New Victorian transfer duty legislation to sting property professionals and fund managers

New legislation that is expected to take effect on 12 June could impose transfer duty on ‘economic entitlements’, such as income derived from property transactions. For instance, if a property fund buys a property after 12 June, the trustee/manager may have to pay additional duty on their acquisition fee. Most standard development agreements entered into from this date will also likely trigger a duty liability. Duty will often be charged on the entire value of the property and payable within 30 days of making the arrangement.


Victoria’s existing ‘landholder’ duty rules have some unique provisions that are not mirrored in the equivalent provisions across the country. Broadly, the ‘economic entitlement’ provisions impose duty on various arrangements where there is an acquisition of certain rights or entitlements relating to the landholdings of a private landholder. Though these may have notionally been introduced as ‘anti-avoidance’ provisions, they go well beyond this and impose significant duty liabilities on some genuine commercial arrangements where there is no element of avoidance; in particular, they can result in duty being triggered by development agreements.

The Victorian Government is proposing to revamp and extend the ‘economic entitlement’ rules by introducing new provisions into the ‘transfer’ duty regime (rather than just in the ‘landholder’ duty regime) and significantly extending their scope. These proposed changes will have extensive reach and will bring many commercial arrangements to duty. They will apply to most ‘standard’ commercial development agreements, many arrangements in the funds management space, and will even go so far as to apply to common real estate transactions involving Victorian land with an unencumbered value that exceeds $1 million. This includes commercial agreements negotiated at arm’s length between unrelated parties.

The proposed amendments are contained in the State Taxation Acts Amendment Bill 2019 (Vic) (Bill), which is currently before Parliament and is expected to be further debated in the Legislative Council on Thursday 6 June 2019. The Bill contains the various state taxation amendments announced in the recent Victorian Budget. However, the Budget made no mention of these economic entitlement measures (nor other measures relating to the charging of duty in relation to fixtures).

Under the Bill, the proposed changes will not affect development agreements entered into before, or on the day, the Bill receives Royal Assent.

Therefore, if you have a draft agreement that relates to property in Victoria, finalising and executing the agreement should move to the top of your ‘to do’ list before the new provisions take effect!

However, even if a development agreement is entered into prior to the legislative amendments taking effect, once the new provisions are in force the subsequent transfer, assignment, or variation of rights under the development agreement could also give rise to further duty consequences. This is because the subsequent transaction itself could constitute an acquisition of an economic entitlement.

Current provisions

Broadly, under the current economic entitlement provisions in the landholder duty rules, duty is payable where someone (alone or together with associated persons) directly or indirectly acquires an entitlement to 50% or more of any of the following ‘economic entitlements’:

  • to participate in the dividends or income of a ‘private landholder’ (i.e. a ‘private unit trust’ or a ‘private company’ with Victorian ‘land holdings’ of $1 million or more);
  • to participate in the income, rents or profits derived from the land holdings of the private landholder;
  • to participate in the capital growth of the land holdings of the private landholder;
  • to participate in the proceeds of sale of the land holdings of the private landholder;
  • to receive any amount determined by reference to (a), (b), (c) or (d); or
  • to acquire an entitlement described in (a), (b), (c), (d) or (e).

In the context of development agreements, these provisions can be triggered when the payment of a fee is expressed as being paid or payable from, or referable to, the income, rents, profits capital growth, or proceeds of sale of, the land holdings of a private landholder. Ultimately, development agreements that are not intended to create or grant ‘economic entitlements’ that give rise to duty in Victoria sometimes fall foul of these provisions and unintentionally trigger duty. This may arise where, for example, a developer is paid:

  • a development fee of less than 50% of the proceeds of sale of the relevant property; plus
  • a management fee that is payable ‘from’ the proceeds of the sale of the property (often simply as a mechanism to ensure payments are made in a particular order, such that priority is given to the remission of GST to the ATO and the repayment of bank loans),

and the development fee and the management fee, when added together, amount to 50% or more of the proceeds of the sale of the property.

Proposed new provisions

The proposed new ‘economic entitlement’ provisions will, based on the provisions in the Bill, come into operation the day after the Bill (once enacted) receives Royal Assent.

If the Bill is passed on Thursday 6 June (when debate is expected to resume), it will likely receive Royal Assent on Tuesday 11 June, such that arrangements entered into on or after 12 June 2019 will be subject to the new provisions.

