We are aware of an increase in compliance activity being undertaken by the State Revenue Office (SRO) in relation to investigating the potential application of the sub-sale provisions to nominations and land sale contracts.

The sub-sale provisions can operate to impose duty on the nominated purchaser and the purchaser that signed the sale contract (i.e. double duty) in circumstances where ‘additional consideration’ has been paid for the nomination or ‘land development’ occurs after the day of sale or option deed and prior to nomination.

Nominations between related parties to accommodate a different land holding structure can result in particularly adverse duty outcomes where the parties undertake land development prior to the nomination.

This article provides a recap on when the sub-sale provisions can apply and highlights common mistakes that can be made by developers when dealing with nominations and the sub-sale provisions.

Recap on the sub-sale provisions

Part 4A of the Duties Act 2000 (Vic) (the Act) contains rules that operate to treat certain transactions as sub-sales of land. The transaction and circumstances that can result in the operation of the sub-sale provisions can be broadly summarised as follows:

1. a contract of sale for land is entered into by a party (first purchaser) where another party (subsequent purchaser) obtains a right (transfer right) to have the land transferred to it (by nomination or otherwise) and either:
   ‘additional consideration’ is paid by the subsequent purchaser or a related party for the transfer right
   ‘land development’ occurs prior to the subsequent purchaser obtaining the transfer right.

2. an option over land is granted to a party (first purchaser) and another party (subsequent purchaser) obtains or assumes a transfer right in relation to the land under the option and ‘additional consideration’ or ‘land development’ occurs in circumstances as set out above relating to land contracts.

The provisions are complicated and contain intricacies and carve outs in certain circumstances, which need be considered carefully prior to a developer making any nominations or assignments under a contract of sale of land or a call option over land.

In particular, we have found that developers have encountered issues with the sub-sale provisions in circumstances where an entity signs the initial contract of sale and subsequently sets up a new structure to settle the property. (Particular care needs to be taken prior to nomination, especially if developers are considering undertaking any ‘land development’ after signing the contract of sale.)

‘Land development’ for the purposes of the sub-sale provisions is defined very broadly and can include:

• applications for planning or building permits (including amendment applications)
• appointment of consultants such as architects, planners or builders
• preparing a plan of subdivision or taking steps to have it registered
• developing or changing the land in any other way that would lead to its enhancement of value.

It generally does not matter which party actually undertakes the land development.

If the sub-sale provisions apply, duty is imposed on both the party that signed the sale contract (or was granted the option) and on the party that takes a transfer of the land. The provisions therefore result in duty being paid twice for the one land acquisition.

Increased SRO investigations

We have experienced an increase in compliance activity being undertaken by the SRO in relation to whether developers have complied with the sub-sale provisions. The investigations seem to be targeted at known or suspected breaches of the sub-sale provisions.

In particular, the SRO seems to be focusing on whether land development has occurred prior to a nomination being made under a sale contract. The SRO is becoming more sophisticated in its investigation procedures and appears focused on the following:

• reviewing duties forms lodged with the SRO that disclose acquisitions that occurred following nominations
• liaising with Councils and their register of building and planning permits to determine whether any applications (including amendments) for building or planning permits relating to the property were lodged with Council
• cross referencing the date of contract and date of nomination disclosed in the SRO declarations against the date any such permit applications were lodged.

If the SRO suspects non-compliance it will initiate an investigation under section 73 of the Act, which can be months to years after settlement of the property. Section 73 provides the SRO with broad powers to request any relevant documents to the transaction be provided to the SRO.

If an investigation results in assessments being issued, penalties and interest (at a premium rate) will also generally be imposed given incorrect disclosures would have been made at the time of transfer.

It is therefore important that developers take great care and obtain appropriate advice prior to undertaking any form of ‘land development’ after signing a contract and prior to nominating any subsequent purchaser under a contract or option.

It is therefore important that developers take great care and obtain appropriate advice prior to undertaking any form of ‘land development’ after signing a contract and prior to nominating any subsequent purchaser under a contract or option.