Victoria’s Transfer Duty (Stamp Duty) regime underwent a significant expansion in July 2012 which included the introduction of the ‘Economic entitlement’ provisions. The following is a brief explanation of the Economic Entitlement provisions.
1. Broadly, the concept of Economic Entitlement is designed to fill a perceived gap in the collection of transfer duty. In a contract where a ‘private landholder’ gives complete rights to use, development, sale and profits to a Developer – but did not actually transfer the landholding – transfer duty previously did not apply on the transaction. This loophole was closed by declaring the contracting of ‘profit rights’ to be an Economic Entitlement and, where the transfer of Economic Entitlement is sufficiently large, they are subject to Transfer Duty.
2. A ‘Private Landholder’ includes most business structures which own land. Importantly, Individuals are not ‘private landholder’s in this sense and so development agreements with Individuals need not consider the Economic Entitlement provisions.
3.The ‘Profit Rights’ which take the form of Economic Entitlements, arise from any arrangement where a person/entity is entitled to:
- Participate in Dividends or Income of a private landholder; or
- Participate in the income, rents or profits; the Capital Growth of; or the proceeds of sale of the land holdings of the private landholder; or
- Any amount determined by reference to the above.
4. In particular, this definition includes any arrangement which includes a ‘profit share’ (Such as a development fee as a percentage of sales), and could potentially extend to a fixed fee contract that was paid ‘out of the proceeds of land sales’.
Fortunately, while the above definition does cause many arrangements to be considered Economic Entitlements, there is no transfer duty payable where the proportion amounts to less than 50% of the total profit rights of a private landholder. In most development arrangements, fees payable to the developer would not be expected to exceed 50% of total sales revenue and so no transfer duty would arise.
There is however potential for exposure where the developer receives a substantial percentage of proceeds by way of ‘profit share’ type arrangement. Consider for example the following scenario:
A development agreement is entered into where the profits, after land costs and the development fee, are divided 50:50 between landholder and Developer. If the result of sales is that the Development Fee + 50% of profits are greater than 50% of sale proceeds, then the Developer will be determined to have acquired an Economic Entitlement and be required to pay (partial) Transfer Duty. In this case, the obligation is not determined until the sale proceeds determine the 50% proportion to be breached, but it does apply retroactively.
If you have any queries on the above please contact our office.
Disclaimer: The contents herein are intended for general information only and should not be construed as legal or accounting advice. Vicca Chartered Accountants Brisbane bears no responsibility for any loss that might occur from reliance on information contained in this publication. Please do not reproduce, transmit or distribute the contents herein in any form without prior permission from Vicca Chartered Accountants, Taxation Accountants Brisbane Australia.