Duty concession for off-the-plan sales

Ruling history

Ruling no.	DA-048v2
Status	Current
Issue date	27 March 2019
Replaces	DA-048, DA-016 and DA-011
Date of effect	1 October 2008

This ruling replaces DA-048 to clarify the off-the-plan concession and the methodology for calculating the concession. It incorporates a full explanation of the alternative method and reflects the established nature of the law surrounding the concession, including the fixed percentage method of calculation.

While the calculation methods for the concession have not changed, the concession’s scope for contracts signed on or after 1 July 2017 is more limited:

• Contracts signed before 1 July 2017 - the off-the-plan concession is available for all property types, including residential and commercial properties, and all purchasers, whether owner-occupiers or investors. 
• Contracts signed on or after 1 July 2017 - the off-the-plan concession is only available for the purchase of a home that qualifies for the principal place of residence concession or the first home buyer duty exemption or concession. This means the purchaser(s) must use the property as their home and meet the 12-month residence requirement. The dutiable value of the property, after applying the off-the-plan concession, must also meet certain thresholds.

Preamble

The Duties Act 2000 (the Act) imposes duty on transfers of dutiable property unless an exemption applies. When a concession applies, the amount of duty payable is reduced. Duty is calculated on the property’s dutiable value which is defined to mean the greater of the consideration for the transfer or the unencumbered value of the dutiable property.

Concessions are available when there is a transfer of land as a result of an off-the-plan sale involving land and the construction of a building or the refurbishment of a lot. Both concessions are commonly referred to as the off-the-plan concession.

The off-the-plan concession allows the consideration for a transfer of land to be adjusted to exclude amounts paid or payable by the purchaser in respect of the construction or refurbishment of the building occurring on or after the date of the contract of sale. The adjustment means the consideration for the transfer, and consequently the dutiable value on which duty is calculated, is reduced.

Section 21(3) of the Act applies where a person enters into a contract for the purchase of land and the construction of a building and construction has not commenced, or only a percentage of construction has been completed, at the date of contract.

Section 21(4) of the Act applies where a contract is entered into for the refurbishment of an existing building and the refurbishment has not commenced or is incomplete at the date of the contract. The transferor (i.e. the vendor under the contract) must be the first registered proprietor of the subdivided lot. Section 21(5) of the Act defines a refurbishment as building work for which a building permit has been issued to convert an existing building.

Under section 21(3) or 21(4) of the Act, the consideration for a transfer is determined by deducting the cost of any construction or refurbishment (inclusive of GST) occurring after the date of the contract of sale from the contract price (inclusive of GST).

In essence, the concession provides that the dutiable value of the property, which is usually the consideration for the transfer of the property, being the contract price, is determined by deducting the cost of any construction or refurbishment occurring on or after the date of the contract of sale from the contract price.

Under section 21A of the Act, the Commissioner may publish percentage amounts for the purposes of these concessions. These are percentages of the consideration for the transfer of a property that represent the amount paid or payable by the purchaser in respect of the construction or refurbishment of a building on or after the date of the contract of sale. The Commissioner may publish different percentage amounts for different classes of building. These are used for the fixed percentage method of calculating the concession.

The purpose of this Revenue Ruling is to

• outline the Commissioner’s approach (whole of project or single lot) to determining the percentage of construction completed at the contract of sale date. This allows the cost of any construction or refurbishment after this date to be calculated
• set out the 2 methods (alternative and fixed percentage) which can be used to calculate the off-the-plan concession
• publish percentage amounts used in the fixed percentage method for different classes of buildings or refurbishments.

Note: The off-the-plan concession only applies to affect the dutiable value of a property where the contract price reflects the market value of the property being purchased. Where this is not the case, and in accordance with the definition of dutiable value contained in section 20(1), the dutiable value of the property is determined based on the unencumbered value of the property.

Ruling

This Revenue Ruling applies to contracts for off-the-plan sales entered into on or after 1 October 2008.

The Act requires the transferor to provide certain information to enable the dutiable value of a property, including the off-the-plan concession, to be calculated. This information is collected from the transferor in the form required by the Commissioner.