Broadly, under the proposed provisions:

  • No de minimus or 50% threshold would apply. Any arrangement where someone acquires an ‘economic entitlement’ in respect of ‘relevant land’ in Victoria valued at more than $1 million would give rise to duty.
  • The provisions can be triggered even if the ‘acquirer’ is not a ‘party to the arrangement’. This change is intended for situations where a party under an arrangement directs the benefit of the economic entitlement to flow to another person, such as a newly created subsidiary.
  • The land no longer needs to be held by a ‘private landholder’ for these provisions to apply; the land could be held by a public company, listed unit trust, trustee of a discretionary trust, individual, or any other owner.

When an ‘economic entitlement’ is acquired, duty will be calculated on the unencumbered value of the relevant land at that time, and will only be reduced to the extent of the economic entitlement acquired if:

  • the percentage is specified in the arrangement;
  • no other economic entitlement is acquired; and
  • the person (and their associates) receive no other entitlement or payment.

If these strict conditions are not satisfied, duty will be calculated on the entire market value of the relevant land unless the Commissioner of State Revenue determines a lesser percentage to be appropriate in the circumstances. Such duty will be phased in where the unencumbered value of relevant land does not exceed $2 million.

To put this in perspective, most ordinary commercial arrangements we review would likely result in duty prima facie being payable on the total value of the relevant land, despite the ‘acquirer’ not actually acquiring rights relating to anywhere near the total value of the land. Some practical examples:

  • An agreement under which a funds manager would receive performance fees on the possible future sale of land as well as a base management fee would be subject to duty on the entire value of the relevant land.
  • A development agreement which provides for a monthly management fee (however small) plus a proportion of the proceeds of sale (again, however small) when the property is ultimately sold would also be subject to duty on 100% of the dutiable value of the relevant land.
  • Most standard agreements engaging a real estate agent to sell land worth more than $1 million (which would apply to many family homes in Victoria) would also be subject to duty on the total value because these agreements usually charge commission based on a small percentage of the sale proceeds plus advertising fees. Even if these agreements were changed to only charge commission of 1%-2%, duty would be payable on that percentage of the value of the relevant land.
  • Even rental management arrangements with real estate agents could be subject to these new provisions, as their fees are generally tied to the rent derived from the relevant land plus other payments.

Under the proposed provisions, the duty liability would be payable within 30 days of entering into the agreement. For most genuine commercial arrangements, this is not financially viable. In the third example above, for instance, the ‘economic entitlement’ duty liability would be payable by the real estate agent well before settlement of the sale of the property, and often before the contract of sale is even signed. The duty itself would exceed the amount received by the real estate agent! Surely this cannot align with the intended operation of the provisions!.

Once an arrangement is entered into, the ‘acquirer’ is deemed to have acquired beneficial ownership of the land. This can have further implications for future transactions or dealings undertaken by the acquirer. It can also have landholder implications if the acquirer is a company or unit trust scheme. There also appears to be no tie-breaker to deem the actual land owner to no longer own the land for duty purposes, so we have this curious position where two or more parties can be treated as owning the same land.

Watch this space

The Explanatory Memorandum to the Bill suggests these measures were introduced to address an issue with the current ‘economic entitlement’ provisions that was highlighted in the Supreme Court of Victoria’s decision in BPG Caulfield Village Pty Ltd v Commissioner of State Revenue [2016] VSC 172. Relevantly, the Supreme Court found that an economic entitlement could not be acquired in circumstances where the taxpayer only acquired an economic entitlement to some, but not all, of the land holdings of a landholder. Accordingly, the proposed amendments focus on the relevant land itself, rather than the landholding entity. However, the proposed amendments clearly go well beyond addressing this issue.

We understand the Government consulted with industry groups after the Bill was introduced in Parliament (but not beforehand). However, we also understand this consultation has been somewhat notional, as the Government intends to proceed as planned without amendment or variation, or even further consultation and negotiation. The introduction and expected passing of this legislation has been swift and, seemingly, not completely thought through.

Though the Victorian Government might see these new provisions as either ‘closing a loophole’ or, potentially, a money-spinner to catch out taxpayers they consider to be doing something ‘wrong’, it’s entirely possible these changes will drive business and development activity out of Victoria. We see a number of investors (that invest using trusts) who intentionally steer clear of Queensland due to Queensland’s onerous ‘trust acquisition’ duty rules. Will we see some businesses move away from Victoria as a consequence of these provisions being too broad?

For advice on how these new economic entitlement provisions would impact you, please contact us.


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