The State Revenue Office (SRO) recently issued Draft Revenue Ruling DA-065 (Draft Ruling). This Ruling clarifies the application of the economic entitlement provisions in the Duties Act 2000 (Vic) (Act) to service fees.
What is an economic entitlement?
The economic entitlement provisions in the Act trigger duty if a person acquires an "economic entitlement" under an arrangement made on or or after 19 June 2019 in relation to relevant land with an unencumbered value of more than $1 million.
You will acquire an economic entitlement if you are entitled to any one or more of the following:
- to participate in the income, rents or profits derived from the land
- to participate in the capital growth of the land
- to participate in the proceeds of sale of the land
- to receive any amount determined by reference to any of the above matters
- to acquire any entitlement described above.
There has been considerable uncertainty as to the impact of these provisions on common fee for service arrangements given the breadth of the definition of economic entitlement.
Are service fees an economic entitlement?
According to the Draft Ruling, genuine service fees that are within industry parameters and are charged by entities normally engaged in providing those services on a full time basis are not considered to be an economic entitlement. For instance, real estate agent fees will not be considered as an economic entitlement despite being calculated as a percentage of the sale price.
Some examples of service providers whose service fees are not an economic entitlement despite being tied to proceeds associated with land and/or its development are as follows:
- Real estate agents;
- Executors and Trustees of deceased estates;
- Project managers;
- Planning consultants;
- Private advisory firms; and
- Lenders and financiers.
When do you need to disclose the service agreement to the SRO?
The Draft Ruling states that if a person is providing a genuine service in relation to land, then the service agreement does not need to be disclosed to the Commissioner.
A person providing a genuine service in relation to land:
- is normally engaged in a full-time capacity in providing those services
- the agreed fee/rate is within industry parameters, and
- the person is not associated to any other person who has an economic entitlement in relation to the land.
In cases where the service provider is associated with a person who has an economic entitlement in relation to the land, the fee for service must be disclosed to the SRO for assessment.
Further, where the services are provided by a special purpose vehicle (SPV) established to provide such services to a project, the service fee arrangement must be disclosed. This is because whilst the SPV might be engaged on a full time basis in providing the services, they do not routinely provide services to third party clients.
Are Responsible entities, trustee and fund manager fees economic entitlements?
Responsible entities, trustee and fund manager fees are not an economic entitlement if all the following conditions are met:
- the fees are genuine;
- the fees are within industry parameters;
- the fees relate to holding and maintaining property for the fund; and
- the property has not been developed for the fund by a person associated with the responsible entity, trustee or fund manager (as applicable).
Interaction of landholder duty and economic entitlement provisions
The Draft Ruling provides some interesting comments on the way in which share and unit interests may trigger duty under the economic entitlement provisions where such interests would not trigger duty under the landholder rules.
An example given in the Draft Ruling concerns the issue of special class units in a unit trust (equal to 15% of the total units in the trust) where the return on the special class is tied to the return from a particular property. Whilst the issue of the units is below the 20% threshold for triggering landholder duty, duty is levied under the economic entitlement provisions because the return on those units is equal to 100% of the net income, rents or profits derived from the particular property.
The Draft Ruling is open for consultation until 28 September 2022.
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