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

The post Land transfer duty – Acquisition of economic entitlements in relation to land (service fees) appeared first on SW Accountants & Advisors.

Property and economics are often cyclical in nature. For this reason, experts often use the past to predict a future outlook. However, with global disruption, the level of uncertainty has increased drastically, with many experts uncertain if we can look back to predict our future.

For this reason, we’re bringing renowned property players together to take a deep dive into the changing landscape in Australia, the impact this has on the future for property and what people and businesses should be considering now to prepare.

Following a keynote from CoreLogic Asia Pacific‘s Head of Research, Tim Lawless, some of our panellists include:

• Scott Keck, Chairman at Charter Keck Cramer
• Danni Hunter, Executive Director, Victoria at Property Council of Australia
• Leanne Boyle, Head of Urban Regeneration at Lendlease
• Daren McDonald, Partner, Chair of Property & Infrastructure Industry Group at SW

Moderated by Matt Birrell, Partner at SW, our speakers and panellists will discuss

• Australian demographics shaping property
• Property future values
• Future of property: Future opportunities vs correction of market

Forum – delivered online & free of charge

​​​​​​​The keynote session will be followed by a presentation and a panel discussion, with Q&A opportunities throughout. Further speakers will be announced shortly, and full program details sent to all registrants.

Date: Thursday 21 October 2021

Time: 9:30am – 11am (AEDT)

The post Spotlight | Property Forum appeared first on SW Accountants & Advisors.

David Chu, Head of International Business, recently joined Thomas Sung on the SBS Radio Cantonese Program to discuss the Australian property market from a financial perspective. Listen to the podcast episode in Cantonese or read the transcript of his interview in English below.

English transcript:

Thomas (host): The RBA and the Commonwealth Bank have each issued research reports, showing that the property market is under tremendous pressure due to the pandemic and may face a drop of up to 40% in the future. Is this the case? First, we will have Mr. David Chu, Head of International Business of ShineWing Australia, share with us his analysis of the Australian property market from a financial perspective. In addition, we will have Peter, who works in the real estate industry, share with you his view on the property market from his personal experience.  Let us first hear the thoughts of David.

David: In relation to office buildings, for example, due to the restrictions, many office staff have been working from home. It has been close to half a year since the local onset of COVID-19 in March. Through ongoing practice, many companies seem to have realised that they do not necessarily have to return to the office environment. Therefore, some of them have changed their future requirements for office buildings, or will instead reduce their footprint by working from home. Some even divided their staff into Team A and Team B to take alternating shifts. From this perspective, the demand for office buildings may decrease. There has been some media reporting lately. Two days ago, it was reported in the Australian Financial Review that a property group was buying Grade C and D office buildings and converting them into residential buildings. On the other hand, some investors feel that as soon as the pandemic is over, people’s passion for travelling will resume. These groups anticipate an ongoing demand for hotels. Therefore, in the long run, if the price is reasonable, they will buy Grade C and Grade D office buildings and convert them into hotels.

Thomas: What about residential properties?

David：Yes, due to the pandemic, many residents in apartments cannot go out due to the stay-at-home restrictions. Even if there are gyms, swimming pools and even other facilities in the building, they are also closed. This will undoubtedly affect newlyweds or the elderly, but more so families with small children. If the children can’t go anywhere, they may feel bored and become impatient. At the same time, for some households, the whole family is packed in an apartment. When the parents have meetings or work via Zoom, they also have to help their children with online classes and home schooling, thus affecting each other. Therefore, some families have begun to consider whether to move to a house or a townhouse that provides more space and at least a backyard for their children to move around. If a swimming pool can be afforded, there will be no need to go to a public swimming pool. This at least gives the children a place for activities. Therefore, in this regard, the pandemic has prompted many parents to think about the liveability of apartments. This may change the real estate market.

Thomas: So there is a new trend in the business community along with the property market, right?

David: Some experts mentioned that commercial buildings may be affected, and residential buildings may be changed too. Some experts have noticed that logistics has become very important during the pandemic. Many people shop online. This may increase the demand for warehousing, cargo storage, logistics and transportation services. That is why some experts have said that there may be an increase in demand for industrial buildings and warehouses. At the same time, there is a new trend in the Australian housing market, known as the build-to-rent scheme. Once a residential building is completed, it is not sold but rented. This has become a new trend in the property fund industry. Many funds would invest in apartment buildings, and then lease them out once they are completed, to generate fixed income. This is an emerging trend in the real estate market.

Thomas: Does this deployment show that the financial sector has better expectations for the future recovery of the property market?

