Amendments to the Duties Act 2000 (VIC) in the form of the State Taxation Acts Amendment Act 2019 (VIC) is likely to have enormous ramifications for developers due to changes to the duty treatment of economic entitlements. It sounds complicated, but in simple terms, under the new amendments, developers will in many instances be obligated to pay enormous amounts of stamp duty to the State Revenue Office, even when they have no ownership over the land.
Prior to amendments, a developer could strike an agreement with a landowner to develop their land in return for an agreed upon percentage of capital generated, be it from increased capital improved value, from rental profits, the proceeds of sales, and so on. This capital is an economic entitlement. An agreement could also include the developer obtaining other economic entitlements such as reimbursement for development materials, payment of administration fees, marketing fees, etc.
Under the old rules, this economic entitlement in land required payment of stamp duty when:
- The land held an unencumbered value of $1 million or more, and;
- The land was held by a private unit trust or a private company, and;
- The economic entitlements acquired by the developer amounted to 50% or more of the capital derived from the land, for example from sale proceeds, rental profit, capital growth, or other economic entitlements.
Under these conditions, the developer would be treated as having made an acquisition to the land and would be liable to pay duty for the percentage of interest acquired.
However, under the new rules, effective as of the 19th of June 2019, while the land must still hold an unencumbered value of $1 million or more, the landowner can be anyone, including discretionary trusts and individuals. Furthermore, any amount of acquired economic entitlement will trigger duty liability, which must be paid within 30 days of signing the agreement on the value of the land at the time of signing. For example, an economic entitlement of 10% of proceeds of sales will mean paying duty on 10% of the unencumbered value of the land.
Perhaps even more concerning is a deeming provision, that states when a percentage of economic entitlement is not specified, or when a person is entitled to two or more different categories of economic entitlement (for example, a unspecified percentage of sales proceeds plus administrative costs), then the person is taken to have acquired an interest in the land of 100%, meaning stamp duty is payable on the whole value of the land.
The extra duty for developer agreements also applies between two related parties. For example, a discretionary trust becomes the owner of a development site. A development agreement is put in place to undertake development between related entitles for reasons of asset protection, or to distribute profits to a related entity. While previously this was not subject to duty, now it is.
The amount of duty payable is further affected by a phasing in of duty when the unencumbered value of the land does not exceed $2 million, however at the end of the day, developers will still find themselves forking over cash to the state revenue office for many arrangements that involve economic entitlements.
For more information, visit the State Revenue Office. To see more of the amendments made under the State Taxation Acts Amendment Act 2019, click here.
