As a result of amendments to the Duties Act 2000 (Vic) just passed by the Victorian Parliament, residential home builders need to reconsider the way in which they procure residential land for their customers, or else risk new liability for duty.
The State Taxation Acts Amendment Bill 2012 has now passed through both houses of Parliament and is awaiting Royal Assent. One day after receipt of that Royal Assent, the amendments proposed by the Bill will become law and have two main implications for builders of residential homes in Victoria. Specifically, home builders will:
- automatically be exempted from the aggregation provisions in the Duties Act 2000 (Vic) in certain circumstances where they purchase vacant land; and
- no longer be entitled to:
- purchase vacant residential land; and
- nominate as substituted purchaser a third party (or third parties) with whom the home builder enters into a building contract,
without being liable for duty on their land acquisition.
Aggregation concession – vacant land
At present, a home builder who enters into contracts to purchase parcels of vacant land within 12 months of each other, and subsequently takes a transfer of two or more interests in vacant freehold land in Victoria under those contracts, will have those acquisitions aggregated and pay duty at a higher rate if the relevant transfers "form, evidence, give effect to or arise from what is, substantially, one arrangement relating to all of the items or parts of the dutiable property" (ie. all of the vacant freehold land acquired).
As an example, if a home builder acquires two vacant residential lots from the same developer for the purpose of constructing display homes in a display village and pays $250,000 for each lot, it will pay $25,070 in duty (being duty payable on an aggregated land value of $500,000), instead of $20,140 (being duty payable on two individual transactions with a value of $250,000 each).
The amendments to the Act will automatically exempt home builders from the aggregation provisions (providing, in the example above, a direct saving $4,930 in duty) if:
- the home builder is registered as a domestic builder under the Building Act 1993 (Vic) and a builder within the meaning of the Domestic Building Contracts Act 1995 (Vic);
- the home builder acquires vacant land (which may include, at the discretion of the Commissioner for State Revenue, land containing remnant of a building that has been preserved because of its heritage significance);
- the home builder intends to construct residential premises on the vacant land for the purpose of selling that land to the public;
- another dutiable transaction does not occur in relation to the vacant land (ie. there is not a subsequent transfer of that land by the home builder) until residential premises that are ready for occupation as a place of residence have been constructed on the land by the home builder;
- premises other than residential premises are not constructed on the vacant land; and
- the home builder constructs residential premises on the vacant land that are ready for occupation as a place of residence within five years after the date on which the land is transferred to the home builder.
Currently, such acquisitions are only exempt from the aggregation provisions at the sole discretion of the Commissioner if the Commissioner believes it just and reasonable to provide an exemption.
Parallel arrangements – Liability for duty upon nomination
While the aggregation concession above will be welcomed by home builders, the amendments to the Act insofar as they relate to the nomination of substituted purchasers by home builders (and their associates) under contracts of sale will almost certainly not.
Currently, a widespread industry practice exists whereby home builders:
- enter into contracts of sale to purchase vacant lots of residential land (or have an associate enter into a contract of sale);
- identify a customer who wishes to build a home on that land;
- enter into a building contract with that customer; and
- nominate (or have their associate nominate) their customer as substituted purchaser under the contract of sale.
Such practice does not currently result in the home builder incurring liability for duty provided:
- the customer does not provide additional consideration for the right to be nominated as substituted purchaser under the contract of sale; and
- land development (as that term is defined in the Act) does not occur until after the customer takes title to the land.
The newly passed amendments introduce a concept of "parallel arrangements" and deem consideration payable under a "parallel arrangement" to be additional consideration for the right to be nominated as substituted purchaser under the contract of sale. This will have the result of imposing duty on home builders in the circumstances described above.
Specifically, new sections 32B(4) and 32B(5) of the Act will provide that:
a "parallel arrangement" includes an arrangement:
- entered into by a customer of the home builder (or their associate) before, at the time of, or within 12 months after that customer is nominated as substituted purchaser under a contract of sale; and
- under which the home builder (or an associate of the home builder) is required to construct, or to arrange for the construction of, improvements to the property the subject of the sale contract for consideration; and
a customer of a home builder (or their associate) who enters into a parallel arrangement (ie. a building contract with the home builder at any time before, at the time or within 12 months after the customer is nominated as substitute purchaser under a contract of sale) will be deemed to have given additional consideration to the home builder for such nomination.
Using a $250,000 block of vacant residential land again as an example, the amendments to the Act will result in an additional cost to the home builder of $10,070 (ie. duty payable on land with a value of $250,000), which it currently is not required to incur. Such a dramatic increase in costs will either:
- require home builders to raise the cost of their products commensurately, thereby further reducing housing affordability in the State of Victoria; or
- result in home builders no longer offering house and land product (or offering significantly reduced numbers of house and land product) to the market.
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