If you’re looking to develop property in Victoria, the most important changes to property development agreements you need to be aware of are those contained in the State Taxation Acts Amendments Bill 2019 (Vic) (the Bill). This Bill overwrites many of the rules laid out in the Duties Act 2000 and was given Royal Assent in mid-June. The Bill’s newly implemented legislation will undoubtedly have a significant impact on many property developers, as well as the general property market. We at Boutique Lawyers want to explore what these changes are and how they will affect you, whether you’re a new or experienced property developer.
The wider net of duty catches more arrangements
The new regime applies to more arrangements due to the following features:
- The provisions are no longer restricted to private unit trusts and private companies – they now apply to all landholders, including individuals and discretionary trusts, that enter an arrangement involving Victorian land with an unencumbered value that exceeds $1M
- There is no more ‘safe limit’ of 50% – unlike the provisions under the Duties Act 2000 where only economic entitlements of 50% or more would trigger a duty liability, the acquisition of any economic entitlement now triggers a duty liability. For example, a 10% economic entitlement to a share of the proceeds of sale will trigger duty costs on 10% of the value of the land
- The economic entitlement may be acquired ‘through another person’, meaning the liable party may not necessarily be a party to the agreement with the landowner
These features have also resulted in the abandonment of a common practice under the old Act where developers used to be able to avoid paying stamp duty; this was possible by the developer entering into an agreement with the landowner to develop a site without actually purchasing the land. Changes brought by the Bill will instead treat developers as though they have acquired beneficial ownership of any site worth more than $1M and subject them to 5.5% stamp duty on potentially the land’s entire value. In the example of a $1,000,001 plot of land, the stamp duty, also known as ‘transfer duty’, could be an additional $55,000 after rounding to the nearest dollar.
New 100% acquisition rule
A developer may be deemed to have acquired 100% of the land in certain circumstances including where:
- The arrangement does not specify the percentage of the acquired economic entitlement; or
- The arrangement specifies the percentage of the economic entitlement, and includes any other entitlement, or amount payable to, the person or an associated person
This rule could be triggered by the incorporation of other payments that are commonly included in development agreements, such as commissions, marketing and administrative fees, and reimbursement for development costs. If percentage is deemed to be 100%, the developer may be liable to pay duty on the whole value of the land.
For example, let’s say a developer enters into a development agreement with a landholder for land worth $10M and is entitled to a 25% share in the profits. The former regime would dictate that no duty is payable as the developer’s economic entitlement is less than 50%. Under the new Bill, the developer is liable to pay 5.5% duty on $2.5M, or $137,500, and if the developer is deemed to have acquired 100% of the land, the duty liability increases to $550,000.
Stuck on what to do next?
If you are a developer with a pending development agreement or were thinking of developing a property prior to becoming aware of these changes, you should consider rethinking the structure of your arrangement in light of the new provisions. You may also wish to consult with property law professionals such as the team at Boutique Lawyers on whether a development agreement is appropriate or feasible given the potential stamp duty consequences. If you would like to obtain more information or legal advice from a team with extensive experience and services provided in property development law, feel free to contact us via our website, call 1300 556 140, or visit our Collins Street office today.