Understanding these rules is vital for developers, landholders, and businesses involved in leasing property, especially with conditions that require the lessee to undertake construction or improvements. This article aims to explain the guidelines, discuss their impact, and offer actionable insights for clients. 

Introduction 

Stamp duty is a tax levied on particular transactions, such as sales and leases of real estate. While it’s a straightforward affair in most circumstances, complex leases involving non-monetary considerations, like property improvements or long-term conditions, can be complicated.  The NSW Chief Commissioner’s guidelines offer examples and conditions under which dutiable value is calculated differently than one might expect. 

The Impact 

Understanding the guidelines has immediate implications for businesses and developers. Depending on the length and conditions of the lease, dutiable values can differ significantly: 

Long-Term Leases: 

Leases exceeding 50 years may have a dutiable value of nil, thereby avoiding stamp duty. 

Conditional Leases:  

Conditional leases often involve stipulations where the lessee (tenant) must undertake certain actions like construction or significant property improvements either as a condition to the grant of the lease or as a condition of the lease itself.  

If a lease is granted for non-monetary consideration comprising improvements to the property, the full cost of the construction (including builder margins) undertaken or to be undertaken by the developer is taken to be the value of the improvements. This value is determined on entry into the agreement for lease or a lease. 

In the absence of evidence of the valuation of the undertaking, the Chief Commissioner has stated in Circular Practice Note (CPN027) that he is prepared to use the following methodology to calculate the proportion of the value attributable to the improvements:  

For instance, in a 15-year lease where the lessee is obligated to make improvements worth $20 million, the dutiable value for calculating stamp duty would be 75% of the improvement costs, which amounts to $15 million. 

Here are some other key points to note for a conditional lease: 

• Valuation Reports: In certain cases, you can provide a professional valuation report to show that the future value of the improvements you have made will be less than the original cost of those improvements. This can help in lowering the stamp duty payable
• Compliance and Documentation: It’s essential to maintain complete documentation of the improvements carried out, including permits, invoices, and reports, to substantiate the dutiable value calculated based on improvement costs
• Implications for Tenants and Landlords: Tenants must be aware that the costs of improvements could impact the dutiable value, while landlords need to consider how these conditions might affect the lessee’s ability to carry out the lease terms. 

Premium and Prepaid Rent:  

Leases may involve upfront payments, which are often categorised as premiums or prepaid rent. These payments can significantly influence the dutiable value of the lease, and consequently, the amount of stamp duty that may be payable. 

In many instances, upfront payments serve as the total consideration for the lease. As a result, these payments could either inflate the dutiable value or, in some situations, completely negate the requirement for stamp duty, depending on the lease terms and other conditions. 

For example, consider a scenario where XYZ Pty Ltd enters into a 15-year lease for an industrial building with a prepaid rent of $15 million. The lessee has the option to satisfy this prepaid rent either through a cash payment or by undertaking construction improvements with an agreed value of $20 million. In the event of an early termination of the lease for reasons other than the lessee’s default, the lessee would be entitled to a proportionate refund of the prepaid rent. No stamp duty is payable on this lease arrangement, regardless of whether the lessee opts for a cash payment or construction improvements, as both options are considered to be forms of prepaid rent 

Failure to grasp these nuances could result in incorrect stamp duty payments, leading to financial and legal repercussions. 

Other Transactions Triggering Duty 

In addition to standard leases, there are various other transactions that could also attract stamp duty, according to guidelines set out in CPN027. These include: 

• Early Termination by Lessor: When a lessor terminates a lease early for specific reasons, such as granting a new lease to another lessee or selling the premises, duty may be payable on any consideration for these arrangements
• Legal Fees over $1,000: If a lessee pays or agrees to pay the lessor’s legal fees, which are non-refundable and greater than $1,000, then duty may be applicable. However, this does not apply to the extension or renewal of a lease where legal fees are paid as rent
• Option to Lease for a Premium: An option to lease land in NSW for a premium may be dutiable
• Assignment of Lease: The transfer or assignment of an existing lease can also attract stamp duty
• Novation of Agreement: Modifying the parties in an agreement for a lease could trigger stamp duty
• Attornment of Leases: In cases of attornment on the sale of a property, stamp duty may also be applicable. 

