COVID-19 Payroll Tax relief measures

The COVID-19 pandemic has created a new way of life, with new challenges constantly emerging for Governments, businesses and households alike.

While much of the recent media attention has been focused on the stimulus and assistance programs being provided by the Federal Governments, the State and Territory Governments have also been busy, announcing various packages to help both businesses and households.

A key measure in the various State and Territory relief packages to help ease the pressure on businesses has been the provision of various forms of Payroll Tax (‘PRT’) relief. Whilst welcome, these PRT measures can be confusing given the lack of uniformity between the measures announced by the different States and Territories.

To assist with cutting through the copious amounts of information out there and to provide some clarity, we have compiled the below high-level tabular summary of the various measures and requirements, based on information available as at 13 April 2020. Click the button below to view.

Note: Readers should only use the table as a starting point of their research and, especially, should seek further information/assistance to confirm their eligibility and the application of the measures to their circumstances. This is of particular relevance as the States and Territories are constantly refining, updating and adding to their measures.

In addition to measures outlined in the table, it is also worth noting that both Victoria and New South Wales have also announced that certain small businesses may be able to access $10,000 grants. In essence, businesses may be eligible for the grant where they:

  • are based in the relevant State;
  • employ staff (between 1 and 19 for NSW);
  • have turnover of more than $75,000;
  • have an ABN by 16 March 2020 for Victoria or 1 March 2020 for NSW;
  • have payroll for 2019-20 below the relevant PRT thresholds – $650,000 for Victoria and $900,000 for NSW; and
  • are highly impacted by the COVID-19 directions for businesses.

Further information can be found here for the Victorian Grant and here for the NSW Grant.


This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

Foreign Person Stamp Duty surcharge – change to Victorian practice: a step behind but in line with proposed NSW legislative changes

Imposition of additional (surcharge) duty where foreign persons purchase residential land or undertake certain other transactions has been a feature of stamp duty legislation in several state jurisdictions for some years. Some recent developments in Victoria and NSW in relation to foreign persons which are discretionary trusts are considered below.

Victorian Duty – the change

The Victorian State Revenue Office (Vic SRO) has announced abandonment of its practical approach to classifying a family discretionary trust (DT) as a foreign trust for stamp duty surcharge purposes. The practical consequence of the change is that most DTs will likely ‘become’ foreign trusts for these purposes unless action is taken.

Under the practical approach, where (residential) land was acquired by a DT, stamp duty surcharge is not applied where the DT has foreign beneficiaries ‘who have not and who are, based on available information, unlikely in the future to receive any distributions’. This was a welcome concession, given the width of definitions of beneficiaries in most DT deeds.

However, from 1 March 2020, Vic SRO has said it will apply the special rules (s. 3B(2) of the Duties Act 2000 – ‘DA (Vic)’) for classifying DTs as foreign trusts.

Under the rules any (potential) beneficiary of a DT is deemed to have a beneficial interest in the maximum percentage of the capital that trustee is empowered to distribute to that particular beneficiary. As a result, a beneficiary which is a foreign natural person, a foreign corporation or a foreign trust may well have more than 50% of the trust estate and, consequently, cause the DT to be a foreign trust.

The Vic SRO will transition to the stricter approach. Contracts entered into or sub-sale nominations made before 1 March 2020 will assessed under the practical approach. Contracts or nominations made (semble) ‘on’ or made after that date will be assessable under the stricter approach.

Implications of the change

Prospective purchasers acquiring in the capacity as trustee of a DT will need to consider amending the trust deed prior to purchase to ensure that there are appropriate restrictions on foreign persons (foreign natural persons, foreign companies and foreign trusts) being beneficiaries of the DT.

Classification as a foreign trust has implications for the amount of duty payable in relation to:

  • purchase of land and other interests dutiable under Chapter 2 of the Duties Act; or
  • acquisitions of interests in landholding companies and landholding trusts to which Chapter 3 of the DA (Vic) applies, such as ‘relevant acquisitions’.

While many of our readers will have limited pre-contract or, even pre-settlement, involvement where their clients are purchasing land, we anticipate they will be heavily involved in relation to restructuring the entities through which a client holds land or in their clients’ purchases of interests in landholding companies and trusts.

Before restructuring or acquiring interests in landholding companies or landholding trusts where the shares or units are  to be held by a DT, care will need to be taken to ensure that the transaction is not unwittingly made more costly due the DT being a foreign trust, when timely amendment of the trust deed would have avoided the duty surcharge.

Contrast the NSW stamp duty position

The Victorian move to requiring compliance with the DA (Vic) coincides with the NSW government’s revamping of the NSW duties legislation in relation to surcharge purchaser duty.

