Substantive legislative reforms to the stamp duty law continue across several Australian states, including the major change, the introduction of a landholder duty regime in Victoria. We also provide an analysis of two recent land-rich duty decisions of the Victorian Court of Appeal.
In light of these recent legislative changes, you should reassess the potential stamp duty implications of any proposed investments in entities that own land in Australia. In particular, the scope of investments in land-owning entities that may be subject to duty in Victoria has been considerably broadened under the new Victorian landholder duty regime, for example, through the removal of the 60% "land-rich" test and the levying of duty on certain acquisitions of "economic entitlements".
In addition, you should note that the majority of states and territories have deferred the abolition of various duties, in particular, duty on the transfer of business assets, mortgage duty in NSW and unlisted marketable securities duty in NSW and SA, which were previously announced to be abolished on 1 July 2012.
Where you are uncertain of the stamp duty implications of existing or proposed transactions, in light of the recent legislative changes, you should seek professional stamp duty advice to ensure the correct stamp duty treatment.
1 JULY 2012 - STAMP DUTY LEGISLATIVE UPDATE
Victorian landholder duty regime
From 1 July 2012, a new landholder duty regime was introduced in Victoria to replace the existing land-rich duty regime. Broadly speaking, these rules will expand the type of arrangements involving the acquisition of interests in a Victorian land-owning entity that are subject to duty.
The key change under the landholder duty regime is that the existing 60% "land-rich" test will be removed and duty is now applied to acquisitions over the new acquisition thresholds in entities that hold land in Victoria valued at $1 million or more.
Key features of the landholder duty regime include:
- For the purposes of the landholder duty provisions, the concept of "land" is expanded and includes any item that is "fixed to the land", even if not a fixture under general law or is owned separately/legally separate from the land under other legislation.
- Acquisitions of 90% or more in landholders that are listed companies, listed trusts or widely held trusts are now subject to duty. However, the rate of duty is 10% of the general rate, provided the entity has held the relevant status for at least 12 months.
- Acquisitions of "economic interests" (eg synthetic instruments) in landholders can also trigger landholder duty.
- The acquisition thresholds to trigger landholder duty (ie for
"significant interests") are as follows:
- For a private trust: 20% or more (unlike other states and territories, this has not been increased to 50%)
- For a private company or a wholesale trust: 50% or more
- For a listed company or trust: 90% or more.
- There have been minor changes to the requirements for a "wholesale unit trust" and "qualified investor".
- Certain transitional provisions will apply to interests acquired prior to 1 July 2012.
The Victorian landholder duty regime has some key differences with the landholder duty regimes in most other Australian states and territories (eg different acquisition thresholds for unit trusts and companies, levying of duty on "economic entitlements"). In this regard, transactions involving acquisitions in entities that own land in various Australian jurisdictions will be increasingly complex and you should be aware that the stamp duty treatment in each jurisdiction will not necessarily be consistent.
Deferral of abolition of stamp duties
Various states and territories in their 2012 Budgets have deferred the abolition date of certain duties, in particular, share transfer duty and business transfer duty, as follows:
- NSW: The abolition of duties on share/unit transfers, non-land business transfers and mortgage duty has been deferred to 1 July 2013 (all previously 1 July 2012).
- SA: The abolition of duties on share/unit transfers (previously 1 July 2012) and non-land business transfers has been deferred indefinitely (previously 1 July 2013).
- Qld: The abolition of duties on non-land business transfers has been deferred indefinitely (previously 1 July 2013).
- NT: The abolition of duties on non-land business transfers has been deferred indefinitely (previously 1 July 2012).
ACT landholder duty – unit trust acquisition threshold
From 1 July 2012, the acquisition threshold for landholder duty in ACT for unit trusts was increased from 20% to 50%, to align with the rules in other states (excluding Victoria).
Land-rich/landholder duty – current thresholds
|Land Value Threshold||Asset % Threshold||Acquisition Threshold||Listed entities?||Goods dutiable?|
* 20% for unlisted unit trusts
COMMISSIONER OF STATE REVENUE (VIC) V SNOWY HYDRO LTD  VSCA 145 - JOINT VENTURE ASSETS AND LANDRICH DUTY
The Victorian Court of Appeal held that the acquisition of all the shares in a company, La Trobe Valley BV, was subject to land-rich duty, on the basis that the value of the power plant facility owned by its wholly owned subsidiary was not to be reduced for the interest of a joint venture partner in the power facility.
In 2005, the taxpayer purchased all the shares in La Trobe Valley BV (LVBV). Its wholly owned subsidiary, Valley Power (VP), owned land in Victoria on which it operated an electricity power plant under a Joint Venture Agreement (JVA) with Contact Peaker Australia Pty Ltd (CP). The power plant assets included land, buildings, cabling and piping, six electricity generating units and other plant and equipment.
Under the terms of the JVA, VP held a 60% interest and CP held a 40% interest in the joint venture. VP was the legal owner of the land and generators. VP leased two of the generators to CP. The parties agreed to use the joint venture assets to produce electricity, which was to be owned in the agreed proportions.
The parties also entered into a trading agreement at the same time as the JVA, under which VP entered into certain hedge contracts (Cap Contracts), which generated substantial revenue for the joint venture. The Cap Contracts were in VP's name but, under the Trading Agreement, VP received 40% of the Cap Contract revenue on behalf of CP.
