The recent Victorian Supreme Court decision in BPG Caulfield Village Pty Ltd v Commissioner of State Revenue  VSC 172 provides some much needed clarity on the operation of the “economic entitlement” provisions under the Victorian landholder duty rules.
Importantly, the decision narrows the circumstances in which the economic entitlement provisions may apply to transactions involving a property development agreement. A property development agreement is an agreement under which an owner of land enters into a contract with a land developer to undertake a particular development project. The land owner sells the developed land and the proceeds of sale are then generally split between the land owner and the developer (or a third party) in agreed proportions.
As at the date of this alert the Commissioner of State Revenue (Commissioner) has not indicated whether he will lodge an appeal against the decision. It is also not yet known whether the Victorian Government will seek to amend the economic entitlement provisions in response to the decision.
Victorian “economic entitlement” provisions - overview
Broadly speaking, the economic entitlement provisions, which are unique to Victoria, charge landholder duty on the acquisition of “synthetic interests” in entities which have Victorian landholdings with an unencumbered value of $1 million or more (Victorian Landholder).
A synthetic interest is effectively a transaction where an entity does not acquire shares or units in the Victorian Landholder but instead acquires an entitlement to certain financial benefits referable to the income or assets of the Victorian Landholder. This may include, for example, a right to participate in the proceeds of sale of the landholdings of the entity.
BPG Case - Background
Relevantly, on 17 August 2012, the Victorian Amateur Turf Club trading as the Melbourne Racing Club (MRC) entered into a Development Agreement with BPG Caulfield Village Pty Ltd (BPG) under which:
- BPG was appointed to develop certain Victorian land held by MRC (Relevant Land);
- following development, the Relevant Land was to be sold to third party purchasers; and
- BPG was entitled to a portion of the proceeds from the sale of the Relevant Land to third party purchasers.
Significantly, the Relevant Land represented less than 50% by value of all the Victorian landholdings of MRC.
The Commissioner assessed landholder duty on the basis that the Development Agreement resulted in BPG acquiring an economic entitlement because BPG was entitled to participate in the proceeds of sale of the Relevant Land.
BPG argued that the economic entitlement provisions did not apply to the acquisition of a synthetic interest which related to some but not all of the Victorian landholdings of MRC.
BPG also argued that, if it did obtain an economic entitlement, its economic entitlement in this case gave it an interest of less than 50%. This was because the Relevant Land represented only 12% by value of all of MRC’s landholdings.
The Supreme Court agreed with BPG and held that BPG did not acquire an economic entitlement pursuant to the Development Agreement.
The Supreme Court held that:
- an entity does not acquire an economic entitlement where the acquiring entity acquires the right to participate in the proceeds of sale of some but not all of the Victorian land held by a Victorian Landholder; and
- where an entity acquires an economic entitlement, landholder duty will not be chargeable unless the economic entitlement amounts to an interest of 50% or more of the value of all the Victorian landholdings of the Victorian Landholder.
Who is affected by this decision?
The decision affects entities who acquire synthetic interests in Victorian Landholders, including agreements to develop and sell Victorian land and split the proceeds of sale.
Taxpayers considering acquiring a synthetic interest in a Victorian Landholders should seek advice to determine their duty position in light of this decision.