NSW Duty on Option Deeds: New Guidelines Provide Clarity for Property Purchasers
The “change in beneficial ownership” provisions under the Duties Act 1997 (NSW) have been in force since May 2022, significantly expanding the scope of dutiable transactions. However, until now, it was unclear how these provisions applied to land purchase options and related agreements such as option deeds.
To address this uncertainty, Revenue NSW has issued a Commissioner’s Practice Note, clarifying its approach to the duty implications of option deeds, put and call options, and the extinguishment of property interests. While the law itself has not changed, this guidance provides long-awaited certainty—meaning property purchasers, investors, and developers may need to review existing practices to ensure compliance and avoid unexpected duty liabilities.
For those seeking to navigate these changes effectively, engaging a property lawyer in NSW is now more important than ever.
Key Takeaways from the Commissioner’s Practice Note
1. Duty Applies to the Grant of a Land Purchase Option
The grant of an option to purchase land—whether a call option or a put/call option—is a dutiable transaction. The Practice Note confirms that duty is payable on the greater of:
- The consideration given for the option (e.g., option fees, reimbursements, or in-kind works).
- The unencumbered market value of the option itself.
However, the Practice Note also clarifies that a bare put option (which only gives the seller a right to sell) is generally not dutiable, unless structured in a way that effectively grants a right to purchase.
For property investors and developers, understanding the difference between these arrangements is crucial—seeking advice from the best property lawyer can help structure transactions to avoid unnecessary duty.
2. What Counts as “Consideration” Under an Option Deed?
Revenue NSW has clarified that consideration for an option deed is not limited to the option fee. Dutiable amounts may include:
- Option fees specified in the agreement.
- Anniversary fees or milestone payments (if pre-agreed).
- Works in kind that benefit the landowner.
- Non-refundable security deposits, if they function as option fees.
- Legal fee reimbursements for preparing the option deed.
- Break fees and charges paid from escrow.
The guidance also confirms that refundable security deposits (which are repaid if the option expires) will not be treated as dutiable consideration.
For property transactions involving option deeds, careful drafting and legal advice from a property lawyer NSW can ensure compliance and avoid unnecessary costs.
3. Options vs. Conditional Contracts: Why It Matters for Duty
The Practice Note emphasises the difference between an option to purchase land and a conditional contract, as they are treated very differently for duty purposes:
| Type of Agreement | When Duty is Payable | What It’s Based On |
|---|---|---|
|
Conditional Contract |
On signing |
Greater of purchase price or market value of land |
|
Option to Purchase |
When the option is granted |
Greater of option fee or market value of the option itself |
If an agreement is incorrectly structured as an option deed but functions as a conditional contract, duty may be payable much earlier than expected. A property lawyer NSW can help review contracts to ensure they correctly reflect the intended legal and tax treatment.
4. Duty on Surrender or Termination of an Option
The surrender or early termination of an option is also a dutiable event under the change in beneficial ownership provisions. Duty is payable on the greater of:
- The consideration paid for the surrender.
- The market value of the option at the time it is extinguished.
However, the Practice Note confirms that if an option simply expires at the end of its term, no duty applies. Since no party takes active steps to extinguish the option, it is not treated as a dutiable event.
5. Market Value Assessments for Land Purchase Options
Revenue NSW generally assumes that the consideration for an option deed reflects its market value. However, a valuation may be required where parties are not dealing at arm’s length, such as when:
- There are pre-existing business or personal relationships between the parties.
- The parties have common ownership structures (e.g., related companies).
- There are common directors who do not recuse themselves from decision-making.
- The exercise price is significantly different from the market value of the land at the time of the option.
Where any of these factors apply, Revenue NSW may require a formal valuation of the land purchase option to determine its dutiable value.
6. No Credit for Duty Paid on the Option
One of the most significant confirmations in the Practice Note is that duty paid on the grant of an option will not be credited against duty payable when the option is exercised.
This means that both the initial option and the final sale may attract duty, potentially leading to double duty. This should be factored into structuring decisions when using option deeds in property transactions.
Consulting the best property lawyer can help develop strategies to mitigate the impact of double duty.
7. Anti-Avoidance Provisions: Revenue NSW’s Position
The change in beneficial ownership provisions were introduced alongside NSW’s anti-avoidance laws, which target schemes designed to defer duty payments.
However, the Practice Note confirms that not all put/call options will be treated as avoidance arrangements. Specifically, if a developer enters into a put/call option with a right to nominate a newly created unit trust for capital raising, this will not be treated as tax avoidance, provided the dominant purpose is genuinely to facilitate capital raising.
Each transaction will still be assessed on a case-by-case basis, with a focus on whether the primary intention was to defer duty payments.
What Property Purchasers Should Do Now
The rules around duty on land purchase options have not changed, but the Practice Note provides much-needed clarity on how Revenue NSW applies these provisions.
Key considerations for property professionals include:
- Developers and investors should ensure their use of option deeds is structured correctly.
- Landowners and sellers should review option agreements to avoid unintended duty liabilities.
- Buyers and nominators should consider how payments such as security deposits and milestone fees may impact duty obligations.
How to Protect Yourself
- Obtain legal advice before signing any land purchase option or nomination agreement.
- Ensure contracts are properly drafted to reflect the correct duty treatment.
- Consider the risk of double duty when structuring transactions.
- Arrange valuations where necessary, especially in related-party dealings.
A property lawyer NSW with expertise in option deeds can provide tailored advice to ensure compliance and minimise tax risks.
Final Thoughts
The Commissioner’s Practice Note does not change the law, but it does provide critical clarification on how Revenue NSW interprets duty provisions. Property purchasers should carefully review existing agreements to align with these interpretations and avoid unintended duty liabilities.
At Jaide Law, we specialise in structuring property transactions, drafting option deeds, and ensuring compliance with NSW duty laws. If you need guidance on land purchase options, nominations, or other complex property transactions, contact us today.
Disclaimer – We know most of you get this, but just to be clear, the information above is general and doesn’t consider your unique situation. Please don’t rely on it as a substitute for professional advice. We strongly encourage you to seek appropriate guidance for your specific needs.
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please reach out to us at contact@jaidelaw.com.au or call us at (02) 9061 7090.