New laws have now been passed by the Victorian Parliament that impose Victorian stamp duty on many types of property development agreements, joint ventures and funding arrangements.
Any contracts whereby a developer or financier participates in sales revenue or profits associated with Victorian land could now be subject to duty, as if the developer or financier had bought the land directly.
What has changed?
The State Taxation Acts Amendment Act 2019 (Vic) is now awaiting royal assent (expected next week), after the bill passed through the Victorian Parliament without any changes.
The Act introduces new 'economic entitlement' provisions that impose stamp duty on the acquisition of an entitlement to participate in (or receive an amount calculated by reference to) the income, rents, profits, capital growth or sale proceeds from Victorian land worth more than $1 million.
The acquisition of such an entitlement is treated as an acquisition of a beneficial interest in the relevant land. Duty is imposed by reference to the percentage of the beneficial interest acquired. There is no minimum interest threshold. The beneficial interest acquired will be equal to:
- the percentage of the economic entitlement that is acquired; or
- 100% if:
- the percentage of the economic entitlement is not specified or cannot be determined;
- there is a percentage specified, but the person or their associate is entitled to other amounts; or
- two or more economic entitlements of different types are acquired.
Duty will be imposed on the acquisition of an economic entitlement regardless of whether the person acquiring or receiving the economic entitlement is a party to the arrangements.
The new economic entitlement provisions apply to land owned by any type of person or entity, and apply to all types of interests in land, leases and fixtures. The current exclusion for discretionary trusts under the landholder rules will not apply.
An economic entitlement described above may also be treated as an interest in land for Victorian landholder duty purposes.
What is the impact?
All Victorian property development and financing arrangements entered into, or amended, after the Act receives royal assent next week will need to consider the application of the new economic entitlement provisions.
Property development agreements that rely upon the sharing of profits or income will need to ensure that a clear percentage is specified so as to avoid the arrangement being treated as an acquisition of 100% of the beneficial interest in the property. The stamp duty cost will also need to be factored into the financial modelling.
There may be ways to mitigate the impact of the economic entitlement provisions, such as entering into a development agreement very early on in the process when the land has a lower valuation.
Alternative remuneration models (eg cost plus margin, fixed cost, or coupon style interest) should be considered.
The provisions are very broad and may impact many other arrangements where fees are charged by reference to income, capital growth or sale proceeds from a property. For example, the new laws could potentially apply to service fees, fund management fees, rental management agreements, advertising fees and sales commissions. The Victorian State Revenue Office is expected to issue guidance in the coming months on the types of arrangements that fall outside of the intent of the new laws.
Other measures that have been introduced include:
- The current exemption for corporate reconstructions will be replaced, from 1 July 2019, with a duty rate of 10% of the duty otherwise payable. The qualifying provisions for such concessional relief will also be expanded.
- An increase in the absentee landowner surcharge from 1.5% to 2% from the 2020 land tax year.
- An increase in the land transfer duty surcharge on foreign purchasers of residential property from 7% to 8%. This will apply to contracts entered into after 1 July 2019.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.