The Victorian Government is proposing a sweeping reform of the “economic entitlement” provisions of the Victorian duties legislation. The result of the proposed changes would be to effectively bring to duty a common form of project funding and structuring used for residential developments in Victoria. Typically these transactions enable a residential developer to secure rights to develop land in Victoria (without taking any ownership in the underlying land) to deliver residential dwellings and to be paid a fee for providing that service.
Under the proposed changes, a residential developer will essentially be taken to have acquired an “economic entitlement” to the income, rents or profits derived from the development land irrespective of the level or type of fee they charge and will be imposed duty as if they have acquired ownership in the development land.
The current economic entitlement provisions were recently unsuccessfully tested by the Commissioner in a Supreme Court case, which led industry to take comfort that most common forms of residential development projects were not captured by the economic entitlement provisions and were not triggering a duty liability.
The proposed changes introduce a fundamental revision of the manner in which duty is imposed on project transactions of this nature. The economic entitlement provisions were first introduced in 2012 as an anti-avoidance measure to capture transactions where the economic benefit a person derives from a development of land was of a nature that equated to acquiring ownership rights in that land. The nature of the substantive revision of these rules that is now being proposed means that residential development transactions will as a rule be captured as dutiable irrespective of the level of economic benefit acquired and the nature and type of such economic benefit.
The impact of such move of the economic entitlement provisions from being an anti-avoidance measure to a separate head of duty will inevitably mean that a myriad of unintended consequences could arise which would potentially capture much broader types of transactions as dutiable. Concerns have been expressed that all arrangements where a service fee or commission is charged for management or selling services are arguably captured under the broad drafting of the proposed legislation if it is passed in its current form.
The deeming nature of the provisions that disregard the level of the economic entitlement acquired potentially means that the duty imposition will have little or no correlation to the underlying economics of the transaction. A person generating a small success fee in a development transaction could somehow be deemed to have acquired the development land and be charged duty at the 5% land transfer rate.
The new proposed economic entitlement rules turn the economics of residential developments in Victoria on its head and are completely at odds to the rest of the country.
The property industry is rightly concerned that these changes will have deep ramifications for the manner in which the industry has been able to efficiently facilitate land developments in Victoria and unlocking of land supply. The final shape of the new duty regime remains to be seen after the Parliament’s consideration of the proposed legislation which is imminent.
Biljana Apostolova, Partner
Jeremy Smith, Partner
Biya Sun, Associate