Since October 2019, the State Revenue Legislation Further Amendment Bill 2019 (NSW) – ‘the Bill’ – has been before the NSW Parliament. It was initially expected that the Bill would be passed prior to 31 December 2019. It was listed for further consideration on 4 February 2020 but consideration was deferred due to matters arising out the NSW bushfires.  It is anticipated that it will receive attention when the NSW Parliament resumes sitting at the end of this month.

Basically, the Bill seeks to update the imposition of the NSW stamp duty surcharge payable by foreign trusts so that the imposition and administration of the surcharge accords with Revenue NSW’s administrative approach (see Ruling G 010 version 2). However, it also addresses the inability to amend operative discretionary testamentary trusts so that these comply with the existing/administrative requirements, by providing ongoing transitional relief. Clients with wills providing for future testamentary trusts will need to update their will, as the transitional provisions have limited application.

The legal concept of a ‘foreign person’ for NSW duty purposes presently relies on modification of the concept in the Foreign Acquisitions and Takeovers Act 1975 (Cwlth). Fundamentally, a trust will be a ‘foreign person’  for duty purposes where a substantial interest in the trust is held by one or more of the following: individuals who are not ordinarily resident in Australia (Australian citizens and certain other persons are deemed to meet the residency test for duty purposes), a foreign corporation or foreign government. A person holds a substantial interest in a trust where the person alone or with associates holds a beneficial interest in at least 20% of the income or property of the trust. In the case of a DT, each (potential) beneficiary is ‘taken to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary’.

The Bill provides (new s. 104JA) that the trustee of a DT will be a foreign trustee (liable to surcharge duty) unless the trust prevents a foreign person being a beneficiary. Prevention generally requires that:

  • ‘no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement)’; and
  • ‘the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement)’.

The ‘no beneficiary requirement’ largely corresponds with the strict approach that the Vic SRO will take from 1 March. The ‘no amendment requirement’ appears to be a step which has not yet been taken in Victoria – but one wonders whether this is only a matter of time.

The latter requirement appears to have arisen (Ruling G 010 version 2) as a condition of a concession rather than something inherent in the present NSW concept of ‘foreign person’, which at trust level has much in common with the Victorian concept of a ‘foreign trust’. On this basis, in order for Victoria to follow the NSW lead would appear to require Victorian legislative change.

Where DTs have acquired land in NSW since the inception of the surcharge on 21 June 2016 or are contemplating acquiring land in NSW, their trustees and advisers need to consider the Bill’s general provisions and transitional provisions.

The transitional provisions provide that the new s.104JA ‘extends to a surcharge duty transaction that occurred before the commencement of that section’. This is understandable because Ruling G 010 version 2 created an administrative concession (allowing time for a DT time to be amended to exclude foreign potential beneficiaries where there is not a scheme to avoid tax) and noted that it would be enshrined in retrospective legislation. The Bill is this retrospective legislation.

While the Bill’s operative provisions envisage the dual requirements will apply from enactment of the Bill, at least one commentator has observed that retrospective compliance from 21 June 2016 (under the transitional provisions) only requires that ‘the no foreign beneficiary requirement be met’. The commentator noted this retrospective application would be inconsistent with the Ruling. However, the second reading speech in relation to the Bill indicates that the ‘inconsistency’ is intentional.

The Bill contemplated a grace period between enactment and 31 December 2019 in which to amend a DT in order to comply with the need to exclude all foreign persons as beneficiaries. It is surmised that the 31 December 2019 end date will be adjusted to allow a grace period following enactment, but this must await further Parliamentary consideration of the Bill.

One might (mistakenly) anticipate that a grace period is not required, given the historical need to comply with the administrative concession. However, the Ruling containing the concession was effective from 13 September 2017 and it may be that some purchasers between 21 June 2016 and 13 September 2017 will not have benefited from the concession so, possibly, the grace period could be beneficial.

Given the administrative concession dates from September 2017 and the proposed legislation is aimed at giving the concession retrospective legislative effect, we anticipate that  the foregoing will, in substance, be limited new news for NSW readers,  although they await further Parliamentary action. However, interstate trustees and their advisers without day to day dealings with the NSW Revenue Office are likely to be in a different position. In particular, interstate advisers will need to appreciate the Bill will impact on purchases of NSW residential land (and certain property transactions such as those listed in s. 104L) as well as on restructuring of the entities through which a client holds residential land or on their clients’ purchases of interests in landholding companies and trusts.

Proposed NSW legislative change extends to land tax

In addition to defining the concept of foreign trustee for NSW stamp duty surcharge purposes, the Bill provides for a corresponding concept to apply for NSW land tax surcharge purposes. We will postpone comparative comment on the DTs in the context of the land tax surcharge to a later article.


