“Parallel arrangements” – one of Victoria’s remaining double duty snares

Nomination is a handy tool – don’t be scared of it.  But be aware that the Duties Act is designed to levy double duty on a “nomination” if you step outside of the boundaries.  Here’s how a “parallel arrangement” can catch you out.

Stepping on the double duty land mine

Rob and Bob are builders.  They are 50/50 partners.  They like to buy land, build on it and sell it again.  Rob contracts (personally) to buy some land but he intends to put it into a new company.  So far, no problem.

Rob and Bob realise they’re a bit stretched.  Rob talks about the land with his mate, Sam, who is a property developer.  Sam likes the land and the opportunity, so he agrees to complete the purchase.  Rob nominates Sam as an alternative purchaser under the contract.

Sam is simply stepping into the contract and doing no more than paying the agreed contract price (and reimbursing Rob for the deposit paid), there is no “consideration” passing between them.  Rob is not getting any benefit out of this deal.  So far, still no problem.

Sam obtains a permit really quickly and is ready to start building on the land soon after settlement.  He talks to some builders (including his mates Rob and Bob) and asks for quotes to build some dwellings on the land.  After some negotiation, Sam favours the quote from Rob and Bob, so he signs a building contract with Rob and Bob’s building company.

“Parallel arrangements” – one of Victoria’s remaining double duty snares | Moores

Boom – without knowing it, they just incurred double duty.  Although he never settled his purchase of the land, Rob is about to get a duty bill.

Ouch.  How did that happen?

Here’s how:

  1. Section 32B of the Duties Act imposes duty on a sub-sale where the nominee (in this case, Sam) gives or agrees to give ‘consideration’ (ie, something of value) in exchange for the nomination.
  2. Although Sam has not paid anything or agreed to give anything of value to Rob or Bob in exchange for the nomination, Sam has entered into a “parallel arrangement”.
  3. A “parallel arrangement” is where Sam (as the subsequent purchaser) asks Rob (the first purchaser) or an “associate” of Rob, to build on the land.
  4. If the building contract is signed within 12 months of the nomination, then the Duties Act deems that Sam has given additional consideration to Rob in exchange for the nomination.  Intention has nothing to do with it – they’re treated as if Rob’s nomination of Sam was conditional on Sam giving Rob the building work.
  5. Sam has already paid duty after settlement, but Rob hasn’t. Rob thought he just nominated and walked away without any further problems.  Since Rob’s building company (as “associate” of Rob) signed the building contract with Sam within 12 months of the nomination, Rob will be treated as having bought the land then sold again – he gets his own invoice for duty.

Nasty huh?

Here’s the golden rules

  • If you’re a builder, don’t sign a contract of sale for a client.  Ever.
  • If you’ve got a group companies, which includes a building company, avoid the building company signing a contract of sale.
  • If you do need to make a nomination to a third party, ask for an indemnity against any duty that might be imposed.  After all, if you’re not making any profit out the nomination, why should you carry the risk?

If you would like more information, please do not hesitate to contact us.

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