|Date of effect||TBC|
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.
A person acquires an economic entitlement if an arrangement is made on or after 19 June 2019 in relation to relevant land with an unencumbered value of more than $1 million, under which the person is or will be entitled (directly or through another person) to an economic entitlement in relation to the land. For the purposes of the provisions, relevant land is not limited to estates or interests in land and can include interests in fixtures held separately from land and leasehold estates specifically defined as dutiable property in section 10(1) of the Act.
An economic entitlement means an entitlement to any one or more of these:
- to participate in the income, rents or profits derived from the land
- to participate in the capital growth of the land
- to participate in the proceeds of sale of the land
- to receive any amount determined by reference to any of the above matters
- to acquire any entitlement described above.
Where a person acquires an economic entitlement, the person is taken to have acquired beneficial ownership in the land in the percentage determined under section 32XE of the Act and duty is chargeable under Chapter 2 of the Act accordingly. The interest in the land taken to be beneficially owned under the economic entitlement provisions is also a land holding for the purpose of the landholder provisions in Part 2 of Chapter 3 of the Act.
The purpose of this ruling is to provide clarification on the application of the economic entitlement provisions to ordinary fees for service. The ruling also sets out how the economic entitlement provisions can apply to acquisitions of shares in companies and units in unit trust schemes that may be outside the scope of Chapter 3 of the Act. This ruling does not deal with any other arrangement or the acquisition of an economic entitlement in relation to a private landholder under section 81 of the Act. This ruling is provided as a guide only and is not exhaustive. If your circumstances are not covered in this ruling, please apply for a private ruling in accordance with Revenue Ruling GEN.009v3 – General Information on Private Rulings.
Genuine service fees are not an economic entitlement
The economic entitlement provisions apply to an economic entitlement in relation to land acquired other than by a dutiable transaction, such as a transfer of freehold land. Accordingly, the intention of the provisions is to impose duty on arrangements where a person, without acquiring an ownership interest in land, nevertheless obtains rights and benefits relating to the land that are economically equivalent to ownership interests.
Ordinary fees for service such as real estate agent fees – even when calculated on a commission basis – are not considered to be an economic entitlement. These are a genuine fee for service and not a benefit normally reserved for the owner of the land.
There are numerous third party service providers whose fees may be tied to the proceeds associated with land and/or its development but are not an economic entitlement. This is the case where the third party service provider receives genuine industry fees for service. While not exhaustive, this can include:
- real estate agents, including executors and trustees of deceased estates – whose fees are based on the proceeds of sale of land
- architects – whose fees can include a percentage of building costs
- project managers – whose fees can include a percentage of project value. Payment of the fees cannot be contingent on / calculated by reference to the performance of the project/development
- planning consultants – whose fees can include a percentage of the value uplift after a precinct structure plan is obtained
- private advisory firms – that may receive a contingency fee for assisting a landowner to take their land to market or negotiate transaction documents
- lenders and financiers – who receive interest for providing finance to a development. The interest/fee cannot be tied to the performance of the development. An example of such an arrangement is a standard loan facility with interest at market rates.
Accordingly, where a person providing a genuine service in relation to land:
- is normally engaged in a full-time capacity in providing those services
- the agreed fee/rate is within industry parameters, and
- the person is unconnected (i.e. not an associated person) to any other person who has an economic entitlement in relation to the land,
it is unnecessary for the service agreement to be disclosed to the Commissioner by the service provider.
However, where the service provider is associated to a person who has acquired an economic entitlement in relation to the land under Part 4B of Chapter 2 of the Act, the fee for service must be disclosed to the Commissioner when disclosing the economic entitlement. The person who obtained the economic entitlement will be required to provide evidence showing the service fee is a genuine fee for service and not a profit sharing mechanism otherwise the fee may be taken into account when determining the duty payable on the acquisition of the economic entitlement. For example, where a person has entered into an arrangement to develop land for a landowner, any ‘add on’ fees for post-development services (such as leasing or property management services) provided by a person associated with the developer must be disclosed to the Commissioner when disclosing any economic entitlement in relation to the land acquired by the developer.
