When is a loan real­ly an Option Fee? And when is an Option a Contract?

It cer­tain­ly is not news to those of us who deal in the prop­er­ty devel­op­ment space that Rev­enue NSW now impos­es trans­fer duty (or for those of us who have come from the old school – stamp duty) on the grant of an option to pur­chase. These laws also impose penal­ties on put and call options that Rev­enue NSW con­sid­er have been doc­u­ment­ed for the pre­dom­i­nant pur­pose of delay­ing the oblig­a­tion to pay trans­fer duty. These laws have been in place since May 2022. The impact of these laws is that a pur­chas­er under an option is liable to pay more duty than they oth­er­wise would under a nor­mal con­tract for sale. 

The trans­fer duty is cal­cu­lat­ed on the greater of the con­sid­er­a­tion paid for the option and the mar­ket val­ue of the option. In most cas­es, this would usu­al­ly be the call option fee.

This has led many tax lawyers and accoun­tants (as they do), to invent numer­ous ​‘loop­holes’, in an attempt to min­imise the duty payable on the grant of an option.

These ​‘loop­holes’ gen­er­al­ly pro­vide for the pur­chas­er to pay a nom­i­nal call option fee, with the pur­chas­er to make a sep­a­rate pay­ment to the sell­er either with­in or out­side the option deed. These sep­a­rate pay­ments could be described as ​‘secu­ri­ty’, a ​‘loan’, an ​‘anniver­sary fee’, an ​‘exten­sion fee’ or the pro­vi­sion of ​‘works-in-kind’.

Up to now, there had been dif­fer­ent inter­pre­ta­tions of whether these sep­a­rate pay­ments should prop­er­ly be treat­ed as part of the con­sid­er­a­tion for the grant of an option (and there­by dutiable), with some tax lawyers and accoun­tants claim­ing that their attempts to min­imise duty have proven to be suc­cess­ful, even when all ​‘ancil­lary’ doc­u­ments had been dis­closed to Rev­enue NSW.

In fact, we have per­son­al­ly been involved in a trans­ac­tion in which our client was asked to enter into a put and call option deed with a sep­a­rate loan agree­ment in lieu of an uncon­di­tion­al con­tract for a prop­er­ty devel­op­ment site. In this sce­nario, the pur­chas­er pro­posed to pay a nom­i­nal option fee under the option deed, then ​‘lend’ what would oth­er­wise have been the deposit under the uncon­di­tion­al con­tract to our client by way of a loan that would only have been repayable to the ​‘lender’ if the put or call option was exercised.

The lawyers act­ing for the pur­chas­er in this trans­ac­tion were adamant that their client had used the exact same set of doc­u­ments for a pre­vi­ous trans­ac­tion and that they had sub­mit­ted all doc­u­ments to Rev­enue NSW (includ­ing the ancil­lary loan doc­u­ment) for assess­ment of trans­fer duty on the option deed. 

The lawyers told us that the option deed for this pre­vi­ous trans­ac­tion was assessed for duty just on the nom­i­nal call option fee (dis­re­gard­ing the non-repayable ​‘loan’) with the con­tract upon exer­cise of the option being assessed based on the mar­ket val­ue of the prop­er­ty at the time that the option was exercised. 

We were some­what scep­ti­cal of this arrange­ment, and so as to ensure our client was not at risk of being seen to aid or abet the pur­chas­er in what appeared to be an avoid­ance of pay­ment of the cor­rect amount of trans­fer duty on the pur­chase, insist­ed that the trans­ac­tion be doc­u­ment­ed via an uncon­di­tion­al con­tract with a delayed com­ple­tion time. 

Fast for­ward to 2 and ½ years after the intro­duc­tion of these laws, and Rev­enue NSW has now released a new Prac­tice Note (CPN037) to dis­cuss and deal with the ​‘loop­holes’ designed to cir­cum­vent this new duty.

Inter­est­ing­ly, the exact arrange­ment that our client was asked to imple­ment was used as an exam­ple in the new Prac­tice Note. The Prac­tice Note express­ly declares that a ​‘loan’ made in those cir­cum­stances would essen­tial­ly be treat­ed as a non-refund­able call option fee, so that trans­fer duty would be payable on the val­ue of the call option fee plus the ​‘loan’.

In addi­tion, Rev­enue NSW would close­ly scru­ti­nise the trans­ac­tion to deter­mine whether the trans­ac­tion was struc­tured for the main pur­pose of defer­ring the pur­chaser’s lia­bil­i­ty to pay trans­fer duty and should there­fore be dealt with under the anti-avoid­ance provisions. 

In fact, Rev­enue NSW has indi­cat­ed that it will close­ly scru­ti­nise all simul­ta­ne­ous put and call options from an anti-avoid­ance per­spec­tive. Unless the pur­chas­er under a call option is able to demon­strate to Rev­enue NSW that there are gen­uine com­mer­cial rea­sons for struc­tur­ing the trans­ac­tion as a simul­ta­ne­ous put and call option (oth­er than to defer the lia­bil­i­ty for pay­ment of trans­fer duty), Rev­enue NSW has the pow­er to treat the simul­ta­ne­ous put and call option as a con­di­tion­al con­tract and there­fore assess trans­fer duty on the mar­ket val­ue of the under­ly­ing land, with duty payable with­in 3 months of the grant of the put and call option.

So when­ev­er con­sid­er­ing how to struc­ture a trans­ac­tion, it always pays to obtain prop­er advice from a rep­utable lawyer who reg­u­lar­ly deals with these types of trans­ac­tions and who is able to give you advice on what you need to know rather than advice that you want to hear. Whilst the lat­ter may save you mon­ey in the short term, it can lead to a world of hurt in the long run.