Actions Clients Need to Take 

Property leasing can be complicated.  We recommend the following steps: 

• Consult a Tax Advisor: Given the complexities, consulting a tax advisor is paramount for ensuring compliance and financial optimisation
• Conduct Valuation: If property improvements are involved, get a valuation to establish a dutiable value
• Document Thoroughly: Keep thorough records of lease terms, conditions, and any upfront payments or improvements made
• Stay Updated: The Chief Commissioner’s guidelines may evolve. Regularly review any updates to remain in compliance
• Liaise with Legal Teams: Ensure that all legal aspects are squared away, especially in leases involving intricate conditions or non-monetary considerations. 

How SW can help

Understanding the NSW Chief Commissioner’s guidelines is essential for any party involved in complex property leasing situations. SW experts can provide professional advice to help you keep abreast of these rules, helping to avoid surprises in the future.

Contributor

Rahul Sanghani

Robert Parker

The post Grant of an option to lease / grant of lease NSW appeared first on SW Accountants & Advisors.

Eligibility

Tenants who are ‘small entities’ may be eligible. A $10m turnover threshold applies, which is based on the year ended 30 June 2021 in most cases. This is lower than the $50m threshold that applied in earlier periods.

Consistent with Regulations applicable to earlier periods, eligibility for the new Regulations is determined based on a comparison of the tenant’s turnover for two periods.

In most cases, the periods to be compared are the months of January 2022 and January 2020. However alternative periods can be used in limited circumstances.

Business tenants need to demonstrate a 30% decline in turnover and ACNC registered charities (with some exceptions) need to demonstrate a 15% decline in turnover.

Process

The process for agreeing rent relief is outlined below.

1. Tenant determines their eligibility
2. Tenant applies for relief in writing, providing a statement including:

• the turnover for the test period (usually January 2022)
• the turnover for the comparison period (usually January 2020)
• if an alternative comparison period is used, how the comparison turnover was calculated (applies in limited circumstances)
• the decline in turnover
• the reduction in rent that would satisfy the minimum requirements, and
• any other circumstances the tenant would like the landlord to consider

3. Within 14 days of applying for relief in writing, the tenant must provide evidence in the form of either:

• extracts from their accounting records, or
• business Activity Statements, or
• bank statements, or
• a statement from a practicing accountant

Failure to do the above within 14 days will result in a lapsed application. A tenant can allow up to 3 applications to lapse before they can no longer apply.

4. Within 14 days of providing evidence, the landlord must provide an offer for relief complying with the following minimum requirements:

• a reduction in rent payable for the relief period (likely 2 months) proportional to the tenant’s reduction in turnover
• at least half the reduction needs to be a waiver. The balance would be a deferral
• an extension of the lease term needs to be offered for the same amount of time that any rent is deferred (likely to be 3 months)

5. Landlord and tenant to negotiate and agree on rent relief
6. If within 15 days of the landlord providing an offer, the landlord and tenant have not reached agreement and the matter has not been referred to the Victorian Small Business Commissioner for mediation, then the tenant is deemed to have accepted the landlord’s offer
7. Agreement should be documented.

Deferred rent

Unless otherwise agreed, deferred rent is to be repaid in equal instalments from 16 March 2022 over the greater of the remaining term of the lease or 24 months.

For eligible tenants, repayment of any rent previously deferred in an earlier period under previous Regulations should be paused and restarted from 16 March 2022.

Other considerations

There are various protections offered within the Regulations, including for example that rent cannot be increased for eligible tenants during the relief period.

Landlords will be prohibited from evicting tenants without first undertaking mediation through the Victorian Small Business Commission.

Tenants can apply for subsequent rent relief if an agreement has previously been made and their financial circumstances materially change.

Commercial landlords that provide rent relief to eligible tenants may be eligible to receive support through the $20 million Commercial Landlord Hardship Fund.

Next steps

Landlords and tenants are required and encouraged to negotiate in good faith. Affected parties should seek advice to ensure that they are operating within the requirements of the Regulations.

How SW can help

SW has property experts who can assist affected landlords and tenants with determining eligibility including calculating the decline in turnover, required rent relief and understanding the process.

Reach out to one of our tax and property experts below for a conversation about your circumstances.

Contributors

Blake Rodgers

E brodgers@sw-au.com

The post Commercial tenant relief update – Victoria appeared first on SW Accountants & Advisors.

The scheme seeks to provide rent relief to commercial tenants affected by COVID-19 and operates in a similar manner to the Regulations released in March 2020, which expired on 28 March 2021. However, there are key differences including more specific details as to how to calculate the tenant’s decline in turnover and a mandatory reassessment process which will adjust the relief percentage from 31 October 2021.

Outlined below are the key eligibility requirements, the turnover reduction calculation methodology and the processes to be followed.

Eligibility

Decline in Turnover Test

Turnover means Current GST Turnover as defined in the GST Act, with some modifications in Regulation 11.

Decline of at least 15% for ACNC registered charities (with some exclusions); or 30% for all other entities.

Turnover test, periods to compare:

• If a tenant commenced trading before 1 April 2019,
• Any consecutive 3-month period between 1 April 2021 and 30 September 2021; compared to either:

1. the equivalent period in 2019; or
2. the tenant’s chosen applicable alternative comparison periods (see table on page 4 for alternative options).

• If a tenant commenced trading after 1 April 2019, but before 1 April 2021:

1. any consecutive 3-month period between 1 April 2021 and 30 September 2021; compared to
2. the tenant’s chosen applicable alternative comparison periods (see table on page 4 for alternative options)

• If tenant commenced trading on or after 1 April 2021,

1. the period that is agreed to by negotiation between landlord and tenant; compared to
2. the tenant’s chosen applicable alternative comparison periods (see table on page 4 for alternative options)

Process for agreeing rent relief

1. Tenant assesses eligibility.
2. Tenant requests relief. A request must be in writing and include a statement from the tenant that:
   • the tenant is an eligible tenant
   • the tenant satisfies the decline in turnover test including:
   1. Turnover for the test period
   2. Turnover for the comparison period
   3. Whether an alternative comparison period used
   4. Details of the calculation of decline in turnover
   5. The decline in turnover percentage
   6. The reduction in rent that would satisfy the minimum requirements of the regulations, consistent with the proportion of decline in turnover percentage provided
   7. Any other circumstances that the tenant would like to include.
   • Within 14 days of making the request, the tenant must provide evidence of the turnover figures used including at least one of the following:
   1. Accounting record extracts
   2. Business Activity Statements
   3. Bank statements
   4. A statement prepared by a practising accountant.
      The evidence must be accompanied by a statutory declaration from the tenant.
      If a tenant fails to provide evidence within the required 14 days then the request automatically lapses.  Up to 3 requests for relief can be made, i.e. 2 more if the first lapses. If they let 3 requests lapse then the tenant cannot apply again.
3. Landlord makes offer within 14 days, unless otherwise agreed, of receiving everything required from the tenant including the request noted in 2. above, supporting evidence and the statutory declaration:
   • the offer must be for rent reduction which at a minimum is proportionate to the decline in turnover
   • at least 50% of the reduction must be a waiver and the balance can be a deferral.
4. Tenant and landlord to negotiate.
5. If no agreement is reached within 15 days of the landlord’s offer of rent relief, the tenant is deemed to have accepted the landlord’s offer unless the tenant has referred the matter to the Small Business Commissioner or the landlord’s offer does not comply with the requirements noted in 3) above.
6. Agreed position to be documented by lease variation or other agreed approach.

Rent relief period

The period commences on either:

• 28 July 2021
  • For complete and successful requests made on or before 30 September 2021
• The date of the request
  For complete and successful requests made after 30 September 2021

The period ends 15 January 2022.

Mandatory Reassessment – before 31 October

For agreements reached on or before 30 September 2021, the tenant must provide the following by 31 October 2021 for re-assessment:

• Turnover for the quarter ended 30 September 2021.
• Turnover for the comparison period being:

1. If the tenant began trading before 1 July 2019, the quarter ended 30 September 2019; or
2. If the tenant began trading between 1 July 2019 and 31 March 2021, the quarter ended 30 June 2021; or
3. An alternative test period (should be same as used for first request), including details of the comparison method.

• The percentage change in the above two periods
• Another statutory declaration.

The net percentage change is then used for the purposes of calculating rent relief from 31 October 2021.

If the tenant fails to provide the necessary information by 31 October, the rent relief agreement no longer applies to the extent that it relates to any waiver of rent from the assessment date.  That means only the deferred portion of any rent relief will continue after 31 October.

Subsequent relief

Tenants can apply for further relief if their financial circumstances materially change, following the process described above under “Process for agreeing rent relief” subheading.

Any new rent relief agreement will apply in substitution of the original agreement.

