The Victorian Government handed down the 2019-20 State Budget on 27 May 2019, with Treasurer Tim Pallas. The Budget proposed substantial tax-related changes including:
- amending the corporate reconstruction exemption for dutiable transactions (detailed at 1 below);
- increases to the foreign resident surcharge for transfer duty and land tax (detailed at 3 below);
- the extension of Victoria's royalty regime to gold at a rate of 2.75% from 1 January 2020;
- two new 'luxury' car thresholds for motor vehicle duty increasing the general rate of duty for vehicles valued at above $100,000;
- increasing the payroll tax-free threshold to $700,000 (from $650,000) by 2022-23; and
- additional payroll and stamp duty concessions for regional areas.
The State Taxation Acts Amendment Bill 2019 (the Budget Bill) has subsequently been introduced into Parliament (available here) providing further detail on the proposed legislative changes to implement the Victorian Government's Budget agenda.
In addition to addressing the headline budget items mentioned above, the Budget Bill also seeks to:
- ensure the imposition of duty on arrangements where fixtures are acquired independently from the underlying land;
- remove restrictions that prevented a unit trust scheme that was at any time eligible for registration as a wholesale unit- trust scheme from being a public unit trust scheme; and
- address the Court's decision in BPG Caulfield Village Pty Ltd v Commissioner of State Revenue  VSC 172 regarding the economic entitlement under the landholder duty provisions by providing for the imposition of duty on economic entitlements focusing on the relevant land itself, rather than the landholding entity (detailed at 2 below).
We set out more detailed comments in relation to the corporate reconstruction changes, economic entitlements and foreign resident surcharges below.
1. Corporate Reconstruction Exemption
Currently, certain eligible transactions involving the intra-group transfer of dutiable property between members of a 90% owned corporate group are eligible for a full 'corporate reconstruction exemption' from duty (CRE), subject to certain conditions including in relation to post-association requirements.
The Victorian Government announced as part of the Budget that from 1 July 2019, the current full CRE from duty will be replaced by a 90% concession (i.e. duty will be payable on eligible transactions at 10% of the 'full' duty amount that would have been payable). In parallel, the Budget flagged that the qualifying provisions for CRE would be expanded "to make the rules more flexible and easier for corporate groups undertaking restructures to comply".
The Budget Bill provides that these goals will be achieved by:
- expanding the definition of 'eligible transaction' to include:
- the granting of a lease by one member of a corporate group to another member of the group; and
- the transfer or assignment of a lease from one member of a corporate group to another member of the group;
- replacing the current CRE provisions to provide for duty to be chargeable on an eligible transaction at 10% of the duty that would otherwise be chargeable on the eligible transaction (subject to a full exemption where duty had been chargeable on an earlier eligible transaction in relation to the same dutiable property within the prior 30 days); and
- removing the provisions that may act to revoke CRE, in particular removing the 3 year post-association requirement.
This means that effective from 1 July 2019, a corporate reconstruction that previously enjoyed full exemption may be dutiable in an amount equal to 10% of the duty at the standard rates.
These changes come into effect on 1 July 2019. The current rules will continue to apply if the agreement or arrangement for the transaction in question was entered into before 1 July 2019.
2. Economic entitlements
Duty applies where a person acquires an "economic entitlement" in relation to relevant land. A person acquires an economic entitlement if an arrangement is made in relation to relevant land that has an unencumbered value that exceeds $1 000 000. Under that arrangement, the person must be entitled to any one or more of the following;
- to participate in the income, rents or profits derived from the relevant land;
- to participate in the capital growth of the relevant land;
- to participate in the proceeds of sale of the relevant land;
- to receive any amount determined by reference to these things;
- to acquire any entitlement described above.
A person who acquires an economic entitlement in relation to relevant land is taken to have acquired beneficial ownership of the relevant land and, subject to ad valorem duty. That entitlement will be calculated as a percentage and if none is specified, the entitlement may be taken to be 100%. This is likely to result in duty on agreements between a developer and a landowner to develop land in return for a share of the development profit (for example the profits from selling subdivided lots) whether that return is calculated as a direct share of profit or a development fee calculated by reference to it.
This change comes into operation on the day after the assent of the Budget Bill but does not apply in relation to an arrangement made before commencement.
3. Foreign Resident Surcharge
Victoria currently applies 'foreign resident' surcharges to certain dutiable transactions involving Victorian residential land (a surcharge of 7% in additional to the general rate of 5.5%), and a land tax surcharge for all Victorian land (a surcharge of 1.5%). The Budget Bill proposes to amend the relevant state legislation to increase the foreign resident surcharge:
- for dutiable transactions involving Victorian residential land to 8% from 1 July 2019; and
- for land tax to 2% for 2020 land tax years onward.
This change will bring the Victorian foreign resident surcharge rate for residential land in-line with New South Wales at 8%.