The Victorian State budget was handed down by the Treasurer on Monday, 27 May 2019.
The amending legislation reflecting the changes announced in the budget was introduced in the Victorian Parliament on the afternoon of 28 May 2019.
There is a major change in the amending legislation that is not mentioned at all in the budget.
This major change relates to development agreements entered into between developers and landowners.
Changes to the “economic entitlement” provisions
Currently, the “economic entitlement” provisions only apply to development agreements between “private landholders” namely companies and unit trusts. It does not apply, for example, to development agreements between developers and individuals or trustees of family trusts.
Further, even where a development agreement is entered into between developer and companies or unit trusts, there is a 50% threshold before landholder duty on the “economic entitlement” is triggered.
In BPG Caulfield Village Pty Ltd v Commissioner of State Revenue, the Court held that an “economic entitlement” would only be acquired where all the landholdings of a landowner were subject to the development agreement (rather than only one parcel of land out of many held by the landowning company).
The purpose of the changes to “economic entitlement” included in the amending legislation purportedly deal with the consequences of the BPG decision.
However, in our view, these amendments, once passed into law, will go well beyond rectifying the outcome of the BPG decision.
They will, in fact, substantially broaden the tax base by:
- Applying the “economic entitlement” provisions to all individual and corporate landowners (not just “private landholders” being companies and unit trusts) in relation to land having a market value of $1,000,000 or more; and
- Abolishing the 50% threshold.
By way of example, even if a developer acquired 1% “economic entitlement”, duty would be payable on 1% of the market value of the land that is subject to development (provided the market value of that land is $1,000,000 or more).
Further, if the development agreement does not specify the developer’s percentage of the profit share, capital growth etc, the developer is deemed to have acquired a 100% “economic entitlement” (subject to the Commissioner having a discretion to reduce the deemed 100% interest). Any right of an associate of the developer to received fees (e.g. consultancy or marketing fees) will be included in the calculation of the developer’s entitlement.
In effect, the developer would be liable to duty as if it has purchased the whole of the land.
The previous “economic entitlement” provisions (with the 50% threshold) in the landholder duty chapter will continue to apply to agreements where a person acquires a 50% or more right to dividends or income of “private landholders” being a company (in its own right) or unit trust.
By way of example, based on our current analysis of the amendments, if a developer entered into an agreement with a “private landholder” whereby the developer received 49% of the dividends or income of the company (not the proceeds of sale from the land), then, arguably, the landholder duty threshold should apply so that duty is not triggered.
Given the obvious advantage of relying on the landholder duty provisions, the concept of what is “income” and what are “proceeds of sale” of the company or unit trust is likely to be an area of contention between taxpayers and the Commissioner.
The corporate reconstruction provisions (which are also changing) may apply to “economic entitlements” acquired by qualifying entities.
The changes for “economic entitlement” will take effect on the date of assent (rather than 1 July as is usually the case).
Duty will be triggered on signing of the development agreement. The duty will be calculated based on the developer’s percentage share of the profit (or proceeds of sale) multiplied by the market value of the development land at that time. The duty will be calculated only once at the time of signing, but, as noted above, the Commissioner has a wide discretion to determine the developer’s percentage of the project and can take into account various fees or bonuses payable to the developer or their associates in determining that calculation.
The other major tax changes are listed below:
Land transfer duty
Changes from 1 July 2019.
The land transfer duty surcharge on foreign buyers of residential property will be increased from 7% to 8% for contracts entered into on or after 1 July 2019.
The sale of fixtures affixed to land that have a value of $2,000,000 or more will now be subject to duty even where there is no sale of the underlying land. This may be relevant not only where a person buys fixtures on the land but also where a landlord buys back tenant’s fixtures with a significant value as part of the “make good” provisions at the end of the lease term.
A land transfer duty concession will be provided to commercial and industrial property transactions in regional Victoria. A 10% concession will be provided for contracts signed from 1 July 2019, increasing by 10 percentage points each year to provide a total 50% discount from 1 July 2023. The concession will be based on the contract date and will be applied to the land transfer duty payable at settlement date. The land must continue to be used for commercial and industrial purposes for at least 12 months after purchase. The concession will rely on the valuer general’s categorisation of the land and a specific definition of “regional Victoria” in the legislation.
The current exemption applying to qualifying transactions of corporate reconstructions will be replaced with a reduced duty rate of 10% on qualifying transactions after 1 July. There will be no 3 year post association requirement once the amendments are passed.
Land tax
Changes from the 2020 land tax year.
From the 2020 land tax year, land in metropolitan Melbourne that is contiguous with a principal place of residence but on a separate title and without a separate residence will no longer be exempt from land tax. This is apparently set to promote efficient use of land and discourage land banking.
Effectively, this can be called the “tennis court” or “swimming pool” tax as landowners who have a tennis court or swimming pool on a separately titled adjoining lot to their house will be taxed as if the lot did not form part of their land tax exempt principal place of residence.
Landowners who do not ordinarily reside in Australia, are liable to absentee landowner surcharge which is due to increase from 1.5% to 2% from the 2020 land tax year.
Motor vehicle taxes
Changes from 1 July 2019.
Motor vehicle duty for used passenger motor vehicles valued above the luxury threshold will be aligned with the rate for new cars ensuring consistent treatment of new and used cars regardless of the value.
All passenger motor vehicles valued between $100 001 and $150 000 will be charged a motor vehicle duty of $14.00 per $200 of the market value and increasing to $18.00 per $200 for passenger motor vehicles valued above $150 001. For passenger cars with low-emissions (carbon dioxide emissions less than 120g/km), owned by primary producers used in the business of primary production, an exemption from the existing and new luxury car duty rates will apply.
The industry has had a small victory with loan service vehicles becoming exempt from duty (similar to demonstrator vehicles).
Payroll tax
From 1 July 2019, payroll tax exemption for wages paid to employees on maternity leave will be extended to all types of parental leave and will apply for up to 14 weeks of wages to employees taking parental leave.
The regional payroll tax paid by eligible businesses will be reduced to 1.2125%, or 25% of the metropolitan rate by 2022/23. This reduction is due to be phased over three years beginning 1 July 2020 with reductions around 0.4% each year in 2020/21, 2021/22 and 2022/23.
The current payroll tax-free threshold of $650,000 will be increased to $675,000, with a further increase of $25,000 to $700,000 in 2022/23.
Other taxes
There are additional changes to mineral royalties and some other charges.
This article was written by John Caravousanos, Partner.
| John Caravousanos
P: +61 7 3169 4792 E: jcaravousanos@hwle.com.au |