This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

FBT, car parking and ride sharing – some notable developments and reminders

Ordinarily, the FBT landscape does not change too much  from year to year. However, in the last few months there have been a number of noteworthy developments particularly in relation to FBT and car parking benefits.

The purpose of this article is to highlight some of these developments, as well as provide a couple of timely reminders in the leadup to FBT season.

Car parking fringe benefits – ATO updates

A key focus of the ATO in relation to FBT has been in relation to the provision of car parking fringe benefits, as evidenced by the recent release of two draft documents:

  1. Draft Taxation Ruling TR 2019/D5 Fringe Benefits Tax: car parking benefits, which updates and replaces TR 96/26 Fringe Benefits tax: car parking fringe benefits (which is now withdrawn pending the finalisation of Draft TR 2019/D5); and
  2. A draft update to Chapter 16 (Car parking fringe benefits) of the Fringe benefits tax – a guide for employers.

In broad terms, the draft ruling and update to Chapter 16 (which are intended to be read together) provide more expansive coverage for employers to identify when a car parking fringe benefit arises and how to value it. Three particular reminders and changes are outlined below.

1. Exempt workhorses and car parking fringe benefits

The 2 most common fringe benefits relating to cars are car fringe benefits (relating to the provision of a car to an employee for private use) and car parking fringe benefits (relating to the provision of an employer provided car park to an employee).

For both fringe benefits, there must be a car, which is defined for FBT purposes as a motor vehicle (except a motorcycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers.

From a car fringe benefit perspective, the benefit will be exempt from FBT where the car is a ute/van/dual cab (i.e. a ‘workhorse’ motor vehicle) and the only private use of the vehicle is home to work travel and other private travel that is minor, infrequent and irregular.

However, just because the car is exempt for the car fringe benefit purposes, this does not mean that it is also exempt for car parking fringe benefit purposes. This is a common misconception and Draft TR 2019/D5 provides a timely reminder (refer paragraph 6) that, so long as the other conditions for a car parking fringe benefit are present, employers may still be providing a taxable car parking fringe benefit even if the car is an exempt workhorse for other FBT purposes.

2. What constitutes a commercial car parking station?

One of the key requirements for an employer to be providing a car parking fringe benefit is that a commercial car parking station must be located within a one kilometre radius of the employer provided car park used by the employee and the fee for all-day parking is more than the prescribed car parking threshold. Whether something constitutes a commercial car parking station is also relevant to determining the taxable value of the fringe benefit where the commercial parking station method is used, which provides that the taxable value of the car parking fringe benefit is the lowest fee charged for all-day parking by any commercial parking station within a one-kilometre radius of the premises on which the car is parked.

This raises the question: what constitutes a commercial car parking station?

A commercial car parking station is defined in s 136(1) of the FBT Assessment Act as:

a permanent commercial car parking facility where any or all of the car parking spaces are available in the ordinary course of business to members of the public for all-day parking on that day on payment of a fee, but does not include a parking facility on a public street, road, lane, thoroughfare or footpath paid for by inserting money in a meter or by obtaining a voucher.

When TR 96/26 was released, the ATO explored this definition and outlined a number of excluded arrangements including parking arrangements:

  • that had a primary purpose other than all-day parking, that charged rates for all-day parking significantly higher than rates charged at other all-day parking facilities; and
  • for car parks not run with a view to making a profit.

On the back of these concessions, many employers were able to gain favourable rulings that a particular car park was not a commercial car parking facility and, therefore, could be ignored in relation to the provision of car parking fringe benefits. In addition, the first excluded concession mentioned above has resulted in a general assumption that certain car parking facilities (e.g. regional airport car parks predominantly used for short-term parking, or shopping centres providing all-day parking at penalty rates) that provide all day parking at rates higher than the threshold do not create an FBT exposure because the primary purpose of the car park was other than all-day parking.

Following the release of the draft ruling and update to Chapter 16, the ATO (as highlighted by the following paragraphs of Draft TR 2019/D5) proposes a much tighter position regarding what constitutes a commercial car park going forward (from 1 April 2020):

… if a car park allows all day parking but its fee structure discourages it with higher fees, the car park can still be considered a commercial parking station if it satisfies other requirements. This is because the parking facility makes car parking spaces available to the public for all-day parking on payment of a fee.

20. Only one space in a parking facility needs to be available in the ordinary course of business to members of the public for all-day parking, for the car park to meet the definition of a ‘commercial parking station.[emphasis added]

In particular, the ATO has signalled its intention to consider treating the following as commercial car parks for FBT purposes: shopping centres, hospitals, universities and airports, etc.

Given the considerably tighter interpretation of what constitutes a car park, employers providing employee parking (particularly those outside of CBDs currently providing parking without paying FBT) may need to get out the 1km tape measure and see what the 2021 FBT year holds in store for them if the ATO position remains unchanged.