David: Opinions vary from one to another. A few factors underpin the Australian real estate market. First, housing demand depends on the intake of immigrants. The population of immigrants has grown in the past ten years. This has largely contributed to the property price rise in big cities such as Sydney and Melbourne. Second, international students. The more the international students, the greater the demand for housing. However, both factors have changed because of the pandemic. There are fewer international students, and the Federal Government has tightened migration policies. It remains unknown what these changes will bring about in respect to housing demands and prices.

Get in touch

David is attuned to the Asian listed company market, international taxation issues, corporate regulations and various stock exchange requirements and is highly regarded in the market place. Reach out below to discuss how we can support your business during this challenging time.

The post Analysis of the Australian property market from a financial perspective appeared first on SW Accountants & Advisors.

David Chu, Head of International Business, recently joined Thomas Sung (host) on the SBS Radio Cantonese Program to discuss the current state of the property market in Australia following reports of an expected fall of up to 32%. Listen to the podcast episode in Cantonese or read the transcript of his interview in English below.

English transcript:

Host: After looking at the global securities market, let’s get back to the situation in Australia. The Commonwealth Bank said in its recent announcement that Australia’s property market may fall up to 32%. The news gave many a terrible fright on its release. Later, many analysts stepped out to provide their analyses with the belief that the Commonwealth Bank’s forecast seemed too conservative. What is the situation? We have David Chu, Head of International Business of ShineWing Australia, here today to share his opinions.

David: When the Commonwealth Bank mentioned real estate in the release of their annual results, they estimated that it will fall by 32%.  But if you look closely, you will find that they were mentioning 32% from March 2020 to March 2023. That is, it will fall by 32% in three years, not 32% in one year. It is definitely startling if you just see the headline.

Host: On what basis did they make such a guess?

David: They said if the pandemic led to the economic recession and the recession continues for a long time, that is what will happen. Nevertheless, be careful while listening, the expression they used is “prolonged crisis”, which was referring to what it will be like if the current situation continues. Their point of view is assuming the economic growth these several years, for example, in 2020 to be -6%, then an increase of 6% in 2021, with the unemployment rate of 8.25% in 2020, which will stay at 8% in 2023. They said if that is the case, the property market will fall by 32%. Some economic experts commented that this might be “the worst case scenario”.

Host: In that context, what would be a more balanced estimate? How will the property market develop? Will there be support?

David: Of course there are other economic experts who agreed that the Commonwealth Bank’s plan should be the worst case scenario. Some economic experts estimate the economic growth in 2020 to be a bit worse, -7.1%, but in 2021 it may come back with a rise of 0.3%. The unemployment rate will be 9% in 2020, 8.5% in 2021, and for 2022 and 2023 depending on how things evolve. With this in mind, home prices may only fall by 11% from 2020 to 2023. Some experts also said that as an investment tool, buying a home and leasing it out for rent is not really that bad, which gives at least 3-4% return, better than putting the money in the bank, which yields at most 1% interest. After all, the RBA interest rate is only 0.25%. Relatively speaking, the return on real estate investment should be good enough to support home prices, so some economic experts have a more optimistic view. Nonetheless, experts do agree that housing prices will fall, and it is just about how much it falls by.

Host: I know that experts have different opinions on home prices. What do they say?

David: Some experts believe that if the pandemic caused the economic recession, and if growth can be resumed as soon as possible, home prices should not fall by as much as 30% in three years. Experts from some other Big 4 banks said that only a 10% drop on average might take place over the next 12 months. UBS’s estimate is a drop by 10-20%, and Morgan Stanley believes it will drop by about 15%. AMP Capital is relatively pessimistic, saying that it may drop by 25%. Of course, these are all estimates by various institutions at such an early stage. As for whether it will fall by 32% in three years, this is of course based on some of the more conservative assumptions just mentioned.

Host: So during this pandemic, I know that some tenants have found themselves in difficulties. One report said that close to 10% of the tenants across the country asked landlords to reduce rents. I know that rent reduction has been voiced and demanded overseas, such as Hong Kong. I heard someone has made it happen. Is this common in Australia?

David: In fact, this is quite common in Australia, and it may have even been requested by more people in Australia than in Hong Kong. The main reason is the introduction of some regulations in Australia. Firstly, landlords of both residential and commercial buildings can’t evict tenants for these six months, because if you lose your job, it is naturally difficult to repay your mortgage and rent. On the payment of rent, some leases clearly stipulate that after two or three months of default in rent payment, the landlord can request termination of the lease and demand vacation of the property. The same is true for commercial properties. Therefore, the government issued a rule that tenants should not be evicted for six months. Second, if you have difficulty repaying your mortgage, you can also apply to the bank for deferring your repayment. On loans, the Commonwealth Bank also mentioned in their release of annual results last time that they received 140,000 applications on home mortgages and 70,000 applications on commercial loans. On personal loans, like credit cards, the Commonwealth Bank received 25,000 applications. The general public has also made requests to reduce their burden. Some of my friends lease out their shops and tenants are asking them for rent reductions. It depends on how their negotiations with the owners go. Some just don’t want to waste a large amount of time negotiating and go ahead to halve the rent; some say that the rent can be reduced, but in exchange for an extended lease, so that the loss will not be significant. So everyone deals with it their own way. Getting back to your question whether this is common, it is indeed more common in Australia than in other countries, and the situation may be much better than that of the United States.

