Land transfer duty – Calculation of economic entitlements
DA-066
| Ruling no. | DA-066 |
|---|---|
| Status | Current |
| Issue date | 30 June 2025 |
| Date of effect | 1 July 2025 |
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. Where a person acquires an economic entitlement, the person is taken to have acquired beneficial ownership of the land in the percentage calculated under section 32XE of the Act.
Section 32XE sets out how to determine the percentage of beneficial ownership and specifies circumstances when the beneficial ownership acquired under an economic entitlement will be deemed to be 100%. However, the Commissioner has discretion to determine a percentage less than 100% if appropriate in the circumstances.
Once the percentage of beneficial ownership has been determined, duty is calculated by reference to that percentage multiplied by the unencumbered value of the land at the time that the economic entitlement is acquired (not the time when the benefits that flow from the economic entitlement are ultimately realised). If the unencumbered value of the land is between $1 million and $2 million, duty is phased-in using the formula set out in section 32XG.
The purpose of this ruling is to provide guidance on how to determine the percentage of beneficial ownership of land taken to have been acquired under an economic entitlement, including circumstances where the Commissioner considers it appropriate to exercise the discretion under section 32XE(3) to determine a percentage less than 100%. For guidance on the meaning of key concepts and other interpretation matters, please see Revenue Ruling DA-067. 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
Beneficial ownership of land taken to be acquired
The percentage of beneficial ownership of land taken to be acquired under an economic entitlement is the total of all of the entitlements referred to in section 32XC(1)(b) that the person (and its associated persons) is or will be entitled to receive or acquire at the time the arrangement is entered into. Those entitlements are as follows:
- to participate in the income, rents or profits derived from the relevant land,
- to participate in the capital growth of the relevant land,
- to participate in the proceeds of sale of the relevant land,
- to receive any amount determined by reference to any of the above matters, and
- to acquire any entitlement described above.
Where an arrangement provides a person with only one entitlement identified above, by reference to a specific percentage, and nothing else is payable to the person or an associated person, the beneficial ownership of the land taken to be acquired will be the stated percentage.
Deeming provision
The beneficial ownership taken to be acquired under an economic entitlement can be deemed to be 100% where the arrangement:
- does not specify the percentage of the entitlement that the person is or will be entitled to receive or acquire,
- in addition to specifying a percentage of the economic entitlement, also includes any other economic entitlement, or amount payable to, the person or an associated person, or
- entitles the person or an associated person to 2 or more of the entitlements referred to in section 32XC(1)(b).
The deeming provision is an integrity measure to be read in the context of the economic entitlement provisions as a whole. The provision is not intended to operate in isolation to deem a higher percentage than the total of all the entitlements that the person (and its associated persons) is or will be entitled to under the arrangement when this can be determined.
Commissioner's discretion
The deeming provision is subject to exercise of the Commissioner’s discretion, allowing the Commissioner to determine a percentage less than 100% if it is appropriate in the circumstances.
In considering whether to exercise the discretion, the Commissioner will have regard to all relevant facts and circumstances, including the total of all the economic entitlements that the person, and any associated persons, are entitled to under the arrangement at the time the arrangement was entered into.
Where a person accurately identifies all of the economic entitlements that the person and its associated persons have acquired under an arrangement, and which can be quantified as a percentage less than 100%, the Commissioner will consider it appropriate to exercise the discretion. In these circumstances, the Commissioner will reduce the percentage of beneficial ownership taken to be acquired from the deemed 100% to a percentage which is equivalent to the economic entitlements acquired.
Arrangements that do not specify the percentage of an economic entitlement
Where the economic entitlement provisions deem a 100% interest because the arrangement does not specify the percentage interest acquired under an economic entitlement, the Commissioner will exercise the discretion to determine a percentage interest less than 100% where the economic entitlement can be appropriately quantified as a percentage less than 100%. This could be from a transaction document, such as a waterfall clause, a formula or methodology contained in or annexed to the relevant document. Alternatively, it may be from another source, such as financial modelling, feasibility studies or other relevant documents or information. In recognition that the inputs in these methodologies or formulas are often based on assumptions and can be uncertain at the time an arrangement is entered into, the Commissioner will, in addition to considering the inputs, also have regard to relevant assumptions underlying the modelling or feasibility study, such as to market conditions.