3. Car parking stations in the modern era

In addition to the above, and acknowledging the modern era, the ATO has also flagged in the draft documents that the traditional view of what constitutes a commercial parking station is no longer sufficient, highlighting changes to what is considered to be a commercial car parking facility and what is the ordinary course of business. In particular, the offer of parking pursuant to certain mobile phone applications may now be caught if done by a business, as indicated by the following example in the updated Chapter 16:

Fancy Co is a marketing firm and also uses Park-it to list a space in its office complex. Fancy’s office complex is in an area of the central business district where parking is at a premium. Generally parking in the complex is restricted to senior executives of Fancy Co. Frequently, (for example, when a senior executive takes annual leave), there are empty spaces. Fancy has a consistent policy of listing those empty spaces on Park-It. Fancy charges market value rates and on average, has a parking space listed and available on Park-It for at least 60% of the year.

The parking would be considered to be permanent and offered as part of Fancy’s business (even though it is not its main business). Therefore, parking at Fancy Co’s office complex would be considered to be a commercial parking station.

The conclusion reached in relation to Fancy Co is a big concern.

From an employer’s perspective, even being expected to know such spaces are available on the 1st business day of the FBT year let alone the status of the provider (whether a business and why/often etc spaces are made available) means this proposed expansion of the net is fraught with problems.

Hopefully, once the consultation period is complete, this view is abandoned.

Car parking fringe benefits – ATO’s valuation concerns

In determining the taxable value of a car parking fringe benefit, there are a number of different methods employers can use. The default method is the commercial car parking method (as discussed above). One of the other methods is the market value method under which the taxable value of the fringe benefit is the market value of the car parking actually provided, based on a valuation report from a ‘suitably qualified valuer’.

It appears that something has attracted the ATO’s attention in relation to the market valuation method, given the statement released on 21 January 2020 to tax agents (refer QC 61147):

From February, we may contact your clients who have engaged an arm’s length valuer as required under the market value method. In some instances valuers have prepared reports using a daily rate that doesn’t reflect the market value. As such, the taxable value of the benefits is significantly discounted or even reduced to nil.

Help your clients understand that engaging an arm’s length valuer does not mean they’ve met all the requirements for working out the taxable value of their car parking fringe benefits. It is your clients’ responsibility to confirm the basis on which valuations are prepared. They must examine any valuation they suspect is incorrect or which considerably reduces their liability.

We could speculate as to what is motivating the ATO but rather than do that, we make the following observations:

  • it is unclear how the ATO proposes to target employers that use the market value method as the current FBT return does not disclose this information. Perhaps the ATO is anticipating a changed 2020 FBT return? Alternatively, will the ATO gather data directly from (certain) valuers?
  • the car parking fringe benefit rules and specifically the valuation rules are not particularly employer compliance friendly. A recent Board of Taxation review aimed at improving cumbersome FBT compliance obligations (such as requirements to identify and measure distances to ‘commercial car parks’, determine whether and when commercial car parks are open and prices charged) may have resulted in some changes which could have overcome the type of valuations that are raising concerns for the ATO, if it had not ultimately been mooted. We are not sure what has happened to the review but given the ATO’s recent statement it may be that identifying/making any compliance focused changes wasn’t as simple as hoped.

As the ATO has provided a list of minimum requirements for a valuation report in QC 61147, it may be timely for employers that use the market value method to review any valuations they are relying on.

FBT and ride-sharing

The advent of Uber, Ola, DiDi and other ride sharing/sourcing arrangements have created some confusion in the tax world. In recent years, there has been a need by Revenue to confirm whether income earned from ride sourcing activities is assessable (it is) and whether drivers need to register for GST (they do) in the same way as taxi drivers.

However, from an FBT perspective, the ATO recently stated that, for the purpose of employers accessing the exemption for travel undertaken by their employees to or from work or due to illness, the travel must be undertaken in a taxi – it could not be taken in a ride sourcing vehicle. So the difference between an employer obtaining the exemption or not depends on whether the employer/employee calls a taxi or an Uber (or other ride sourcing vehicle).

Given this inconsistency, legislation has now been introduced into Parliament to align the FBT treatment of ride-sharing travel services (other than luxury cars such as limousines) with the existing GST treatment of taxis. These changes are anticipated to apply from 1 April 2019 (i.e. for the 2020 FBT year), assuming the legislation is passed shortly.

As a final note, as part of the MYFEO 2019-20 report the Government has signalled its intention to introduce a sharing economy reporting regime for ride-sourcing and short-term accommodation from 1 July 2022. Additionally, from 1 July 2023, the sharing economy reporting regime will be extended to include asset sharing, food delivery and task based platforms which will likely result in popular Australian car parking applications (such as Parkhound, Parkopedia  and Cheap Parking) being required to report identification and income information to the ATO for data matching purposes. From a practical perspective, it will be interesting to see how this will be enforced.


