Land Transfer Duty and Adverse Possession Claims in Victoria

Why acquiring land by possession is a dutiable transaction, how the State Revenue Office assesses it, and what claimants should budget for.

Introduction

While many people are familiar making a claim for adverse possession, the financial implications for the claimant are less well understood beyond the surveying and application fees. One example is the requirement for pay duty on the transfer.

In Victoria, acquiring land by adverse possession is often still treated by the State Revenue Office a dutiable transaction. The State Revenue Office assesses land transfer duty on the value of the land claimed, in much the same way as if the land had been bought. For many claimants this is the least expected cost of the process, and it is one that should be understood before an application is lodged.

How title passes on a successful claim

A common misconception is that adverse possession transfers the registered proprietor’s title to the possessor; it extinguishes it. Under section 18 of the Limitation of Actions Act 1958 (Vic), once a person has been in adverse possession for the limitation period, generally 15 years under section 8, the former owner’s title to the land is extinguished which then allows it to be claimed.

The possessor then holds a possessory title that is good against the world. To bring that title onto the register, the possessor applies to the Registrar of Titles under section 60 of the Transfer of Land Act 1958 (Vic) to be registered as proprietor. Sections 61 and 62 deal with objections and the Registrar’s powers. If the application succeeds, the Registrar registers the applicant as the proprietor of the land.

This mechanism matters for duty. Because there is no contract of sale and no transfer from the former owner, claimants often assume that duty cannot apply. That assumption is wrong.

Why duty applies: the acquisition is a dutiable transaction

Land transfer duty is imposed by the Duties Act 2000 (Vic). It is charged on dutiable transactions over dutiable property, which includes land in Victoria. A dutiable transaction is not confined to a transfer on sale. Section 7 of the Act lists a range of transactions that attract duty.

The registration of an adverse possession applicant falls within that list. When the Registrar of Titles registers the applicant as proprietor on a section 60 application, the land vests in the applicant by an order of the Registrar of Titles. A vesting of dutiable property by an order of the Registrar of Titles is a dutiable transaction under section 7(1)(b)(iii) of the Duties Act 2000 (Vic).

The absence of a vendor, a contract or a purchase price does not take the acquisition outside the duty net. Duty attaches to the vesting of the land, not to a sale. Acquiring land by adverse possession is dutiable in the same way as many other acquisitions of land that do not involve a sale.

How the duty is calculated

Duty is assessed on the dutiable value of the land. Under section 20 of the Duties Act 2000 (Vic), the dutiable value is the greater of the consideration for the transaction and the unencumbered value of the property. In an adverse possession claim there is usually no consideration, because nothing is paid for the land. Duty is therefore assessed on the unencumbered market value of the land claimed.

This is why a valuation is required as part of the application process. The applicant must establish the market value of the land being claimed, and the State Revenue Office assesses duty on that value. The land is valued on ordinary market value principles.

Duty is then calculated at the general land transfer duty rates. For a narrow strip along a boundary, the value is often modest and the duty correspondingly small. For a larger parcel, an entire allotment, or a substantial encroachment in a high value location, the duty can be significant. Claimants should treat the duty as a real cost of acquiring the land, not an afterthought.

The valuation is open to review. Where the applicant provides a valuation, the Valuer-General may assess the value independently. If that assessment materially exceeds the value put forward, the applicant may be required to bear the cost of the valuation. It is prudent to obtain a defensible valuation from a qualified valuer at the outset.

When the State Revenue Office assesses the duty

The process has changed over time. Historically, the instrument acquiring the land had to be stamped before it could be registered. That is no longer the position. The application is lodged with Land Use Victoria, and the State Revenue Office assesses duty in connection with the acquisition rather than by pre-stamping a document.

The person liable for the duty is the person who acquires the land, being the applicant. Duty is payable within the time allowed once an assessment issues, and interest and penalty tax can accrue if it is not paid. Claimants should allow for duty, and for the valuation that drives it, when budgeting for an application.

Successive possessors and assignments of possessory rights

Possession can be built up by more than one occupier. Where successive occupiers have each possessed the land, their periods can be aggregated, provided there is continuity of possession. This is often called tacking. On a sale of the possessing property, a deed of assignment of possessory rights is commonly used to pass the earlier occupier’s possessory interest to the buyer.

These assignments are no longer separately stamped. Duty is assessed on the acquisition that is ultimately registered, on the value of the land claimed. The assignment documents remain important as evidence of continuity, but they do not create a second charge to duty.

Related duty issues to watch

A negotiated boundary transfer is treated differently. Where neighbours resolve a boundary discrepancy by agreeing to transfer the disputed strip, rather than by an adverse possession claim, that transfer is a separate dutiable transaction. Duty is assessed on the greater of the price and the market value of the strip, and the transfer proceeds through the usual duty process.

Foreign purchasers should take advice. The foreign purchaser additional duty regime in the Duties Act 2000 (Vic) can apply to acquisitions of residential property by foreign purchasers. Whether it applies to an acquisition by adverse possession will depend on the facts, and it should be checked before an application is lodged where a foreign person or foreign corporation is involved.

Duty is not the only revenue consequence. Once registered, the applicant holds the land as owner for land tax purposes, and the newly acquired land forms part of the owner’s holdings from that time. On any later sale, the buyer will pay duty in the ordinary way.

Practical takeaways

For landowners, developers and their advisers, the practical lessons are straightforward. Obtain a valuation of the land to be claimed early, and treat it as the basis of the duty assessment. Budget for duty as a genuine cost of the acquisition, not a formality. Where the value of the land is significant, weigh the duty against the cost and certainty of negotiating a transfer or another resolution. Keep the evidence of possession, and of any assignment of possessory rights, in order, because it supports both the claim and the duty position.

While Best Hooper has experienced various treatments by the State Revenue Office on adverse possession claims, the most likely time for an assessment arises where there is a deed of assignment of possessory rights. However, it is important to always get advice to understand the financial impacts of any claim for adverse possession.

A claimant must also be careful to understand its own declaration obligations and not just think it can wait for the State Revenue Office to provide an assessment on its own initiative.

Conclusion

Adverse possession is one of the few ways in which land can be acquired in Victoria without buying it. It is not a way to acquire land without paying duty. The acquisition is a dutiable transaction, duty is assessed on the unencumbered value of the land claimed, and the State Revenue Office assesses that duty by reference to a valuation.

For a small boundary correction the duty may be minor. For a larger parcel it can be substantial. Either way, the sensible course is to identify the duty exposure, obtain a valuation, and budget for the cost before lodging an application, so that the duty is a planned expense rather than an unwelcome surprise.

This article is intended as general information only and does not constitute legal advice. You should seek specific legal advice in relation to your particular circumstances.