New Victorian Economic Entitlement Provisions – Developers Beware!

June 11, 2019

On 6 June 2019, the State Taxations Acts Amendment Bill 2019 (the Bill) passed both houses of Victorian parliament and at the time of writing is awaiting royal assent. The Bill makes significant and far-reaching changes to the Duties Act 2000 (Vic). This article discusses, in particular, the “economic entitlement” provisions contained in the Bill.


Prior to the Bill, economic entitlement rules were contained in the landholder duty provisions in Part 2 of Chapter 3 of the Duties Act 2000 (Vic). The landholder duty provisions were enacted primarily as a tax avoidance measure to prevent taxpayers from circumventing duty on acquisitions of land by instead acquiring the membership interests in a company or a unit trust that was “land rich”. Within these provisions, where a person enters into an arrangement which entitles them to returns based on the underlying land (i.e. an economic entitlement), the acquisition of that economic entitlement may be dutiable. The types of arrangements include rights to:

  • participate in income, rents or profits from the land;
  • share in capital growth of the land;
  • participate in proceeds of sale of the land;
  • receive amounts determined by reference above;
  • acquire any entitlement described above.

Importantly, the former provisions only applied to “landholders”, essentially companies and unit trusts. They did not apply to economic entitlements in land owned by discretionary trusts and individuals. Furthermore, an acquisition is only dutiable where the arrangement amounts to an interest of 50% or more of the economic entitlement in the land.

New Economic Entitlement Provisions

In BPG Caulfield Village Pty Ltd v CSR [2016] VSC 172, the Supreme Court determined that where a taxpayer acquired an economic entitlement to some, but not all, of the landholdings of a landholder, the taxpayer did not acquire an economic interest and therefore the economic entitlement provisions could not apply.
Rather than simply addressing this discrete issue, the Bill introduces new economic entitlement provisions which have the effect of substantially widening the types of arrangements and taxpayers that may be caught. Under the new provisions:

  • economic entitlement provisions will apply to all taxpayers including discretionary trusts and individuals;
  • the 50% threshold will be removed and any percentage entitlement will be dutiable;
  • a deeming provision is introduced whereby arrangements which do not specify the percentage of economic entitlement or includes other entitlements or amounts payable to a person are deemed to be an acquisition of 100% of the economic entitlements.

The new provisions apply to economic entitlements in land valued over $1 million. A “phased in” rate of duty applies to land valued between $1 million to $2 million.

Commencement Date

The new provisions apply to arrangements entered into after the date of royal assent. Arrangements entered into prior to this date are intended to be grandfathered.

Removal of PPR Exemption for Contiguous Land

The new Victorian legislation also removes the current land tax exemption for all land in Metropolitan Melbourne that is contiguous with a principle place of residence (PPR) but on a separate title from the 2020 land tax year. This means that as at 31 December 2019, the PPR exemption will no longer apply to contiguous property (eg. a tennis court) that is on a separate title. To obtain PPR exemption over such land, the land would need to be consolidated onto the one title with the PPR land.

DAA Comment

The new provisions are concerning to say the least. The Victorian Government purports that the new provisions are intended to overcome the BPG decision. However, the effects of the new provisions are far-reaching and have unintended consequences.

In particular, the new provisions create considerable uncertainty where development agreements are used. A common structure used by property developers is where a development entity (the Developer) enters into an agreement with a land-owning entity to develop the property in return for a development fee. While the Explanatory Memorandum states that the new provisions will not apply to reimbursements of development costs, it is unclear whether any other arrangements may be considered an “economic entitlement”. A development fee based on a market rate cost-plus method is likely to be acceptable however, this is not without doubt. Many other arrangements, including some fixed fee arrangements or where an excessive mark-up on costs is applied, could be considered as economic entitlement.

The removal of the 50% threshold creates significant unintended consequences. Any fee arrangements, however minute, that are based on a percentage of sales or profits are technically caught under the new rules. For example, development project management fees, real estate agent’s commissions, other contractors and consultants (such as architects) will all technically have acquired an economic entitlement to land and be subject to duty at the time of entering into the arrangement. Alarmingly, in circumstances where no fixed percentage is expressed in the arrangement, the economic entitlement can be deemed to be 100%.

Despite vehement lobbying and concerns about lack of consultation, the Victorian Government has pressed on with the new legislation. The wide ambit of the legislation will mean that taxpayers must rely on the goodwill of the Commissioner of State Revenue to limit the scope of the new laws. We eagerly await further comment from the Victorian State Revenue Office.