The Victorian State Revenue Office (SRO) has recently released a draft ruling for consultation on the meaning of the term ‘land development’ (draft revenue ruling DA-064).
The new draft ruling and the definition of ‘land development’ in a duty context is of particular relevance to:
purchasers involved in pre-settlement nomination arrangements
Foreign purchasers may be liable for additional duty if they acquire:
property which is intended to be converted into residential property.
This additional duty impost is commonly referred to as Foreign Purchaser Additional Duty (FPAD). The FPAD rate is 8% over and above the normal duty rate.
Relevantly, the definition of residential property includes land on which a person has undertaken or intends to undertake land development to create residential property.
The definition of land development also has relevance to arrangements involving nominations of land contracts pre-settlement. Where there has been an acquisition of a transfer right between contract/option date and settlement of a transfer, the performance of land development can be a trigger for the transfer of land being charged with multiple lots of duty under the ‘sub-sale’ duty rules. A common scenario that attracts a liability under the sub-sale provisions is where ‘land development’ occurred between the contract date and the nomination date.
What does ‘land development’ mean?
The term ‘land development’ is defined in section 3(1) of the Duties Act 2000. It has six alternative limbs, the satisfaction of any one of which would mean that a land development activity is involved.
These limbs are:
a) preparing a plan of subdivision of the land or taking any steps to have a plan registered under the Subdivision Act 1988
b) applying for or obtaining a permit under the Planning and Environment Act 1987 in relation to the use or development of the land
c) requesting under the Planning and Environment Act 1987 a planning authority to prepare an amendment to a planning scheme that would affect the land
d) applying for or obtaining a permit or approval under the Building Act 1993 in relation to the land
e) doing anything in relation to the land for which a permit or approval referred to in paragraph (d) would be required
f) developing or changing the land in any other way that would lead to the enhancement of its value.
The purpose of the draft ruling is to clarify the SRO’s interpretation of each of these six limbs.
What does the SRO regard as land development under the above limbs?
The draft ruling indicates that the Commissioner will generally consider the following matters in determining whether any of the above limbs are satisfied:
the facts, circumstances and contexts of each matter
the tangible and intentional actions associated with developing and changing the use of the land
the overall effect and consequence of the activities undertaken.
The draft also makes the observation that land development is the process (often involving multiple steps) of changing the state and/or use of land to increase its value or utility. In the Commissioner’s view it is irrelevant who carried out or intended to carry out the process or any part of the process. It does not matter whether the actions are performed in-house or by external professionals. Notably, if an activity does not fit into limb (a), (b), (c), (d) or (e), the activity may still constitute land development under limb (f) if it results in enhancing the value of the land.
A number of factors are listed in the draft ruling as being evidence, in the Commissioner’s view at least, that one of the ‘land development limbs’ referred to above is satisfied. This list (which is not exhaustive) includes items that are relatively obvious, but also includes activities like:
engaging professional surveyors to undertake surveys and/or prepare reports for the purpose of a plan of subdivision or consolidation (limb (a))
engaging a council or servicing authority to review or comment on a plan either inside or outside of a formal process, and irrespective of whether it results in any changes to the plan (limb (a))
engaging with a municipal council to request that the council pursue an amendment with the Minister for Planning to rezone land in the
planning scheme from farming to residential (limb (c))
decontamination activities that enhance the value of land (limb (f)).
In determining whether land development has occurred under limb (a), the Commissioner states that the extent to which formalities have been involved will be taken into consideration. Such matters as the engagement of architects/draftsman to prepare building plans based on the land survey, the commissioning of feasibility studies to make recommendations on optimal use and professional town planning advice will, according to the draft ruling, be relevant.
For reference, a full list of the factors outlined in the draft ruling have been included in a table on the attachment the end of this page.
One of the practical challenges with the FPAD rules and the land development definition is the fact that the rule encompasses actions of the purchaser and also includes an ‘intention’ limb, as referred to above. This breadth may create an element of uncertainty for purchasers that are foreign purchasers.
Reminder – who is a foreign purchaser?
A foreign purchaser is essentially:
a foreign individual - an individual that is not a citizen or permanent resident of Australia (or a NZ citizen in certain circumstances)
a foreign company - a company incorporated outside Australia or a company incorporated in Australia, if another foreign person (individual, company or trust) has a controlling interest in that company
a foreign trust – a trust where a foreign individual, foreign corporation or trustee of another foreign trust has a ‘substantial interest’ in that trust. For discretionary trusts, it is important to note the SRO’s recent announcement – from 1 March 2020, if a foreign person is a potential beneficiary (whether or not distributions have or will be made to such persons) a discretionary trust will be deemed to be a foreign trust.
Draft status of ruling
This ruling is currently only in draft form for consultation (consultation period ends on 7 October 2020). Submissions are expected to be made and we will keep clients appraised of any further developments in this space.
If you believe that you may be affected by the draft ruling, have any questions, or even believe that there are circumstances that would warrant a submission to the SRO during the consultation process, please contact us – either your usual ShineWing Australia contact or any of our experts below.