Developers should be cautious
if using development agreements

New duty on Development Agreements

Michael Taylor-Sands Partner, Maddocks Law Firm

The Victorian government recently imposed new stamp duty rules on development agreements. To explain the changes and impact on developers, we sought the expertise of Michael Taylor-Sands, Partner at Maddocks law firm.

RPM: What are the new changes?

MT-S: The changes, announced in the 2019 Victorian State Budget, relate to the ‘economic entitlement’ duty rules. They are significantly broader than the previous rules and effectively create a new type of duty.

The previous rules only imposed duty where the landowner was a unit trust or private company, and only where a person acquired a right to participate in 50% or more of the proceeds of sale or profits from land. The new rules can apply to any type of landowner (not just unit trusts and private companies) and there is no longer a 50% threshold for the entitlement acquired.

The changes will impact on how development agreements are drafted, as they may impose a duty liability at the time the agreement is entered (well before the property is actually developed and eventually sold).

 

RPM: When will they be introduced/effective?

MT-S: The new rules apply to arrangements entered into on or after 19 June 2019. Arrangements entered into before this date are not subject to the new rules but are still subject to the previous economic entitlement rules in section 81 of the Duties Act 2000 (Vic).

 

RPM: How will the new rules operate?

MT-S: Under the new rules a person who acquires an ‘economic entitlement’ will be liable to pay duty and is effectively treated as having acquired an interest in the land for duty purposes.

An economic entitlement for these purposes includes an arrangement where a person is entitled to participate in the income, proceeds from sale, rents, profits, or capital growth of land. The land must have unencumbered value of more than $1 million, but this provides little relief for developers.

Where the agreement provides an entity with an economic entitlement by reference to a stated percentage (e.g. 20% of proceeds from sale), the duty is calculated as if a 20% interest in the land has been acquired based on the market value of the land at the date of the agreement.

However, where the agreement does not specify the percentage, the person is deemed to have acquired a 100% interest in the land, unless the Commissioner of State Revenue exercises his discretion that a lesser percentage is appropriate.

This creates a great deal of uncertainty and is clearly not a satisfactory practical outcome for developers.

 

RPM: How will they affect developers and landowners who enter into these agreements – both intended and possible unintended consequences on developers, the industry and the market?

 MT-S: The new rules create an upfront duty cost for developers entering into a development agreement where the development fee is referrable to the proceeds from the sale of land and/or profit. This will significantly impact how feasible development agreements are for developers and landowners now that the changes are in effect.

Further, consultants engaged as part of a development with arrangements where the fee payable is calculated with reference to the proceeds of sale of land will need to be cautious they are not subject to the new rules.

The State Revenue Office has issued guidance on its website that service fee arrangements are not intended to be captured by the new rules, but this is an administrative view which is not necessarily supported by the legislation.

 

RPM: What should developers do?

MT-S: Developers must be cautious if they are considering using development agreements now, as there may be an upfront duty cost when entering into the agreement.

Further, development agreements will need to be drafted carefully to ensure that duty is not chargeable as though the developer has acquired a 100% interest in the relevant land. If the new rules are triggered, the developer will need to lodge the development agreement with the State Revenue Office for assessment of duty.

If a development agreement structure is no longer feasible, other alternative structures will need to be explored.