Given the increased focused on FBT by the ATO at the moment, especially around car parking and ride-sharing, employers and advisers should consider reviewing existing arrangements and continue watching the FBT space carefully as there is no telling where the ATO’s focus will turn next!


This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

Active assets and vacant land used partially for business – the saga continues

As many readers will be aware, one of the key requirements to access the small business capital gains tax (“SBCGT”) concessions in Division 152 of the Income Tax Assessment Act 1997 (“ITAA 1997”) is that the taxpayer must satisfy the active asset test. This test requires the subject CGT asset to have been an active asset for the lesser of half the ownership period or 7.5 years (s. 152-35). In order for an asset to qualify as an active asset, it must be used, or held ready for use, in the course of carrying on a business (whether alone or in partnership) by the taxpayer, their affiliate or their connected entity (both defined terms)(s. 152-40).

The question of ‘to what extent an asset has to be used in the course of carrying on a business in order to qualify as an active asset’ is one that has plagued taxpayers for many years, particularly taxpayers that own vacant land used partially for business purposes. The Commissioner’s viewpoint was and is that the land must have a direct connection that is not merely incidental with the business operations. This was historically also the position the Administrative Appeals Tribunal (the “Tribunal”) held.

However, the Tribunal took a different position in Eichmann and Commissioner of Taxation (Taxation) [2019] AATA 162 (15 February 2019) (considered in a previous article) that appeared to shift the line in the sand in the favour of taxpayers.

Briefly, in this case, the taxpayer operated a construction, bricklaying and paving business through a related trust. The relevant asset the subject of the matter was a parcel of vacant land the taxpayer owned adjacent to their family home. This land was used to store materials, equipment and tools on the land (both in and out of sheds located on the land). In addition, work vehicles and trailers were parked on the land and the land was commonly visited a number of times a day in between jobs. The size of the land and the proportionate areas of use were not identified, although it was inferred that the entire land was used for the identified purposes. The taxpayer sought a private ruling from the Commissioner to confirm whether the land  was an active asset for the purposes of the SBCGT concessions. Following the Commissioner’s unfavourable ruling , and subsequent  rejection of the taxpayer’s objection, the case went to the Tribunal.

In the first instance, the Tribunal agreed that minimal or incidental use of an asset would not be sufficient to cause the asset to satisfy the active asset test, but rejected the Commissioner’s contention that the phrase “in the course of” requires the use to be integral to the process by which the business is carried on. In particular, the Tribunal stated that the legislature could easily have used the word “necessary,” “integral” or “essential” in order to further limit the availability of the concession should it so desire. It did not do so. This decision was welcomed by taxpayers, although the question regarding whether there was a prescribed proportion of the land needed to be used for business purposes in order to be an active asset still remained unanswered.

Unsurprisingly, the Commissioner appealed this decision.

Unfortunately for taxpayers, the Federal Court’s decision (Commissioner of Taxation vs Eichmann [2019] FCA 2155) was ultimately not in favour of the taxpayer.

It is encouraging that the Federal Court again rejected the Commissioner’s submission that the use of the asset must be ‘integral’ to the business processes (in the sense of being critical or fundamental to the business processes). However, the Federal Court held that the requirement of the definition of active asset is that it be used “in the course of carrying on a business“, necessitating the existence of a direct relationship between the use(s) to which the asset is put and the carrying on of the business. That is, in order for an asset to be used “in” the course of carrying on a business, it is necessary for the use to have a direct functional relevance to the carrying on of the normal day-to-day activities of the business which are directed to the gaining or production of assessable income. The taxpayer was unable to satisfy this requirement as the business of the trust was the provision of services in the nature of construction, bricklaying and paving, but the relevant uses to which the land was put were held to be preparatory or for storage, which itself was not an activity in the ordinary course of the trust’s business. There was no direct connection between the different uses and the business activities, and the uses had no functional relevance to those business activities.

It was noted in the decision that ultimately, the underlying intention of the SBCGT concessions is to afford relief to small business operators by recognising that they frequently utilise their own assets or those of associated entities for the operation of their businesses. Accordingly, it would be an unusual construction if the legislature were to have intended that the SBCGT concessions could apply to gains on the sale of an asset where only a small portion of it had been used for business purposes.

The impact of the Federal Court’s interpretation of the definition of ‘active asset’ is that the range of business assets that may be eligible for relief is effectively limited not only for owners of vacant land, but other taxpayers. Based on the decision, to satisfy the statutory active asset test, it needs to be established that the whole, or predominately the whole, of the asset is or had been used in the carrying on of the normal day-to-day activities of the business which are directed to the gaining or production of assessable income.  The question still remains as to what would be an adequate level of use – would the use of more than 50% but less than 85% (or some other percentage) be sufficient to satisfy the statutory test?

