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New stamping ground from land rich to landholder duty

Feature Articles

Cite as: December 2012 86 (12) LIJ, p.36

Duty charged on transfers of shares or units in & landholder companies or trusts is an ever-widening risk area for practitioners and their clients. (See the following article by Kathryn Bertram for another perspective.)

By Michael Norbury

On 1 July 2012, Victoria changed from a system of assessing duty on “land rich” transactions to assessing duty on “landholder” transactions. The change was effected by making substantial amendments to Chapter 3 of the Duties Act 2000 (Vic),1 which took effect on 1 July 2012.

Background

“Land rich” provisions were introduced into the Stamps Act 1958 (Vic) in October 1987. They were introduced as an anti-avoidance provision.

Prior to that time, shares in land-owning companies or units in land-holding unit trusts were sometimes transferred between assignor and assignee, rather than transferring the underlying land, as a means of reducing stamp duty in respect of the transaction. The reduction in stamp duty was achieved because stamp duty was charged on the value of the shares or units (having regard to the liabilities of the company or unit trust) at the rate of 0.6 per cent, rather than on the unencumbered value of the underlying land at the rate of 5.5 per cent.

Since that time, the “land rich” provisions have been progressively widened, turning them into a source of duty in their own right rather than a mere anti-avoidance provision. The changes which came into effect on 1 July are a further step in that process. Treasury estimates that the change will raise an extra $50–75 million in duty revenue in Victoria each year.2

By converting to a “landholder” duty model, Victoria has followed the lead of the other states. Only Tasmania retains a “land rich” regime.

The changes

Removal of 60 per cent threshold

This is the primary change.

Under the land rich provisions, as first introduced and remaining in place until the end of June 2012, two tests had to be satisfied in order for a share transfer or unit transfer to be caught in the land rich provisions:

  • The unencumbered value of Victorian land in the landholder (“landholder” means a company or unit trust which holds Victorian land) must have exceeded $1 million.
  • The unencumbered value of land (anywhere in the world) held by the landholder as a proportion of the total assets of the landholder must have exceeded 60 per cent.3

This second test has now been removed. Any landholder holding Victorian land with a total unencumbered value of $1 million or more is caught by the new provisions: s71(1).4 This is so regardless of the liabilities or the other assets of the landholder.

Definition of “land”

The definition of “land” has been expanded for the purposes of the landholder provisions.

Land now includes anything fixed to land, whether or not the item:

  • constitutes a fixture at law, or
  • is owned separately from the land, or
  • is notionally severed or considered to be legally separate to the land as a result of the operation of any other Act or law: s73(1).

Furthermore, a thing can be fixed to the land by a physical connection to the land. According to the Explanatory Memorandum: “A physical connection to land will ordinarily require something more than the item merely resting on the land on its own weight” (p8). Land includes tenants’ fixtures if they would be included in the value of the land by s22A: s73(2), (3).

It is possible to have tenants’ fixtures excluded from the value of the land, but only if the Commissioner of State Revenue makes a determination in the taxpayer’s favour: s73(5). Consider a factory in Victoria with a value of $990,000, which is owned by a unit trust. An unrelated third party is tenant and has fixtures in the factory with a value of $1,010,000. All the units in the trust are sold. Without a determination from the Commissioner, duty will be assessed on a $2 million sale. With a determination, there will be no duty because the value of the factory is below the threshold.

Goods that would be excluded under s10(1)(d) from the definition of “dutiable property” are also excluded from the calculation of value for “landholder” purposes: s73(4).

As with the land rich provisions, the value of land that is the subject of an uncompleted agreement is included in the definition of “land”, but the definition has been expanded to include the grantee of a put option or the grantor of a call option, and includes an arrangement that includes both a put and a call option: s74(2).

Significant interests

What constitutes a “significant interest” (s79(2a)) and therefore triggers a liability is set out in Table 1 below.

The inclusion of listed entities is new; what constitutes a “significant interest” for other forms of companies and trusts is unchanged.

The timeframe within which the significant interest must be acquired is now unlimited. The three-year period contained in the former s79 has been removed. However, duty is paid in respect of all the transactions made in the previous three years. Thus, in year one a person purchases a 30 per cent interest in a private company. In year five the person purchases another 30 per cent, a total of 60 per cent. Duty is payable, but only by reference to those acquisitions that have occurred in the previous three-year period, i.e. 30 per cent: s86.

