The 2019 Victorian budget contained a sleeper in the form of the amendments to the Victorian economic entitlement provisions. These provisions will have a detrimental impact on how many development agreements are currently structured with the result that many potential development arrangements may need to be reconsidered or abandoned in favour of alternative structures.
The measure is currently being rushed through the Victorian parliament in the State Taxation Acts Amendment Bill 2019 and, if the Bill is passed, will apply on the day after Royal Assent. At the time of writing the Bill had passed the Legislative Assembly and had been introduced in the Legislative Council. The Government does not propose to consult on the measure.
It is also worth noting that, although this article focuses on the impact of the amendments on development agreements, the changes will impact any agreement where an economic entitlement is acquired.
What are the current economic entitlement provisions?
The current economic entitlement provisions have a limited application. They only apply where:
land is held by private unit trusts and private companies – ie land held by individuals, discretionary trusts and self managed superannuation funds are not caught by the regime; and
the economic entitlement acquired is 50% or more.
The current regime is effectively an anti avoidance regime to stop taxpayers using development agreements to avoid the landholder regime.
What has changed?
The proposed new economic regime will apply as follows:
it will apply to all landholders including where land is held by individuals, discretionary trusts and self managed superannuation funds who enter into an arrangement for Victorian land valued $1 million or more;
there is no percentage threshold – any economic entitlement will trigger duty – eg a 10% economic entitlement will trigger duty on 10% of the value of the land;
This means that the economic entitlement provisions are now operating outside of the landholder duty provisions and are effectively another head of duty.
What is an economic entitlement?
An economic entitlement is defined to include an arrangement which directly or indirectly includes any of the following participation rights:
income, rents or profits derived from the relevant land;
capital growth of the relevant land;
proceeds of sale of the relevant land; or
any amount determined with reference to or entitlement described above.
The provisions include a reference to an economic entitlement being acquired “through another person”, and accordingly it is not necessary to have an agreement directly with the landowner in order for the liability to be triggered.
To add further complexity, the provisions also introduce further amendments to widen the scope of landholder duty. Going forward, any economic entitlements in relation to Victorian land valued over $1 million are now also defined as ‘landholdings’, widening the net of which landholder duty may be applied.
How is the value of an economic entitlement determined?
Duty is charged on the value of the land at the time the economic entitlement is acquired multiplied by the percentage that the economic entitlements acquired make up of the total of all entitlements.
For example, if a developer enters into a development agreement with a landholder for land worth $2 million, under which the developer is entitled to 40% of the net proceeds, then the developer will pay duty on $800,000 (ie duty of $43,070).
If the percentage cannot be determined, then the developer will be deemed to have acquired 100% of the land and pay duty on the full value of the land. Although, in that scenario, the developer could apply to the Commissioner of State Revenue to determine a lower percentage.
In addition, a developer can be deemed to have acquired 100% in the situation where there is “any other entitlement of, or amount payable to, the person or an associated person”. This is an extremely wide provision that could catch any number of innocuous payments. For example, project management fees, commissions, payments for development costs, advertising fees etc.
The breadth of the provisions means that any property owners and developers who are contemplating or who are in the midst of entering a development arrangement with regard to underlying Victorian lands valued at $1 million or more will now be subject to additional unexpected (stamp) duty costs.
Given the current declines in the property market, this is a significant blow to property owners and developers.
What should be done now (before the Bill passes)?
As the new laws will come into operation the day after Royal Assent, this is expected to come into operation very shortly.
You should urgently:
seek advice on any existing development arrangement negotiations in relation to any Victorian land worth $1 million or more; and
look to sign any existing development arrangements currently under negotiation.
What should be done if the Bill passes?
If the Bill passes, things to consider could include:
alternatives to development agreements – including straight sales;
structuring development agreements on a cost plus arrangement;
entering into profit share development agreements when the value of the land is lower;
factoring in economic entitlement duty in the development costs of a development;
for existing development agreements, care should be taken in amending those agreements to ensure that amendment does not result in a dutiable economic entitlement; and/or
assess any contemplated relevant acquisitions in a Victorian landholding entity in light of the widened definition of ‘landholdings’.
If you have any questions on how these controversial amendments will affect you and your options, please contact one of the members of our specialist teams: