State Revenue office Draft Ruling DA-065 – economic entitlements and service fees
On 8 September 2022, the SRO released draft ruling DA-065 entitled: Land transfer duty – Acquisition of economic entitlements in relation to land (service fees).[1]
The draft ruling seeks to clarify the application of the economic entitlement provisions under the Duties Act 2000 (Vic) as they apply to services fees.
Broadly, the economic entitlement provisions impose duty where a person acquires an “economic entitlement” in relation to land that has an unencumbered value of more than $1,000,000.
An economic entitlement is defined at section 32XC of the Duties Act 2000 as, broadly, an arrangement where a person directly or indirectly will be entitled to any one or more of the following:
- income, rents or profits of the land;
- capital growth of the land;
- proceeds of sale of the land;
- an amount determined by reference to any of the above.
Given this broad definition, many service providers that were never intended to be caught by these provisions will fall within the definition. For example, a real estate agent is often compensated by reference to a percentage of the proceeds of sale of the land. As such, while the provisions were never intended to impose duty on real estate agents, a payment based on the proceeds of sale is likely to fall within the definition of an economic entitlement.
Accordingly, service providers such as real estate agents must rely on the way the Commissioner currently administers these provisions. The draft ruling clarifies that from the Commissioner’s perspective, ordinary fees for a service such as real estate agent fees – even when calculated on a commission basis – are not considered to be an economic entitlement. The explanation given is that such arrangements are a genuine fee for service and are not a benefit normally reserved for the owner of the land.
The draft ruling provides the following examples as to what is regarded as ordinary fees not normally reserved for the owner of the land:
- real estate – whose fees are based on the proceeds of sale
- architects – whose fees can include a percentage of building costs
- project managers – whose fees can include a percentage of project value (but they must not be contingent on/calculated by reference to the performance of the project/development)
- planning consultants – whose fees can include a percentage of the value uplift after a precinct structure plan is obtained
- private advisory firms – that may receive a contingency fee for assisting a landowner to take their land to market or negotiate transaction documents
- lenders and financiers – provided the interest/fee is not tied to the performance of the development.
The draft ruling explains that where a person provides a genuine service in relation to the land:
- is normally engaged in a full-time capacity in providing those services;
- the agreed fee/rate is within industry parameters; and
- the person is unconnected (not an associated person) to any other person who has an economic entitlement in relation to the land
then it is unnecessary for the service agreement to be disclosed to the Commissioner by the service provider.
However, where new entities are established to solely provide such services, even if the fee structure is within industry parameters, it will not be regarded as being a genuine fee for services. This is because such a ‘special purpose entity’ does not provide the services on a full-time basis to third party clients. In these instances, where an economic entitlement is acquired, but an associate provides these otherwise genuine services – the services agreement must also be disclosed to the Commissioner.
While formalising this administrative approach into a formal ruling on this aspect is welcome, it should be appreciated that unlike the case of income tax rulings issued by the Federal Commissioner of Taxation, rulings issued by the Commissioner of State Revenue (SRO) do not have the force of law. Notwithstanding, the Commissioner of State Revenue is unlikely to administer the law inconsistently with a published ruling.
Comments on the draft ruling can be provided up until 5pm on 28 September 2022.
[1] https://www.sro.vic.gov.au/land-transfer-duty-acquisition-economic-entitlements-relation-relevant-land-service-fees
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