In brief
The State Taxation Acts Amendment Bill 2019 (the Bill) received royal assent on Tuesday 18 June 2019 and is now in force.
The Bill significantly changes the economic entitlement provisions in the Duties Act 2000 (Vic) (the Act).
The new economic entitlement regime greatly increases the number of arrangements that are now subject to duty. In a nutshell, any development agreements that provide for an entitlement to profits from the land, including where “set” development fees are referable to profits derived from, or sales of the land, are now subject to duty.
What you need to know
The regime significantly changes the economic entitlement provisions with the scope widened by the following mechanisms:
- Removal of the relevance of the landholder
- Broadening the definition of economic entitlements
- Deemed percentage of beneficial ownership
- Removal of the interest threshold
1. Removal of the relevance of the landholder (s 32XA)
The new economic entitlement requirements apply where a person acquires an economic entitlement in relation to relevant land.[1] Relevant land is all dutiable property.[2]
Prior to the amendments, the Act imposed duty where a person acquired an economic entitlement if the person acquired shares or units in a private landholder (defined as a private unit trust scheme, a private company or wholesale unit trust scheme).[3] The amendments do not make any reference to a private landholder. Instead, duty applies with respect to relevant land held by any person.
2. Broadening the definition of economic entitlements (s 32XC)
Pursuant to the amendments, an economic entitlement is incurred where:
- An arrangement is made in relation to relevant land that has an unencumbered value that exceeds $1,000,000, and
- Under the arrangement the person is entitled to:[4]
- Participate in the income, rents or profits derived from the relevant land;
- Participate in the capital growth of the relevant land;
- Participate in the proceeds of sale of the relevant land;
- Receive any amount specified above; or
- Acquire any entitlement specified above.
Prior to the amendments, the provisions only applied where the acquisition of the economic entitlement amounted to an interest of 50% or more. (s.81(5)(a) of the Act) This threshold has been removed. Under the amendment, any economic entitlement will be subject to duty.
The amendments deliberately widen the scope so that someone who is not party to the arrangement can still acquire an economic entitlement. This is to stop situations where a party under a relevant arrangement directs the benefit to another person, such as a newly created subsidiary. Under the amendment, the newly created subsidiary will still be caught.[5]
3. Deemed percentage of beneficial ownership
A person who acquires an economic entitlement is taken to have acquired beneficial ownership of the land and is charged duty accordingly.[6]
The percentage of beneficial ownership is determined as follows:
- If:
- there is only one form of economic entitlement acquired of which the percentage is specified, and
- the arrangement does not include any other amount payable to the person or an associated person;
the beneficial ownership taken to be acquired is the specified percentage.[7]
- If
- The percentage of economic entitlement is not specified;
- The arrangement, in addition to specifying the percentage of economic entitlement, includes any other entitlement of or amount payable to the person or an associated person; or
- The arrangement under which the economic entitlement is acquired entitles the person or an associated person to 2 or more economic entitlements;
4. No interest threshold for economic entitlement to be dutiable
How will this impact developer agreements?
The wide scope of the new amendments means that economic entitlements will arise more often. It also means that development agreements cannot avoid duty by:
- Transferring the benefits to a party outside the arrangement;
- Understating economic entitlements by representing the benefits as fees, bonuses, charges and other items, as this will run the risk of causing the beneficial ownership to be deemed 100%.
Note however that the amendments do not affect development agreement that were in place prior to the Bill.
Conclusion
The Madgwicks Property team will continue to provide updates and developments on this issue as they arise. If you have any questions, please do not hesitate to contact James Christodoulakis at the contact details below.
[1] State Taxation Acts Amendment Bill 2019 (Vic) (Explanatory Memorandum) cl 10.
[2] Duties Act 2000 (Vic) s 32XB.
[3] Duties Act 2000 (Vic) s 81.
[4] Duties Act 2000 (Vic) s 32XC.
[5] State Taxation Acts Amendment Bill 2019 (Vic) (Explanatory Memorandum) cl 10.
[6] Duties Act 2000 (Vic) s 32XD(1).
[7] Duties Act 2000 (Vic) s 32XE(1).
