Is duty payable on your economic entitlement? Developers and retirement village operators beware

Where an arrangement is entered into which leads to an economic entitlement in relation to land in Victoria, proportional beneficial ownership is taken to have been obtained.

This article sets out whether or not the economic entitlement obtained is subject to transfer duty and provides an overview of the following guidance that was recently issued by the Victorian State Revenue Office:

• DA 065 – Acquisition of economic entitlements in relation to land (service fees) (DA 065);
• DA 066 – Calculation of economic entitlements (DA 066); and
• Draft ruling – DA 067 – Economic entitlements in relation to land – key concepts and interpretation (DA 067). DA 067 is open for consultation until 5pm on 28 July 2025.

What is an economic entitlement?

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 and under that arrangement a person is – or will be – entitled (directly or through another person) to any one or more of the following:

1. to participate in the income, rents or profits derived from the relevant land;
2. to participate in the capital growth of the relevant land;
3. to participate in the proceeds of sale of the relevant land;
4. to receive any amount determined by reference to subparagraphs (a), (b) or (​​c);
5. to acquire any entitlement described in subparagraph (a), (b), (​​c) or (d).

The person who acquires the economic entitlement does not need to be a party to the arrangement by which it is acquired.

The beneficial ownership obtained under an economic entitlement is the total percentage the person is entitled to acquire under the economic entitlement (or if not specified, 100 per cent unless the Commissioner exercises their discretion to lower the percentage).

DA 065: Service fees

DA 065 outlines the circumstances when an economic entitlement will apply to service fees.

What are service fees?

A “service fee” refers to a payment made in exchange for services rendered (e.g. development management, consulting or project coordination). 

Where these fees are tied to the work performed, they are generally not economic entitlements. However, where service fees are determined by reference to income, rents or profits derived from land, or the capital growth or proceeds of the sale of the land, they may comprise an economic entitlement and result in duty being payable.

In determining whether such fees amount to an economic entitlement, the Commissioner will have regard to the following factors. 

• Nature and scale of the arrangement – if the service provider takes on financial risks, the fee may be an economic entitlement.
• Nature and magnitude of the service fee – fees based on market rates suggest ordinary remuneration, but fees tied to a significant share of the land’s economic benefit may indicate an economic entitlement.
• Nature of the service provider – if similar services are provided to third parties in the course of business, the fee is more likely to be standard compensation.

Where a service provider is an “associated person” of someone who has acquired an economic entitlement (e.g. a developer), the Commissioner may require disclosure of service fees and will assess whether those fees also amount to an economic entitlement. 

The existence of a contingency fee does not, by itself, result in a finding of an economic entitlement. Instead, an objective analysis of the arrangement is required, taking into account the relevant outcome or benchmark and the corresponding entitlement.

How are common types of service fees treated under this regime? Are they economic entitlements?

The ruling indicates that the following services fees may amount to an economic entitlement:

• Developers – entitlement to a variable mark-up cost development agreement.
• Lenders – entitlement to interest tied to land performance that the loan relates to.
• Retirement village operators – entitlement to participate directly or indirectly in the proceeds of the sale of units.

The following service fees may not amount to an economic entitlement:

• Developers – cost-plus development agreements (fixed percentage mark-up).
• Lenders – interest as a percentage of a loan amount.
• Retirement village owners – amounts payable by outgoing residents under lease/licence arrangements if the owner already holds full beneficial ownership of the land.
• Retirees – entitlement to participate in the proceeds of the first sale of the residence under a lease/licence agreement.
• Real estate agents – fees based on rent or sale proceeds for selling or managing property.
• Project managers – fees based on sale proceeds or capital growth for managing a development.
• Planning consultants – fees based on capital growth for services including obtaining planning permits.
• Private advisory firms – fees based on sale proceeds for services including negotiating transaction documents.
• Hotel operators – fees based on profits derived from land in exchange for operating hotels.
• Responsible entities, trustees, fund managers, asset managers and investment managers – fees determined by reference to proceeds of sale, rents, profits or capital growth of land under management of the fund.
• Architects – fees based on costs incurred in construction of a building.