Acquisition of a significant interest

The acquisition of a significant interest includes:

(a) the purchase, gift, allotment or issue of a unit or share;

(b) the cancellation, redemption or surrender of a unit or share;

(c) the abrogation or alteration of a right pertaining to a unit or share; and

(d) the payment of an amount owing for a unit or share (s80(2)),

which remains unchanged, but “acquisition” has been expanded to include the acquisition of an economic entitlement: s81.

“Economic entitlement” means an acquisition where shares or units in a landholder are acquired other than by an acquisition covered elsewhere, and includes arrangements in relation to “private landholders” where the private landholder will (s81(2)):

“(a) participate in the dividends or income of the private landholder;

(b) participate in the income, rents or profits derived from the land holdings of the private landholder;

(c) participate in the capital growth of the land holdings of the private landholder;

(d) participate in the proceeds of sale of the land holdings of the private landholder;

(e) receive any amount determined by reference to paragraph (a), (b), (c) or (d);

(f) acquire any entitlement described in paragraph (a), (b), (c), (d) or (e)”,

but is aggregated only with those events of economic entitlement occurring within a three-year period: s81(5).

The Explanatory Memorandum explains that s81 is an anti-avoidance mechanism (p154). It operates to impose duty on transactions where the economic benefit of ownership of land is acquired other than by a relevant acquisition elsewhere listed in the landholder duty provisions. The State Revenue Office (SRO) provides two examples of the operation of the “economic entitlement” provisions on its website.5 In those examples, where a person becomes entitled to value equivalent to either a portion of or all the capital interest in the land without triggering either s80(1) or any of the events in s80(2), a duty liability arises.

It might be fairly said that these provisions are introducing an entirely new head of duty: there was no equivalent head of duty in the former provisions.

The “acquisition of control” provision (s82) is largely unaltered, except that it adopts the economic entitlement definition contained in s81. It retains the requirement to occur within a three-year period.

There is no longer a requirement that money or other valuable consideration flow from one party to the other, although this will usually be the case.

Conversion from private to public

New provisions have been included that deal with the conversion of a private unit trust scheme to a public unit trust scheme, and from an unlisted company to a listed company: ss89B, 89C.

If under the agreement or arrangement which results – in the case of a unit trust, the trust becoming a public unit trust, and in the case of a company, listing – there is any acquisition of interests, there is a deemed relevant acquisition of 100 per cent in the public entity. The Commissioner is obliged to calculate the unencumbered value of all the entity’s land holdings in Victoria and levy duty on that amount: s87(1).

As with the operation of landholder duty generally, where a liability arises as a result of conversion from private to public, the party making the acquisition and the landholder are jointly liable to pay the duty: s85(1).

Rates of duty

The rate of duty applicable generally follows that which was imposed by the land rich provisions. The rate is now set out in s86:

“(1) Duty on a relevant acquisition in a private landholder is chargeable, at the rate specified under this Act for a transfer of dutiable property, on the amount calculated by multiplying the unencumbered value of all land holdings of the landholder in Victoria (calculated at the date of acquisition of the interest acquired) by the proportion of that value represented by the interest acquired in the relevant acquisition.

(2) If a relevant acquisition results from the aggregation of the interests acquired by all or any of the following—

(a) a person; or

(b) an associated person; or

(c) any other person in an associated transaction—

a reference in subsection (1) to the interest acquired includes a reference to any interest acquired by those persons on the same day”.

However, the acquisition of interests in a public landholder is charged at a concessional rate of 10 per cent (s87), except where the public landholder has been listed, or registered, or otherwise satisfied the definition of widely held trust for less than 12 months – in which case the non public rate applies rather than the concessional rate: s88.

Exemptions

The same exemptions apply to landholder transactions as for transactions to which Chapter 2 would apply if there had been a transaction involving a direct interest in land: s89D.

However, the “just and reasonable” ground contained in the former s85(2)6 has been removed and replaced with a new “alignment” provision (s89E):

“(1) Subject to subsection (3), this section applies to a relevant acquisition if the Commissioner, having regard to all the facts and circumstances, is satisfied that—

(a) the application of this Part results in an anomalous duty outcome; and

(b) the duty payable under this Part is greater than the duty that would be payable under Chapter 2 had the subject of the relevant acquisition been a transfer of the land of the landholder to the person.

