With the rulings to take effect from 1 July 2025, the Victorian SRO issued draft revenue ruling DA-067 and final versions of revenue rulings DA-065 and DA-066 which consider the treatment of economic entitlements under the Duties Act 2000 (Vic) (Duties Act).  

Economic entitlements  

Under the Duties Act, an economic entitlement arises when a person gains access to the economic benefits of land such as income, capital growth, or sale proceeds, without acquiring ownership. These provisions are designed to capture arrangements that are economically equivalent to land ownership but fall outside traditional dutiable transactions. 

This includes complex commercial arrangements, such as profit-sharing agreements, development partnerships, and certain retirement village structures.

Draft DA-067: Economic entitlements – key concepts and interpretation 

Draft DA-067 aims to clarify key concepts and interpretations surrounding economic entitlements, particularly where arrangements do not involve a direct transfer of land but still confer financial benefits tied to land ownership. This draft ruling addresses longstanding industry concerns about the breadth and ambiguity of the provisions, particularly in property development and investment arrangements. 

DA-067 outlines the Commissioner’s interpretation of key concepts that are relevant to the economic entitlement regime. These have been summarised below. 

“Arrangement” 

The word ‘arrangement’ is not defined in the Act but has been interpreted in various ways in different statutory contexts. In the current context, the Commissioner will not consider an arrangement to have been made unless there is at least one binding agreement. An arrangement in this context is not used to capture matters that are merely a proposed course of action. 

“Is or will be entitled to” 

This phrase incorporates an element of futurity about when a person will be entitled to participate or receive an amount under an arrangement. It includes both current and future rights to receive a benefit under an arrangement. It includes direct and indirect entitlements, whether the person is actively involved or passively entitled.  

“To participate in” 

This is outlined to mean having a right to share in the economic benefits of the land, such as income, rents, profits, capital growth or proceeds from sale of the land. 

“Directly or through another person” 

This phrase is intended to ‘look through’ participation by a trustee or nominee acting for or on behalf of another person or beneficiary. 

DA-067 has been subject to consultation and is expected to be issued in due course. 

DA-065: Acquisition of economic entitlements via service fees

DA-065 focuses on when a service fee arrangement may be deemed to confer an economic entitlement, thereby triggering land transfer duty under part 4B of Chapter 2 of the Duties Act. 

The economic entitlement provisions provide that a person acquires an economic entitlement if an arrangement is made in relation to land (with an unencumbered value exceeding $1 million) under which a person is or will be entitled to any of the following: 

• to participate in the income, rents or profits derived from the land  

• to participate in the capital growth of the land  

• to participate in the proceeds of sale of the land  

• to receive any amount determined by reference to any of the above matters 

• to acquire any entitlement described above. 

DA-065 provides that in considering whether a service fee amounts to an economic entitlement, the Commissioner will consider the following factors: 

• the nature and scale of the arrangement, including the rights, obligations, risk allocation, and responsibilities of the parties to the arrangement. The assumption by a service provider of economic risks associated with the ownership and/or development of land generally indicates that this type of service fee will amount to an economic entitlement.  

• the nature and magnitude of the service fee, including whether the substance of the fee is remuneration for identifiable services. For example, the percentage used to calculate the fee is at market rates and the structure of the fee is similar to ordinary fees chargeable by a comparable service provider as remuneration for the identified services. The larger the percentage of an economic benefit of land used to calculate the service fee, the more indicative the service fee will amount to an economic entitlement. 

• the nature of the service provider, including whether the service provider ordinarily provides the identified services to third-party recipients within the course of its business. 

Examples where the Commissioner wouldn’t consider a service fee to be an economic entitlement include:  

• real estate agents commission which are determined by rents or proceeds of sale   

• project managers fees which are determined by reference to the proceeds of sale or capital growth of land in exchange for providing project management services to a landowner 

• trustees, fund managers, asset managers, and investment managers fees that are determined by reference to the proceeds of sale, rents, profits or capital growth of land under management of the fund.  

Retirement villages  

DA-065 considers specific circumstances in relation to arrangements involving retirement villages. 

Under lease or licence arrangements in retirement villages, a retiree’s right to reside and share in the proceeds from the first resale of their unit is not considered an economic entitlement under Part 4B of the Duties Act, as it is part of their existing lease/licence (which is generally not dutiable). However, this exemption only applies to the first resale, meaning that if the retiree has rights to proceeds from multiple resales, it may be treated as an economic entitlement. 

Similarly, payments made by outgoing residents to the retirement village owner are not considered economic entitlements, since the owner already holds full beneficial ownership of the land. 

