The following examples illustrate the application of the lease provisions to some common situations. These are a guide only and not an exhaustive list of the types of arrangements to which the provisions may or may not apply.
Examples where the lease provisions apply
Example 1: Long-term lease of an office building
ABC Pty Ltd is the owner of prime CBD real estate including an office building, which is run down and in need of refurbishment. XYZ Pty Ltd, a development company, wants to acquire the property, refurbish the office tower and lease out the various floors.
Instead of acquiring the freehold, which has an estimated market value of $10 million, XYZ Pty Ltd takes a long-term lease of the property from ABC Pty Ltd in consideration of the payment of a premium of $10 million and an annual rental of $10. The grant of the lease to XYZ Pty Ltd is dutiable with reference to a value of $10 million.
Example 2: Alpine ski resort
ABC Pty Ltd is the lessee under a Crown lease of land at Mount Hotham upon which a ski resort, including 10 residential apartments, is located. ABC Pty Ltd operates the ski resort and has entered into 10 sub-leases of the property, comprising the residential apartments, to various sub-lessees, including X, who acquired his lease prior to the commencement of the provisions.
The sub-lessees do not acquire shares in ABC Pty Ltd, so the arrangement is not a land use entitlement. Y wishes to acquire an apartment in Mount Hotham for use as a holiday home and pays X the sum of $500,000 for a transfer of X's sub-lease, which has 30 years yet to run.
The transfer of the sub-lease from X to Y is dutiable under the lease provisions.
Example 3: Concurrent lease
ABC Pty Ltd is the lessor and XYZ Pty Ltd is the lessee under a standard commercial lease under which market rental is payable. The term of the lease is 10 years coupled with 9 options for XYZ Pty Ltd to renew for a further 10 years.
As such, the lease could potentially run for 100 years. ABC Pty Ltd grants a concurrent lease to DEF Pty Ltd under which DEF Pty Ltd effectively stands in the shoes of the lessor, ABC Pty Ltd. The consideration for the grant of the concurrent lease is $10 million, which reflects the net present value of the income stream from the property in perpetuity.
The grant of the concurrent lease is dutiable under the lease provisions.
Examples where the lease provisions do not apply or an exemption applies
Example 4: Sale of business
ABC Pty Ltd conducts a manufacturing business on premises which are leased from DEF Pty Ltd under the terms of a standard commercial lease. The lease does not provide ABC Pty Ltd with any rights to acquire the property in the future whether by way of transfer, option, or right of first refusal.
ABC Pty Ltd enters into a business sale agreement with XYZ Pty Ltd to transfer or assign all of the assets of the manufacturing business, including the commercial lease of the premises upon which the business is conducted.
Under the business sale agreement the purchase price has been apportioned between the business assets and to ensure the enforceability of the arrangements between the parties, nominal consideration of $1 has been allocated to the assignment of the commercial lease of the premises.
In these circumstances, no duty is payable on the transfer or assignment of the lease. However, duty may be payable in respect of the acquisition of the business assets if they constitute fixtures.
Example 5: Sale of a caravan park site
ABC Pty Ltd is the lessee under a Crown lease of land in respect of which ABC Pty Ltd pays an annual rental. It operates a registered caravan park on the property which comprises 40 caravan sites.
ABC Pty Ltd grants a sub-lease of one of the caravans and caravan sites to X in consideration of the payment of a premium. X occupies the caravan and the caravan site as his principal place of residence.
The grant of the sub-lease to X is exempt from duty under the lease provisions.
Example 6: Surrender of old lease and grant of new lease
ABC Pty Ltd owns a shopping centre and has granted a lease of one of its shops to XYZ Pty Ltd. Other than the rent reserved, XYZ Pty Ltd has not paid or agreed to pay any consideration for the grant of the lease.
Due to the expansion of another tenant, ABC Pty Ltd requests XYZ Pty Ltd to relocate to a new shop within the centre. To induce XYZ Pty Ltd to move, ABC Pty Ltd agrees to pay XYZ Pty Ltd $10,000 in relocation expenses. Having accepted the relocation, XYZ Pty Ltd surrenders the lease over the old shop and accepts a grant of a lease over the new shop in respect of which it does not pay or agree to pay any consideration other than the rent reserved.
The surrender of the old lease is not dutiable as no consideration other than rent reserved was paid or agreed to be paid on its grant to XYZ Pty Ltd. Similarly, the grant of the new lease to XYZ Pty Ltd is not liable to duty.
In such circumstances, the Commissioner will not regard the payment to XYZ Pty Ltd of $10,000 in relocation expenses as consideration for the grant of the new lease.
Examples that consider the timing of when duty is payable
Example 7: Lease with an option to purchase land for consideration equivalent to full market value during or on expiry of lease
ABC Pty Ltd is the lessor of land valued at $5 million. XYZ Pty Ltd wishes to establish and conduct a manufacturing business on the premises.
This will require XYZ Pty Ltd to expend a considerable sum on plant and equipment so XYZ Pty Ltd agrees, in addition to rent reserved, to pay consideration by way of a premium of $5,000 to ABC Pty Ltd for an option to purchase the premises at the conclusion of the lease in 5 years’ time.
Upon exercise of the option XYZ Pty Ltd is required to pay to ABC Pty Ltd consideration equivalent to the full market value of the land when the option is exercised.
In these circumstances, the Commissioner will allow XYZ Pty Ltd to defer payment of duty until the option to purchase is exercised. If full duty is paid on the lease, the subsequent transfer of land from ABC Pty Ltd to XYZ Pty Ltd will not be separately dutiable.
Example 8: Lease with a right to acquire land for less than market value during or on expiry of lease
ABC Pty Ltd leases land valued at $1.5 million to XYZ Pty Ltd. On the grant of the lease, XYZ Pty Ltd paid ABC Pty Ltd consideration of $1 million for the right to acquire the land during the term of the lease or upon expiry of the lease.
On the exercise of the right to acquire the land XYZ Pty Ltd is only obligated to pay the balance of the unencumbered value of the land, being $500,000.
In these circumstances, duty is payable at the time the lease is granted on the greater of the consideration paid and the unencumbered value of the land, being $1.5 million.
