Land transfer duty - Economic entitlements in relation to land - Key concepts and interpretation

DA-067

Preamble

The economic entitlement provisions in Part 4B of Chapter 2 of the Duties Act 2000 (the Act) apply if a person acquires an economic entitlement in relation to relevant land, other than by a transaction that is already a dutiable transaction under Chapter 2 of the Act (for example, a transfer of land).

Section 32XC of the Act provides that a person acquires an economic entitlement if an arrangement is made in relation to relevant land with an unencumbered value that exceeds $1 million, under which the person is or will be entitled, whether directly or through another person, to any one or more of the following:

• to participate in the income, rents or profits derived from the relevant land
• to participate in the capital growth of the relevant land
• to participate in the proceeds of sale of the relevant land
• to receive any amount determined by reference to any of the above matters
• to acquire any entitlement described above.

In this ruling, the phrase ‘economic benefits from land’ means the income, rents, profits, capital growth and proceeds of sale from relevant land.

The purpose of this ruling is to provide guidance on key concepts in the economic entitlement provisions in Part 4B of Chapter 2 of the Act. This includes acquisitions of shares in companies and units in unit trust schemes that are outside the scope of the landholder provisions in Part 2 of Chapter 3 of the Act. This ruling does not provide any guidance on the landholder provisions.

This ruling should be read together with Revenue Ruling DA-065 – Land transfer duty – Acquisition of economic entitlements in relation to land (service fees) and Revenue Ruling DA-066 – Land transfer duty – Calculation of economic entitlements.

This ruling is provided as a guide only and is not exhaustive. If your circumstances are not covered in this ruling, you can apply for a private ruling in accordance with Revenue Ruling GEN-009v3 – General information on private rulings.

Ruling

Meaning of an 'arrangement' under the economic entitlement provisions

The economic entitlement provisions in Part 4B of Chapter 2 of the Act apply to an ‘arrangement’ made in relation to relevant land. The term ‘arrangement’ is not defined in Part 4B and can have different meanings in other statutory contexts. For Part 4B, it has a broad meaning and may encompass a wider course of conduct or a series of related agreements rather than a single agreement.

While broad, an arrangement is not made for Part 4B unless there is at least one binding agreement or other legally enforceable instrument under which a person is or will be entitled to participate in, or receive an amount determined by reference to, an economic benefit from land. The term arrangement in this context therefore does not capture non-binding expressions of intent or other preliminary documents (for example, indicative offers or heads of agreement) that merely record commercial intentions and do not create legally enforceable entitlements in relation to the economic benefits from land.

Transitional relief (arrangements made before 19 June 2019)

Clause 47 of Schedule 2 to the Act provides that the economic entitlement provisions do not apply if an arrangement was made before 19 June 2019 (i.e. transitional relief). In this transitional context, the term ‘arrangement’ has a broader meaning and may encompass non-binding concerted actions or plans by the relevant parties to undertake specific actions under which an economic entitlement will be acquired. To evidence that such an arrangement was made, the intended actions must have been documented contemporaneously, be sufficiently certain, and demonstrate how the parties intend to share in the economic benefits from land. An executed binding agreement is not required.

By contrast, the transitional relief in clause 47 of Schedule 2 to the Act does not apply where a post-19 June 2019 amendment to a pre-19 June 2019 arrangement results in the acquisition of a new economic entitlement or a substantial change to the entitlement provided for under the arrangement. A substantial change is taken to occur where the amendment goes beyond what was recorded in the pre-19 June 2019 contemporaneous documents evidencing the arrangement. Examples of such amendments include the introduction of a new person to acquire the economic entitlement (who was not identifiable or within a class of persons identifiable under the pre-19 June 2019 documents), the substitution of the land to which the entitlement relates, or a substantial change in the percentage of the entitlement. Transitional relief also does not apply where an economic entitlement is first created under a pre-19 June 2019 arrangement and then assigned or novated under a separate arrangement made after that date.

Land nexus and aggregate unencumbered value

The economic entitlement provisions apply to arrangements made ‘in relation to’ relevant land. This includes arrangements involving the assignment or transfer of an existing economic entitlement between parties who do not own the relevant land (such as Example 1).

The economic entitlement provisions are not limited to arrangements in relation to a single parcel of land. They can also apply where an arrangement is in relation to multiple parcels of land. The multiple parcels of land must collectively have an aggregate unencumbered value that exceeds $1 million, even if no individual parcel of land meets that threshold. This situation is illustrated in Example 6 in Revenue Ruling DA-066.

