Throughout the first half of 2019, a number of key developments in property and tax law in Victoria emerged.
Below, we explore these developments – which include a number of State tax changes, State Revenue Office changes to complex duty transactions, and changes to the Sale of Land Act (Vic) – and consider their implications for the residential property market in Victoria.
State tax changes
The 2019-20 Victorian State Budget introduced a raft of provisions intended to increase the amount of duty collected in relation to property transactions.
1. ‘Economic entitlement’ provisions rewritten
Perhaps the most significant State tax change was actually not announced as part of the Budget measures.
The ‘economic entitlement’ provisions in the Duties Act 2000 (Vic) (Duties Act) have been rewritten for the stated purpose of addressing the Supreme Court decision in BPG Caulfield Village Pty Ltd v Commissioner of Revenue  VSC 172 (BPG). However, the re-write arguably goes much further and may have unintended consequences, including direct implications on structuring property development agreements and further pressure on housing affordability.
Although it may not be long before other States follow suit, the economic entitlement provisions are unique to Victoria. They apply to impose landholder duty to an arrangement between a private landholder and another party (e.g. a developer) under which that other party acquires an entitlement to participate in:
- the dividends or income of the private landholder; or
- the income, rents, profits, capital growth or proceeds of sale of the landholdings of the private landholder.
Prior to the recent amendments to the Duties Act, the economic entitlement provisions only applied to arrangements involving a ‘private landholder’, generally being a private company or a private unit trust and where the entitlement amounted to an interest of 50% or more. Arrangements involving other types of land owners such as an individual or the trustee of a discretionary trust fell outside the provisions. Further, as a result of the BPG case, the arrangement needed to involve all of the landholdings of the private landholder. Accordingly, the provisions would not apply to an arrangement that excluded some of the private landholder’s land, no matter how small.
Under the new provisions, however, it does not matter whether the arrangement involves all of the landholdings of the land owner, or whether the land owner is a ‘private landholder’. As a result, it’s likely that every development agreement will now be subject to transfer duty. This is because the fee payable to the developer has traditionally been calculated with some reference to the proceeds of sale.
Importantly, while the new provisions will only apply where the relevant land has a value of more than $1,000,000, transfer duty is payable regardless of the percentage interest deemed to have been acquired, i.e. there is no 50% threshold test. The removal of the 50% test in particular has the potential for creating unintended consequences. For example, the provisions could technically apply to a real estate agent who manages a rental property and receives a commission based on a percentage of the rent in that the agent could be deemed to have acquired a percentage of the rental property and be subject to duty.
Thankfully, the Victorian State Revenue Office (SRO) has recently published guidance on how it intends to apply these provisions. According to the SRO, an arrangement that exhibits the following characteristics will not need to be disclosed to them:
- a person provides a service in relation to land;
- the person is normally engaged in a full time capacity in providing those services;
- the agreed fee/rate is within industry parameters; and
- the person is unconnected to any other person who has an economic entitlement in relation to the land.
In other cases, including where the service provider is connected to a person who acquires an economic entitlement, the fee for service must be disclosed to the SRO so the Commissioner may assess whether or not duty is payable.
Given the breadth of the provisions and the need to rely on the Commissioner’s administrative practice, taxpayers should seek advice before proceeding with transactions that may be affected by the new provisions.
2. Foreign property surcharge rate increases
On 1 July 2019, the land transfer duty surcharge on foreign buyers of residential property increased from 7% to 8%, and from the 2020 land tax year, the absentee owner land tax surcharge will increase from 1.5% to 2.0%.
3. Corporate reconstruction exemption replaced with a concession
From 1 July 2019, the corporate reconstruction exemption has been replaced with a concession. Duty will now be payable on a corporate reconstruction transaction at the rate of 10% of the duty otherwise payable. However, the new rules have also been expanded to:
- specifically include dutiable lease transactions as transactions eligible for relief;
- remove the three year post-association test;
- remove the Commissioner’s power to impose conditions on the relief; and
- provide relief where a corporate reconstruction arrangement involves multiple eligible transactions involving the same dutiable property. Depending upon the amount of concessional duty paid on the first eligible transaction, the relief for subsequent eligible transactions can operate as a full exemption or a concession.
4. Land transfer duty concession for regional Victoria
A land transfer duty concession will be provided to commercial and industrial property transactions in regional Victoria. A 10% concession will be provided from 1 July 2019, increasing by ten percentage points each year to provide a full 50% discount from 1 July 2023.
5. Duties Act amended to introduce ‘fixtures’
The Duties Act has been amended to introduce ‘fixtures’ as a new category of dutiable property. Fixtures are defined to mean anything that constitutes a fixture at law or any other items fixed to land, including tenant’s fixtures. Duty, however, is only imposed where the fixtures are:
- dealt with separately from the underlying land; and
- where the unencumbered value of the fixtures (taken as a whole, rather than the value of the interest subject to the transaction) is more than A$2 million.
