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

DA-065

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 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: 

1. to participate in the income, rents or profits derived from the land.
2. to participate in the capital growth of the land.
3. to participate in the proceeds of sale of the land.
4. to receive any amount determined by reference to any of the above matters.
5. 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 and duty is chargeable under Chapter 2 accordingly. When an arrangement does not specify the percentage of the economic entitlement acquired by a person or includes other entitlements of or amounts payable to the person or associated persons (as defined in section 3(1)), the beneficial ownership taken to be acquired by the person is deemed to be 100% unless the Commissioner determines otherwise.

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 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 in relation to certain arrangements involving retirement villages. 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. This ruling is provided as a guide only and is not exhaustive. For guidance on the meaning of key concepts in Part 4B of Chapter 2 and the application of the economic entitlement provisions to other types of arrangements, please see Revenue Ruling DA-067. 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. 

One common example of the application of the provisions is in the context of development arrangements. However, the provisions can also apply to arrangements that do not involve the development of land if a person obtains an entitlement under the arrangement to the economic benefits of land which are economically equivalent to an ownership interest in the land.   

In the context of development arrangements, a developer is often 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. In this context, the rights and benefits obtained by the developer are considered to be economically equivalent to an ownership interest in the land because the nature of this type of development agreement is generally to share the economic benefits (and often the risks) of the success (or failure) of the development of the land. The development fee provides the mechanism for the developer to receive its share of the benefits that would normally be reserved for the landowner, without acquiring ownership of a share 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. Consistent with the policy intent of the provisions, 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 substance of the fee is remuneration for identifiable services. For example, the percentage used to calculate the fee is at market rates and the structure of the fee is similar to ordinary fees chargeable by a comparable service provider as remuneration 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/arrangements that do not amount to an economic entitlement

Consistent with the policy intent of the economic entitlement provisions and the factors set out in this Ruling, examples of third-party service providers whose ordinary fee arrangements, when based on one or more economic benefits of land referred to in section 32XC(1)(b), will generally not amount to an economic entitlement include:

• Real estate agents – who receive fees determined by reference to rents or the proceeds of sale of land in exchange for services including property management or assisting a landowner to 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, rents, profits or capital growth of land under management of the fund.

The above are examples of ordinary fee arrangements which, when objectively viewed against the factors listed in this Ruling, are not entered into to provide the service provider with rights and benefits which are economically equivalent to an ownership interest in the land. Instead, the fees are generally remuneration for providing identifiable services to or at the request or direction of a person in connection with land and/or its development. Accordingly, the ordinary fees chargeable by these service providers will generally not be considered to amount to an economic entitlement when they are considered in isolation. 

Where a service provider is an associated person of a person (such as a developer) that has obtained an economic entitlement under Part 4B of Chapter 2, 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 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. In these circumstances, the person that has obtained the economic entitlement will be required to provide all relevant information to substantiate that the service fee payable to an associate 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.  

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. 

Service fees/arrangements 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 merely 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, a developer will acquire an economic entitlement if they are entitled to a variable mark-up of costs based on the income, rents or profits derived from land, or the capital growth or proceeds of sale of the land. 

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, where the interest/fee for the loan is tied to the performance of the land that the loan relates to, the lender is likely to be considered to have acquired an economic entitlement. For example, 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). 

Arrangements involving retirement villages

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. 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.  

Similarly, under a lease/licence arrangement where the retirement village owner remains the owner of the land and leases or licences the units to the residents, any amount payable to the retirement village owner by an outgoing resident will not be considered to be the acquisition of an economic entitlement because the retirement village owner is the freehold owner of the land who already holds complete beneficial ownership of the land.

Where a person who is not the owner of the units or land, such as an operator of the retirement village, has an entitlement to participate directly or indirectly in the proceeds of sale of the units, that would be an economic entitlement and must be disclosed to the Commissioner.

When is a service fee arrangement not required to be disclosed to the Commissioner?

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

• it is a service fee that does not amount to an economic entitlement; and
• they are not an associated person of a person who has acquired an economic entitlement in relation to the land. 

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 of the subject land or another service provider who is entitled to a service fee that does not amount to an economic entitlement. 

Examples

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.