In contrast, non-owners, such as operators who have a right to share in the proceeds of unit sales, are considered to be acquiring an economic entitlement, which must be disclosed to the Commissioner. 

DA-066: Calculation of economic entitlements  

DA-066 acts as the companion ruling to DA-065 and provides guidance on how to calculate the percentage of beneficial ownership of land taken to be acquired under an economic entitlement. 

Percentage of beneficial ownership 

Where a person acquires an economic entitlement, the percentage of beneficial ownership of land taken to be acquired will be the total of all the entitlements that the person (or associated persons) is or will be entitled to receive or acquire at the time the arrangement is entered into.  

As mentioned above, the relevant entitlements are:  

• to participate in the income, rents or profits derived from the land  

• to participate in the capital growth of the land  

• to participate in the proceeds of sale of the land  

• to receive any amount determined by reference to any of the above matters 

• to acquire any entitlement described above. 

If an arrangement grants a person only one of the above entitlements, clearly defined by a particular percentage, and no additional payments are made to that person or any associated party, the percentage of beneficial ownership deemed to be acquired will be equal to that stated percentage. 

Deeming provision 

DA-066 also provides a deeming provision that operates to deem the beneficial ownership taken to be acquired to be 100% where the arrangement is entered into: 

• does not specify the percentage of the entitlement that the person is or will be entitled to receive or acquire 

• in addition to specifying a percentage of the economic entitlement, also includes any other economic entitlement, or amount payable to, the person or an associated person or 

• entitles the person or an associated person to 2 or more of the entitlements referred to in section 32XC(1)(b) of the Duties Act. 

The deeming provision is subject to the Commissioner’s exercise of discretion, which allows the Commissioner to determine a percentage less than 100% if it is appropriate in the circumstances. 

When deciding whether to exercise discretion, the Commissioner will consider all relevant circumstances, including the total economic entitlements held by the person and their associates at the time the arrangement was made. 

If the person accurately identifies and quantifies all economic entitlements as less than 100%, the Commissioner may reduce the deemed beneficial ownership from 100% to the actual percentage of entitlements acquired. 

Calculation 

Once the percentage of beneficial ownership is established, duty is assessed based on that percentage of the land’s unencumbered value at the time the economic entitlement is acquired, not when the associated benefits are eventually received. If the land’s unencumbered value falls between $1 million and $2 million, the duty is gradually phased in using the following formula: 

[(A – $1,000,000)/$1,000,000] x B 

Where: 

• A is the unencumbered value of the relevant land and 

• B is the duty that, apart from this section, would be chargeable on the acquisition of the economic entitlement. 

How SW can help 

These rulings provide greater clarity for developers, investors, and retirement village operators, ensuring compliance with duty obligations and reducing ambiguity around complex land-related arrangements. 

Stakeholders should review existing and future arrangements considering the new rulings to ensure compliance and mitigate any risks for duty being imposed. 

Please reach out to our dedicated tax specialists to help you interpret the changes, assess your exposure, and ensure your arrangements remain compliant. 

Contributors

Rob Parker

William Zhang

The post Victorian State Revenue Office clarifies land transfer duty on economic entitlements   appeared first on SW Accountants & Advisors.

On 30 August 2022 the State Revenue Office of Victoria (SRO) released a draft Ruling on the operation of the economic entitlement provisions contained in the Duties Act 2000 (Vic).

Draft Ruling DA.065 Acquisition of economic entitlements in relation to land (service fees) formalises the guidance previously published on the SRO website in relation to arrangements potentially dutiable under these provisions.

Much of what was previously published is contained in the draft ruling, however the ruling does include some further examples. There is still some significant uncertainty as to the operation of the provisions and further clarity in some instances would be helpful prior the ruling being finalised. The SRO are accepting comments in relation to the draft ruling up until 28 September 2022.

Economic entitlement provisions

Broadly, the economic entitlement provisions will apply where there is an arrangement in relation to land (with an unencumbered value that exceeds $1,000,000) under which a person has an entitlement:

• to participate in the income, rents or profits derived from the land
• to participate in the capital growth of the land
• to participate in the proceeds of sale of the land
• to receive any amount determined by reference to any of the above matters
• to acquire any entitlement described above.

The provisions are broadly drafted and paragraph IV as it is currently worded has the potential to apply to any ‘fee’, ‘interest’ or other amount that is calculated by reference to the income, profits, rents or proceeds of sale derived from the development of the land.

The draft ruling highlights the intention of the provisions to impose duty on arrangements where a person, without acquiring an ownership interest in land, effectively obtains rights and benefits relating to the land that are economically equivalent to ownership interests. Labelling an amount as a ‘fee’ or ‘interest’, or something else, will not avoid the economic entitlement provisions if they otherwise apply

Outcome of draft ruling

The information previously published on the SRO website broadly details situations and examples which may commonly arise with respect to land dealings and provides guidance on whether the economic entitlement provisions would apply.

