now apply to the Office of State Revenue for a refund.
The Office of State Revenue advises that the change will operate as a "variation to statute" until a legislative amendment is made.
Other Relevant Changes to the Principal Place of Residence Exemption For Estates
The requirement that the exemption only applied for the benefit of natural persons has been modified and replaced with a threshold test that at least 50% of the ownership interest must be held by 1 or more natural persons who reside in the home as their principal place of residence.
Another important change introduced by the December 2004 Amending Act was the extension of the principal place of residence exemption to the sale of a property by a guardian of a person under a legal disability. To qualify for the exemption, the property must be occupied by the person under a legal disability as his/her principal place of residence on the same terms that apply to the general exemption. This concession extends to a trustee who holds property on trust for such persons under an instrument of trust or by order or direction of a Court or Tribunal.
More of the same?
Leaving aside its unpopularity with investors, it is clear that a new tax such as vendor duty will create complexities especially until it is fully "fine-tuned". Care needs to be taken to review the current concessions when decisions are made in relation to dealings with estate property.