Generally, the Commissioner will accept submitted values and inputs where they are appropriate and market-based. For example, where value inputs are based on an independent assessment by a suitably qualified person. In calculating the proportional entitlement, the focus is on the entitlement acquired by the person at the time the arrangement is entered into, not the net benefit or profit that may or may not ultimately flow. This will be the case notwithstanding that the person may be obligated to incur costs in connection with the arrangement.
Additional amount payable to a person or an associated person
It is common for an arrangement to provide a person with an economic entitlement which is expressed as a specified percentage, plus additional amounts which may be payable to the person or an associated person.
In these circumstances, the Commissioner will exercise the discretion to reduce the percentage of beneficial ownership from 100% where the person substantiates that the additional amount is not, or does not amount to, an economic entitlement. Upon exercise of the discretion, the percentage of beneficial ownership taken to be acquired will be determined as the percentage specified in the arrangement for the economic entitlement.
Where a person does not substantiate that an additional entitlement or amount is not an economic entitlement, the discretion may still be exercised if the Commissioner is satisfied that the total of all the economic entitlements acquired under the arrangement amount to less than 100%. In these circumstances, the Commissioner may consider the additional entitlement or amount to be an economic entitlement when determining the percentage of beneficial ownership taken to be acquired by the person.
For guidance on when a service fee may amount to an economic entitlement, please see Revenue Ruling DA-065.
Arrangements that provide for two or more economic entitlements
Where an agreement provides a person (or a person and an associated person) with a combination of two or more economic entitlements, the Commissioner will exercise the discretion if the Commissioner is satisfied that the total of all the economic entitlements acquired under the arrangement amount to less than 100% having regard to the proportion of the total of the entitlements that the person (or the person and an associated person) acquired under the arrangement.
This will involve consideration of the nature and effect of the arrangement, including the types of entitlements that are provided under the arrangement. If the Commissioner exercises the discretion in a case where an arrangement provides for two or more entitlements each of which is specified by reference to a different percentage, the Commissioner will generally not reduce the percentage of beneficial ownership below the higher of the percentages, unless satisfied that some lesser percentage is more appropriate in the circumstances.
Where an agreement contemplates two or more discrete methods which may be used to quantify two or more entitlements, the Commissioner will exercise the discretion to determine a percentage less than 100% if the Commissioner can quantify each percentage entitlement under the arrangement. If the Commissioner exercises the discretion, the Commissioner will determine the percentage of beneficial ownership by reference to the entitlement which is most appropriate to the facts and circumstances of the matter, as well as the nature and effect of the agreement as a whole. For example, where a development agreement entitles a developer to the higher of 70% of the gross proceeds of sale of land or 50% of the profits derived from the land, the Commissioner will reduce the beneficial ownership from a deemed 100% to 70%. This is because the focus is on the entitlement acquired by the person at the time the arrangement is entered into, not the net benefit or profit that may or may not ultimately flow. In this example, as the development agreement contemplates the higher of two discrete entitlements, it is appropriate that the beneficial ownership deemed to have been acquired under the arrangement is reduced from 100% to 70%.
Phasing in of duty
Where the unencumbered value of the land is between $1 million and $2 million, the phasing in of duty formula applies. Duty is chargeable under section 32XG in accordance with the following formula:
- [(A - $1,000,000)/$1,000,000] x B
where:
- A is the unencumbered value of the relevant land, and
- B is the duty that, apart from this section, would be chargeable on the acquisition of the economic entitlement.
The effect of the formula is that duty is phased in on a sliding scale. The closer the unencumbered value of the land is to $1 million, the closer the duty chargeable will be to nil. The closer the unencumbered value of the land is to $2 million, the closer the duty chargeable will be to the full amount that would normally apply.
Examples
Example 1: Joint venture
Joe, a retired market gardener, has obtained planning approval to subdivide part of his farm into 55 residential lots for sale to third parties. The farm is valued at $4.5 million. Joe does not have the means or expertise to undertake the development himself so enters into a joint venture with an unrelated property developer, under which the property developer is entitled to receive 25% of the proceeds of sale of the lots. The property developer engages an unrelated building company to undertake the development, including planning and subdivision for a fixed fee with the property developer paying these costs and overseeing the construction.
The property developer’s entitlement to receive 25% of the sale proceeds from the development constitutes an economic entitlement in relation to the land. As a result, the property developer will be taken to have acquired beneficial ownership of 25% in the land upon entering into the joint venture with Joe. This constitutes a dutiable transaction with the duty payable within 30 days of the economic entitlement being acquired (i.e. 30 days of entering into the joint venture agreement).
