Commissioner of State Revenue oversteps

Change in application of economic entitlement provisions under the Duties Act 2000 (Vic)

On 22 April 2016, the Supreme Court of Victoria handed down its decision in BPG Caulfield Village Pty Ltd v Commissioner of State Revenue [2016] VSC 172. The decision related to the application of the economic entitlement provisions of the Duties Act 2000 (Vic) (Duties Act) to development agreements.

The Court confirmed that an entity will not acquire an economic entitlement pursuant to the Duties Act where it acquires a right to benefit from some, but not all, of the land holdings of a landholder. The Court also confirmed that, even where an economic entitlement has been acquired, landholder duty will only apply where that economic entitlement constitutes an interest of 50 percent or more of the value of all of the relevant land holdings of a landholder (instead of that portion of the land holdings that the entity acquired an interest in).

Consequences of the decision

The decision clarifies that the economic entitlement provisions of the Duties Act operate more narrowly than the Commissioner of State Revenue (Commissioner) previously contemplated.

Developers should be aware:

• an economic entitlement will not be acquired if, when entering into a development agreement to develop and sell land in Victoria and split the proceeds of sale, a developer merely acquires a right to benefit from some, but not all, of the land holdings of a land holding entity; and
• even when an economic entitlement has been acquired by a developer pursuant to the Duties Act, the entitlement must constitute 50 percent or more of the total land holdings of the land holding entity (and not simply that portion of the land holdings that the developer has acquired a right to benefit in) for land holder duty to apply.

Background

BPG Caulfield Village Pty Ltd (BPG) and the Victorian Amateur Turf Club (incorporating the Melbourne Racing Club) trading as the Melbourne Racing Club (MRC) entered into a development agreement for the development and sale of land adjacent to the Caulfield Racecourse (Land). Under this development agreement, BPG would be entitled to 82.9 percent of the proceeds of the sale of the land. The Land constituted less than 50 percent of the unencumbered value of all MRC’s landholdings in Victoria.

The Commissioner assessed duty on the basis that BPG had acquired an 82.9 percent interest in the proceeds of sale of the Land by entering into the development agreement (on the basis that BPG had acquired an entitlement to 82.9 percent of the proceeds of the sale of the Land), and had therefore acquired an economic entitlement pursuant to section 81 of the Duties Act.

BPG contended that it had not acquired an economic entitlement because it had acquired an interest which related to some, but not all, of the landholdings of MRC in Victoria. BPG also contended that, if it did acquire an economic entitlement, the Commissioner’s assessment of the interest that it acquired in MRC was flawed because it was based solely on the entitlement that BPG had acquired in the Land, but should have instead been based on the entitlement that BPG acquired in the total unencumbered value of MRC’s landholdings in Victoria. The Court was required to determine the proper construction of sections 81(2)(d) and 81(5) of the Duties Act, in particular:

• whether the entitlement to ‘to participate in the proceeds of sale of the land holdings of the private landholder’ in section 81(2)(d) should be read to include a right to participate in the proceeds of some, but not all, of the land holdings; and
• whether ‘an interest of 50% or more’ in a private landholder in section 81(5) should be determined relative to all of the land holdings of the landholder, or merely the portion of the land holdings that the entity acquired an interest in.

In regards to the interpretation of section 81(2)(d), the Court agreed with BPG’s interpretation and found that BPG had not acquired an economic entitlement because it had only acquired an entitlement to some, but not all, of the Victorian landholdings of MRC. In relation to the interpretation of section 81(5), the Court again agreed with BPG’s interpretation, finding that, even if BPG did acquire an economic entitlement, that economic entitlement was less than 50 percent of the unencumbered value of all MRC’s Victorian landholdings, and BPG therefore had not acquired an economic entitlement pursuant to section 81 of the Duties Act. The Court based its decision on an interpretation of the text of the relevant provisions of the Duties Act. This was done so in light of the overall purpose of section 81 as an anti-avoidance provision targeting ‘indirect interests’, designed specifically to fill the gap in the machinery of sections 78 and 79 of the Duties Act, which were otherwise applicable to ‘direct interests’. The Court noted that to interpret these provisions in any other way would effectively give section 81 greater scope than sections 78 and 79, producing a result that is unlikely to have been intended by the legislature.