Transfer duty and landholder duty

Main legislation

Duties Act 2000 (Vic) (Duties Act) and the Taxation Administration Act 1997 (Vic) (which contains provisions for the administration and enforcement of Victoria's taxation laws).

Note that the summary below only relates to Victorian duty (each Australian state and territory has its own duties legislation).

Transfer duty is a tax on 'dutiable transactions' in respect of 'dutiable property', with each of these concepts being defined in the Duties Act. The top standard rate of Victorian duty is currently 6.5%, however 'foreign purchaser additional duty' (being an additional 8% on top of the standard duty) can apply to the transfer of 'residential property’ to a 'foreign purchaser' (as those terms are defined in the Duties Act).

The most common example of a dutiable transaction is a transfer of land that occurs upon settlement of a contract of sale. Other types of dutiable transaction can include (but are not limited to) a declaration of trust relating to dutiable property, a surrender of dutiable property or another type of transaction that involves (or is deemed to be) a change in beneficial ownership of dutiable property. Further, the acquisition of an 'economic entitlement' may also constitute a dutiable transaction.

Importantly, dutiable transactions can sometimes arise even where there is no dealing in freehold land involved. For example, the grant or the transfer of a leasehold interest can in certain circumstances constitute a dutiable transaction.

Further, indirect dealings in interests in land can in certain circumstances give rise to a separate type of duty —'landholder duty'. Broadly, where a company or trustee of a unit trust holds interests in land (including improvements/items fixed to land) with an unencumbered market value of $1m or more:

• the company or unit trust (as applicable) will be a 'landholder' for the purposes of the Duties Act and
• where a person acquires or commences to hold a 'significant interest' in the landholder, a liability to landholder duty can arise (for which the person and the landholder are jointly liable) — note that:
  • the 'significant interest' is generally 50% or more in the case of companies or 20% or more in the case of private unit trusts (the threshold generally increasing to 90% or more in the case of listed landholders) and
  • percentage interests must be determined having regard to interests acquired or held by 'associated persons' and under 'associated transactions' — consideration of these concepts can often require expert input.

Landholder duty can arise in limited circumstances even when the relevant 'significant interest' threshold outlined above is not met. In particular:

• the acquisition of 'control' in a private landholder can also give rise to landholder duty (this can require reference not only to rights attaching to shares/units but also to the rights and practical influence obtained by persons other than shareholders/unitholders) and
• a separate analysis is required if a person acquires (either alone or together with an associated person) an 'economic entitlement' in a private landholder — this requires reference to shares/units held in the landholder and extends to any other rights to participate in the dividends or income of the private landholder (and certain derivative rights relating to the landholder — e.g. a right to receive an amount determined by reference to the dividends or income of the private landholder).

Exemptions/concessions

Various exemptions or reduced rates of duty may be available in certain circumstances, however these require strict conditions to be satisfied.

For example, for the purposes of the ‘spouse and partner exemption’ there must be compliance with sections 43, 43AA, 43A and 43B of the Duties Act including the transfer must be between spouses or genuine domestic partners (no other person can take or be entitled to take an interest in the property)

• the transfer must be for no consideration (special rules apply in respect of mortgages)
• the land must be residential property
• at least one person in the relationship must generally occupy the land as their principal place of residence for a continuous period of at least 12 months commencing within the 12-month period immediately after the transfer.

Other common examples of transactions eligible for an exemption or concession from duty include, but are not limited to:

• 'off-the-plan' duty concessions
• transfers from the trustee of a trust to a beneficiary or a newly appointed trustee
• transfers occurring following the breakdown of a marriage or domestic relationship
• transfers from deceased estates and
• certain transfers involving superannuation funds.

It is not uncommon for the State Revenue Office (SRO) to audit exemption and concession claims (sometimes years later) to check for compliance.

Land transfer duty | State Revenue Office

Landholder duty | State Revenue Office

Tax issues checklist | LPLC

Double duty

Every practitioner involved in dealings in Victorian land must be aware of the 'sub-sale' rules contained in Part 4A of Chapter 2 of the Duties Act.

If a person or entity enters a contract (or option) to purchase land and then nominates (or otherwise arranges for) a substitute, new or different purchaser to complete the land transfer, in certain circumstances the SRO may assess duty on both the first purchaser and the nominee/ultimate transferee (i.e. two separate assessments of duty may arise, commonly referred to as ‘double duty’).

Broadly, 'double duty' can arise if:

• the nominee/ultimate transferee (referred to in the Duties Act as the 'subsequent purchaser') or an associate gives or agrees to give 'additional consideration' in order to obtain the transfer right. While the most common example of additional consideration is a nomination fee, this concept is broadly defined and expert input may be required to confirm whether there has been or will be additional consideration. For example, additional consideration can include a 'parallel arrangement'. Such arrangements can arise where the nominee/subsequent purchaser (or an associate of the nominee/subsequent purchaser) engages the first purchaser (or an associate of the first purchaser) to construct (or arrange the construction of) improvements to the property and/or
• 'land development' occurs after the contract/option is signed and before the nomination (or other relevant transaction) occurs — note that the concept of 'land development' is defined very broadly — it can occur even if nothing physical is done to the land, it does not of itself need to increase the value of the land and it can generally be undertaken by any person (i.e. it could be a person other than the original named purchaser). The Duties Act defines 'land development' to include:
  • preparing a plan of subdivision or taking steps to have it registered
  • applying for or obtaining a planning permit
  • requesting a planning authority to prepare an amendment to a planning scheme that would affect the land
  • applying for or obtaining a building permit or approval
  • doing anything on the land for which a building permit or approval would be required
  • developing or changing the land in any way which would increase its value.

