Purchasers Beware – Duty is Now Payable on Late Settlement Interest

If settlement is delayed by the purchaser, through no fault of the Vendor, then interest can be payable by the Purchaser in accordance with the terms of the contract of sale of land (Late Settlement Interest). Late Settlement Interest is normally calculated at 12% per annum of the purchase price.

On 15 June 2022 the Victorian State Revenue Office (SRO) updated its website guidance in respect of Late Settlement Interest. The SRO states that from 1 July 2022, it will introduce an administrative approach in relation to Late Settlement Interest payments forming part of the dutiable value of a Victorian property. As a result, duty must be paid in Victoria by purchasers and developers not only on the dutiable value of the property but also on Late Settlement Interest they pay to vendors.

What has changed?

In its guidance the SRO states that Late Settlement Interest amounts to consideration which ‘moves’ a transfer of land. As such the interest amount is deemed to form part of the dutiable value of the land and as such additional duty must be paid in respect of the increased dutiable value.

This updated guidance from the SRO was anticipated following the Victorian Supreme Court’s 2021 decision in Commissioner of State Revenue v 1043 Melton Highway Pty Ltd [2020] VSC 820 (Melton Highway).

In Melton Highway the Supreme Court determined that default interest formed part of the consideration for duty assessment purposes on the basis that:

...the stipulation to pay interest on late advances moved the transfer in this case. Put another way, consistent with the terms of cl 4.1, the vendors were only prepared to transfer the property on the payment of the additional amounts (characterised as ‘interest’) in circumstances where the ‘loan advances’ had not been made on the dates stipulated.

Justice Kennedy at paragraph 122

What about other late settlement fees?

At the date of this article the SRO guidance addresses Late Settlement Interest only. Other payments relating to the transfer of dutiable property which are often reimbursed as a result of a late settlement have not been addressed by the SRO. This may include amounts for rates, land tax and fees imposed by a vendor’s bank. Ultimately the question for taxpayers and advisors to consider when advising clients (albeit a difficult one) is whether such amounts are deemed to ‘move’ the transfer or are merely an appropriate division of costs.

The SRO’s current administrative approach

For the first 12 months of implementing the new guidance the SRO has introduced an administrative approach that it will only impose duty on the Late Settlement Interest of amounts that exceed $5,000. That means for Late Settlement Interest below this threshold will not be subject to duty at this stage.

However, this threshold is specified by the SRO as an “interim measure” and therefore it may decrease or increase in the future. Taxpayers and advisors should confirm the threshold applicable at the date of the relevant transfer and not rely on previous transactions as a rule.

When is the additional duty payable?

The Late Settlement Interest is not included in Duties Online. Rather settlement should proceed with the original estimate and separately the SRO must be notified by email of the Late Settlement Interest. The transaction must then be re-lodged for duty assessment within 30 days of settlement.

Does the Late Settlement Interest impact other state concessions, exemptions or grants?

The Late Settlement Interest does not form part of the dutiable value of the land for the purpose of determining a taxpayer’s eligibility to duty concessions, exemptions or grants.

Next Steps

When a purchaser is considering their overall risk liability the additional duty must be added to the equation as Late Settlement Interest is compounded by this additional duty. Lawyers and conveyancers must consider the additional duty when advising clients on late settlement fees.

When entering into agreements to defer settlement buyers must be aware of the implications of any default interest which they agree to pay the vendor. In the current market such deferrals are frequent and therefore many re-lodgements will be required.

If you have any questions or require assistance in relodging a duty assessment, please contact:

Vittoria De Stefano
Principal
M: 0407 091 301 | T 03 5226 8520
E vdestefano@ha.legal

Joseph Flanagan
Associate
T 03 5226 8504
E jflanagan@ha.legal