The decision of the Federal Court was based on the facts and evidence before it, which were limited to those that were expressed in the original PBR application. The author notes that these facts did not expressly identify the extent to which the property was used for purposes associated with the related trust business. Accordingly, we are left wondering  whether the outcome would be any different if the facts in the original PBR application had identified the size of the land and the proportionate areas of use.

As a final note, the Federal Court proceeding was funded under the Test Case Litigation Program, suggesting compliance with the SBCGT concessions could be part of the ATO compliance program going forward. Accordingly, careful consideration needs to be given by practitioners when assessing their clients’ eligibility to access the SBCGT concessions.


This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

Victorian economic entitlement duty regime – a trap for the unwary

Consider the following scenario:

A farmer (or any other Victorian landholder) is considering entering into an agreement with a property developer to develop and sell all or a part of their land. The development agreement has the following features:

  • the landholder retains ownership of the land until it is sold to the ultimate purchaser(s);
  • the developer agrees to develop the land (which may be done in stages);
  • in compensation for the developer assuming all the development risks, handling the financing of the development as well as the marketing and sale on behalf of the landowner, the developer will receive some combination of reimbursement for the development cost and a fee generally calculated by reference to the sale proceeds or profit of the project.

Historically, such an arrangement would not have been subject to any duty on the basis that the developer is not acquiring any ownership interest in the land. However, for a number of years there have been ‘economic entitlement’ provisions in the Duties Act 2000 (Vic) under which an agreement such as the above would only result in duty for the developer if the landholder was a private company or a unit trust and the developer obtained an ‘economic entitlement’ of 50% or more in the landholder.

However, these uniquely Victorian ‘economic entitlement’ provisions received a significant overhaul as a result of the 2019 Victorian State Budget and the passing of the State Taxation Acts Amendment Act 2019. The new version of ‘economic entitlement’ provisions which have effect from 19 June 2019 arguably have created a new duty that capture a far broader range of development arrangements and can apply whether the landholder is a private company, unit trust, discretionary trust or even an individual!

This article seeks to shed some light on these changes, which have largely flown under the radar, and the potential complexities and unexpected costs developers now face, which may have flow-on affects for anyone considering entering into a development agreement.

The economic entitlement provisions prior to 19 June 2019

The original form of the economic entitlement provisions, as summarised above, arguably had limited application/were easy to circumnavigate on the basis that the relevant landholder had to be a private company or a unit trust, and the relevant entitlement threshold was ‘high’ at 50%.

The ease with which developers were able to structure their deals to ensure the provisions were not triggered was confirmed by the Supreme Court in in BPG Caulfield Village Pty Ltd v Commissioner of State Revenue [2016] VSC 172 (‘BPG Caulfield’), which considered the situation where a developer acquired economic entitlements in only some of the landholder’s land. The Court held (amongst other things) that an economic entitlement could not be acquired in circumstances where the taxpayer only acquired an economic entitlement to some, but not all, of the landholder’s landholdings. In other words, transactions could be easily organised to overcome the application of the former provisions simply by quarantining a portion of landholder’s land from the arrangement.

The new economic entitlements provisions

Following the decision in BPG Caulfield, the Victorian government legislated (via State Taxation Acts Amendment Act 2019) new economic entitlement provisions which focus on the land itself, rather than the landholding entity.

Accordingly, a person acquires now an economic entitlement (whether directly or indirectly) if the person is entitled to participate in the:

  • income, rents, profits;
  • capital growth;
  • the proceeds of sale; or
  • any amount determined with reference to any entitlement described above;

in the relevant land, instead of in the relevant landholder.

Additionally, under the new provisions:

  • there is no minimum threshold for a relevant acquisition of economic entitlements (i.e., the 50% threshold is removed);
  • there is no restriction regarding the type of landowner, such that the provision can apply irrespective of whether the land is held by a private company, unit trust, individual, discretionary trust or self-managed superannuation fund, so long as the relevant Victorian land that is the subject of the economic entitlement arrangement has an unencumbered value exceeding $1 million.

So under the new rules, even if a developer obtains only a 5% interest in the profits or proceeds of sale of Victorian land with an unencumbered value of more than $1 million, they may be liable to duty.

Can conventional fee for service arrangements be subject to the new rules?

Given how broadly the new provisions are drafted, arguably any arrangement where payment is calculated by reference to any of the participation rights described above could be captured.

