The new economic entitlement provisions in the Victorian Stamp Duties Act17 June 2019
The State Taxation Acts Amendment Bill 2019 was recently introduced to implement the 2019 Victorian Government budget announcements on State taxes and the Bill proposes to amend both:
- the dutiable transaction provisions by deeming an economic entitlement to be an interest in land, and
- the landholder provisions by deeming a landholder to include an entity that has an economic interest.
What will the changes impact?
Where a person is to receive a share in any of the income, rents, profit, capital growth or proceeds of sale, an analysis of whether this amounts to “participate” will be required in order to determine whether stamp duty is payable. Determination of a percentage beneficial ownership (which is not a clear-cut determination) is also necessary.
Whilst the provisions apply to project delivery agreement arrangements, they have a much wider operation.
Proposed Part 4B introduces the new economic entitlement provisions in Chapter 2 transactions concerning dutiable property.
There are two new key concepts—an economic entitlement (defined in s 32XC) and calculation of the percentage interest (in accordance with s 32XE). The amount so determined is deemed to be the beneficial ownership of the relevant land (s 32XD) and chargeable with duty (s 28). Where there is foreign residential ownership, foreign residential property duty is chargeable (s 28A).
“Relevant land” is defined in s 32XB as dutiable property in s 10(1)(a), (ab), (ac), or (ad).
There is a minimum unencumbered value of land of $1 million and a shading in for land having an unencumbered value between $1 million and $2 million.
Part 4B applies where a person acquires an economic entitlement in relation to relevant land other than by a dutiable transaction.
Section 32XC(1)(b) is widely drafted and applies where the person is or will be entitled, whether directly or indirectly through another person, to any one or more of the following:
“(i) to participate in the income, rents or profits derived from the relevant land (ii) to participate in the capital growth of the relevant land (iii) to participate in the proceeds of sale of the relevant land (iv) to receive any amount determined by reference to subparagraphs (i), (ii) or (iii) (v) to acquire any entitlement described in subparagraph (i), (ii), (iii) or (iv).”
The calculation of percentage beneficial ownership and hence amount of relevant land subject to duty is determined in accordance with s 32XE. Section 32XE(1) provides that it is the percentage of the total of all entitlements referred to in the above paragraphs.
Section 32XE(2) deems 100% ownership where the arrangement does not specify the percentage, or if in addition to a percentage, the arrangement includes any other entitlement or amount. It is therefore critical when drafting relevant documents to ensure this deeming provision is not triggered.
Liability is by reference to the unencumbered value of the relevant land at the time the interest is acquired under s 32XF.
It is quite clear from the width of the provisions of s 32XC that the provisions are not limited to interests acquired by reference to property development agreements (PDAs).
Fund Managers who are entitled to part of the proceeds of sale of managed land at the time of entry into the management agreement would appear to be caught.
Section 32XE is in very simplistic terms. The denominator is not specified. It simply describes the percentage of the total of each or all entitlements without saying what that actually means.
How do you determine an entitlement to a percentage of the rent or income for a fixed period?
The percentage for a fixed period is not a percentage of the total but a percentage of some lesser sum and for the 100% default in subsection (2) to not apply, it would appear it has to specify a percentage of the total.
Does it mean there is no percentage, in which case subsection (2) applies and the whole of the underlying land is dutiable?
Not all payments by reference to a share of rent or profits will be a right to participate; it will require analysis of the nature of the relationship.
Subsection (3) provides the Commissioner may determine a lesser percentage, however, no guidelines are specified and it is a Commissioner discretion and therefore very difficult to successfully and effectively review.
The definition of landholding in s 72 now includes an interest under s 32XD.
Amendments are made to s 81 to the previous economic entitlement provisions which were revealed to be easily overcome in the BPG Caulfield Village case. Section 81 applies to any economic interest.
Landholder duty will apply where there is a relevant acquisition in a unit trust (20%) or private company (50%) or public company (90%) holding economic entitlements.
Landholder duty will also apply where there is an acquisition of economic entitlement of 50% or more in the landholder (and it is not a relevant acquisition)–s 81(5).
The economic entitlement provisions will commence on royal assent.