When is stamp duty payable on property options in NSW?

An option to purchase land is dutiable property in NSW which means that when a dutiable transaction takes place, stamp duty is payable.

This article provides an explanation of when stamp duty is payable on property options. The relevant sections of the Duties Act 1997 (NSW) are noted at the end.

What is a property option and how is it used?

A property option is created when a landowner grants a purchaser (called a ‘grantee’) an option to enter into a Contract for the sale of land (the expression ‘land’ includes all improvements). The grantee under a property option has the right to exercise the option, that is, to enter into a Contract to purchase the land for an agreed price within a specified period of time.

Property options are used by landowners because they receive a higher price for their property than if they sell the property at market price. They are used by purchasers to aggregate properties for redevelopment and to obtain development approvals, which provides the economic rationale for agreeing to pay a higher price.

These are four examples of how property options are used:

• Acreage on the fringes of metropolitan area might be re-zoned from rural to residential. A property developer might take an option to purchase at $1,000,000 per acre for 24 months. They might pay an option fee of $25,000 up front and $100,000 per acre after a 60 days due diligence period. The developer obtains development approval for a residential land subdivision, at their cost during the option period.
• A developer might option two or three suburban blocks of land at 25% above their market value for 12 months. The developer might pay an option fee of 5% or 10% of the price up front for the option. The developer obtains development approval for 4, 5 or 6 townhouses at their cost during the option period.
• Older style strata apartments and strata offices might be optioned at 50% to 80% above their market value for 36 months. At least 75% of the strata owners must grant an option to the developer, which under Strata Law means that the remaining owners can be forced to sell. An option fee of 10% of the price is paid up front for the option. The developer obtains development approval for high rise apartments or an office tower at their cost during the option period.
• A renovator might option a house or apartment which has been left in a mess by its owner or by bad tenants for 5% above its market value for up 6 months. They pay a 5% or 10% option fee and are given immediate access to renovate and complete a cosmetic renovation. They on-sell the option (called ‘flipping a property’) at a profit.

Note: the option fee is released on payment to the landowner. It is not held by a stakeholder as a deposit under a Contract for the sale of land might be.

Call Options and Put and Call Options

A Call Option is the most common form of option. Under a Call Option, the grantee has the choice of either exercising the option or allowing the option to lapse. The term “call” refers to “acquiring” the property. If the property does not suit the grantee’s requirements, then the grantee is able to walk away from the option and lose only the option fee they have paid.

A Put and Call Option is a call option to which a put option is added. A Put Option gives the property owner the right to force the grantee to exercise the option if the grantee does not exercise the option by the option expiry date.

In practice, Put and Call Options are agreed to by grantees only when they are certain that they wish to purchase the property.

Transactions with options – the stamp duty payable

1. The option is granted In NSW an original and copy Deed of Option are signed and exchanged. The option fee is paid and is released to the landowner. The requirements for a residential property are that the Deed of Option must contain a non-exercise period of 42 days, a cooling off rights statement, and attach a Contract for the sale of land with the purchase price and which contains the statutory certificates.
   No duty is payable on the grant of the option, whether it is a call option or a put and call option.
    
2. The option is exercised An option is exercised by the grantee serving a notice of exercise of option and a signed Contract for the sale of land, and paying the 10% deposit payable (less the option fee paid) to the landowner. The landowner signs a Contract for the sale of land, Contracts are exchanged and dated.
   Duty is payable by the purchaser on the Contract on the purchase price within three months of the option exercise date.
    
3. A nominee is appointed Most options permit the grantee to transfer the option by nominating someone else to exercise the option in their place. A Nomination Deed is used. Alternatively, the grantee can request the landowner to enter into a Contract directly with the nominee. A Novation Deed is used. The nominee pays a fee to the grantee.
   Duty is payable by the nominee on the fee as of the nomination date or novation date. If it is a put and call option, duty is also payable by the grantee on the purchase price. Duty is payable within three months.
    
4. The option is assigned Most options permit the grantee to transfer the option by assigning the option to someone else. The assignment fee and the terms are usually recorded in a Deed of Assignment. An assignment fee is paid.
   Duty is payable by the assignee on the assignment fee as of the assignment date. If it is a put and call option, duty is also payable by the grantee on the purchase price. Duty is payable within three months.
    
5. The option lapses If an option is not exercised before the option expiry date, it lapses. The option fee is not refundable and the option ceases to have legal effect.
   No duty is payable when an option lapses.

Specific Provisions in the Duties Act 1997

An option to purchase land in New South Wales is “dutiable property” which means that specified transactions may be subject to duty - s 11(1)(k).

If an option is transferred, by nomination, assignment or novation, then purchaser duty is paid on the fee (‘valuable consideration’) paid for the transaction - s 9B. ‘Valuable consideration’ includes all benefits, not only the fee paid. It also includes the amount or value of the consideration paid for its grant, transfer or exercise - s 22(4).

If it is a call option, the nominee, assignee or novatee (person taking the novated option) is liable to pay the purchaser duty - s 105 to s 111.

The purchaser duty payable by the nominee, assignee or novatee can be offset against the duty payable on the Contract for the sale of land – s 64D.

If it is a put and call option, the option holder (the nominator, assignor or novating party) is liable to pay duty on the full purchase price (‘call option assignment duty’) because the nomination, assignment or novation of a put option is treated as a sub-sale of the property. The nominee, assignee or novatee remains liable to pay the purchaser duty – s 108.

If an option is for residential-related property and it is transferred by nomination, assignment or novation to a foreign person, then surcharge purchaser duty is payable by the nominee, assignee or novatee on the fee paid – s 104K, 104O, 104ZO.

Surcharge call option assignment duty is also payable if the transfer is by a foreign owner who holds the put and call option – s 108A.

Some transactions are not liable to call option assignment duty – s 111. For example, if the option was entered into for the sole purpose of the grantee obtaining funding, or if the transfer is to a member of the same corporate group as the assignor or nominator or novating party.

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