Recognising this, the Commissioner of State Revenue has released the  SRO Economic Entitlements Factsheet, which states that fees for service (such as fees paid to real estate agents, professional advisors such as architects, project managers, planning consultants etc.) that include a percentage of building cost, project value or value uplift will not be subject to the new provisions provided the fee charged is within industry parameters and the service provider is not associated with any other person(s) who has an economic entitlement in relation to the land.

Where the service provider is associated with any other person(s) who has an economic entitlement in relation to the relevant and, the fee for service must be disclosed to the SRO and the person who obtained the economic benefit must provide evidence showing that it is a reasonable fee for service and not a profit-sharing mechanism.

Calculating the value of an economic entitlement and corresponding duty payable

Under the new rules, duty is calculated based on the unencumbered value of the relevant land at the time the economic entitlement was acquired (with a sliding scale where the land is valued between $1 million and $2 million), multiplied by the percentage of the total of all economic entitlements the entity (usually the developer) is entitled to receive in relation to the relevant land.

When determining the percentage of economic entitlements the developer is entitled to, the terms of the agreement will be key such that where the agreement/arrangement:

  • provides the entity with an economic entitlement by reference to a stated percentage and nothing else, the beneficial ownership acquired is determined by reference to that stated percentage;
  • does not specify a percentage; or include any other entitlements of, or an amount payable to, the person (or their associates); or provides for two or more different categories of economic entitlements, the entity is deemed to have acquired economic entitlements in the land of 100%. This is subject to the Commissioner determining a lesser percentage as he may consider appropriate in the circumstances.

For example, if the development agreement provides that the developer is entitled to a 30% share of profit and nothing else of land with an unencumbered value of $30 million, then:

  • the developer is treated as having acquired economic entitlements to 30% of the relevant land;
  • the developer will then be liable to pay duty on 30% of the total value of the land ($30 million) leading to duty of $495,000 (i.e., 5.5% x 30% x $30 million).

However, if the developer was also entitled to a payment of the development costs, the developer would be deemed to have acquired economic entitlements to 100% of the relevant land and would be subject to duty on the full $30 million value of the land regardless of the actual benefits that the developer actually received. In such a case, the developer would need to request the Commissioner exercise his discretion to reduce the economic entitlement and corresponding duty.

Currently there is no guidance on how the discretion may be exercised. Based on the examples set out in the SRO Economic Entitlements Factsheet, there is an expectation that the developer must be able to substantiate that the development costs is a reasonable fee for service and does not include an additional element of profit from the development of the relevant land. Further, the payment of the development costs must not be contingent on the development being profitable or any other performance measures associated with the ultimate sale of the development.


The new provisions apply to arrangements entered into on or after 19 June 2019.

However, transitional provisions can apply where the landowner and the other entity (e.g., developer) entered into an arrangement prior to 19 June 2019. To access these transitional provisions, the parties must have “committed” to undertake specific actions under which an economic entitlement is acquired prior to 19 June 2019. The example provided by the SRO was a Heads of Agreement entered into prior to 19 June 2019 setting out with “sufficient certainty a proposed development of the land and how the parties intend to contract to share in the benefits of the development”.

What next?

Practitioners acting for clients who are property developers should consider whether the new economic entitlement provisions could potentially apply, and an economic entitlement duty should be factored into the development costs. Consideration should also be given to whether there is a need to make representations to the Commissioner to seek to reduce any unintended duty liability where the 100% deeming rule applies. For existing development agreements entered into prior to 19 June 2019, care should be taken to ensure any amendments do not result in a dutiable economic entitlement.


This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

Non-arm’s length income – the impracticality of the Commissioner’s new policy

Accountants lodging your SMSF’s tax return – unless you lodge by paper, your actions may already be exposing your fund to a 45% tax rate, even if it is in pension phase!

I arrived at this conclusion after reading the Commissioner’s draft law companion ruling, LCR 2019/D3. This ruling outlines the Commissioner’s position regarding the recent expansion to the non-arm’s length income (NALI) provisions, which can apply to tax some or all of a superannuation fund’s income at 45% instead of the usual 15% or 0%.  The draft ruling follows changes to the existing law such that some or all of a super fund’s taxable income will now be ‘NALI’ where there is a non-arm’s length dealing regarding expenses incurred by the fund.  These changes came into effect from 1 July 2018 and apply irrespective of when the relevant arrangement commenced (i.e. there are no grandfathering provisions).

Based on the explanatory memorandum accompanying the amending legislation, it seems the law change occurred due to concerns that SMSFs were entering into arrangements to underpay (or not pay at all) for goods or services, potentially resulting in the SMSF making a higher profit than would arise under a completely commercial arm’s length situation.  Given the policy behind contribution caps is to restrict the flow of funds into super, I assume that there was some concern that such underpayments were being used to subvert the integrity of these caps.