Timing and nature of economic entitlements

The economic entitlement provisions apply to binding arrangements under which a person ’is or will be entitled’ to one or more economic benefits from land. This occurs where an arrangement confers a present or future entitlement to participate in, or receive an amount determined by reference to, an economic benefit from land. Such an entitlement will arise even if payment, timing or calculation of the benefit or amount is dependent on the satisfaction of a condition or future event. An entitlement can be acquired by any means, including on its creation or on transfer.

By contrast, a person does not acquire an economic entitlement under an instrument that merely grants them a right to enter into, or negotiate, a future agreement under which an entitlement may be acquired. Similarly, a person does not acquire an economic entitlement under a bare call option limited to the purchase of land.

Ownership of land

A person will usually acquire an economic entitlement under an arrangement involving another party that holds an interest in land. In other cases, an arrangement may be made in anticipation of a party acquiring an interest in land. Under that arrangement, a person may be entitled to an economic entitlement whose existence is conditional on another party acquiring an interest in land.

Where an arrangement provides a person with an economic entitlement whose existence is conditional on another party (a purchaser) acquiring an interest in land, the economic entitlement is taken to be acquired when that interest is acquired by the purchaser. This timing reflects that the economic entitlement itself is not taken to exist until the purchaser has acquired its interest in the land. Duty on the economic entitlement is calculated by reference to the dutiable value of the land at the time when the purchaser acquires its interest in the land and the condition is satisfied, causing the economic entitlement to arise. If the purchaser does not acquire an interest in land, no economic entitlement will arise.

Acquisition of an entitlement through another person

A person can acquire an economic entitlement directly under an arrangement or indirectly ‘through another person’. In either case, it is immaterial whether the person who obtains the benefit of the economic entitlement is a party to the arrangement. A person can acquire an economic entitlement ‘through another person’ where:

• the economic entitlement is acquired by an intermediary (for example, a trustee, custodian or nominee) on behalf of another person
• a party to an arrangement directs that an economic entitlement is to be conferred on a person who is not a party to the arrangement (for example, by way of nomination)
• an arrangement specifies that an economic benefit (for example, the proceeds of sale of land) is to be provided (for example, paid) directly to a person who is not a party to the arrangement.

Participation in the economic benefits from land

A person acquires an economic entitlement if, under an arrangement, they are or will be entitled ‘to participate in’ one or more economic benefits from land. In this context, the phrase ’to participate in’ means an entitlement to share in one or more of those economic benefits from land. It does not require active involvement in generating the benefits.

A person also acquires an economic entitlement if they are or will be entitled to receive an amount determined by reference to one or more of the economic benefits from land. To this end, the label given to the amount (for example, a ‘fee’, ‘interest’ or ‘uplift’) is immaterial. The focus is on the substance of the arrangement and whether the amount is, on an objective basis, determined by reference to one or more economic benefits from land (see Revenue Ruling DA-065 for further guidance).

Acquisitions of shares in companies and units in unit trust schemes

The economic entitlement provisions in Part 4B of Chapter 2 of the Act do not apply to the acquisition of shares or units (or other securities) in a company or unit trust that confer rights only to general dividends or income that are determined by reference to the landholders’ assets as a whole. This remains so even if the landholder’s only asset is a single parcel of land. Such acquisitions are addressed under the landholder provisions in Part 2 of Chapter 3 of the Act (including, section 81, where applicable).

By contrast, the economic entitlement provisions in Part 4B of Chapter 2 of the Act can apply where a landholder’s governing document (for example, its constitution or trust deed) or another binding instrument confers a legally enforceable right to participate in, or receive an amount determined by reference to, one or more economic benefits from specific land (rather than the landholder’s assets as a whole). Such an entitlement arises even if its payment, timing or calculation depends on a future event (for example, a declaration or distribution). This situation is distinct from the ordinary rights of a shareholder or unitholder in a company or unit trust scheme.

Foreign purchaser additional duty

Foreign purchaser additional duty (FPAD) applies to a dutiable transaction under which a ‘land-related interest’ in ‘residential property’ is transferred to a ‘foreign purchaser’.

An acquisition of an economic entitlement in relation to relevant land is treated as a dutiable transaction in the form of an acquisition of beneficial ownership of relevant land. Such an acquisition will always involve a ‘land-related interest’ given the overlapping definitions of ‘relevant land’ and ‘land-related interest’ in the Act. Accordingly, if, at the time an economic entitlement is acquired, the relevant land is ‘residential property’ and the acquirer is a ‘foreign purchaser’ (each as defined in the Act), FPAD will apply in addition to the duty otherwise chargeable.

Disclaimer

Rulings do not have the force of law. Each decision made by the State Revenue Office is made on the merits of each individual case having regard to any relevant ruling. All rulings must be read subject to Revenue Ruling GEN-001.