The off-the-plan calculation uses:

1. The percentage of construction or refurbishment completed at the date of the contract.
2. The selected concession calculation method, being either the fixed percentage method or alternative method.

For the purposes of this ruling, all references to construction apply equally to refurbishment works.

Determining the amount of construction completed at the date of contract

Whole of project or single lot approach when determining the percentage of construction costs

In order to determine the amount of construction costs completed as at the date of the contract of sale, it is necessary to have regard to the manner in which the project is managed. This can be either a whole of project approach or a single lot approach for the property.

Whole of project approach

In multi-lot developments, the completion of construction works for the property or the lot, and the issue of the occupancy permit, depends on the completion of construction works for all lots in the development, including the common areas.

As such, the Commissioner considers that the whole of project approach should be used for multi-lot developments. When this approach is used, it must be used for all units in the development. It requires evidence of (but not limited to) progress payments claimed by the builder and supported by quantity surveyor reports. The whole of project approach accords with industry practice and ensures calculations take into account the relevant proportion of costs attributable to common areas (e.g. security, lifts and stairwells).

Single lot approach

A transferor can use the single lot approach when:

• the completion of the construction works for the property is not dependent on the completion of construction works for all properties in that development, and
• separate approvals, including the occupancy permit, can be obtained for the individual lot.

This approach requires the transferor to keep detailed records of the progress of the construction works for that specific lot at the time of the contract of sale.

For a single lot freestanding construction, based on the progress payment schedule contained in a standard domestic building contract, the following minimum percentages for the various stages of construction can be used as a guide to determine the percentage of construction completed at the contract date:

• 15% for base (slab/foundations etc.)
• 30% for frame
• 65% for lock up
• 90% for fixing
• 100% for completion.

If the building contract uses a different progress payment schedule, then the transferor should refer to those figures to determine the amount of construction completed at the date of the contract.

Calculation of the off-the-plan concession

There are 2 methods for calculating the off-the-plan concession:

1. The fixed percentage method.
2. The alternative method.

The transferor must complete the form required by the Commissioner, with the details required for the method chosen. These details are used to calculate the concession and adjust the dutiable value of the property. Duty is then calculated using the resulting reduced dutiable value.

Whichever method is selected, transferors must use the same method for all contracts within the same development or project.

Fixed percentage method

The fixed percentage method is a simpler method for calculating the concession.

Under this method, a ‘fixed percentage’ of the contract price is deemed to represent the total amount paid or payable by the purchaser for the construction of the building or the refurbishment of the lot. The percentages vary depending upon the class of building.

The deemed fixed percentages for various classes of buildings are:

Class of building	Description of building	Deemed fixed percentage
Single lot	Freestanding or single dwellings sharing side walls (e.g. a terraced house or duplex), including dwellings with abutting garage walls.	45%
Multi-lot low rise	Buildings up to 3 storeys, not including basements. These are usually units or apartments with access to common property.	60%
Multi-lot high rise	Buildings of 4 or more storeys, not including basements. These are usually units or apartments with access to common property.	75%

If no construction has started at the date of the contract, the off-the-plan concession is calculated by multiplying the deemed fixed percentage for the class of building of the property by the contract price. The resulting amount is deducted from the contract price for the property to produce the minimum possible dutiable value for the property under this method.

If works have started at the date of the contract but are incomplete, the deemed fixed percentage is proportionally reduced by the amount of works completed at the date of the contract.

Under the fixed percentage method, the percentage of works completed can be rounded down to the next 10% increment, thereby resulting in a greater concession. The remaining proportional amount of the deemed fixed percentage for the class of building can then be multiplied by the contract price to produce the value of the off-the-plan concession. The dutiable value of the property can be obtained by deducting the calculated concession from the contract price.

Calculating the concession

Under the fixed percentage method, the off-the-plan concession is calculated by:

1. Multiplying the contract price by the fixed percentage applying to the class of building. This produces a dollar value for the amount paid or payable by the purchaser for the construction works under the contract.
   
   Example: for a $500,000 single lot home, the contract price is multiplied by 45%.
    
2. Determining the percentage of construction works completed at the date of the contract.
   
   Example: 15% for base slab/foundations, 30% for frame.
    
3. If the percentage of construction works completed is not a multiple of 10, rounding the percentage of construction works down to 10% increment.
   
   Example: if 15% has been completed, this is rounded down to 10%.
    
4. Deducting the percentage of construction works completed from 100% to get the percentage of uncompleted works at the contract date.
   
   Example: if the percentage of construction works completed is 10%, then 90 % of the construction works are uncompleted.
    
5. Multiplying the percentage of uncompleted works at the contract date by the dollar amount paid or payable by the purchaser for the construction component of the contract as calculated in step 1. The resulting figure is the value of the off-the-plan concession and is deducted from the contract price to produce the reduced dutiable value on which duty is calculated.
   
   Example: if 90% of construction works are uncompleted at contract date on a $500,000 single lot home, the off-the-plan concession will reduce the consideration for the transfer by $202,500. This is calculated as follows: $500,000 multiplied by 45%, multiplied by 90%.
   
   The dutiable value of the property, after applying the concession, is $297,500 ($500,000 minus $202,500).

Examples of fixed percentage method of calculation

Alternative method

The alternative method requires the transferor to determine and provide the Commissioner with information on various values relating to the land and the cost of construction. These values are used in a series of calculations to determine the cost of the construction or refurbishment works paid or payable by the purchaser in the contract price.

If no construction has started at the date of the contract, the full value of the derived cost of construction in the contract price is the amount of the off-the-plan concession. The derived value is deducted from the contract price for the property to calculate the minimum possible dutiable value for the property under this method.

If at the date of the contract construction works have started but are incomplete, the derived value of the works is proportionally reduced by the amount of works completed at the date of the contract. The remaining proportional amount of the derived value of the works is then deducted from the contract price to produce the dutiable value of the property after applying the concession. Rounding down on the percentage of construction completed at the date of the contract is not available with the alternative method.

Duty is then calculated on the resulting dutiable value of the property.

Key values

The alternative method requires the transferor to ascertain the following values for the property:

• contract price
• GST
• market value of the parent land, if the development involves subdivision
• unit entitlement ratio if the development involves a subdivision
• base land value
• percentage of infrastructure value
• off-the-plan value
• non-deductible costs unrelated to the physical construction of a building
• construction costs which are deductible
• percentage of construction completed.

The meanings of these terms are explained below.

Market value of the land

This is the value for which the property might be reasonably sold, free from encumbrances on the open market, immediately before any infrastructure is in place. This is not the purchase price paid by the vendor, unless it has remained the same since it was paid.

If the property is a lot on a subdivision, the market value will be the value of the parent property prior to subdivision. The unit entitlement ratio is then applied to determine the value of the land.

Unit entitlement ratio (UER)

This is the portion that the lot represents in the total land (parent lot) being subdivided. If there is no subdivision, the ratio is 100%.

For example, where a $1 million block of land or shell of a building to be refurbished is divided into 10 equal lots, each lot has a unit entitlement ratio of 1/10 and a base land value of $100,000.

Base land value

The base land value is the value attributable to the un-subdivided land immediately before any infrastructure is in place, taking into account the UER. It is the product of the market value of the land multiplied by the UER.

If there is no subdivision, the base land value is the market value of the land.

Infrastructure value

The infrastructure value is a percentage that represents the enhanced value that infrastructure adds to the land before any building works commence. It does not represent the actual cost of any infrastructure, such as the costs of obtaining the planning and building permits and approvals and other similar costs (infrastructure costs), but rather the value this infrastructure adds to the land.

Where the infrastructure value increased the base land value by more than 25%, the actual increase should be provided. Where no reasonable valuation method is available, the Commissioner will accept a minimum 25% increase of the base land value as appropriate for multi-lot developments. This figure is based on advice from the Office of the Valuer-General of Victoria.

A claim that the infrastructure value increased the base land value by less than 25% will need to be substantiated with appropriate evidence, such as a recent formal valuation.