Prior to the issue of these rulings, the Commissioner provided some guidance on his website on economic entitlements. However, this ruling is more detailed than the previous website guidance. The ruling provides a number of detailed examples to illustrate the Commissioner’s views on the application of the law. 

DA 066: Calculating the percentage of beneficial ownership

Under the economic entitlement provisions, a person may be taken to have acquired 100 per cent beneficial ownership of land even if their actual entitlement is less. This can occur in the following three common scenarios:

• arrangements that do not specify a percentage;
• arrangements that include additional payments to a person or associated person; or
• arrangements that involve multiple entitlements.

In each case, the Commissioner of State Revenue has discretion to apply a lower percentage if the entitlement can be reasonably quantified.

What does the Commissioner take into account when exercising their discretion?

The Commissioner will have regard to all relevant facts and circumstances (including the total of all economic entitlements that the person and any associated persons are entitled to under the arrangement at the time the arrangement was entered into). This information could be obtained from a transaction document, a formula or methodology contained in a relevant document or it could involve the Commissioner having regard to broader transaction documents such as modelling or feasibility studies, as well as to any assumptions underlying such documents such as to market conditions. 

If such economic entitlements are quantified at less than 100 per cent, the Commissioner may consider it appropriate to exercise the discretion. The Commissioner explains in the ruling that when determining whether to apply a lesser percentage, the focus is on the entitlement acquired by the person at the time the arrangement was entered into, not the net benefit or profit that may ultimately flow. For example, if a development agreement contemplates the higher of two discrete entitlements, the Commissioner may reduce the arrangement to the higher of the two possible entitlements.

Again, there are several examples in the ruling to illustrate the Commissioner’s interpretation of the legislation. 

DA 067: Key concepts and interpretation 

DA 067 outlines the Commissioner’s interpretation of key concepts relevant to the economic entitlement regime. The Commissioner’s interpretation is summarised in the below table.

Key takeaways

The key takeaways from DA 065, DA 066 and draft DA 067 are:

• If service fees are economic entitlements, transfer duty may be payable, depending on the value of the underlying land and/or the aggregation of any other potential transactions.
• The economic entitlement provisions can apply to the acquisitions of shares in companies and units in unit trust schemes that may be outside of the scope of the landholder duty provisions, for example because the interest acquired falls below the landholder duty relevant acquisition thresholds but a person is still entitled to participate in the income, rents, capital growth or profits from particular land held by an entity. However, an entitlement to the income, rents, capital growth or profits would not amount to an economic entitlement if it is not specific to particular parcels of land.
• For property developers, fixed mark-up cost development agreements containing service fees should not amount to an economic entitlement.
• Retirement village operators need to take a close look at their various agreements and consider whether they may in fact make an economic entitlement and have an obligation to lodge with the Commissioner and pay duty. Similarly, any person looking to acquire retirement village management rights, which includes the right to deferred management fees, may acquire an economic entitlement even if the underlying units are valued at less than $1 million on the basis that the collective interests acquired will be aggregated and exceed $1 million.
• Specifying the percentage interest acquired under an economic entitlement prevents the need to rely on the Commissioner’s discretion to reduce the beneficial ownership percentage to less than 100 per cent.
• While DA 065, DA 066 and draft DA 067 are the Commissioner’s view of how the legislation is to be interpreted and a Court may not agree with these views, the rulings inform taxpayers as to how the Commissioner is interpreting the economic entitlement provisions and identify potential risks for taxpayers.
• Understanding when the economic entitlements regime may trigger transfer duty is essential for managing tax risk and ensuring tax compliance.
   

If you have any questions or comments about how the rulings or economic entitlement provisions might affect your business, please contact Kathryn Bertram from the JWS tax team.