Landholder duty is a regime that was introduced to impose duty on acquisitions in landholding entities. These complicated provisions are difficult to understand, and yet are increasingly becoming a compliance area of focus for revenue authorities. This is Part 5 of a series of articles by our State Taxes Team on landholder duty and deconstructs the complex provisions by providing a snapshot on landholder duty and its application with regards to private entities.
In Parts 1-4 of this series, we discussed the landholder duty provisions, with a particular focus on Victorian landholder duty. In this part we continue to delve into the complex landholder provisions, with a focus on the principle of an acquisition of economic entitlement.
The ‘economic entitlement’ provisions are unique to the Victorian landholder legislation. Contained in section 81 of the Duties Act 2000 the provisions are integrity measures. The aim of the provisions is to apply duty to transactions which provide the acquirer with an economic entitlement that amounts to an interest of 50% or more in a private landholder. In particular, the provisions are aimed at arrangements where developers or builders enter into arrangements whereby they will receive 50% or more of the profits or income of a landholder’s land without acquiring any interest or “significant interest in the landholder.
The provisions will trigger a duty liability where a person, either alone or with associate persons, in a three-year period, acquires shares or units in a private landholder or as a result of entering into an arrangement with the landholder under which the person is entitlement to all or any of the following:
a. To participate in the dividends or income of the private landholder;
b. To participate in the income, rents or profits derived from the land holdings of the private landholder;
c. To participate in the capital growth of the land holdings of the private landholder;
d. To participate in the proceeds of sale of the land holdings of the private landholder;
e. To receive any amount determined by reference to paragraph (a), (b), (c) or (d);
f. To acquire any entitlement described in paragraph (a), (b), (c), (d) or (e).
In order to trigger economic entitlement landholder duty, an acquisition of 50% of more of the total economic entitlements of the landholder must be acquired. If that occurs, then duty will be imposed as though those acquisitions were acquisitions of units/shares in a landholder. Notably, duty will only be chargeable in relation to the specific landholdings the economic entitlement interest is acquired in.
Churchill Pty Ltd (Churchill) is a private landholder. Churchill holds three parcels of land in Wodonga, in Northern Victoria. Brooker Builds Pty Ltd (Brooker) enters an agreement with Churchill to develop its most substantial parcel of land, representing 80% of the landholdings of Churchill. Brooker is covering the majority of the costs for the development and, as a result, under the agreement between the two entities, it is agreed that Brooker will be entitled to 70% of the profits derived by Churchill from all of its landholdings. Duty is therefore charged in relation to the 70% of the unencumbered value of that one parcel of land.
BPG Caulfield Village Pty Ltd v Commissioner of State Revenue (2016) VSC 172
As can be seen from points a-f above, the breadth of the economic entitlement provisions is far reaching. The width of the provisions was examined in 2016 in the Victorian Supreme Court’s (Court) decision in BPG Caulfield Village Pty Ltd v Commissioner of State Revenue (2016) VSC 172. In this matter the Court provided some clarity on the economic entitlement provisions, and importantly, narrowed the Victorian State Revenue Office’s (SRO) broad interpretation of the provisions.
By way of background, the Melbourne Racing Club (MRC) held landholdings in Victoria significantly higher than the $1million landholder threshold. In 2012 MRC entered an agreement with BPG Caulfield Village Pty Ltd (BPG) to develop an area of these landholdings amounting to less than 50% of the total unencumbered value of all the Victorian landholdings held by MRC. As part of the agreement BPG was provided with a portion of the proceeds from the sale of the developed properties to third party purchasers – falling under (d) of the above list.
On the basis that BPG was entitled to participate in the proceeds of the sale of the developed land, the Commissioner of State Revenue (Commissioner) assessed BPG for landholder duty on the basis that, due to this participation, it was deemed BPG had acquired an economic entitlement in MRC, a landholder.
The questions before the Court were:
Did BPG acquire an economic entitlement within the meaning of subsection (d) noted above?
If BPG acquired an economic entitlement under that subsection, was that economic entitlement an interest of 50% or more in the private landholder (MRC)?
The Court held that BPG did not acquire an ‘economic entitlement’ within the meaning the Act because to acquire an economic entitlement sufficient to fall within the provisions, this entitlement must be in relation to economic benefits of all land held by the landholder, not simply a portion as was the case for BPG. It was not necessary for the Court to consider the second question however it was noted that BPG’s entitlement represented only 12% of the value of all of MRC’s landholdings, far below the economic entitlement required.
Justice Croft in his decision also commented in light of the explanatory memorandum that the economic entitlement provisions are anti-avoidance in nature, with the intention to render dutiable the traditional ‘direct interests’ and ‘synthetic interests’. Nevertheless, there is no distinguishing between the two or an intention to create a separate head of duty.
Notes for taxpayers and advisors
Whilst the BPG case narrowed the operation of the provisions, it is still important that taxpayers and advisors continue to take note of the width of application that the economic entitlement provisions contain.
It is not a requirement to simply consider whether the percentage of shares or units acquired in a landholder breach the landholder threshold, but rather further consideration needs to be given to whether entering into an arrangement with the landholder provides an economic right sufficient to trigger the thresholds of the economic entitlement principle. A common example is under a development agreement with a landholder.
Where taxpayers are concerned that the economic entitlement provisions may be met, consideration should be given to the merits of applying for the Commissioner to exercise his discretion to determine a lower percentage interest. In certain circumstances the Commissioner can determine a lesser percentage however this must be made in writing with appropriate support for the position.
*Please note that recent amendments introduced in the 2019/20 Victorian State Budget significantly alter the operation of the economic entitlement provisions. This is explored further in our update here.
If you have any further questions on the application of landholder duty or state taxes, please contact one of the members of our specialist team: