By Tony Rutherford, Partner and Shaun Whittaker, Partner
The duty amendments contained in the State Taxation Acts Amendment Bill 2019 (Vic), as announced in the recent Victorian budget, are expected to receive royal assent any day. The scope and impact of these changes across the general property development sector have been well documented (including in the Mills Oakley Budget Summary), but they will also have a specific impact on Specialist Disability Accommodation (SDA) Projects using current standard structures.
Two key concerns raised by these proposed changes in relation to SDA projects relate to:
- the updated economic entitlement regime and the potential stamp duty payable for registered providers of SDA (SDA Providers) at the point of entry into a head lease; and
- the inclusion of unit trusts, that are party to head leases in a standard SDA legal structure, as landholding entities and the impact of this change on equity investment for SDA projects.
Duty on Economic Entitlement of SDA Providers
The new law states that a party will be taken to have received an economic entitlement, and be required to pay duty on said entitlement, if there is an arrangement for the party to “participate in the income, rents, profits, capital growth or proceeds of sale derived from the relevant land”. This definition is quite broad and includes within it any agreement whereby a third party receives any portion of rent derived from dutiable land.
Under a standard SDA legal structure, the unit trust enters into a head lease with a SDA Provider for the purpose of maintaining the SDA property. Usually, payments under this lease are directly referable to a percentage of the rent paid by residents. Under the new regime, the percentage of the rent received by the SDA Provider would arguably be seen as being equivalent to an economic entitlement over the same percentage of the land and, upon entry into the head lease, the SDA Provider may be required to pay duty on this entitlement.
Additionally, the new law also states that where it is unclear what percentage of the land a party is entitled to, they will be deemed to be entitled to 100% of the economic entitlement of the land and will be liable to pay duty accordingly.
SDA developers must bear both of these changes in mind when entering into head leases with SDA Providers. If SDA developers choose to continue to enter into leases with these payment structures, the parties must ensure that the percentage of rent to be paid to SDA Providers is clearly set out and not subject to change (to ensure there is no confusion over the SDA Providers’ entitlement) and that sufficient funds are set aside to cover this potential duty.
We are currently working with a number of SDA clients on alternative arrangements to ensure SDA Providers’ fees are not captured in this regime, so if you would like further advice on this issue please reach out to the team below.
Duties Impacting SDA Investment
Under the new regime, any land held by the trustee of a unit trust, in its role as trustee and as party to a head lease in a standard SDA legal structure, will be deemed to be land held by the unit trust. This has the effect of requiring the unit trust to pay transfer duty on the land upon a change in ownership of the unit trust, with a change in ownership being defined as a change in the control of 20% of the units in the trust.
Under current duty laws, SDA developers would have the ability to sell units in their landholding unit trust to co-investors without attracting transfer duty. Under these stamp duty changes, any new unitholders will have to pay landholder duty if they purchase more than 20% of the units. It is an unwelcome additional cost to SDA developers already battling to attract co-investors for their projects and one which we believe the government has not considered.
Again, we are working on two alternative modes of investment in light of these new changes so please do reach out to see if these options suit your project.