Land transfer duty – Acquisition of economic entitlements in relation to land (service fees)

Preamble

The economic entitlement provisions in Part 4B of Chapter 2 of the Duties Act 2000 (the Act) apply if a person acquires an economic entitlement in relation to relevant land, other than by a transaction that is already a dutiable transaction under Chapter 2 of the Act (such as a transfer of freehold land).

For the purposes of the provisions, relevant land is not limited to estates or interests in land and can include interests in fixtures held separately from land and leasehold estates specifically defined as dutiable property in section 10(1) of the Act.

Section 32XC of the Act provides that a person acquires an economic entitlement if an arrangement is made on or after 19 June 2019 in relation to relevant land with an unencumbered value of more than $1 million, under which the person is or will be entitled, whether directly or through another person, to any one or more 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.

Where a person acquires an economic entitlement, the person is taken to have acquired beneficial ownership of the land in the percentage determined under section 32XE of the Act and duty is chargeable under Chapter 2 of the Act accordingly. Subject to the Commissioner determining a lesser percentage, the beneficial ownership taken to be acquired by the person is deemed to be 100% in certain circumstances, including where the arrangement includes any other entitlement of, or amount payable to, an associated person (as defined in section 3(1) of the Act).

For information on how to calculate the percentage of beneficial ownership of land taken to be acquired under an economic entitlement, please see Revenue Ruling DA-066.

There are a wide range of persons who may be entitled to receive a fee in exchange for providing identifiable services to or at the request or direction of a person in connection with land and/or its development (service fees).

The purpose of this ruling is to provide clarification on the application of the economic entitlement provisions to service fees. The ruling also sets out when the economic entitlement provisions can apply to a resident in a retirement village. It also deals with acquisitions of shares in companies and units in unit trust schemes that may be outside the scope of the landholder provisions in Part 2 of Chapter 3 of the Act. This ruling does not deal with any other arrangement or the acquisition of an economic entitlement in relation to a private landholder under section 81 of the Act. This ruling is provided as a guide only and is not exhaustive. If your circumstances are not covered in this ruling, please apply for a private ruling in accordance with Revenue Ruling GEN-009v3 – General Information on Private Rulings. 

Ruling

When will the economic entitlement provisions apply to service fees?

The economic entitlement provisions apply to arrangements by which a person obtains an entitlement to the economic benefits of land that are normally reserved for the owner, without acquiring legal or beneficial ownership of the land. The provisions are intended to apply to entitlements which are economically equivalent to an ownership interest in the land.

Where a developer is entitled under a development agreement to receive a fee determined by reference to the income, rents or profits derived from land, or the capital growth or proceeds of sale of the land, the rights and benefits obtained by the developer are considered to be economically equivalent to an ownership interest in the land. The nature of this type of development agreement is to share the economic benefits (and often the risks) of the success (or failure) of the development of the land, which are benefits that would normally be reserved for the landowner. The development fee provides the mechanism for the developer to receive its share of those benefits, without acquiring ownership of the land. 

In contrast, a service fee that is determined by reference to matters other than the income, rents or profits derived from land, or the capital growth or proceeds of sale of the land, is not an economic entitlement. For example, a service fee payable to an architect that is determined by reference to the costs incurred in constructing a building on land is not an economic entitlement.

Some service fees are determined by reference to the income, rents or profits derived from land, or the capital growth or proceeds of sale of the land but comprise remuneration for identifiable services rendered in connection with the land. This type of service fee will not amount to an economic entitlement, if when objectively viewed, the fee arrangement was not entered into to provide the service provider with rights and benefits which are economically equivalent to an ownership interest in the land.

Which factors will the Commissioner take into account in determining whether a service fee amounts to an economic entitlement?

In considering whether a service fee determined by reference to one or more economic benefits of land amounts to an economic entitlement, the Commissioner will have regard to the following factors:

• The nature and scale of the arrangement as a whole, 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 percentage used to calculate the fee is at market rates and the structure of the fee is similar to standard fees chargeable by a comparable service provider 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.

Service fees that fall outside the economic entitlement provisions

The economic entitlement provisions do not apply to service fees or other amounts that are determined by reference to matters other than the income, rents or profits derived from land, or the capital growth or proceeds of sale of the land. 

Cost-plus development agreements

A developer that is entitled to receive a reimbursement of the costs it genuinely incurred to develop land, plus a fixed percentage mark-up on those costs, will not acquire an economic entitlement as defined.

However, this position will not apply if it is found that other circumstances exist which indicate that the developer is entitled, whether directly or through another person, to one or more of the entitlements referred to in section 32XC(1)(b) of the Act.

Lenders and financiers

A lender who provides a conventional loan facility to a developer, where the interest rate is determined as a percentage of the loan amount advanced, will not acquire an economic entitlement in relation to the land being developed.

