On Tuesday 28 May 2019, the State Taxation Acts Amendments Bill 2019 (Vic) (the Bill) was introduced into Parliament. This may impact Victorian development agreements.
Amongst a number of proposed changes that were announced and detailed in the 2020 Victorian State Budget (see link for details of those announcements) the most significant change that will impact property developers is that property development agreements in almost all forms, will create a dutiable event.
Unfortunately, this proposed change was introduced into the legislation without being announced in the 2020 State Budget and without any industry consultation.
This change is proposed to apply from the day after the Bill receives Royal Assent (which could be within a week of the publishing of this article).
Current law regarding economic entitlement
Under the current law, landholder duty will arise if a person acquires an ‘economic entitlement’ of more than 50% in a private landholder. Importantly, under the current law, a landholder does not include individuals, discretionary trusts and self-managed super funds.
This means that under the current law, property developers could structure to mitigate paying stamp duty by entering into a development agreement with the landholder to develop a site without actually purchasing the land. This type of structuring could be done simply to allow a developer to separate landholding and development activities for asset protection purposes.
Proposed changes under the Bill
However, under the Bill, an economic entitlement will be acquired where an arrangement is made in relation to relevant land that has an unencumbered value of more than $1 million and that arrangement entitles a person to participate in (or acquire the entitlement to) the income, rent or profits from, capital growth of, or the proceeds of sale of, the relevant land.
This change essentially will treat property developers as acquiring ‘beneficial ownership’ of any site worth more than $1 million and subjecting them to 5.5% stamp duty on potentially the entire value of the land if a development agreement is entered into that has a profit / revenue linked component to the remuneration.
Importantly, this proposed change applies to all landholders.
What this means to property developers
Under a typical development agreement, developers are entitled to charge the landowner for the development costs incurred and might be entitled to a margin on these costs as well as a share of the profit derived from the development. The profit component of the development’s remuneration falls within the definition of ‘economic entitlement’.
Currently, if a developer’s economic entitlement is less than 50%, stamp duty is generally not payable. However, if the Bill is passed, a developer (without any economic entitlement threshold) could be subject to stamp duty and the stamp duty will be charged on the entire value of the land, rather than the profit derived by the developer through the development agreement.
The proposed changes will require developers to plan carefully when entering onto a property development acquisition or negotiation with a landowner under a development agreement / joint venture scenario.
If a developer is currently in negotiation under a property development agreement, it may be best to try and enter into such agreements before this new proposed law comes into effect.
This article was co-authored by Gloria Liang, HLB Mann Judd Melbourne