On 22 April 2016, the Victorian Supreme Court (Croft J)
delivered judgment in the first case to be brought before the
courts on the new 'economic entitlement' provisions in the
Victorian Duties Act 2000 (Act). The
decision (BPG Caulfield Village Pty Ltd v Commissioner of State
Revenue  VSC 172) is important for property developers
and provides some much needed clarity on the operation of the
economic entitlement provisions and their application to
Norton Rose Fulbright acted for the taxpayer, BPG Caulfield
Village Pty Ltd (BPG), in this matter.
What were the facts of the case?
On 17 August 2012, BPG (a special purpose vehicle incorporated
by the BECK Probuild consortium) entered into a development
agreement (DA) with the Melbourne Racing Club
(MRC) in relation to the development and sale of
certain land adjacent to Caulfield Racecourse to be called
Caulfield Village (CV Land).
The CV Land was not the only Victorian landholding of MRC and
represented less than 50% of the unencumbered value of all of
MRC's landholdings in Victoria.
The Commissioner of State Revenue
(Commissioner) assessed BPG to duty on the basis
that BPG had acquired an economic entitlement, being an entitlement
to participate in the proceeds of sale of the CV Land, estimating
that interest to be approximately 83% (derived from cash flow
estimates contained in a schedule to the DA). BPG objected to the
assessment. The Commissioner disallowed BPG's objection. BPG
appealed the Commissioner's disallowance of the objection to
the Victorian Supreme Court.
What are the economic entitlement provisions?
The economic entitlement provisions are contained within the
landholder rules in section 81 of the Act. The provisions are
unique to Victoria and were introduced with effect from 1 July
a person acquires an economic entitlement under section 81 if
they enter into an arrangement in relation to a 'private
landholder' (private company or private unit trust) under which
the person is entitled to participate in the dividends or income of
the private landholder, the income, rents or profits derived from
the landholdings of the private landholder, the capital growth of
the landholdings of the private landholder or the proceeds of sale
of the landholdings of the private landholder: section 81(2);
where an economic entitlement amounts to an interest of 50% or
more ['in a private landholder'], the person is taken to
have made a 'relevant acquisition' for the purposes of the
landholder rules: section 81(5); and
duty is chargeable (at the rate of 5.5%) on the amount
calculated by multiplying the unencumbered value of the Victorian
landholdings of the private landholder to which the economic
entitlement relates by the percentage interest acquired under the
relevant acquisition: sections 81(6) and 86(1).
While not relevant in BPG's case, it is noteworthy that the
words 'in a private landholder' (highlighted in square
brackets above) in section 81(5) were subsequently removed by the
State Tax Laws Amendment (Budget and Other Measures) Act
What was the decision?
Croft J held that:
BPG did not acquire an economic entitlement upon entry into the
DA because the DA related to only some and not all
of the landholdings of MRC; and
even if BPG had acquired an economic entitlement, it did not
amount to an interest of 50% or more in MRC.
What are the implications?
The decision confirms that, at least up until the amendment of
section 81(5) referred to above, the economic entitlement
provisions had a much narrower field of operation than the
Commissioner was giving them.
The position moving forward is not entirely certain –
Croft J's reasons for decision cast doubt on the efficacy of
the amendment made to section 81(5).
Croft J was not required to address the question of whether the
Commissioner's purported 'estimate' of the future
proceeds of sale of the CV Land for the purposes of quantifying the
interest acquired by BPG under the economic entitlement was
supported by section 11(2) of the Taxation Administration Act
1997. This question remains open for another day.
It is unclear yet whether the Commissioner will appeal the
decision. We will keep you updated on any developments.
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ATO has released 2 draft fact sheets relating to the 2010 amendments to corporate law and tax in relation to dividends.
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