However, if a lender or financier provides finance in connection with land in exchange for an interest rate determined by reference to the income or rents derived from the land, the lender or financier will generally have acquired an economic entitlement unless it can be established that the arrangement was not entered into to provide the lender or financier with rights and benefits which are economically equivalent to an ownership interest in the land (including evidence that the interest rate is below a reasonable benchmark for a comparable loan facility under which interest is determined as a percentage of the loan amount advanced). Alternatively, where the lender or financier acquires an entitlement to any other matter referred to in section 32XC(1)(b) of the Act (e.g. an entitlement to participate in the gross proceeds of sale or any capital growth of the land), the lender or financier will have acquired an economic entitlement as it is considered to have acquired rights and benefits which are economically equivalent to an ownership interest in the land.

A resident in a retirement village

Where a retiree enters into a lease/licence arrangement with a retirement village operator that gives the retiree a long-term right to reside in a residence at the village, any entitlement the retiree enjoys to participate in the proceeds of a subsequent sale of the residence to a new resident will not be considered to be the acquisition of an economic entitlement under Part 4B of Chapter 2 of the Act. Rather, this will be considered to be an entitlement that is already held by the retiree under the lease/licence (which is generally not dutiable).

This position only applies in relation to a retiree’s entitlement to participate in the proceeds of the first sale of the residence from when the retiree commenced residing in the residence under the lease/licence. It does not apply where the retiree has a right to participate in the proceeds from more than one on-selling of the residence. The above position also does not apply to any other party, such as an operator of a retirement village who does not own the units within the village but has an entitlement to participate in the proceeds of sale of the units.

Service fees that do not amount to an economic entitlement 

The following examples highlight situations where fees for the provision of services determined by reference to one or more of the economic benefits referred to in section 32XC(1)(b) of the Act, would not be regarded as economic entitlements because they do not give the service provider rights and benefits which are economically equivalent to an ownership interest in the land.

• Real estate agents – who receive fees determined by reference to the proceeds of sale of land in exchange for services including assisting a landowner sell the land.
• Project managers – who receive fees determined by reference to the proceeds of sale or capital growth of land in exchange for providing project management services to a landowner.
• Planning consultants – who receive fees determined by reference to the capital growth of land in exchange for services including assisting a landowner obtain a planning permit.
• Private advisory firms – who receive fees determined by reference to the proceeds of sale of land in exchange for services including assisting the landowner take their land to market or negotiate transaction documents.
• Hotel operators – who receive fees determined by reference to the profit derived from land in exchange for operating the hotel.
• Responsible entities, trustees, fund managers, asset managers and investment managers – who receive fees determined by reference to the proceeds of sale or capital growth of land under management of the fund.

Contingency fees

The Commissioner recognises that, to incentivise a service provider to maximise the results of a project, a service fee may be structured to provide for variable or larger entitlements when a specific outcome or benchmark is met (i.e. contingency fees). The existence of a contingency component to a service fee does not of itself indicate that the service fee amounts to an economic entitlement. This will depend on an objective analysis of the nature of the arrangement as a whole, including the nature of the relevant outcome or benchmark and the size of the corresponding entitlement.

When should a service fee be disclosed to the Commissioner?

A service provider is not required to lodge their fee arrangements with the Commissioner if:

• they have not acquired an economic entitlement because the service fee is not an economic entitlement under this Ruling, and
• they are not an associated person of a person who has acquired an economic entitlement in relation to the land under Part 4B of Chapter 2 of the Act.

A service provider that satisfies the above requirements is not required to lodge their fee arrangement with the Commissioner even if they are an associated person of the owner (or transferee) of the subject land.

Where a service provider is an associated person of a developer or other person that has obtained an economic entitlement under Part 4B of Chapter 2 of the Act, a closer analysis of the arrangement will usually be required for the purposes of calculating the percentage of beneficial ownership acquired under the economic entitlement. Generally, the developer or other person that has obtained the economic entitlement will be required to disclose the details of all service fees and other amounts payable under the arrangement to its associated persons, pursuant to section 32XE of the Act. In these circumstances, the developer or other person that has acquired the economic entitlement will be required to provide all relevant information to substantiate that the service fee is not an economic entitlement, otherwise the fee may be taken into account when calculating the percentage of beneficial ownership acquired. For information on how to calculate the beneficial ownership acquired, please refer to Revenue Ruling DA-066.

Examples

Acquisitions of shares in companies and units in unit trust schemes

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. Where the entitlement to income, rents, profits, capital growth or proceeds of sale is general in nature and not specific to particular land held by the entity, the economic entitlement provisions in relation to land would not apply.

Exemptions and concessions

The Act sets out several exemptions, concessions and reductions which can apply to the beneficial ownership of land taken to be acquired under Part 4B of Chapter 2 of the Act:

• the exemptions and concessions applicable to dutiable transactions under Part 5 of Chapter 2 of the Act
• the exemptions and concession for corporate reconstructions under Chapter 11 of the Act. A transfer of an economic entitlement between members of a corporate group can also be an eligible transaction under Chapter 11 of the Act
• section 32XI of the Act can reduce the amount of duty payable on a transfer of land to a person who, before the transfer, held an economic entitlement in relation to the land.

Commissioner of State Revenue

Rulings do not have the force of law. Each decision made by the State Revenue Office is made on the merits of each individual case having regard to any relevant ruling. All rulings must be read subject to Revenue Ruling GEN-001.

This is a draft ruling only, and is not available for publication, nor may it be relied upon by taxation officers, taxpayers or practitioners.