Stamp duty on leases set for major hike
Stamp duty payable on lease agreements is set to rise sharply if legislation passed by the House of Assembly, and currently before the Senate, comes into force.
Under current legislation, a flat stamp duty fee is based on the monthly rent of the property in question. The maximum fee payable is $400, which is due on a property that attracts a monthly rent of $5,000 or more. Properties with lower monthly rents attract lower flat fees.
However, the Stamp Duties Amendment Act 2019 has introduced a new fee schedule that is based on a percentage of the aggregate rent payable under the lease. The stamp duty payable is 1 per cent of the aggregate rent payable for the first three years of a lease, and 0.5 per cent of the aggregate rent payable for any additional period beyond three years.
For a one-year lease on a property attracting a monthly rent of $5,000, the new fee would be $600, an increase of $200 over current rates. A three-year lease on the same property would attract stamp duty of $1,800, a rise of some $1,400 over current rates.
Sharp increases materialise in the case of multiyear leases of larger spaces such as commercial property.
A commercial lease of 5,000 sq ft of space at the typical rate of $40 per square foot per year over three years, would result in stamp duty of $6,000, a $5,600 increase on the current flat fee of $400.
A 10-year lease on the same property would result in stamp duty of $13,000, an increase of $12,600 over the current rate.
Stamp duty must be paid within 30 days of the execution of a lease.
The amending legislation was passed by the House of Assembly on March 15. It gets a second reading in the Senate today.
Provided it is passed by the Senate, the amending legislation — and the new stamp duty rates therein — will become effective on April 1, the legislation says.
Speaking on the condition of anonymity, a leading property lawyer said: “It is a dramatic increase — that is agreed — but the need for a change in the stamp duty rates payable on leases has long been acknowledged. It seems a bit ridiculous that a lease granted for five years, or even 100 years, at a rent of $1 million per annum should be stamped at the rate of $400. Increases probably ought to have been implemented some time ago.
“No doubt, the increase will cause a stir, but the schedule of fees has been crying out for some form of revisit for many years. Maybe Government has gone too far in the eyes of some people, and maybe not in the eyes of others, but stamp duty at the rate of $400 for $1m or $2m in rent is somewhat lower than it should be.”
The lawyer pointed out that stamp duty of approximately $34,000 would be payable on the purchase of a residential property for the sum of $1 million.
Even so, the lawyer said, the increase in rates will be a shock to commercial landlords.
“The other side of the argument is that commercial landlords have come to expect stamp duty rates to be maintained at a certain level and if they are operating on the basis of tight financial margins, a sudden increase of this nature could have a material (negative) impact on them,” the lawyer said. “Taking this new approach in a phased way may have been a better idea. If it had been done 10 or 15 years ago, when it was first discussed, perhaps there could have been steady increases over time.”
The lawyer identified a flaw in the proposed legislation. “The way the new rates are framed, prevents one from calculating the stamp duty that will need to be paid on leases that include open market and consumer price index based rent review provisions,” the lawyer said. “In such cases, you won’t know what the stamp duty should be because it’s not determinable. You will have no choice but to send it to the Tax Commissioner’s Office for adjudication, or to determine the stamp duty that should be paid.”