The Victorian State Revenue Office (SRO) released a draft revenue ruling which sets out the actions and activities which the Commissioner of State Revenue will consider constitute 'land development' under the Duties Act 2000 (Vic) (Duties Act). The draft revenue ruling is currently open for consultation until 6 November 2020.
Whether or not an activity constitutes 'land development' can have important duty consequences in the context of a sub-sale or an acquisition of residential property by a foreign purchaser. Although this draft revenue ruling clearly aims to provide taxpayers with additional certainty, the breadth of the commentary and examples may have the opposite effect and indeed broaden the potential basis for the Commissioner to claim additional duty on certain transactions. It may be necessary to obtain a private ruling in many cases to obtain the requisite degree of certainty.
Why is the meaning of 'land development' relevant?
The land development provisions come up in two main contexts:
- Double duty under the 'sub-sale' provisions – the common scenario being where a purchaser under a contract of sale nominates another person as the transferee of the land. If land development has occurred between the contract date and the nomination date, duty can be charged twice on both the sale contract and the nomination. Although timing of the land development is important, as explained further below, it does not matter who carries out or intended to carry out the land development process.
- The application of the 8% foreign purchaser additional duty (FPAD) – a foreign purchaser who acquires residential property may be liable for an additional amount of duty at a rate of 8%. 'Residential property' is defined to include land on which a person has undertaken or intends to undertake land development to create residential property. It does not matter when the land development actually occurs, as a mere intention by any person to carry out land development can be caught.
What is the current guidance on land development?
There is very limited guidance. Currently, taxpayers can only refer to high level guidance published on the SRO website or seek a private ruling on whether certain events would fall within the meaning of land development.
What is land development?
Under the Duties Act, land development means any one or more of the following activities:
- preparing a plan of subdivision (or taking any steps to have the plan registered);
- applying for or obtaining a planning permit;
- seeking an amendment to a planning scheme;
- applying for or obtaining a building permit or approval (or doing anything for which a building permit or approval would be required); and
- developing or changing the land in any other way that would lead to the enhancement of its value.
On the legislation alone, the ambit of land development is broad.
What is the effect of the draft ruling?
The draft ruling contains examples of activities that the Commissioner would consider falls under each of the limbs outlined above. Some of these examples stretch the ambit of a particular limb beyond the current guidance. Notably:
The Commissioner will regard initial activities with a view to register, or that result in registration of, a plan of subdivision as land development. This includes, for instance, engaging professional surveyors to prepare reports for the purpose of a plan of subdivision or undertaking any works required to obtain a 'Statement of Compliance'. Importantly, the Commissioner will take into account certain activities such as:
- engaging an architect or draftsperson to prepare building plans based on a land survey;
- commissioning a feasibility study to make recommendations on the optimal use of the land; or
- obtaining professional planning advice on navigating town planning requirements of a proposal.
It is unclear whether the SRO has now changed position on this limb, given that current guidance states that preliminary consultative planning steps would not ordinarily be captured (e.g. where a party seeks advice from internal or external consultants regarding a proposed plan of subdivision that is yet to be prepared). In any event, it is clear that the SRO intend for the land development provisions to be broad reaching.
Conducting preliminary research (such as reviewing sales data) to identify the general development potential of a property, performing routine property searches or enquiring about the subdivision process should not be caught under this limb.
Applying for or obtaining a planning or building permit
An application for a permit or the granting of a permit constitutes land development. For example, if a vendor made an application for a permit before the date of a contract, then:
- double duty will arise if the permit was granted after exchange of a sale contract but before the purchaser nominates another person as the transferee; and
- the land is taken to be residential property (as it is irrelevant who applied for the permit) and a foreign purchaser will be liable to pay FPAD.
On the other hand, minor amendments to an existing planning permit (which may be requested by a council) or an extension of time for an existing planning permit should not be caught under this limb. Further, preparatory works such as engaging a firm to provide professional building advice and prepare reports should not be caught.
However, any activity that may result in the enhanced value of the land may constitute land development under a separate value enhancement 'catch all' limb below.
Developing or changing the land in any other way that would lead to enhancement of value
If none of the other specific limbs apply, tangible (e.g. decontamination activities) or intangible activity (e.g. removal of a covenant on title or removal from the Heritage Register) can still constitute land development if it would lead to enhanced value of the land. General repair or maintenance works (e.g. repairing fences or existing storm water pipes) should not be caught under this limb.
It is unclear whether the value enhancement must be realised before the activity would be caught under this limb. However, what is clear is that any enhancement is to be considered on a gross basis and it is irrelevant if a contemporaneous activity would have a net negative impact on value.
What to look out for
So that taxpayers are not inadvertently stung with double duty under the sub-sale provisions, or caught unaware of FPAD applying, it would be prudent for taxpayers to:
- test whether the activities proposed to be carried out by any party after exchange of a land sale contract may constitute land development, especially if nomination of a subsequent purchaser is intended;
- particularly relevant to foreign purchasers, inform themselves through due diligence as to whether any party (the vendor or otherwise) has carried out land development prior to exchange, including submitting any application for planning or building permits. If the permit is granted after exchange and before a nomination, double duty may arise under the sub-sale provisions; and
- seek a private ruling if it is unclear whether any events or activities would constitute land development.