On 22 April 2016, the Victorian Supreme Court (Croft J) delivered judgment in the first case to be brought before the courts on the new 'economic entitlement' provisions in the Victorian Duties Act 2000 (Act). The decision (BPG Caulfield Village Pty Ltd v Commissioner of State Revenue [2016] VSC 172) is important for property developers and provides some much needed clarity on the operation of the economic entitlement provisions and their application to development agreements.
Norton Rose Fulbright acted for the taxpayer, BPG Caulfield Village Pty Ltd (BPG), in this matter.
What were the facts of the case?
On 17 August 2012, BPG (a special purpose vehicle incorporated by the BECK Probuild consortium) entered into a development agreement (DA) with the Melbourne Racing Club (MRC) in relation to the development and sale of certain land adjacent to Caulfield Racecourse to be called Caulfield Village (CV Land).
The CV Land was not the only Victorian landholding of MRC and represented less than 50% of the unencumbered value of all of MRC's landholdings in Victoria.
The Commissioner of State Revenue (Commissioner) assessed BPG to duty on the basis that BPG had acquired an economic entitlement, being an entitlement to participate in the proceeds of sale of the CV Land, estimating that interest to be approximately 83% (derived from cash flow estimates contained in a schedule to the DA). BPG objected to the assessment. The Commissioner disallowed BPG's objection. BPG appealed the Commissioner's disallowance of the objection to the Victorian Supreme Court.
What are the economic entitlement provisions?
The economic entitlement provisions are contained within the landholder rules in section 81 of the Act. The provisions are unique to Victoria and were introduced with effect from 1 July 2012.
Broadly:
- a person acquires an economic entitlement under section 81 if they enter into an arrangement in relation to a 'private landholder' (private company or private unit trust) under which the person is entitled to participate in the dividends or income of the private landholder, the income, rents or profits derived from the landholdings of the private landholder, the capital growth of the landholdings of the private landholder or the proceeds of sale of the landholdings of the private landholder: section 81(2);
- where an economic entitlement amounts to an interest of 50% or more ['in a private landholder'], the person is taken to have made a 'relevant acquisition' for the purposes of the landholder rules: section 81(5); and
- duty is chargeable (at the rate of 5.5%) on the amount calculated by multiplying the unencumbered value of the Victorian landholdings of the private landholder to which the economic entitlement relates by the percentage interest acquired under the relevant acquisition: sections 81(6) and 86(1).
While not relevant in BPG's case, it is noteworthy that the words 'in a private landholder' (highlighted in square brackets above) in section 81(5) were subsequently removed by the State Tax Laws Amendment (Budget and Other Measures) Act 2013.
What was the decision?
Croft J held that:
- BPG did not acquire an economic entitlement upon entry into the DA because the DA related to only some and not all of the landholdings of MRC; and
- even if BPG had acquired an economic entitlement, it did not amount to an interest of 50% or more in MRC.
What are the implications?
The decision confirms that, at least up until the amendment of section 81(5) referred to above, the economic entitlement provisions had a much narrower field of operation than the Commissioner was giving them.
The position moving forward is not entirely certain – Croft J's reasons for decision cast doubt on the efficacy of the amendment made to section 81(5).
Croft J was not required to address the question of whether the Commissioner's purported 'estimate' of the future proceeds of sale of the CV Land for the purposes of quantifying the interest acquired by BPG under the economic entitlement was supported by section 11(2) of the Taxation Administration Act 1997. This question remains open for another day.
It is unclear yet whether the Commissioner will appeal the decision. We will keep you updated on any developments.
