Victoria’s new landholder duty regime is a transparent grab for cash that will squeeze the profits of property developers and may deter investment in Victoria.

Under what is effectively a new head of transfer duty, developers who share in the profits of a property development are now liable to pay stamp duty, even if they never acquire shares or units in the landholder.

Introduced in July this year, Victoria’s new landholder duty regime is earning a dubious reputation as the most onerous landholder regime in Australia.  It is much wider than the State’s former land rich regime, with more transactions being subject to duty than in any other state or territory.

The biggest area of concern is the introduction of the new “economic entitlement” concept. The new rules treat a person who acquires a 50% or greater entitlement to dividends, income, rents or profits, capital growth or proceeds of sale of the landholdings of a private landholder as if they acquired a significant interest in the private landholder.

This will apply even if the economic entitlement is contingent on future events (such as the sale of property for a specific minimum amount), with duty payable on the interest in the underlying land within 30 days of acquiring the entitlement. To comply, taxpayers will need to obtain costly valuations to value (and pay duty on) an economic entitlement that may never eventuate, with no clear entitlement to a refund if it fails to crystallise. 

While the State Revenue Office is charged with administering the landholder regime, it has offered  little guidance to help taxpayers understand their obligations, save for two simple examples on the SRO website.

One of the SRO’s examples involves a property developer agreeing to undertake a development of land on behalf of the land owner. Part of the developer’s remuneration includes a right to a share of the profits generated by the project.  Previously these arrangements would not have been caught by the landholder rules as no shares or units in a landholder are ever acquired. 

These types of profit sharing arrangements between property developers and land owners are common and clearly are being targeted by the ‘economic entitlement’ rules.  It’s also likely the rules will capture some transactions unintentionally due to their being drafted in very broad terms. For example, it could potentially apply to a situation where an estate agent is remunerated by reference to the rental income derived from a property.

This is not the first time the Victorian Government has introduced broad provisions and left them to the SRO to interpret and administer.  The same approach was used in the 2008 lease duty reforms.

The lack of timely guidance at the time the provisions commence creates considerable uncertainty. More significantly,  as seen in the case of lease duty, the SRO’s interpretations are not always consistent with the plain words of the legislation. Therefore, while the rulings give taxpayers insight as to how the SRO sees the rules working, it is not necessarily the case that a Court would take the same view.

It will be some time before we see the full effects of Victoria’s new landholder regime. Certainly, it is a bold experiment in testing just how far a state government can go in levying economic activity before that activity finds another location. No doubt the other states will be closely watching as this story unfolds.

In the short term, the economic entitlement provisions will compel developers and landholders in Victoria to rethink project structures, and potentially factor in increased stamp duty into their deals.  Let’s hope that profits are not squeezed to the point that it is no longer viable to undertake property development projects in Victoria, leading developers to look elsewhere.