Developers will no longer be able to avoid paying stamp duty by entering into an agreement to develop a site without purchasing the land from the landowner.
Developers are now treated as having beneficial ownership of any site worth more than $1 million and will be subject to paying 5.5% stamp duty on potentially the entire value of the land.
These new provisions under the State Taxation Acts Amendment Act 201 brought in by the Victorian Government came into effect on 19th July.
Is has been introduced to help off-set the projected $5.1 billion shortfall in stamp duty expectations following the decline in Victorian property values from their 2017 peak.
Previously stamp duty was generally not payable by developers if there economic entitlement was less than 50% of the development. This threshold has now been removed and developers will be liable to pay stamp duty on any economic entitlement regardless of the percentage.
What is economic entitlement?
A person who enters into an agreement in which they are entitled directly or indirectly to obtained an economic benefit from the land.
A person acquires an economic entitlement if the person is entitled to any one or more of these:
• 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.
When do developers have to pay stamp duty?
The stamp duty is payable when the economic entitlement has been acquired as the person has obtained an ‘ownership interest’ in the land which is then liable for stamp duty.
It is payable upfront when the economic entitlement is agreed upon not when the developer receives the entitlement. It is calculated by the percent interest the developer has obtained based on the market value of the land at the time of the agreement. It is not determined by the end value of the development.
The economic entitlement is treated as obtaining a beneficial interest in the land. The amount of stamp duty payable is dependent on the percentage of the beneficial interest acquired by the developer. Therefore if the land is valued at $10 million and the developer has acquired an economic entitlement of 10 percent they then will have to pay stamp duty of $55,000 (5.5 percent of their 10 percent interest)
The beneficial interest will be equal to:
The percentage of the economic entitlement that is acquired; or
- the percentage of the economic entitlement is not specified or cannot be determined;
- there is a percentage specified, but the person or their associate is entitled to other amounts; or
- two or more economic entitlements of different types are acquired.
Developers will need to make sure that a clear percentage of interest is identified in any arrangement with land owners to avoid being treated as having a beneficial interest of 100 percent and being charge 5.5% stamp duty on the whole of the land value. However in these cases developers can apply to the Commissioner of State Revenue who can lower the percentage if they see fit.
What does this mean for developers and the Victorian housing market?
The changes will have major implications for developers who may now start to rethink develop agreements with land owners and be put off from certain development projects all together.
Development Company Resi Ventures have warned that the changes will reduce supply and increase land prices for buyers.
Already they have said they will walk away from a 900-lot house and land project in Melbourne West following the changes.
“Imposing a tax upfront is a draconian measure, stamp duty is not normally paid until settlement so this accelerated taxing treatment will torpedo a number of deals Resi Ventures has in the pipeline,” Resi Ventures director Mr Anthony Braunthal said.
Mr Braunthal believes that the Victorian Government will not receive the ‘tax windfall it expects’ and may even see revenue fall.
“Developers are the very organisations that create jobs and pay significant amounts of tax. More should be done to drive affordability down by reducing regulation and taxation - not increasing imposts on development,” he said.
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