Responsible entities, trustees and fund manager fees
Responsible entities, trustees and fund managers can be entitled to commissions or management fees based on the asset value of fund property. Fund managers can also be entitled to performance fees calculated on a percentage of returns from property under management above a benchmark (i.e. out performance fee) and disposal fees calculated as a percentage of the sale price of property disposed of by the fund.
Where these fees are genuine and relate to holding and maintaining property for the fund, the fees will be considered a fee for service and therefore not an economic entitlement. For this to apply, the fees must be within industry parameters and the property cannot have been developed for the fund by a person associated with the responsible entity, trustee or fund manager (as applicable).
A resident in a retirement village
Where a retiree enters into a lease/licence arrangement with a retirement village operator that gives the retiree a long-term right to reside in a residence at the village, any entitlement the retiree enjoys to participate in proceeds of a subsequent sale of the residence to a new resident will not be considered to be the acquisition of an economic entitlement under Part 4B of Chapter 2 of the Act. Rather, this will be considered to be an entitlement that is already held by the retiree under the lease/licence (which is generally not dutiable).
This only applies in relation to an entitlement to participate in the proceeds of the first sale of the residence from when the retiree commenced residing in the residence under the lease/licence. It does not apply where the retiree has a right to participate in the proceeds from more than one on-selling of the residence.
Example 1: Real estate agent service fee
A development company is building an apartment tower on land it owns. Prior to construction starting, it entered into an exclusive selling arrangement with a third-party real estate agency for the sale of apartments at the development. Under the arrangement, the agency is entitled to a fee of 1.5% of the sale price for each apartment sold, being a percentage which is within industry parameters.
The arrangement is a fee for service and does not provide for the acquisition of an economic entitlement. As the fee is not connected to the acquisition of an economic entitlement by an associate of the real estate agency it is not necessary to disclose details of the agency arrangement to the Commissioner.
Example 2: Non-genuine service fees
XYZ owns land valued at $5 million and has obtained planning approval to develop the land into 15 residential townhouses. As XYZ does not have the means or experience to undertake and fund the development, XYZ enters into an arrangement with Company A and the trustees for Trust B and C. Company A is an established developer whereas Trusts B and C are discretionary trusts which have been newly created by the two directors/shareholders of Company A for the sole purpose of the arrangement. Under the arrangement:
- Company A is entitled to 40% of the net sales proceeds for each townhouse sold (i.e. after reimbursement of build costs).
- The trustee of Trust B is entitled to a ‘consultation’ service fee which is claimed to be in recognition of consultancy services provided to XYZ.
- The trustee of Trust C is entitled to a ‘sales management’ service fee which is claimed to be in recognition of sales management services provided to XYZ.
The ‘consultation’ and ‘sales management’ service fees are each calculated based on the net sales proceeds for each townhouse sold and are each a percentage which is within industry parameters.
Although each claimed service fee is within industry parameters, the Commissioner would not consider the fees to be genuine fees for services. This is because the trustees of Trust B and C are not established service providers who are normally engaged in the full-time capacity of providing consultancy and sales management services to third party clients. Accordingly, the fees form part of an arrangement involving the acquisition of economic entitlements by Company A and the trustees for Trust B and C.
Example 3: Non-bank third party financier
Developer Pty Ltd is a special purpose project entity and has entered into a development agreement with a landowner to develop land into a residential master-planned community. To fund the development, Developer Pty Ltd has entered into an arrangement with XYZ, a non-bank third party financier, to provide construction finance of $30 million which is capitalised at a fixed interest rate (which is within industry parameters). Under a payment waterfall clause in the development agreement, XYZ is entitled to a priority distribution of the gross proceeds of the sale of the development until the loan is discharged in full (inclusive of capitalised interest). XYZ is granted a security interest over the assets of Developer Pty Ltd and a mortgage over the land.
