By Russell Cocks, Solicitor

First published in the Law Institute Journal

Since the Stamps Act morphed into the Duties Act, it is not even correct to refer to the tax imposed on a transfer of land of land as ‘stamp duty’, however old habits die hard and it may take a generation or two to eradicate this habit. There is no particular justification for the government imposing a tax on this event, it is simply a convenient way for the government to raise revenue and given that the government controls the Titles Office, a citizen is not able to rely on the benefits of indefeasibility of title unless the tax is paid – a great incentive to compliance.

However various concession in relation to duty are recognised by the Act and duty may be exempt or reduced in transactions involving (amongst others) a trustee, domestic partners, family farm, principal place of residence and ‘off the plan’ sales.

Duty is normally calculated on the consideration paid for, or value of, the real estate transferred. This is generally represented by the contract price. However dutiable consideration does not include any amount paid in respect of a building to be constructed on the land after the date of the contract (s 21(3) Duties Act). This concession therefore means that the amount used for calculation of duty is not the contract price, but rather the contract price less the cost of construction works performed on the property between the date of the contract and the date of completion (Revenue Ruling DA.016). This reduction in duty is appealing to a purchaser in a transaction involving the sale of ‘yet to be constructed’ units and is therefore commonly referred to as an ‘off the plan’ concession, but it is not limited to transactions involving unregistered plans of subdivision. Indeed, in its simplest form, it applies to the sale of a stand-alone building sold prior to, or during the course of, construction. The cost of works performed after contract, and hence the amount available to reduce duty, will be greatest when the property is sold before construction has commenced and will gradually reduce as the purchase occurs later in time in the construction process, with no concession available if construction is complete when the contract is signed.

To establish the extent of the concession the purchaser must establish the cost of works performed during the contract and this is achieved by the vendor providing the purchaser with a Land & Building Packages statutory declaration (Form 4 available at www.sro.vic.gov.au). Completion of this form requires access to detailed cost of construction information, information that will not normally be available to the vendor’s solicitor. It requires the builder to have very precise information as to the cost of construction and to be able to apportion those costs to reflect the costs incurred after the date upon which the contract of sale was entered into. If the sale is of a stand-alone building these costs may be relatively simple to identify, but many of these transactions are as part of a multi-storey development and there may have been substantial infrastructure costs (including the cost of acquiring the land) incurred to reach the stage where the actual construction can commence. The calculations are complicated by the need to take account of the effect of GST on the actual cost of construction as well as on the sale price. The SRO does provide a ‘live’ version of the Form 4 on its website that will undertake the mathematical calculations when the information is entered. It is recommended that solicitors not attempt to prepare these forms but rather ensure that the builder/vendor fully understands the need to provide precise information.

A most unsatisfactory practice exists of including a figure in the contract of sale that represents a notional value of the land component of an off the plan sale. This figure is often as low as $40,000 and immediately creates a false impression in the purchaser that duty will be calculated on that figure. This is rarely so and results in a purchaser being liable to pay much more duty than was expected, a most unhappy turn of events. Inclusion of such amounts might in fact constitute misleading and deceptive conduct and whilst a vendor might protect itself by the inclusion of a ‘no representations’ clause, it recommended that a more generic clause, such as ‘the vendor will provide the purchaser with a statutory declaration establishing the cost of construction undertaken after the date of contract’ be included in such contracts.

The vendor’s obligation to provide a statutory declaration to the purchaser arises from Condition 12 of the Table, but if the purchaser nominates a substituted purchaser the vendor has no obligation to provide a second declaration detailing construction costs incurred after the nomination.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.