Avoiding double duty in property transactions

Buyers often seek advice on their ability to change the person or entity that has contracted to buy a property without incurring double duty.  This often occurs because the buyer did not obtain structuring or tax advice prior to contracting to acquire the property.

Substituted purchaser exemptions

The simplest way to amend the buyer entity is to utilise the substituted purchaser exemptions in section 42(2) of the Duties Act 2008 (WA) (Duties Act).

Section 42(2) of the Duties Act provides that duty liability will not arise in limited circumstances where the person named on the transfer form is not the same as the buyer noted in the contract.

In general, the substituted purchaser exemptions will only be available for substitutions between related parties. For example, in the context of an individual buyer, a transfer to the following persons/ entities will be authorised:

• the individual’s parents, children or spouse;
• a company of which the individual is the sole shareholder (or is a qualifying relative of all of the other shareholders); or
• a unit trust of which the individual is the sole unit holder (or is a qualifying relative of all of the other unit holders).

It is important to note that the substituted purchaser provisions will not assist a buyer that:

• has contracted in the name of a discretionary trust; or
• requires the substituted purchaser to be the trustee of a discretionary trust.

To obtain a substituted purchaser exemption, an application must be lodged at the Office of State Revenue (OSR) attaching the relevant agreement to transfer and the transfer of land, with Form DA14 ‘Substituted Transferees’.

Corporate reconstruction exemptions

Alternatively, exemptions are available for corporations or unit trust schemes within the same ‘family’ group.

Similar to the substituted purchaser exemption, the company or trust must be related.

Uniquely, a decision can be obtained as to whether the exemption applies in advance of the transaction being entered into.

Cancellation of contract

If the substituted purchaser exemptions are not available, buyers often propose to cancel their existing contract and enter into a new contract in the name of the preferred person/entity.

If the contract is terminated, the buyer can apply to the OSR to obtain an exemption from the requirement to pay duty (or refund of duty, if the duty has already been paid).

However, an exemption/refund will not be granted by the OSR if a ‘replacement transaction’ or a ‘subsale transaction’ has been entered into.

Replacement transaction

A replacement transaction is a subsequent transaction that is between all of the same parties, that is substantially similar in effect to the cancelled transaction and is considered by the OSR to be a scheme or arrangement to reduce tax.

Subsale transaction

Of greater relevance to a buyer that intends to enter into a new contract in the name of a different person/entity (which will, therefore, not be a replacement transaction) is a subsale transaction.

A subsale transaction is defined very widely to cover any transaction in relation to the property that is contemplated to occur as a result of the cancelled transaction.

To protect its position, a seller will usually require written confirmation that termination of an existing contract is conditional upon the new contract being entered into. In these circumstances, the new contract will clearly be a subsale transaction. However, even if the existing contract can be terminated and the replacement contract entered into without any documentary evidence linking the two contracts, the subsequent contract will constitute a ‘subsale transaction’ if there is an understanding between the parties that the contract has been cancelled so that a new contract has been entered into.

It is important to note that the application for exemption/refund of duty form requires the buyer to declare that no replacement or subsale transaction has been, or will be, entered into. The penalties associated with providing misleading information to the OSR can be significant. As a result, agents acting for a buyer should be particularly wary of agreeing to assist in applying for an exemption/refund of duty in circumstances where a replacement or subsale transaction may be entered into.

Swapping properties

A new contract may not be a subsale transaction if a different property is acquired. However, this will only be a viable alternative where the property has been purchased from a seller that holds other equivalent properties (ie a developer).

Summary

Amending the buyer entity in a contract without incurring double duty can be a problematic and costly process.

Buyers can avoid these issues by obtaining structuring and tax advice prior to entering into contracts.

We regularly assist our clients by advising on these issues and applying for relevant exemptions.

Thank you to Jonathan Tartaglia, Law Graduate, for his valuable research and assistance with this article. 

Disclaimer

The information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.