The Victorian State Revenue Office has released 2 new rulings to clarify its administration of the economic entitlement provisions in Part 4B of Chapter 2 of the Duties Act 2000 (Act): Ruling DA-065 and Ruling DA-066. In addition, draft Ruling DA-067 has been subject to consultation and is expected to be issued in due course.
Overview of the economic entitlement rules
The Victorian economic entitlement rules are specific anti-avoidance rules intended to impose duty on transactions which confer economically equivalent benefits to land ownership. Generally speaking, the provisions apply where a person enters into an arrangement entitling them to participate in or receive an amount determined by reference to:
- the income, rent or profit derived from land, the capital growth of land, or the sale proceeds from land (and there is otherwise no dutiable transaction); or
- 50% or more of the dividends or income of a private landholder company or unit trust (and there is otherwise no dutiable landholder duty acquisition).
Only item 1 above is addressed in this note.
A simple example of an arrangement subject to the provisions is where a landowner appoints a developer to develop the land for sale to third parties, with sale proceeds split between the landowner (as to an amount reflecting the undeveloped land value) and the developer (as to the remainder).
Development agreements and development management agreements are commercially common and vary in their terms depending on the relevant circumstances and the arrangement between the parties. Complexities arise in determining how the economic entitlement provisions apply to these arrangements, as well as arrangements with other service providers. Given the breadth of arrangements which fall under the economic entitlement provisions as outlined in DA-065, it is important to obtain advice and ensure appropriate disclosure is made to the Commissioner in accordance with the Ruling. In many cases, it may also be appropriate to obtain a private ruling ahead of the transaction.
Where duty is payable, the amount can be significant, with duty rates of up to 6.5% on the market value of the land (plus 8% foreign purchaser additional duty on residential land).
When is a service fee dutiable as an economic entitlement?
Ruling DA-065 'Land transfer duty – Acquisition of economic entitlements in relation to land (service fees)' is relevant where a service provider receives a fee for providing services to a landowner (or in connection with land). The Ruling outlines the circumstances in which the service provider acquires an economic entitlement.
General principles
DA-065 confirms that a service fee will not amount to an economic entitlement if, when objectively viewed, the arrangement is not entered into to provide the service provider with rights and benefits which are economically equivalent to an ownership interest in the land, having regard to the nature of the arrangement, the service fee and the service provider. For example:
- a service fee will be an economic entitlement where the service provider assumes economic risks associated with ownership and/or development of land;
- a larger fee above market rates is more likely to indicate an economic entitlement;
- a service provider who provides identified services to third party recipients within the course of its business is less likely to acquire an economic entitlement.
Ordinary service fee arrangements
The Ruling confirms the following ordinary fee arrangements where the service provider who provides the usual identified services does not acquire an economic entitlement:
- real estate agent, with a fee based on rents or sale proceeds;
- project manager, with a fee based on sale proceeds or capital growth;
- planning consultant, with a fee based on capital growth;
- advisory firm, with a fee based on sale proceeds;
- hotel operator, with a fee based on the profit derived from land;
- trustee, fund manager, asset manager and investment manager, with a fee based on sale proceeds, rents, profits or capital growth.
More bespoke examples
Other more bespoke examples in the Ruling include:
- a contingency fee, which may be an economic entitlement depending on an objective analysis of the nature of the arrangement as a whole, including the nature of the relevant outcome or benchmark, and the size of the fee;
- a developer's fee comprising a costs reimbursement plus a fixed percentage, is not an economic entitlement provided there is no variable costs mark-up based on income, rents, profits, capital growth or sale proceeds;
- a lender who provides a conventional loan to a developer with interest as a percentage of the principal will not acquire an economic entitlement. However, the outcome may be different where the interest or fee is tied to the performance of the land (eg interest determined by rent);
- where a retirement village operator and land owner leases/licences units to residents, the amount payable to the owner by an outgoing resident is not an economic entitlement. Where the operator is not the landowner, the operator's entitlement to participate in the sale proceeds of the units is an economic entitlement.
How is duty calculated on acquiring an economic entitlement?
Where a person acquires an economic entitlement, duty is payable as if the person acquired the relevant percentage interest in land. Generally speaking, the percentage interest acquired can be up to 100% in the land, unless the person only acquires a specific percentage in one category of economic entitlement, or the Commissioner otherwise determines a lower percentage.
Detailed examples are provided in the Ruling and should be considered for their application to specific situations. Some guiding principles include:
- The Commissioner will have regard to all relevant facts and circumstances, including the total of all economic entitlements to which the person and associated persons are entitled at the time of entering the arrangement.
- Where the economic entitlement can be identified and quantified as a percentage less than 100%, the identified percentage will be dutiable.
- Where the arrangement does not specify the percentage acquired under an economic entitlement, the Commissioner will look to quantify the percentage based on, for example a waterfall clause, a formula, financial modelling and feasibility studies (the Commissioner will also have regard to assumptions underlying the modelling/feasibility).
- The Commissioner will accept submitted values and inputs where they are appropriate and market-based, eg an independent assessment by a suitably qualified person.
- The percentage is based on the entitlement acquired at the time the arrangement is entered into, not the net benefit or profit that may ultimately flow. As noted in the Ruling: "This will be the case notwithstanding that the person may be obligated to incur costs in connection with the arrangement."
- Where a person is entitled to a fixed percentage economic entitlement plus additional amounts, whether the additional amounts are included depends on whether they are themselves an economic entitlement.
- Where a person acquires two or more economic entitlements of differing percentages, duty will generally be imposed at least on the higher of the percentages.
- Where an agreement contemplates discrete methods to quantify
two or more entitlements, the Commissioner will consider which is
most appropriate to the facts and circumstances of the matter. For
example, where a development agreement entitles a developer to the
higher of 70% of gross sale proceeds or 50% of profits, 70% will be
dutiable.
Draft Ruling DA-067 will further clarify the Commissioner's practice
The economic entitlement rules are complex and many questions remain as to how they apply to specific transactions. When finalised, Draft DA-067will provide further guidance on some of the key concepts used in the provisions. In the meantime, the draft Ruling provides insight into the Commissioner's current view, including:
- The economic entitlement provisions apply to an
'arrangement' made in relation to 'relevant land'.
- 'Arrangement' in this context requires at least one binding agreement under which a person obtains an economic entitlement.
- Where an arrangement is made in anticipation of a party (a purchaser) acquiring an interest in land, the economic entitlement is not acquired until the purchaser has acquired its interest in the land.
- There would be no arrangement if no party to the arrangement has an interest in land and there is no anticipation of any party acquiring or holding an interest in the land.
- Relevant land includes all relevant land subject to the arrangement, including aggregating multiple parcels (the provisions apply where the land value, or the combined land value, exceeds $1 million).
- The provisions can extend to the acquisition of securities in an entity where the acquirer is entitled to participate in the income, rents or profits, capital growth or proceeds of sale from particular land held by the entity (but does not apply where the entitlement is general in nature and not specific to particular land held by the entity)
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.
