It is not uncommon for property developers to secure a parcel of land for development and enter into the contract using a Director’s name or a shell company. This is so that the parcel of land can be secured quickly especially in a competitive situation. The intention may be then to source legal and tax advice on the preferred structure and then “nominate” in the preferred final land ownership entity.
However, a property developer may be exposed to double land transfer (stamp) duty when they nominate the new final land-owning entity and the developer has undertaken any action(s) amounting to “land development.” The broad intention of this tax law is that if the developer has done certain actions to enhance the value of the land between contract date and nomination of a new entity, then this is an additional dutiable event under the “sub-sale” provisions.
This potential for double duty means the developer could be paying up to 14.5% land transfer duty twice if they are a foreign purchaser of residential development or up to 6.5% land transfer duty twice for local developers.
The Commissioner’s view on land development
The State Revenue Office has recently finalised its views on what constitutes “land development” in Ruling DA-064.
Concerningly, the Commissioner takes an extremely wide view on what may constitute “land development”, which may mean one or more of any of the following:
- Preparing a plan of subdivision of the land or taking any steps to have a plan registered.
- Applying for or obtaining a planning permit in relation to the use or development of the land.
- 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 in relation to the land.
- Doing anything in relation to the land for which a permit or approval referred to in item (4) would be required.
- Developing or changing the land in any other way that would lead to the enhancement of its value.
The scope of the Ruling requires developers to take significant caution if they are to consider nominating a new entity for the following reasons:
- The Ruling provides examples where the Commissioner considers that certain actions may constitute land development, even if arguably these are more routine commercial and non-value enhancing activities. Examples include simply engaging a professional surveyor or commissioning a review of a plan for subdivision;
- The broad “catch all” limb of (6) above provides the Commissioner far reaching scope to make his own assessment of any activities undertaken by the developer that may enhance the value of the land. These include activities that do not alter the physical characteristics of the land (e.g. removal of single dwelling covenant or a removal of land from the Victorian Heritage Register);
- The Commissioner also takes the view that even if there is an overall set of activities that decreases the value of the land, if a single activity of the developer could increase the value of the land, then this can cause land development and double duty to occur.
Given the significant risks of inadvertent double duty for property developers if looking to nominate a new entity, it may be prudent in parallel when doing due diligence on acquiring a development site to consider the setup of the preferred final acquisition structure.
By having the preferred structure in place early, it may also identify any other legal or commercial tax planning opportunities before acquisition, as well as the give the developer confidence to start any necessary development activities once the contract is signed.
If this is not commercially possible, it will be important for developers to be aware and likely take a conservative approach on any activities relating to the land before nomination of the final preferred structure is undertaken.