Host: We also expect these measures to give some relief to the tenants who are now hit by the pandemic. We are very grateful to Mr. David Chu, Head of International Business of ShineWing Australia, for taking the time out of his busy schedule to share with us his analysis of whether proper prices in Australia will fall by 32% under this pandemic. Thank you!

David: Thank you Thomas! Thanks everybody.

Get in touch

David is attuned to the Asian listed company market, international taxation issues, corporate regulations and various stock exchange requirements and is highly regarded in the market place. Reach out below to discuss how we can support your business during this challenging time.

The post The impact of COVID-19 on Australia’s property market appeared first on SW Accountants & Advisors.

Experienced property developers have been patiently waiting to capitalise on an anticipated property market downturn after being priced out of many opportunities over recent years. With a number of these developers preparing to act now that property prices are beginning to trend upward again, changes to tax and duty legislation have reared their heads. Unfortunately for these developers, these changes provide a new cause for uncertainty surrounding feasibilities.

In particular, the wide reaching changes to the economic entitlements provisions in the Victorian Duties Act put developers at risk of paying duty more than once. Structures that have previously been commonplace may no longer be suitable for current and future developments.

Understanding the implications of the legislation changes

Under the new rules widely used development management agreements, project management agreements, joint venture agreements and lending agreements are now at risk of triggering duty.

Following the recent changes, the State Revenue Office (SRO) provided guidance on how the Commissioner will apply the new law, however there are very few test cases for advisors and developers to refer to as yet. The SRO is now seeking to provide guidance on specific arrangements if any developers are willing to submit their structure for scrutiny.

Potential risks for developers

One potential at risk arrangement may involve bringing an equity provider into the development after an interest in land has been obtained.

Whilst it is recommended to have all equity participants in place upfront and to have the entire development structure and all associated agreements in place before signing a land purchase contract, practically this is often a difficult or even impossible task.

Actions for developers

Developers should review their pro-forma documentation before proceeding with any new developments to ensure any duty risks are understood and addressed.

How can we help?

Reach out to one of our property or tax experts to discuss the duty implications on your development structures and agreements and avoid being caught out by the SRO.

Get in touch

Our experts can assist with further information.

Daren McDonald

E dmcdonald@sw-au.com

Blake Rodgers

E brodgers@sw-au.com

The post Property development update appeared first on SW Accountants & Advisors.

The State of the Market series will be run over the year and will host panels of investment managers to explain trends in the following specific asset classes:

• Listed and unlisted property funds
• Debt funds
• Equity Funds
• Alternate / Infrastructure Funds

Our first briefing will cover listed and unlisted property funds, along with insights into the broader Australian property market, including the impact of falling housing prices.

Expert Panellists

Moderated by Daniel Minihan, Partner, ShineWing Australia, we are very excited to bring to you a range of expert panellists:

• Chris Langford, Joint Managing Director, Newmark Capital
• David Omond, Joint Managing Director, Placer Property Group
• Michael Doble, CIO Real Estate Securities, APN Property Group (Sydney)
• Pete Morrissey, CEO Real Estate Securities, APN Property Group (Melbourne)

Benefits of attending

• Understand the diverse nature of investment markets
• Consider the impact of market volatility and what actions to take
• Learn from real life case studies
• Hear perspectives from subject matter experts
• Understand expert views on the current investment cycle
• Discover financial product trends
• Gain an understanding of the opportunity and risk in various asset classes

Event details 

Sydney

Date: Wednesday, 20 March 2019
Time: 12pm for 12:15pm start – 1:30pm. Networking lunch provided, followed by afternoon tea.
Venue: ShineWing Australia, Level 8, 167 Macquarie Street, Sydney

Melbourne

Date: Monday, 1 April 2019
Time: 12pm for 12:15pm start – 1:30pm. Networking lunch provided, followed by afternoon tea.
Venue: ShineWing Australia, Level 10, 530 Collins Street, Melbourne

For more information about these events, or if you have any queries, please contact the ShineWing Australia Marketing team via marketing@sw-au.com

We look forward to your attendance!

The post State of the Market appeared first on SW Accountants & Advisors.