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Tax Issue of Economic Entitlement

If you are not the owner of a piece of land, but you have an economic entitlement over the land/property, then it is likely that you would have to pay taxes for such benefit. In many cases, the economic entitlement is created through an agreement between a person who is not named in the title certificate and the registered proprietor of the land/property. For example, a person may help the owner develop the land in exchange for part of the proceeds of the sale of the land.

According to the latest law, if the abovementioned agreement is signed after 19 June 2019, then the economic benefits will likely be taxed. The new law that commenced in 2019 is to prevent people prevent creative avoidance or frustration of our current stamp duty system. Under the current laws, if your economic benefits from the land are equivalent to ownership interest, you have to pay stamp duty on the land because your entitlements to proceed of the sale make you, effectively, the owner of the land.

The ambit of the law is broad. Technically, any benefits based on profit, capital growth, or sale proceeds of the land will be regarded as economic entitlement and, therefore, taxable under the current stamp duty scheme.

Example 1

Mr A owns a farm. He has obtained planning approval to build 55 residential properties on the land. The farm is worth $4.5 million. However, Mr A does not have expertise and skills for the development, so he decides to establish a joint venture with Company B. According to the JV agreement, Company B will pay the construction company and supervise them for the development in exchange to 25% of the sale proceeds of the development. Under this agreement, Company B is entitled part of the proceeds of the development, hence Company B has economic entitlement over the said land, and must, therefore, pay stamp duty.

Example 2

Company X owns a land in Melbourne worth $30 million. It has obtained approval to develop an apartment complex. Company X and Company Y reached a JV agreement that Company Y will pay for construction and supervise it, in exchange for 50% of the sale profit, and that Company X will receive $30 million for cost of land plus 50% of the sale profit. In this case, Company Y has to pay tax because of the 50% profit sharing arrangement.

Example 3

Adam is a foreign person. His friend James has a land for development in Melbourne. James borrowed $3 million from Adam and the agreement states that after the development, Adam will receive $3 million plus interest, which is pegged to 50% of the sale profit. As the interest is calculated based on the development profit which will be regarded as economic entitlement, Adam will have to pay stamp duty.

What is not economic entitlement?

Generally speaking, third party service fees such as architects, engineers, town planners and project managers are not economic entitlement.

Example 4

A company is developing an apartment complex on its own land. Before building, the company reached an exclusive sale agreement with a real estate agency. According to the agreement, the agency will charge 1.5% of the sale price of each apartment sold. This type of fees will generally be regarded as third-party service fees rather than economic entitlement and, therefore, stamp duty would not be payable.

Conclusion

If you involved in a complex property transaction/arrangement wherein economic entitlement could be implied, but you are unsure as to whether stamp duty is payable, you can consult our experienced solicitors and we will provide advice accordingly.

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