State Revenue Office changes to complex duty transactions
The move towards 100% electronic conveyancing continues, with the SRO recently allowing for electronic completion of ‘complex transactions’ through Duties Online.
A common example of a complex transaction is the purchase of multiple properties that are considered substantially one arrangement (also known as aggregation). A comprehensive list of complex transactions can be accessed online through the SRO’s Evidentiary Requirements Manual.
From 1 August 2019, all complex transactions must be lodged and managed online through Duties Online and settled in PEXA. The SRO have advised that it will need at least 30 days before the scheduled settlement date to make its assessment of duty. In practical terms, this means that parties will be required to lodge at least 30 days before the scheduled settlement date in the PEXA workspace (unlike regular duty transactions which can be calculated instantly online).
Failure to comply with these changes has important consequences which could result in settlement being delayed. For example, PEXA has confirmed that complex transactions lodged less than 30 days before settlement will result in the settlement date being automatically pushed back in the PEXA workspace to meet the 30 day requirement.
If the settlement date for a complex duty transaction is less than 30 days away, lodging parties may apply to the SRO for an ‘Urgent Assessment Request’, although the criteria for assessment under this process are limited and accordingly you should assume that the urgent request will not be available.
On a practical level, these changes mean that, wherever possible, parties to complex duty transactions should start thinking about preparing for lodgement as soon as possible, including by accelerating the timeline of when documents need to be in final form capable of lodgement.
For example, a transaction with a purchase price of over $100 million is currently considered a complex transaction. This means that the vendors and the purchasers transacting with such high value land will need to provide sufficient leeway to prepare and lodge the duty application 30 days before settlement – otherwise the parties will risk having a delayed settlement! This will need to be borne in mind until such transactions fall within the standard regime.
The changes may also restrict the ability to conduct simultaneous exchange and settlements where the transaction is considered ‘complex’.
Changes to the Sale of Land Act 1962 (Vic)
The Sale of Land Amendment Act 2019 (Vic) was recently passed by State parliament and received assent on 4 June 2019. Some of these changes have a retrospective application, and the remaining changes will come into operation between 4 June 2019 and 1 March 2020.
The key changes to the Sale of Land Act 1962 (Vic) (Sale of Land Act) are set out below:
1. Sunset clauses
On and from 23 August 2018, a vendor or developer cannot rescind a residential off-the-plan contract under a sunset clause without obtaining prior written consent from affected purchasers (regardless of whether the vendor or developer has caused or contributed to any delay).
On and from 5 June 2019, a vendor or developer must obtain the purchaser’s consent or an order from the Supreme Court before it will be entitled to rescind the contract under a sunset clause.
On or before 1 March 2020, all residential off-the-plan contracts must contain a specific statement about a vendor’s right to terminate under a sunset clause.
Developers should engage with their lawyers now to begin the process of updating the pro forma contracts of sale.
2. New disclosure obligations.
It will now be an offence to knowingly conceal material facts about a property with the intention of inducing a potential buyer to purchase land.
The Director of Consumer Affairs Victoria has indicated that “material facts” are likely to include instances where a property has been used as a clandestine drug laboratory or was the site of a homicide. However, it is unclear whether this section is intended only to capture historical information about the property (such as previous use as a drug laboratory), or whether it will serve to expand the traditional disclosure obligations of a vendor under section 32 of the Sale of Land Act.
We anticipate that some further guidance will be published on the application of this section of the Sale of Land Act in the near future.
3. Terms contracts.
Any person who knowingly advertises, induces a person to buy, sells or arranges or brokers the sale of, property under certain prohibited residential terms contracts (for example, contracts where the sale price of the land is less than the amount prescribed by the regulations), will face significant fines and potential imprisonment. Failure to comply may result in the purchaser being entitled to avoid the contract and have all money paid under the contract returned.
4. Rent-to-buy arrangements
It will be an offence to knowingly sell, arrange, broker or advertise residential land under a rent-to-buy arrangement unless the arrangement complies with new prescribed requirements which are yet to be published. These requirements are expected to strengthen the purchaser’s position by imposing obligations on the seller to hold money on trust on behalf of the purchaser.
5. Options in land banking schemes
New protections for investors in land banking schemes will be introduced, which will include a requirement for the purchaser’s money to be held on trust by the vendor’s lawyer, conveyancer or licensed agent until the registration of the plan of subdivision or expiry date by which option must be exercised.
However, these protections will not apply if the land banking scheme is either a registered managed investment scheme or a financial product issued by the holder of an Australian financial services licence.