Sub-sales | State Revenue Office

Sub-sales and duty | State Revenue Office

Nomination and the risk of double duty | LPLC

Where a 'foreign purchaser' enters a dutiable transaction in respect of 'residential property' (each of those terms being specifically defined in the Duties Act), 'foreign purchaser additional duty' (FPAD) will generally apply. FPAD is currently 8% of the dutiable value of the property (this being in addition to the standard rate of duty, meaning that duty of up to 14.5% can be imposed where FPAD applies).

When advising clients, practitioners must have regard to the specific definition of 'residential property' in the Duties Act. This definition is broad, noting that it can include land which is intended to be developed as residential in the future (and notification requirements can apply where non-residential land becomes 'residential' after a transaction occurs).

Broadly, an individual will be a 'foreign purchaser' if they are not an Australian citizen, the holder of a permanent visa within the meaning of section 30(1) of the Migration Act 1958 (Cth) or a New Zealand citizen who is the holder of a special category visa within the meaning of section 32(1) of the Migration Act 1958 (Cth).

Further, companies and trusts can also be 'foreign purchasers' if they have foreign ownership or control (or if they are incorporated offshore). Foreign status in such circumstances generally requires foreign ownership or voting power of more than 50%, however a detailed analysis of direct or indirect holdings and control may sometimes be required.

In the case of discretionary trusts (often referred to as 'family trusts'), a trust will be treated as a 'foreign trust' if the trustee has a power or discretion to distribute capital to any person or entity that is 'foreign' for the purposes of the Duties Act (even if such person or entity is an unspecified member of a class of objects of the trust). Accordingly, it is critical that a practitioner reviews the terms of the relevant trust deed (and considers the potential need for amendments) prior to entry into any transaction documentation.

Foreign purchasers of property | State Revenue Office

Foreign purchaser additional duty — does it apply | LPLC information and flowchart

Foreign purchaser additional duty for discretionary trusts — what you need to know | LPLC

The most common type of dutiable transaction is the transfer of land. However, in cases involving land with an unencumbered market value that exceeds $1m, regard must be had to the 'economic entitlement' duty rules set out in Part 4B of Chapter 2 of the Duties Act.

Broadly, a person will acquire an 'economic entitlement' if they acquire an entitlement to any one or more of the following:

• 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 the above or
• a right to acquire any entitlement outlined above.

In such circumstances, the person will generally be deemed to have acquired beneficial ownership of the relevant land (the relevant percentage can be up to 100% but this can be subject to the Commissioner of State Revenue determining a lesser percentage as appropriate).

Development agreements are the most common example of where a dutiable economic entitlement may arise, however the rules are broad enough to capture many and varied scenarios.

These provisions are nuanced and complex. Practitioners who are not experienced in this work should refer clients for expert advice.

Practitioners should note that the economic entitlement rules outlined above are in addition to separate economic entitlement rules applicable in the landholder duty context (refer section 81 of the Duties Act).

Economic entitlements | State Revenue Office

Economic entitlement in land — what you should know | LPLC

Various exemptions from duty may be available in the context of transfers of land to and from trustees of trusts. These exemptions are set out in Part 5 of Chapter 2 of the Duties Act.

These exemptions require the satisfaction of strict (and sometimes complex) criteria. For example, in the case of transfers of land from the trustee of a discretionary trust or a unit trust to a beneficiary, one criterion (among many) is that the transfer cannot be for consideration (whether that be cash, or non-cash such as the assumption of a mortgage). Further, not all beneficiaries of a trust can qualify for exemption (only beneficiaries which meet a series of criteria can qualify).

This is not an area where a general understanding of basic principles is enough. Any practitioner advising on these exemptions must have regard to the detailed provisions, case law and SRO guidance. The terms of any trust deed and the proposed transaction documents should be reviewed carefully prior to proceeding.

• Look for the tax and duty implications associated with the transfer of real property and associated transactions (like share transfers) to alert clients and, if appropriate and required, provide advice or direct the client to seek expert advice.
• Read the guidance and the information provided to improve your understanding and awareness.
• Identify complexities beyond your expertise and refer clients for expert advice.
• Use a checklist or prompt at the start of a matter to identify tax and duty issues.
• Always check the details in the legislation and SRO guidelines before advising clients and keep records to confirm any advice given.
• Establish, update and maintain comprehensive advice letters and resources that you can adapt for each specific client matter to ensure relevant advice is given to clients and confirmed in writing.
• Maintain a focus on tax and duty in all property and property conveyancing matters.