(2) The Commissioner may reduce the duty payable to an amount not less than the duty that would be payable under Chapter 2, had the subject of the acquisition been a transfer of the land of the landholder to the person.

(3) This section does not apply to a relevant acquisition that is the acquisition of an economic entitlement under section 81 or the acquisition of control under section 82”.

Perhaps the deletion of the just and reasonable ground is in response to the Supreme Court decision in Commissioner of State Revenue v STIC Australia Pty Ltd & Anor.7

Time for payment

In line with the changes made to the Duties Act generally in April 2012, the landholder duty must be paid within 30 days after the liability to pay the duty arises: s84.

Phasing in

In one aspect of the new regime, the taxpayer is better off.

The phasing-in range has been extended, from $1,000,000–$1,500,000 (unaltered since 1987) to $1,000,000–$2,000,000: s89. Thus, the amount of duty levied on a transaction that is within the range $1,000,000–$2,000,000, provided it would have been a land rich transaction under the former law, will be lower under the landholder provisions.

Transitional provisions

Special transitional provisions apply as follows (Sch 2 cl 31):

  • Interests acquired in a landholder prior to 1 July 2009 will not be aggregated with a transaction occurring on or after 1 July 2012.
  • Interests acquired in a listed entity prior to 1 July 2012 will not be aggregated with those acquired after that date.
  • An economic entitlement acquired by a person prior to 1 July 2012 will not be aggregated with one acquired after that date.
  • Duty will not be chargeable in respect of an interest acquired on or after 1 July 2009 and prior to 1 July 2012 if the interest was not acquired in a land rich landholder under the former provisions.
  • A wholesale unit trust or a public unit trust registered under the land rich duty provisions will continue to be taken to be registered under those provisions until the registration expires.
Other provisions

Many of the new provisions relating to other important areas of the landholder duty regime – such as constructive ownership of linked entities and discretionary trusts, the creation of acquisition statements, and who is liable to pay – remain unchanged; they are simply the former sections renumbered.

Conclusion

The provisions of the Duties Act relating to land rich duty and now landholder duty are not well understood, and are often overlooked. It is easy to overlook the duty consequences of a transaction where no money changes hands – for instance, when settling litigation involving the ownership of disputed shares in a land-owning company. It is also easy to overlook duty when dealing with the effects of the various federal taxes on particular transactions. Those who are knowledgeable in relation to federal taxes may not have the same knowledge of the Duties Act.

The SRO has a landholder duty section, which is active in its investigation of transactions where a liability for landholder duty might arise. It appears that the SRO conducts data matching using information relating to changes in shareholding obtained from ASIC returns. The SRO has not been slow in charging interest and penalties in circumstances where landholder duty should have been paid but has not been paid. There is no indication that this approach will be any different under the new regime.

The landholder provisions of the Duties Act are complex and can be difficult to follow, but practitioners can protect themselves. Simply remember that every transaction involving either shares in a company or units in a unit trust – where the company or the trust owns land or tenants’ fixtures, or both – is potentially a transaction that attracts duty, and alert your clients to take action accordingly. Failure to do so may well be a breach of practitioners’ duty to their clients.

Table 1: Significant interests (%)

Landholder Significant interest

Non-listed company 50%

Listed company 90%

Unit trusts

– public 90%

– private 20%

– wholesale 50%



MICHAEL NORBURY, chartered tax adviser, is a partner with Madgwicks Lawyers.

1. Duties Amendment (Landholder) Act 2012 (Vic) (No. 38 of 2012).

2. 2011 Victorian Budget Papers. The Treasurer’s second reading speech anticipated an increased revenue of $125–150 million per annum.

3. 80 per cent when first introduced.

4. References to specific sections relate to the Duties Act unless otherwise indicated.

5. Look for “Landholder Acquisition” under “Taxes and Duties”: “Duties” on the SRO website, www.sro.vic.gov.au.

6. “An acquisition by a person of an interest in a landholder is an exempt acquisition if the Commissioner so determines, being satisfied that the application of this Part to the acquisition in the particular case would not be just and reasonable.”

7. [2010] VSC 608.

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