Duty is charged by reference to the dutiable value of the land the subject of the dutiable transaction, being $1.125 million. This is the value of the 25% beneficial ownership taken to have been acquired by the property developer upon entry into the arrangement (25% x $4.5m). The phasing in formula will not apply because the unencumbered value of the land the subject of the arrangement is greater than $2 million. Phasing-in looks to the value of the land that is the subject of the arrangement, not the dutiable value of the beneficial ownership taken to be acquired in the land.
Example 2: Assignment of rental stream to an associated person
Company A owns a building on land which is divided into two occupancies. The land is valued at $6 million and each occupancy is leased to a tenant under separate leases (Lease 1 and Lease 2). The terms and rent payable under each lease are identical. Company A then enters into an agreement (Agreement) with an associated person (Associate) to assign its rights in relation to Lease 1 (including the right to receive all the rents under that lease) to the Associate.
As the Associate is entitled to receive 50% of all of the rents derived from the land (being all of the rents under Lease 1), it will acquire an economic entitlement under section 32XC(1)(b) and will be deemed to acquire 50% beneficial ownership of the land. Duty is charged by reference to the dutiable value of the land the subject of the dutiable transaction, being $3 million. This is the value of the 50% beneficial ownership taken to have been acquired by the Associate upon entry into the Agreement (50% x $6m).
The assignment of the rental stream under the Agreement is contractual in nature, providing the Associate with the right to participate in the economic benefits of the land. By contrast, if Company A had instead granted the Associate a concurrent lease over the land or part of it, this would result in the grant of a proprietary interest in the land and, if granted for consideration other than rent reserved, would be dutiable under section 7(1)(b)(v).
Example 3: Profit sharing development agreement
Company B owns land in Melbourne valued at $30 million and has obtained planning approval to develop the land into an apartment tower. In order to proceed with the development, Company B has entered into an arrangement with a developer, under which the developer has agreed to fund and oversee the development. In exchange, the developer is entitled to receive from Company B an amount by way of reimbursement of the costs of construction as well as a development fee equal to 40% of the total profit from the sale of the apartments. Under the arrangement, Company B is entitled to $30 million, being the initial market value of the land, plus 60% of the total profit from the sale of the apartments. The build cost is estimated to be $80 million with projected gross sales revenue upon sale of the developed apartments at $150 million.
As the arrangement includes an economic entitlement, being the entitlement to receive 40% of total profit, as well as a payment other than an economic entitlement expressed in percentage form, the integrity provision will apply to deem the developer to have acquired 100% beneficial ownership of the land. However, this is subject to the Commissioner exercising the discretion to determine a lesser percentage.
The Commissioner would be inclined to exercise the discretion and reduce the percentage interest acquired from a deemed interest of 100% to 40% if the developer can substantiate that the build cost of $80 million is a reasonable estimate of the cost of construction and does not include an additional element of profit from the development of the land. Where reimbursement of the cost of construction is contingent on the profitability of the development or any other performance measures associated with the ultimate sale of the development, it may be considered an economic entitlement, being a right to participate in the proceeds of sale of the land.
Where the developer does not satisfy the Commissioner that the cost of construction is reasonable and does not include an additional profit element, the Commissioner may still exercise the discretion and reduce the economic entitlement to 64%. This is the maximum percentage that the developer is entitled to under the arrangement, calculated as follows:
- Projected profit for the development is $40 million ($150 million (projected gross sale revenue) - $110 million [$30 million (land value) + $80 million (build cost)])
- Company B is entitled to $30 million + $24 million (60% of $40 million profit) = $54 million
- The developer is entitled to $80 million + $16 million (40% of $40 million profit) = $96 million which, as a percentage of the total gross proceeds of sale of $150 million, is 64%.
Duty is calculated by reference to the percentage of beneficial ownership deemed to have been acquired in the land at the date of acquisition, being $19,200,000 (64% x $30 million).
Example 4: Development fee determined by reference to gross sale proceeds
A company owns land in Melbourne valued at $2 million and has entered into a development agreement with a developer, under which the developer has agreed to develop the land with individual apartments being sold to third party purchasers. As part of the arrangement, the developer will incur all costs of the development and is entitled to receive a development fee determined by reference to the gross proceeds of sale of all of the apartments less a landowner’s fixed amount of $4 million (i.e. what the developer will receive from the development for contributing the land).