The loan arrangement is a fee for service and does not provide for the acquisition of an economic entitlement by XYZ. As the interest rate/fee is within industry parameters and not tied to the performance of the development and XYZ is not connected to Developer Pty Ltd or any other person who has an economic entitlement in relation to the land, it is unnecessary for XYZ to disclose details of the loan arrangement to the Commissioner. In this case, the loan arrangement would not be taken into account when determining the duty payable on any acquisition of an economic entitlement by Developer Pty Ltd.
Example 4: Project management service fees
NewCo as trustee for the New Trust owns vacant land valued at $10 million and has obtained planning approval to subdivide the land into 100 residential lots for sale to third parties. In order to proceed with the development, NewCo has entered into a project management agreement with ProjectCo, an experienced third-party project manager. Under the agreement, ProjectCo has agreed to provide day-to-day project management services for the development and is entitled to be paid the following project management service fees:
- an initial project management fee based on a percentage of estimated project costs.
- a final project management fee of 50% of the balance of the net sales proceeds from the sale of the lots after a targeted internal rate of the return (IRR) for the project is achieved - the effect of this fee is that NewCo is entitled to receive the net sale proceeds of the development up to the targeted IRR with the balance then split 50% to NewCo and 50% to ProjectCo.
In these circumstances, the final project management fee will constitute an economic entitlement. This fee will not be considered a genuine fee for service as it is economically equivalent to an ownership interest given its payment is contingent on and calculated by reference to the performance of the development. In this regard, the final project management fee can be contrasted with the initial project management fee, which is payable irrespective of the performance of the project and is not calculated by reference to performance or upside.
Acquisitions of shares in companies and units in unit trust schemes
The economic entitlement provisions contained in Chapter 2 of the Act can also apply to acquisitions of shares in companies and units in unit trust schemes that may be outside the scope of the landholder provisions in Chapter 3 of the Act. As a result, a liability may arise under Chapter 2 where no liability would arise under Chapter 3 because the interest acquired is below the relevant acquisition threshold. However, this would only occur where the acquisition of units, shares or other security interests entitle the holder to participate in the income, rents or profits, capital growth or proceeds of sale from particular land held by the entity. Where the entitlement to income, rents, profits, capital growth or proceeds of sale is general in nature and not specific to particular land held by the entity, the economic entitlement provisions in relation to land would not apply.
Example 5: Acquisition of units in a unit trust scheme
ABC is the owner of two shopping centres in Victoria that it holds on behalf of the ABC Unit Trust, the sole unit holder of which is XYZ. One centre is in regional Victoria and valued at $15 million while the other is in metropolitan Melbourne and valued at $85 million. To fund an expansion of its metropolitan shopping centre, ABC and XYZ (who holds 85 million ordinary units in the trust) have decided to sell the regional centre.
A potential investor, with no experience in managing shopping centres, proposes an alternative arrangement for the acquisition of the shopping centre other than via a conventional sale and purchase transaction. To maintain ABC as the manager of the shopping centre, the proposal involves the creation and issue of 15 million new Class A units in the trust to the investor for $15 million. By virtue of these units the investor will be entitled to 100% of the net income, rents and profits associated with the operation of the regional centre alone. On a winding up of the trust, the Class A units would also provide the investor with an entitlement to participate in a distribution of the trust's property to the extent that the value of the regional shopping centre bears to the total value of both shopping centres (15% as at the time of the proposal).
The parties agree to the proposal and the new Class A units are created and issued to the investor for a subscription price of $15 million. While the acquisition is not chargeable with duty under Chapter 3 of the Act, the acquisition is dutiable as the acquisition of an economic entitlement under Chapter 2 of the Act. This is because it involved an arrangement under which the investor has an entitlement to participate in 100% of the net income, rents or profits derived from specific land.
Commissioner of State Revenue
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.
This is a draft ruling only, and is not available for publication, nor may it be relied upon by taxation officers, taxpayers or practitioners.