Significant change in Victorian stamp duty rules to impact land development arrangements

By Craig Whatman - May 29, 2019

The State Taxation Acts Amendment Bill 2019 was introduced into the Victorian Parliament yesterday afternoon. The Bill contains a major change to the ‘economic entitlement’ provisions of the Victorian Duties Act 2000 that will have a significant and adverse impact on many property developers and the property market more generally.

Many standard development arrangements that are not caught by the current duty rules will be subject to duty under the new provisions.

This major change was not announced by the Treasurer and is not directly referred to in the Budget papers (click here for our analysis), despite the change effectively creating a new head of duty liability under which significantly more development arrangements will be subject to duty.

What are the current economic entitlement provisions?

The Duties Act 2000 currently contains complex ‘economic entitlement’ rules within its landholder duty provisions, which can apply to development agreements entered into between a private landholder (company or unit trust) and a developer. These rules are unique to Victoria.

Under a typical development agreement, the developer will be entitled to charge the landowner for the development costs incurred and might be entitled to a margin on those costs and/or a share of the profit derived from the development.

The profit component of the developer’s remuneration falls within the definition of ‘economic entitlement’. That definition also includes participation in the dividends or income of the landholder, participation in the income or rents derived from the land holdings of the landholder, or participation in the capital growth or proceeds of sale of the land holdings.

Under the current rules, provided the total economic entitlement(s) of the developer equate to an interest of less than 50%, duty is generally not payable on the arrangement.

Example

For example, if a development agreement entitles a developer to recover the development costs incurred plus receive a 45% share of the profit derived from the development, the developer should be able to proceed without paying duty on the arrangement under the development agreement.

Proposed changes to the economic entitlement provisions

The Bill almost completely re-writes the economic entitlement provisions. A new set of economic entitlement rules will be introduced into the transfer duty provisions, which will dramatically broaden the duty net and result in a wider range of land development arrangements being subject to duty.

The key change is the removal of the 50% threshold for the interest acquired under the economic entitlement(s).

Example

Taking the example above (where a developer enters into a development agreement under which they are entitled to a reimbursement of development costs plus a 45% share of the profit), if the value of the relevant land is $30M, the developer will now be faced with a duty liability of at least $742,000, which could increase to $1.65M if they are deemed to acquire a 100% beneficial interest in the land.

Below is a summary of the key features of the new provisions compared to the current provisions:

Feature

Current provisions

New provisions

Type of landowner

Only private companies and private unit trusts with land worth $1M or more in Victoria.

All types of landowners (whether individuals, companies, or trustees of any types of trusts) with land worth more than $1M in Victoria.

Type of economic entitlements

  • Participation in the dividends or income of the landholder.
  • Participation in the income, rents or profits derived from the landholder’s land.
  • Participation in the capital growth of the landholder’s land.
  • Participation in the proceeds of the sale of the landholder’s land.
  • Receipt of any amount determined by reference to the above types of participation.
  • Acquisition of any of the above entitlements.
  • Participation in income, rents or profits derived from the relevant land.
  • Participation in the capital growth of the relevant land.
  • Participation in the proceeds of the sale of the relevant land.
  • Receipt of any amount determined by reference to the above types of participation.
  • Acquisition of any of the above entitlements.

Note that participation in the dividends or income of a private company or unit trust with land worth $1m or more may also be caught.

 

Interest threshold for economic entitlement(s) to be dutiable

50%

No threshold – any economic entitlement will be subject to duty.

Note that a participation in the dividends or income of a private company or unit trust with land worth $1m or more is still subject to the 50% threshold.

Deeming rule for the size of interest acquired under economic entitlement(s)

None

Interest deemed to be 100%, if:

  • the agreement does not specify the percentage of the economic entitlement acquired;
  • the agreement specifies that percentage but also includes other amounts payable; or
  • the agreement entitles the person or their associate to two or more types of economic entitlements.

The Victorian State Revenue Office is given a discretion to determine a lesser percentage than 100% if they consider it appropriate.

 

Date of effect

If enacted, the new rules will come into effect on the day after the day on which the Act receives Royal Assent. The new rules could then apply to any development agreement executed from that date onwards. That could be as early as next week.

Next steps?

Pitcher Partners is currently working with the Property Council to discuss the impact of these proposed changes on the development industry and the market more generally with both the Government and the Opposition.  We will be advocating on your behalf against these measures as strongly as possible.

If you are currently negotiating a land development arrangement that could be caught by the new stamp duty rules or would like further information about this change or any other tax change announced in the Budget, please contact your Pitcher Partners representative.


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