However, these amendments seem to have been introduced with no consideration to the existing governance rules in the Superannuation Industry (Supervision) Act (SIS Act).  For example, section 109 of the ‘SIS’ Act requires a trustee of a fund to deal with other parties on an arm’s length basis in relation to investments of the fund.  The possible consequences of breaching this requirement include both civil and criminal penalties against the trustees rather than potentially large negative impacts on members retirement balances. Given the ATO is the Regulator for SMSFs, it already had the power to penalise such breaches.

Despite the pre-existing mechanisms (including the example above) which arguably should already deal with the perceived or real problem, we now have additional new laws to comply with.

Going back to the draft ruling, while the Commissioner indicates that the draft ruling is intended to clarify the operation of the law, there are a number of examples which have raised more questions than answers regarding the extent to which the Commissioner intends to enforce the rules.

Two particular contrasting examples from the draft ruling illustrate this.

Example 2 considers an accountant whose accounting firm provides accounting services to her SMSF without charging the fund for those services.  The conclusion drawn by the Commissioner is that this is a non-arm’s length arrangement (presumably the reason that the accounting firm is not charging for their time is due to its relationship with the individual trustee) and so all of the fund’s net income is NALI and taxed at 45% (as the expenditure does not relate to any single asset or income stream, but to the fund as a whole).

Example 6 provides a contrasting set of facts that is intended to confirm that a trustee of a fund can provide services in their trustee capacity without remuneration. In this example, the accountant uses their personal skills to do their SMSF’s return without use of the equipment or assets of her firm, and without lodging the return using her tax agent registration. In this instance, the Commissioner says that the NALI tax rate would not apply on the basis the accountant is acting in their trustee capacity.

To illustrate the effect of these examples, assume that the SMSF has $1 million of member funds, on which it derives a 5% return, i.e. $50,000 in the relevant year. Ignoring the NALI rules, and assuming the fund is in accumulation phase and that the accounting firm usually charges a $2,000 fee for the work, the SMSF’s tax liability would be $7,200 (i.e. ($50,000 – $2,000) x 15%). Simply due to the accountant’s firm not charging their normal fee, the Commissioner will now treat the fund’s entire income as NALI, resulting in the SMSF’s tax bill jumping from $7,200 to $22,500(being $50,000 x 45%).  If the fund was in pension phase then the tax bill goes from $nil to $22,500.  On these numbers the penalty appears harsh!

Clearly there would be other examples, such as a builder using their skills to maintain a fund’s rental property, a real estate agent managing their SMSF’s rental properties, or a solicitor’s firm assisting via discount conveyancing.

So how far will the Commissioner go with this? What if the accountant does the work herself using her firm’s accounting software (for no fee), but lodges in her trustee capacity (i.e. without using her firm’s tax agent licence)? Or she does nothing more than use her accounting firm’s photocopier?  Maybe the builder uses his work tools, or the solicitor uses the office electronic conveyancing system.  Is there a level where the ATO will concede no breach has occurred?  Looking at paragraph 39 of the ruling does not give much hope that he will, as these sorts of things appear to be ones where he would apply the NALI tax rate.

The changed rules also potentially conflict with another part of the SIS Act.  The definition of a SMSF requires that trustees do not receive any remuneration from the fund for any duties or services performed in their capacity as trustee.  If this rule is breached, the fund may cease to be a SMSF, so there is a strong incentive for trustees not to breach this rule.  There is an exception where duties or services are provided other than in the capacity as trustee where they are duties which the trustee performs as part of the services they provide to the public, and where the remuneration is no more favourable than an arm’s length dealing would have.  I note this exception requires remuneration to be charged for it to be available.

So the situation seems to be that if an accountant prepares the accounts and tax return through their firm’s software or other resources, and:

  • charges a fee, they must prove that the fee is at a market rate and that the services being provided are ones that the accountant otherwise provides (so if you are an auditor, an insolvency advisor or even an accountant who doesn’t have any super fund clients this might not be possible). There is a whole lot of minutes, letters back and forth and market price testing documentation that the ATO could expect you to have in this situation, and any flaws could cause the fund to breach the SIS Act such that the fund will cease to qualify as an SMSF; or
  • doesn’t charge a fee, then while the fund does not breach the SIS Act and is still a SMSF, all its income is NALI.

For those still wondering why I think more accountants may move to paper returns – if your SMSF has low expenses for a year and you lodge the return electronically through your firm’s tax agent registration, there is a far greater risk that the Commissioner will form the opinion that you provided a non-arm’s length service (lodgement for a below market or nil fee) has been provided and that they should apply the ruling to tax the fund at 45%. The electronic lodgement itself could be all the evidence the Commissioner needs to start a review or audit.

The trustees still have to lodge a tax return each year – if an electronic lodgement will cost thousands in NALI tax, then we all might be reaching for a ballpoint pen!

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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