The Commissioner assessed the taxpayer for duty on the share purchase on the basis that LVBV was "land rich" for the purposes of the Duties Act 2000 (Vic) (the Act) via its ownership of the shares in VP. The Commissioner also imposed a 20% penalty on the basis that the taxpayer had failed to take reasonable care.
The key issue was whether the value of LVBV's land holdings (being the numerator in the relevant formula) comprised 60% or more of the value of all its assets (being the denominator in the formula).
At first instance, the Supreme Court allowed the taxpayer's appeal against the Commissioner's assessment on the basis that the JVA gave CP a 40% equitable proprietary interest in the land and generators for the period of the joint venture, which reduced the value of LVBV's attributed land holding for duty purposes such that the 60% threshold was not reached.
The Commissioner appealed and the taxpayer also cross-appealed on certain other matters.
In a joint decision, the court (Maxwell P, Redlich JA and Robson AJA) allowed the Commissioner's appeal and dismissed the taxpayer's cross-appeal, and held that:
Numerator - VP's landholdings
- The generators were fixtures for the reasons provided by the Supreme Court at first instance. It was abundantly clear that the units were installed on the land "for the long term use of that site as a gas turbine electricity generation plant". The units were bolted to the ground so that the entire site could function safely and efficiently as a power plant, to which purpose the site had been unconditionally, and indefinitely, dedicated.
- Based on the terms of the JVA, CP had no equitable interest in the land and thus the value of VP's interest in the land was not to be reduced for CP's interests under the JVA. There was no statement or clear intention in the JVA for VP to convey a proprietary interest in the land to CP. In fact, the actual terms of the JVA and other documentary evidence (eg external valuations) indicated that CP did not have any proprietary interest in the land (excluding its leasehold interest in two of the generator units). The mere fact that the JVA provided CP with a share in the proceeds from a sale of the power plant facility was not sufficient to indicate an intention to transfer a proprietary interest in the land - "an agreement to share proceeds of sale says nothing about ownership". CP's interest in respect of the land was merely a contractual right for the land to be available to the joint venture for the agreed purpose.
- There was no question regarding the admissibility of the JVA, since the JVA did not transfer any proprietary interest in the land to CP (and thus was not required to be stamped).
- CP's contractual rights under the JVA in respect of the land was to be disregarded in determining the "unencumbered value" of VP's interest in the land.
Denominator - Other assets owned by VP
- The Cap Contracts should have been included in the denominator at 60% of their full valuation, rather than 100%. The clear intention of the parties, based on the terms of the Trading Agreement, was for VP to hold the contracts on trust (or alternatively as agent), to the extent of 40%, for CP.
- The lease receivable (in respect of the land) should not be included in the denominator as a separate asset from the land. The valuation of VP's total assets for the landrich formula denominator could not properly include both the agreed value of VP's unqualified freehold interest in the land and the value of its right as lessor of the two units to receive rent. Such a computation would have "double counted" the value of VP's right to lease the land. The court also refused the taxpayer leave to advance, which was raised for the first time during the appeal, the alternative argument that the land could have been valued on a different basis (ie by disaggregating the lease receivable from the reversionary interest in the land).
- The spare generator unit should have been included in the denominator at 100% of valuation.
Computation of duty and penalties
- Based on the above, LVBV was land-rich for duty purposes (land assets comprised 67.7% of its total assets).
- The Commissioner ought to have concluded that the taxpayer had taken reasonable care and reduced penalties accordingly. The seeking of legal advice showed, unambiguously, that the taxpayer wished to know whether it had any obligations under the Act and, if so, what they were. Seeking legal advice was both necessary and sufficient for that purpose, on the basis that the question of liability to duty raised issues of considerable complexity. The seeking of a private ruling further signified the taking of care to ensure compliance. On this basis, the 25% penalty tax was reduced to nil.
Impact for taxpayers
Although Victoria replaced its land-rich duty regime with a landholder duty regime from 1 July 2012, this decision is still highly relevant for taxpayers when identifying the nature and value of land interests for stamp duty purposes. In particular, the valuation of land is a key factor in determining the amount of duty payable in respect of a transfer of land or interests in a landholder.
The decision of the Court of Appeal highlights the importance of appropriately drafting clauses in JVAs (and other similar agreements) that involve interests in land to properly reflect the commercial intention of the parties and the expected stamp duty outcomes of their arrangements. Where taxpayers are uncertain of the potential stamp duty implications of their joint venture or similar arrangements, they should seek professional stamp duty advice to ensure that their agreements are appropriately drafted and are aware of the potential stamp duty outcomes (as well reducing the potential exposure to penalties).
Commissioner of State Revenue v Australand Investments Ltd  VSCA 152
We also note that the Victorian Court of Appeal has recently handed down its decision in another landrich duty case, Commissioner of State Revenue v Australand Investments Ltd  VSCA 152. This case concerned the application of land-rich duty to the acquisition of interests in two property trusts resulting from a stapling transaction, as a conversion of a public unit trust to a private unit trust. The court dismissed the appeal and held that a transitional provision applied to exclude duty on the acquisition of the units in one of the trusts. However, the court held that the transitional provisions did not apply to the acquisition of interests in the second trust.
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