The draft Ruling builds on this guidance and considers two issues:

• whether ordinary fees for service may amount to an economic entitlement; and
• circumstances where an acquisition of a share or unit may amount to an economic entitlement despite not attracting landholder duty.

Fee for Service

The draft Ruling states that fees may be tied to the proceeds associated with land and/or its development but not amount to an economic entitlement. This is the case where third party service providers receive ‘genuine industry fees’ for service.

Examples include:

• real estate agents, including executors and trustees of deceased estates – whose fees are based on the proceeds of sale of land
• architects – whose fees can include a percentage of building costs
• project managers – whose fees can include a percentage of project value. Payment of the fees cannot be contingent on / calculated by reference to the performance of the project/development
• planning consultants – whose fees can include a percentage of the value uplift after a precinct structure plan is obtained
• private advisory firms – that may receive a contingency fee for assisting a landowner to take their land to market or negotiate transaction documents
• lenders and financiers – who receive interest for providing finance to a development. The interest/fee cannot be tied to the performance of the development. An example of such an arrangement is a standard loan facility with interest at market rates.

The Ruling follows on to provide that there is no need to lodge or pay duty where a person provides a ‘genuine’ service in relation to land and:

• 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 (i.e. not an associated person) to any other person who has an economic entitlement in relation to the land.

Limitations of the ruling

Whilst the examples provided have been included to avoid confusion, it is our view that more clarity is still required as the ruling does not articulate the principles which are being applied by the Commissioner in the examples.

In some examples the conclusion is that the fee is not an economic entitlement, however it is not clear whether this is because those examples actually fall outside the definition of an economic entitlement in the first place. For example, an architect who charges fees on a percentage of building costs does not actually acquire any entitlement to participate in the income, rent or profits derived from the land. Similarly, financiers who are entitled to interest calculated on the loan advanced do not have an entitlement to participate in the income, rent or profits derived from the land. In these circumstances, it is irrelevant whether the fees are “genuine” and within “industry parameters”.

In addition, the draft Ruling provides no guidance as to what are ‘genuine’ fees or whether a ‘fee/rate is within industry parameters’. Industry parameters cover a broad range and depend upon multiple factors.

Acquisition of a share or unit.

The draft Ruling states that:

The economic entitlement provisions contained in Chapter 2 of the Act can also apply to acquisitions of shares in companies and units in unit trust schemes that may be outside the scope of the landholder provisions in Chapter 3 of the Act. As a result, a liability may arise under Chapter 2 where no liability would arise under Chapter 3 because the interest acquired is below the relevant acquisition threshold. However, this would only occur where the acquisition of units, shares or other security interests entitle the holder to participate in the income, rents or profits, capital growth or proceeds of sale from particular land held by the entity.

The ruling provides an example where specific classes of units might be dutiable under the economic entitlement provisions, although not dutiable under the landholder provisions (as the interest acquired is below the relevant acquisition threshold). The ruling states that the economic entitlement provisions would only apply where the shareholder/unitholder is entitled to participate in the income, rents or profits, capital growth or proceeds of sale from particular land held by the entity. Where shareholders/unitholders are entitled to income/proceeds etc. that are general in nature and not specific to a particular land held by the entity, the economic entitlement provisions would not apply.

The example provided in the ruling is somewhat artificial as it involves the creation of a new class of units issued to a potential investor who wants to acquire one of the shopping centres (Property A) held in the Trust, but not through a conventional purchase. The new class of units entitles the investor to 100% of the new income, rents and profits associated with one of the properties and entitlement to the trust’s property upon wind up to the extent that the value of Property A bears to the total value of both properties.

It is our view that the anti-avoidance provisions contained in the landholder provisions should apply to such arrangements. The economic entitlement provisions should have no application to the issue of units and shares. Although the rights to dividends and capital of a particular class or units or share may be determined by reference to returns from a particular property or a particular pool of assets, the dividend or capital payments are not an entitlement to participate in the income, rent or profits derived from the land or capital growth (except in very unique circumstances).

How we can help

Whilst the ruling somewhat builds on the previous information published on the SRO website, it still does not provide the guidance needed by the property industry to understand what arrangements would be captured by the economic entitlement provisions. This unfortunately means that taxpayers seeking certainty will need to seek a private ruling from the SRO.

SW is currently involved in a number of submissions, so please reach out to the team if you have questions, comments or feedback.

Contributors

Robert Parker, Consulting Director, Tax

Carmelin De Francesco, Senior Manager, Tax

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