Off-the-plan land value

The off-the-plan land value is the amount for which the subdivided land might reasonably have been sold on the open market immediately before the contract of sale was entered into.

This value must take into account the impact of the infrastructure to be provided in respect of the land before construction starts. This is irrespective of whether the infrastructure is in place before or after the date of the contract.

The off-the-plan land value does not reflect the purchase price paid by the vendor to acquire the property and/or the cost of the infrastructure. Rather, it reflects the value that infrastructure (e.g. planning permits) adds to the land. The off-the-plan value is obtained by taking the base land value of the lot and increasing it by the infrastructure value.

Non-deductible costs

Non-deductible costs are costs incurred by the vendor that are not directly related to the physical construction or refurbishment of the building.

Examples include:

• agent’s commission for selling the property
• legal or other business expenses incurred in selling the property
• advertising or promotional expenses
• goods, including furniture packages
• GST on non-construction or non-refurbishment costs or on construction or refurbishment occurring prior to the contract date.

The total sum of these costs is added to the off-the-plan value in order to determine the value of the property, excluding the costs of construction.

Construction costs

Construction costs are deductible costs (including GST) and include:

• legal costs associated with the permit or bringing the building to completion
• surveyor and consultant fees
• planning permits
• water and sewerage connections
• building permits and other similar fees
• VicRoads approval
• gas and electricity approval
• required road access or utilities works
• site decontamination costs
• cost of demolition and removal work
• cost of material, labour and finance for building construction
• GST in respect of construction costs after the contract date.

GST

This is the GST payable by the vendor in relation to the sale of the property. The portion of the GST claimed in respect of the cost of construction occurring on or after the contract date cannot exceed the amount of GST paid pursuant to the contract of sale.

Calculating the concession

The concession is calculated by:

1. Multiplying the market value of the land to be subdivided by the unit entitlement ratio of the lot to derive the base land value of the lot.
2. Increasing the base land value of the lot by the percentage of infrastructure value to arrive at the off-the-plan value of the lot.
3. Deducting the off-the-plan value and the value of the non-deductible costs from the GST-exclusive contract price to determine total construction costs value.
4. Determining the percentage of construction completed after the date of the contract.
5. Multiplying the total construction costs value by the percentage of construction completed after the contract date. This figure is then increased by the value of GST. This is the value of the off-the-plan concession.
6. The figure resulting from step 5 is then deducted from the contract price (including GST). This is the dutiable value of the property after applying the off-the-plan concession. Duty is calculated on this value.

Record keeping

The Act imposes specific record keeping obligations on transferors for off-the-plan concession claims. These are in addition to the record keeping obligations imposed on the transferee pursuant to Part 8 of the Taxation Administration Act 1997. The transferor’s obligations apply to all applications for the off-the-plan concession where the contract of sale is entered into on or after 1 October 2008, irrespective of the calculation method.

The transferor must keep, or cause to be kept, all records required to assess the duty payable on the transfer, such as:

• land valuations
• quantity surveyor reports
• drawdown schedules against financial accommodation
• third party completion of works claims
• occupancy permit showing mandatory inspection stages.

The transferor must retain the records for not less than 5 years after the date they were made or obtained, or the date on which the dutiable transaction occurred, whichever is the later unless the Commissioner authorises a shorter retention period. It is an offence to fail to comply with this record keeping obligation.

The Commissioner, by written notice, may require a person to produce a document that is required to be kept within the period specified in the notice or any extended period allowed by the Commissioner.

Joint and several liability for additional duty

Where a transferor gives information under section 21(4A) of the Act and that information is incorrect, the transferor is jointly and severally liable with the transferee for any additional duty payable on the transfer, including any penalty tax or interest.

In deciding whether to apply this provision to a transferor and issue a reassessment for duty, penalty tax and interest, the Commissioner will generally first contact the transferor to determine the facts and reasons why the Commissioner was provided with incorrect information. Any resulting reassessment will be issued with consideration to the factors set out TAA-007v4 – Interest and Penalty Tax.

Commissioner of State Revenue

Please note: 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.