Property developers who enter into agreements to develop Victorian land with an unencumbered value of over $1 million are at significant risk of incurring a duty liability, under new legislation that received Royal Assent on 18 June 2019.
The State Taxation Acts Amendment Act 2019 (the Act) rewrites the former ‘economic entitlement’ provisions of the Duties Act 2000. Those provisions, which formed part of the landholder regime, were initially introduced as an anti-avoidance measure to capture the use of development agreements to transfer property interests to developers, rather than via direct acquisitions of landholders.
The new economic entitlement provisions, which commenced operation on 19 June 2019, have very broad application and effectively operate as a new head of duty. Under transitional provisions, the amendments do not apply to arrangements made before commencement.
It will be essential to review draft development agreements that are currently being negotiated to ensure there is no inadvertent duty exposure.
The former economic entitlement provisions
Under a standard development agreement, the developer will be entitled to receive remuneration from the landowner in respect of development costs incurred. As part of the agreement, the developer may also be entitled to a percentage of the profits derived by the landowner on the sale of the development.
The right of the developer to receive a share of the profits will constitute the acquisition of an ‘economic entitlement.’ An economic entitlement is defined to also include participation in the dividends or income of the landholder, participation in the income or rents derived from the landholdings, participation in the proceeds of sale of the landholdings or in the capital growth of the landholdings.
Under the former rules, the acquisition of an economic entitlement in Victorian land with an unencumbered value of $1 million or more was dutiable in limited circumstances where:
- The land was held by private unit trusts and private companies; and
- The economic entitlements acquired by the developer (either alone or with an associated person) amounted to 50% or more.
Where these thresholds were met, the developer would be treated as having made an acquisition of the underlying land to which the economic entitlement related, and would be liable to duty on the percentage interest acquired.
The expanded duty net – what arrangements are caught?
The new regime has wide application due to the following features:
- The provisions are not restricted to private unit trusts and private companies – they apply to all landholders that enter into an arrangement in respect of Victorian land with an unencumbered value that exceeds $1 million (eg all landholders are now within the regime, including discretionary trusts and individuals).
- There is no 50% ‘safe harbour’ – the acquisition of any economic entitlement will trigger a duty liability. For example, a 5% economic entitlement to a share of the proceeds of sale will trigger duty on 5% of the value of the land.
- The economic entitlement may be acquired ‘through another person’ – accordingly the liable party may not necessarily be a party to the agreement with the landowner.
Duty is calculated based on the unencumbered value of the land at the time of acquisition of the economic entitlement, multiplied by the percentage of the total of all entitlements the person is entitled to receive under the economic entitlement.
New 100% ‘deeming rule’
A developer may be deemed to have acquired 100% of the land in certain circumstances including where:
- The arrangement does not specify the percentage of the economic entitlement acquired; or
- The arrangement does specify the percentage of the economic entitlement, and includes any other entitlement, or amount payable to, the person or an associated person.
This extremely broad deeming rule could be triggered by the inclusion of other payments which are commonly incorporated in development agreements, such as fees for the reimbursement for development costs, or administration fees, commissions and marketing fees.
Where the percentage is deemed to be 100%, the developer will be liable to pay duty on the whole value of the land.
For example, assume a developer enters into a development agreement with a landholder for land worth $5 million, under which the developer is entitled to recover their development costs plus a 30% share in the profits. Under the former regime, no duty would be payable as the entitlement of the developer is less than 50%.
Under the new provisions, the developer will be liable to pay duty on $1.5 million (eg duty of $82,500). If the developer is deemed to have acquired 100% of the land, the duty liability will increase to $275,000.
Where the 100% deeming rule applies, the Commissioner of State Revenue is provided with a discretion to determine a lesser percentage if appropriate in the circumstances. However, the developer will need to make submissions seeking this reduction in duty which may prove difficult where there is no guidance on how the discretion may be exercised. It is therefore critical to ensure agreements are carefully drafted without triggering this provision.
How can Rigby Cooke help?
Rigby Cooke’s Tax and Wealth and Property teams can assist your business by providing urgent advice on draft development agreements to consider whether the new provisions may be triggered. We can assist your business to structure such agreements in a commercially effective manner that does not result in the developer obtaining an economic entitlement.
Where existing development agreements require amendment, we can assist you in ensuring that any amendments do not trigger a duty liability.
We can also work with you to consider whether it is necessary to account for duty as part of calculating your development costs.
If you have a potential duty liability under the new provisions, we can make representations to the Commissioner of State Revenue to seek to reduce any inadvertent duty liability, in particular where the 100% deeming rule is applied.