As the economic entitlement is not expressed in percentage terms the developer is deemed to have acquired 100% beneficial ownership of the land, subject to the Commissioner’s discretion to determine a lesser percentage.
The developer comes to the Commissioner seeking exercise of the discretion and provides the Commissioner with all the information required to quantify its economic entitlement. This includes a feasibility study prepared by an independent third party which includes appropriate market-based assumptions and estimates. The feasibility study estimates that the gross proceeds of sale will be $10 million. The developer also provides an independent cost plan which shows estimated development costs of $4 million.
Based on submissions made by the developer, the Commissioner would consider it appropriate to exercise the discretion to reduce the beneficial ownership in the land taken to have been acquired by the developer from 100% to 60%, being the developer’s entitlement to gross sale process ($6 million) as a percentage of total estimated gross sale proceeds ($10 million).
This is the most appropriate method to estimate the entitlement because at the time the arrangement is entered into, the economic entitlement comprises a development fee determined by reference to gross sale proceeds, not the net benefit or profit that may or may not ultimately flow to it based on the inputs in the feasibility study.
Duty is calculated by reference to the percentage of beneficial ownership deemed to have been acquired in the land at the date of acquisition, being $1,200,000 (60% x $2 million value of land upon entry into the arrangement).
Example 5: Service fee payable to an associated person
Company C owns land valued at $1.5 million and has entered into a development agreement with a developer, under which the developer has agreed to develop the land. In exchange, the developer is entitled to receive 50% of the profit derived from the sale of the developed lots.
The developer appoints a wholly owned subsidiary, as its development and project manager. The subsidiary will carry out the development and provide development and project management services for the developer in exchange for a fee equal to 2% of the proceeds of sale of the developed lots. The terms of the development agreement provide that the developer may carry out the development and provide the development and project management services itself, or alternatively, it may engage a person to undertake this work and provide the services.
Company C’s engagement of the developer under the development agreement and the developer’s engagement of its subsidiary are part of the same arrangement to develop the relevant land.
As the arrangement under which the developer acquired the economic entitlement includes an amount payable to an associated person of the developer, the developer is deemed to have acquired 100% beneficial ownership of the land. The developer seeks the exercise of the Commissioner’s discretion and provides evidence that the service fee payable to the subsidiary is at market rates, demonstrating that the service fee is not a profit-sharing mechanism and does not amount to an economic entitlement.
Upon being satisfied, the Commissioner will exercise the discretion to reduce the beneficial ownership taken to be acquired from 100% to 50% reflecting the economic entitlement acquired by the developer under the arrangement.
As the unencumbered value of the land was between $1 million and $2 million, duty will be calculated using the phasing in formula set out in section 32XG. The duty chargeable on the arrangement would be calculated as follows:
[($1.5 million - $1 million) ÷ $1 million] × the duty otherwise payable
The duty otherwise payable is $40,070. This amount is calculated by reference to the value of the land upon entering the development agreement ($1.5 million) multiplied by the beneficial ownership in the land taken to have been acquired (50%) by the developer.
The final calculation is: $500,000/$1m x $40,070 = $20,035.
Example 6: Retirement village operator sale of management rights
Expanding on the facts from Example 2 in Revenue Ruling DA-065. Company Y, being the operator of a strata titled retirement village, enters into an agreement to sell the retirement village management rights to a new operator, Company Z. The management rights include the right to the deferred management fees in relation to all the units in the village. The deferred management fees are calculated as a proportion of the future proceeds of sale of a unit by a resident, which depends on the number of years that the resident has occupied the unit with a maximum percentage being 30% in this case.
Individually, each of the units in the village is valued below $1 million. However, the aggregate value of the units is well above $1 million. Therefore, given the sale of the management rights for the units occurs under a single arrangement, this would be regarded as the acquisition of a single economic entitlement in relation to all of the units in the village. The $1 million threshold would be met even though none of the individual units are valued at $1 million or more.
Given the above facts, the Commissioner would be inclined to exercise the discretion and reduce the percentage interest acquired from a deemed interest of 100% to 30% being the maximum entitlement of the deferred management fee if Company Z provides the Commissioner with sufficient evidence to quantify the economic entitlement.
Duty will be calculated by reference to the beneficial ownership in the land taken to have been acquired (30%) by Company Z at the date of entry into the agreement.
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.
