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Recently the Victorian State Revenue Office released guidance on its website on its interpretation of the economic entitlement provisions contained in the Duties Act 2000 (Vic) (Act).
The economic entitlement rules impose duty on arrangements where a person obtains benefits usually enjoyed by the owner of land, without acquiring an ownership interest in land. The provisions will apply when a person enters into an arrangement in relation to land that has an unencumbered value of more than $1 million.
A person acquires an economic entitlement if they are entitled to any one or more of the following:
The rules do not apply to transactions that are already dutiable transactions under other provisions of Chapter 2 of the Act.
The SRO guidance has stated that ordinary fees for service which relate to the cost/proceeds of a development should not be an economic entitlement. Subject to some qualifications, this includes fees charged by:
The guidance explains that the service agreement will not need to be disclosed to the SRO if the person providing a service in relation to land:
If, however, the service provider is associated with a person who has acquired an economic entitlement in relation to the land, the fee for service must be disclosed to the SRO when disclosing the economic entitlement.
Where fund managers charge fees for holding and maintaining a property for the fund, if the fees are within industry parameters and the property is not developed for the fund by a person associated with the fund manager, the fees will not be considered fees for service and will not be an economic entitlement.
The dutiable value of the land to which the economic entitlement relates is the unencumbered value of the relevant land at the time that the economic entitlement is acquired. The duty is phased in where land is valued at $2 million or less.
If a person acquires an economic entitlement of a stated percentage of the profits of a project, the interest in land will be determined by reference to that stated percentage. However, if the arrangement:
the person will be taken to have acquired a 100% interest in the land. The Commissioner has a discretion to determine a lesser percentage if he considers it appropriate to do so in the circumstances.
The SRO states in the guidance that where a taxpayer accurately discloses the economic entitlement acquired, the Commissioner will always exercise his discretion to reduce the percentage ownership interest in the land so the duty is only imposed by reference to the economic entitlement. This, however, highlights the problem of the government drafting extremely broad legislation and then trying to limit it via administrative guidance. It would be much easier for taxpayers to comply with their obligations if the legislation was clearer and not subject to a discretion being exercised by the Commissioner.
The economic entitlement rules can apply to acquisitions of interests in companies and trusts that are not dutiable under the landholder duty rules if the acquisition of an interest entitles the holder to participate in the income, rents or profits, capital growth or proceeds of sale from particular land held by the entity. The economic entitlement provisions will not apply where the entitlements to income, rent, profits, capital growth or proceeds of sale are general in nature and not specific to particular land held by the entity.
In addition, when calculating the value of landholdings for the purposes of the landholder duty rules in Chapter 3, land that is deemed to be owned under the economic entitlement provisions must be included.
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