The brave new world of vendor duty - does it work?

By David Klarich.

Key Points:
NSW vendor duty is not just another tax. It is an insidious tax that causes practical problems for both vendors and purchasers, and seeming illogical behaviour and results.

On 1 June 2004 NSW taxpayers entered the brave new world of 2.25% vendor duty. The provisions are lengthy and complex; the reasoning behind them flawed.

Vendor duty applies to virtually all real property transactions in NSW, unless an exemption applies. Exemptions include the transfer, etc of a principal place of residence, farm, new or substantially new building, off the plan sales and improved vacant land. But the exemptions are not straightforward. Each exemption has a complex set of conditions that need to be satisfied. Some are tough to satisfy.

For a non-exempt real property transaction, the Government's aggregate stamp duty take has now increased to as much as 7.75% (ie. 2.25% from the vendor, plus up to 5.5% from the purchaser).

Vendor duty is currently not imposed on land rich transactions. Provisions to extend vendor duty to land rich transactions are proposed to be introduced later this year (along with amendments to fix some of the problems with vendor duty already identified – eg. mortgagee sales).

If there is a standard contract for the sale of land, followed by a transfer, the vendor duty is payable on or before settlement of the contract (ie. at or prior to the vendor receiving the sale proceeds). Thus vendor duty can dictate the place of settlement. Both the contract and the transfer need to be stamped (or marked not chargeable) with vendor duty before the purchaser is entitled to register the transfer. Thus solicitors acting for purchasers are required to enforce the vendor duty provisions to ensure that their client is able to take title to the property. But what happens if there is a dispute between the vendor and the NSW Office of State Revenue as to whether vendor duty is payable?

Put simply, vendor duty is an illogical nightmare.

Two further examples will suffice. Vendor duty is not payable if the value of the real property has increased by less than 12% since it was acquired by the vendor. For an increase of 12-15% a phasing-in of the vendor duty applies. There is no allowance for improvements made to the real property by the vendor. As a result, the following ridiculous circumstances arise:

• When GST, CGT and vendor duty are all taken into account, a vendor will receive higher net proceeds if it sells for an 11.9% profit over the land’s original acquisition cost, rather than a 13.1% profit.
• Vendor duty can increase a vendor's loss on sale. A vendor acquires land for $100m and makes improvements of $40m. The vendor sells at a loss for $120m, but vendor duty is still payable and increases the vendor’s loss by an additional $2.7m.