On 27 May 2019, the 2019-20 Victorian State Budget detailed increases to the land transfer duty surcharge for foreign buyers of residential property, the absentee landowner surcharge and the removal of the land tax exemption for contiguous land in metropolitan Melbourne. The State Taxation Acts Amendment Act 2019 (Vic) (“the Act”) received Royal Assent on 18 June 2019, implementing these, and other, changes to the Duties Act 2000 (Vic) (“the Duties Act”) and the Land Tax Act 2005 (Vic) (“the Land Tax Act”). The summary below looks at important changes to land transfer duty and land tax in Victoria.
1. Land transfer duty for foreign purchasers
The Duties Act has been amended to increase the amount of additional duty charged for foreign buyers of Victorian residential property from 7 per cent to 8 per cent on the greater of either the purchase price or the market value of the property. This is in addition to any other land transfer duty payable (i.e. the general rate of 5.5%), and increases the total duty payable from 12.5% to 13.5%. The surcharge applies to contracts entered into on or after 1 July 2019, and is payable at settlement.
2. Absentee landowner surcharge
A landowner that does not ordinarily reside in Australia is liable for an absentee landowner surcharge, in addition to any other land tax payable. This applies to all land types, and is not restricted to residential land. The Land Tax Act has been amended to increase the absentee landowner surcharge from 1.5 per cent to 2.0 percent. The increase will apply from the 2020 land tax year.
3. Land Tax exemption for contiguous land
From the 2020 land tax year, land in metropolitan Melbourne that is contiguous with a principal place of residence (“PPR”) but on a separate title and without a separate residence will no longer be exempt from land tax.
Both the contiguous land and the PPR land must be wholly in regional Victoria in order for the land tax exemption to apply. Therefore, the land tax exemption for land contiguous to a PPR is limited to land used and occupied as a principal place of residence located wholly in regional Victoria.
4. Fixtures separate to the land
The Duties Act has been amended to include an interest in a fixture, separate from an estate or interest in land, within the definition of ‘dutiable property’. Fixtures are tangible property attached to the land, so that they become part of the land. The Act broadens the definition of a fixture, to include anything that constitutes a fixture at law or any other items fixed to the land, including tenant’s fixtures. The provisions focus on fixtures with significant value greater than $2,000,000.
For fixtures valued between $2,000,000 and $3,000,000, a concessional rate of duty is payable. Full duty is payable where fixtures are valued at more than $3,000,000. The value threshold relates to the unencumbered value of the fixture taken as a whole, and not the interest acquired by the transferee. The example provided in the Explanatory Memorandum highlights that, if the value of the fixture as a whole is $2,500,000, but an interest of only 50% of the fixture is acquired (to the value of $1,250,000), duty will still be payable, and the exemption will not apply.
5. Duty concession for transfers of commercial and industrial land in regional Victoria
New provisions have been introduced into the Duties Act which provide for a concessional rate of land transfer duty where there are transfers of commercial and industrial land located wholly in regional Victoria. The concession starts at 10% for contracts entered into on or after 1 July 2019, and is annually increased by 10%,up to a maximum of 50%, for contracts entered into on or after July 2023. Any reduction in land transfer duty is subject to the land being used solely or primarily for a ‘qualifying use’, roughly equating to commercial or industrial land, for a continuous period of at least 12 months.
The qualifying use must commence within 2 years of the owner becoming entitled to possession of the land. The Commissioner has the discretion to reduce the required period of qualifying use, determine that temporary cessation of qualifying use does not end the continuity of the use and can extend the period in which the use must begin. Where the use requirement has not been complied with, liability for the standard rates of land transfer duty apply, arising from the date of non-compliance.
6. Economic entitlements
6.1 Duties Act amendments
An economic entitlement is an entitlement to participate in the economic benefits of land held by another party.
The Act provides that where an economic entitlement is acquired in relation to relevant land, land transfer duty is chargeable under the Duties Act. Relevant land includes interests in fee simple estates, certain dutiable leases and interests in fixtures. An economic entitlement is acquired where an arrangement is made in relation to relevant land with an unencumbered value of more than $1,000,000, where the person is or will be entitled to either:
(a) participate in the income, rents or profits derived from the land;
(b) participate in the capital growth of the land;
(c) participate in the proceeds of sale of the land;
(d) receive any amount determined by reference to the above; or
(e) acquire any entitlement described above.
This differs from the former position, which defined economic entitlements with reference to a ‘private landholder’ rather than the relevant land. A private landholder included a private unit trust or a private company with Victorian land holdings of more than $1,000,000. The Explanatory Memorandum outlined that the amendments are in response to the Supreme Court’s decision in BPG Caulfield Village Pty Ltd v Commissioner of State Revenue  VSC 172, which held that duty was only payable where a person acquired an economic entitlement of more than 50% and that an economic entitlement could not be acquired where it was in reference to some, but not all, of the land holdings. The Act removes the 50% threshold for economic entitlements and no longer requires that the holder of the relevant land be a Victorian private company or unit trust.
The amount of duty payable is phased in where the economic entitlement is more than $1,000,000 but does not exceed $2,000,000. This is based on the value of the land acquired, and not the dutiable value of the economic entitlement. The beneficial ownership acquired under an economic entitlement is to be determined by a percentage of the total entitlements that the person will receive or acquire. Where the arrangement does not specify the percentage of the economic entitlement or the arrangement, in addition to specifying the percentage, includes any other entitlement of, or amount payable to, the person or an associated person, the entitlement is to be taken to be 100% and duty will be assessed on the entire market value of the property. The Commissioner is, however, able to determine a lesser percentage than 100% if they consider it appropriate in the circumstances.
The person acquiring the economic entitlement is not required to be a party to the arrangement, covering situations where the benefit of the economic entitlement is directed to a third person. The economic entitlement can also be acquired by any means, including by its creation or transfer.
6.2 State Revenue Office (“SRO”) Guidelines
The SRO has released a guidance note outlining the SRO’s application of the economic entitlement provisions. It includes the following:
- Any liability to pay duty arises when the economic entitlement is obtained, not when the benefits flowing from the economic entitlement are realised.
- The provisions only apply where an economic entitlement is acquired other than by a transaction that is already dutiable (such as a land transfer).
- Where a development agreement is entered into, entitling the developer to an economic entitlement for the land, the developer will be taken to have acquired an ownership interest in the land when that agreement is entered into. The duty payable is calculated by reference to the unencumbered value of the land, based on the percentage interest deemed to have been acquired, at that time, and not by reference to the development’s end value.
- Ordinary fees for service, including real estate agent fees, are not economic entitlements, even where they are calculated on a commission basis. Other examples are given of third party service providers whose fees may be linked to the costs or proceeds of a development, but who the SRO says do not give rise to an economic entitlement include architects, project managers, planning consultants and private advisory firms. The SRO says service agreements do not need to be disclosed to the SRO if a person providing a service in relation to land:
(a) is normally engaged in a full time capacity in providing those services,
(b) the agreed fee/ rate is within industry parameters, and
(c) the person is unconnected (i.e. not an associated person) to any person who has an economic entitlement in the land.
- The SRO says a fee for service must be disclosed to the SRO if the service provider is associated with a person acquiring an economic entitlement. Evidence will need to be provided showing that the fee is a genuine fee for service and not a profit sharing mechanism.
A copy of the SRO Guidelines, with three examples, is available here.