The Victorian Government has recently announced changes to the Duties Act 2000 which has resulted in some good news and some bad news for those involved in real estate development.
The good news — Decreased duty when home builders buy multiple lots of land
Under the old regime, a house builder who purchased multiple lots from one vendor within 12 months of each purchase may have had to pay stamp duty based on the total value aggregate value of the land rather than the value of each individual lot.
The Commissioner of State Revenue had discretion, in certain circumstances, not to aggregate the value of individual lots but only if he deemed it was “just and reasonable” to do so.
The new regime removes the Commissioner’s discretion and introduces a specific exemption for registered house builders who:
- enter into transactions to purchase multiple lots of vacant land; and
- intend to construct residential houses on the vacant lots to sell to the public.
Under the new regime, the house builders will only incur stamp duty on the value of the individual lots of land.
This is good news for house builders who purchase multiple lots of land for house and land packages as they will incur a lower amount of duty.
Example
David purchases 5 blocks of land for $200,000 from the same vendor with an aggregate value of $1,000,000.
Old Regime | New Regime |
Dutiable Value: $1,000,000 Total Duty: $55,000 | Dutiable Value: $200,000 Duty Per Lot: $7,070 Total Duty: $35,350 |
Under the new rules, when purchasing 5 blocks of land for $200,000, David will pay $19,650 less duty.
The bad news — Double Duty when builders nominate
Double stamp duty is payable when a buyer of vacant land nominates a substitute purchaser if the substitute purchaser pays (in addition to the price payable under the contract) additional consideration, i.e. pays the original buyer a fee for the nomination.
When additional consideration is paid, one lot of stamp duty is paid by the original purchaser and a second lot of stamp duty is paid by the person nominated under the contract of sale — ‘double duty’.
The concept of additional consideration has been expanded by the State Tax Act 2012 and house builders who nominate substitute purchasers under a contract of sale for vacant land may now incur duty.
Parallel Arrangements — Applies to contracts entered into from 28 June 2012
The new regime, which applies to contracts entered into from 28 June 2012, introduces the concept of Parallel Arrangements being deemed to be additional consideration.
A Parallel Arrangement is when a house builder nominates a substitute purchaser under a contract of sale for a vacant block of land and, within 12 months, enters into a contract with the nominated purchaser to build a house on the land.
The money paid to the house builder under the Parallel Arrangements is now considered to be additional consideration for the right to be nominated as a subsequent purchaser. Both the house builder and the subsequent purchaser will be liable for stamp duty on the purchase of the vacant lot – ‘double duty’.
The changes may also affect developers who buy rundown apartment buildings, nominate substitute purchasers and then renovate the building.
Example
David (a builder) purchases a vacant block of land. Within 12 months of entering into the contract of sale, David then enters into a construction contract with Betty to build a house on the vacant lot. David nominates Betty as a subsequent purchaser under the contract of sale.
Old Regime | New Regime |
Only Betty would pay stamp duty on the transaction. | Both David and Betty would pay stamp duty on the transaction — double duty! |
Our advice
The changes to the Duty Act inevitably means that house builders will reconsider ‘parking’ vacant lots to build on.
Builders who purchase individual lots and cannot bear the risk of purchasing land without on-selling to home buyers will be hardest hit by the new amendments.
On the other hand, builders who purchase multiple lots to build on will enjoy a stamp duty saving.
Only time will tell how these amendments affect prices of vacant land and new houses, the majority of which are bought by first home buyers who are invariably very price sensitive.
More information
For further information relating to Stamp Duty changes, please contact a member of our Property team on (03) 8600 8888.
Note: This update is a guide only and is not intended to constitute legal advice.