Extension of term

The landlord must offer an extension on the same terms as were in place on 28 July equivalent to the period for which rent is deferred. E.g. if 3 months rent is deferred, 3 months must be added to the term of the lease.

Deferred rent

The landlord cannot request payment until after 15 January 2022.

Deferred amount is to be paid over the greater of the remaining term of the lease, including any extension, and 24 months.

Previous deferrals

Any leases subject to rent deferrals under the previous (2020) rent relief scheme, must have the repayment of those deferrals paused and resumed after 15 January 2022.

Dispute resolution

Either party can refer a dispute to the Small Business Commissioner for mediation.

Further powers are provided to the Small Business Commissioner to make a binding order in certain circumstances.

Application can be made to VCAT for review of a binding order in certain circumstances.

Alternative comparison periods

How SW can assist

Our teams can assist commercial landlords and tenants to calculate the decline in turnover, assessing eligibility, the application and negotiation process.

Reach out to one of our experts below for a conversation about your circumstances.

Stephen O’Flynn

E soflynn@sw-au.com

Abi Chellapen

E achellapen@sw-au.com

Blake Rodgers

E brodgers@sw-au.com

The post VIC COVID-19 commercial rent relief appeared first on SW Accountants & Advisors.

Following a similar scheme provided in 2020, the current program provides a reduction in land tax payable for the 2021 land tax year for eligible landowners providing rent relief to tenants between 1 July 2021 and 31 December 2021. Applications will be open until 31 January 2022.

Residential landlords have the option of choosing between the land tax relief or the Residential Tenancy Support Payment of up to $1,500 per tenancy agreement if they agree to reduce rent for COVID-19 impacted tenants from 14 July 2021 to 31 December 2021. If the residential landlord has claimed the Residential Tenancy Support Payment they will be ineligible for land tax relief.

How is land tax relief calculated and provided?

• The land tax reduction will be the lesser of:
  • The amount of rent reduction provided to an eligible tenant for any period between 1 July 2021 and 31 December 2021, or
  • 100% of the 2021 land tax attributable[1] to the parcel of land leased to that tenant.
• If eligible, the land tax relief will be available in the form of:
  • A refund if 2021 land tax has already been paid in full, or
  • An offset for the amount of land tax payable if the payment has not been completed.

Landlord eligibility requirements

• Must be leasing a parcel of land to:Must have reduced the rent of the affected tenant for any period between 1 July 2021 and 31 December 2021.
  • A commercial tenant who has an annual turnover of up to $50 million and is eligible for the Micro-business COVID-19 Support Grant, the 2021 NSW Business Grant and/or the JobSaver scheme, or
  • A residential tenant who has had a reduction in household income of 25% or more due to COVID-19.
• Must have provided the rent reduction without any requirement for it to be paid back at a later date.
• Must have land tax attributable to the parcel of land leased to that tenant for 2021.

Key evidence required

For all landlords

• Details of all eligible tenants, including ABN/ACN for commercial tenants.
• Confirmation of total rent reduced or waived for the 1 July 2021 to 31 December 2021 period. Examples include:
  • Copies of tenancy agreements proving rental reduction
  • Rental ledgers
  • A letter from an accountant or property manager
  • Tenant’s financial statements

For commercial tenants

• Documentation demonstrating an annual turnover of less than $50 million in the 2021 financial year in the form of a letter from an accountant, tax return, business activity statement, or other financial statements.
• Evidence of the tenants’ eligibility to be approved for the Micro-business COVID-19 Support Grant, 2021 COVID-19 NSW Business Grant, and/or the JobSaver scheme.

For residential tenants

• Documentation demonstrating a 25% reduction in household income in the form of
  • a statement from the tenants explaining how they have been impacted by COVID-19
  • copies of written communication with the tenants
  • a letter from an employer or accountant, bank statements, payslips, or other financial statements.

How we can help

Our teams can assist both commercial and residential landlords of all sizes to review evidence documentation, financials, and provide accountant letters to ensure your application is successful. Reach out to one of our experts for a conversation about your circumstances.

Get in touch

Leo Luan

E lluan@sw-au.com

Tony Principe

E tprincipe@sw-au.com

Blake Rodgers

E brodgers@sw-au.com

Dilushi Wijesinghe

E dwjesinghe@sw-au.com

The post NSW COVID-19 land tax relief appeared first on SW Accountants & Advisors.