Victorian Treasurer seeks to close property developer stamp duty loophole

The State Taxation Acts Amendment Bill 2019 which seeks to extend the tax on development agreements was introduced into the Victorian Parliament this week.

The Bill contains a major change to the ‘economic entitlement’ provisions of the Victorian Duties Act 2000 that will have a significant and adverse impact on many property developers and the property market more generally, according to tax lawyers.

The Victorian government will seek to boost its slumping stamp duty receipts by extending the tax on development agreements.

It will no longer let developers avoid paying stamp duty by entering into an agreement with the landowner to develop a site without actually purchasing the land.

Many standard development arrangements that are not caught by the current duty rules will be subject to duty under the new provisions, Craig Whatman at Pitcher Partners says.

"This major change was not announced by the Treasurer and is not directly referred to in the Budget papers, despite the change effectively creating a new head of duty liability under which significantly more development arrangements will be subject to duty," he said.

Pitcher Partners is currently working with the Property Council to discuss the impact of these proposed changes on the development industry and the market more generally with both the Government and the Opposition.

The Duties Act 2000 currently contains complex ‘economic entitlement’ rules within its landholder duty provisions, which can apply to development agreements entered into between a private landholder (company or unit trust) and a developer. These rules are unique to Victoria.

Under a typical development agreement, the developer will be entitled to charge the landowner for the development costs incurred and might be entitled to a margin on those costs and/or a share of the profit derived from the development.

The profit component of the developer’s remuneration falls within the definition of ‘economic entitlement’. That definition also includes participation in the dividends or income of the landholder, participation in the income or rents derived from the land holdings of the landholder, or participation in the capital growth or proceeds of sale of the land holdings.

Under the current rules, provided the total economic entitlement(s) of the developer equate to an interest of less than 50%, duty is generally not payable on the arrangement.

For example, if a development agreement entitles a developer to recover the development costs incurred plus receive a 45% share of the profit derived from the development, the developer should be able to proceed without paying duty on the arrangement under the development agreement.

The Bill almost completely re-writes the economic entitlement provisions.

A new set of economic entitlement rules will be introduced into the transfer duty provisions, which will dramatically broaden the duty net and result in a wider range of land development arrangements being subject to duty.

The key change is the removal of the 50% threshold for the interest acquired under the economic entitlement(s).

Taking the example above (where a developer enters into a development agreement under which they are entitled to a reimbursement of development costs plus a 45% share of the profit), if the value of the relevant land is $30M, the developer will now be faced with a duty liability of at least $742,000, which could increase to $1.65M if they are deemed to acquire a 100% beneficial interest in the land.