Matthew McKee, Partner at Brown Wright Stein, discusses how private landholder duty can apply in NSW in unexpected circumstances. The potential for landholder duty hinges on two concepts – ‘landholder’ and ‘relevant acquisition’ – and these concepts are extremely broad, he writes.
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There is the potential for landholder duty to apply any time that a person obtains an increased interest in a company or a unit trust. Even when the company or unit trust does not own any land. Recognising the potential for landholder duty to apply can help to prevent a nasty surprise.
Why?
Because the potential for landholder duty hinges on two concepts – ‘landholder’ and ‘relevant acquisition’ – and these concepts are extremely broad.
There are two different landholder duty regimes; one for ‘private landholders’ and one for ‘public landholders’. This paper only deals with the regime for private landholders.
Landholder
A landholder is a company or unit trust which has landholdings in New South Wales with a registered value of $2 million or more.[1]
Now comes the sting.
Deemed landholdings
The landholdings of a company or unit trust can include land owned by other entities, including as follows
1. land owned by ‘linked entities’ where the company or unit trust would be entitled on distribution to all of the property of each entity in the chain of the linked entities. The linked entity deeming would apply, at the very least, to include the landholdings of any companies or unit trusts in which a company or unit trust has a direct or indirect interest of 50% or more;
2. the landholdings of a company or unit trust also include any land held by a discretionary trust of which the company or unit trust is a beneficiary, whether or not the unit trust or company is a named beneficiary. If a discretionary trust and a unit trust or a company are controlled by the same family group, for example, there is a strong likelihood that the unit trust or company will be a beneficiary of the discretionary trust and, if the assets of the discretionary trust include land, that land is deemed to be owned by the unit trust or company in determining if it is a landholder.
3. land that the company or unit trust has contracted to purchase but the purchase has not yet completed.
Trap: transfer of shares in corporate trustee – Transferring shares in a corporate trustee of a discretionary that owns no assets in its own capacity can have duty implications if the trust assets include direct or indirect ownership of land in New South Wales. This will be the case where the trustee is also beneficiary of the discretionary trust as the trustee will be deemed to own all of the land of the trust.
Where a corporate trustee of a trust that directly or indirectly owns land with a registered value of $2 million or more is a beneficiary of the trust, it is prudent to exclude the trustee as a beneficiary prior to making changes shareholdings in the corporate trustee.
Relevant acquisition
A person makes a ‘relevant acquisition’ where they obtain an interest in a landholder of, or their existing interest increases to, 50% or more. It does not matter how the interest increases. For example, a redemption of one unitholder’s units in a unit trust may cause another unitholder’s interest to increase and, therefore, for that other unitholder to make a relevant acquisition.
There are also aggregation provisions. A person’s interest is aggregated with the interest of any ‘associated persons’ in working out if they have made a relevant acquisition.
A person’s interest will also be aggregated with non-associated persons if they acquire their respective interests under an acquisitions that form, evidence, give effect to or arise from what is substantially one arrangement between them as acquirers. This single arrangement aggregation is a recent change to the landholder duty provisions in New South Wales and appears to results in a landholder duty exposure for a sale of shares in a company or units in a unit trust to multiple non-associated purchasers as part of one sale where each purchaser does not by themselves obtain an interest of 50% or more.
A person can acquire an interest if they begin to hold an interest in a different capacity. For example, if a person acquires an interest from an ‘associated person’, that may be a relevant acquisition even though the associated person’s interest was taken into account when the person acquired their original interest under the aggregation provisions.
Trap: three year period – When a person makes a ‘relevant acquisition’, the person is required to lodge an ‘acquisition statement’ showing all acquisitions that they made in the landholder in the past 3 years. Duty is charged on each acquisition in the three year period, irrespective of whether a particular acquisition was a ‘relevant acquisition’ or whether the value of the landholdings of the company or unit trust exceeded $2 million at the time of the acquisition.
Some examples demonstrate the traps that this may pose:
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Example 1: Earlier acquisition made within three year period
Person A acquires 43% of the shares in a company that is a landholder.
12 months later Person B, an associated person of Person A, acquires 9% of the shares in the company.
The second acquisition is a ‘relevant acquisition’ as between them Person A and Person B have an interest of greater than 50%.
Duty is charged on the 52% as the earlier acquisition was made in the 3 year period.
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Example 2: Earlier acquisition made within three year period but when entity not a landholder
Person A acquires 43% of the shares in a company that has landholdings in NSW with a registered value not exceeding $2 million.
24 months later Person B, an associated person of Person A, acquires 9% of the shares in the company. By this time, the value of the landholdings held by the company have increased to be above $2 million.
The second acquisition is a ‘relevant acquisition’ as between them Person A and Person B have an interest of greater than 50%.
Duty is charged on the 52% as the earlier acquisition was made in the 3 year period despite the fact that the company was not a landholder at the time of that earlier acquisition.
The period can be longer than three years where an earlier acquisition is related to the ‘relevant acquisition’. An earlier acquisition will be related to a ‘relevant acquisition’ where the acquisitions are made as part of a single arrangement.
Exemptions?
There are some exemptions from landholder duty. The most commonly encountered are the exemptions for restructuring of corporate groups and for transfers in relation to deceased estates. Each of these exemptions has very specific conditions and it is important to ensure the conditions are met before relying upon them.
Revenue NSW also has discretion under section 163H of the Duties Act to grant a full or partial exemption of land holder duty where it is not just and reasonable to impose landholder duty in the circumstances.
The application of the section 163H of the Duties Act exemption now seems very limited. That there has been no change in underlying economic ownership of the land does not appear to be a basis for the exercise of the discretion. Consider the following example:
Trustee of discretionary trust (Trustee) owns shares in Company A, a trading entity. Company A owns shares in Company B. Company B owns land.
The Trustee wishes to restructure the group so that it owns shares directly in Company B.
The transfer of shares from Company A to Trustee is a relevant acquisition. Landholder duty is payable.
Chief Commissioner approach is that he will not grant 163H exemption in such circumstances. Exemption for restructuring of corporate groups is not available in these circumstances.
In Winston-Smith v Chief Commissioner of State Revenue [2018] NSWSC 773 Emmett AJA in the Supreme Court considered whether the Chief Commissioner should exercise the discretion in section 163H in not dissimilar circumstances. His Honour noted that section 163H of the Duties Act will generally only be exercised where the landholder duty payable is greater than would be the case if there was a direct transfer of the land. In the above example, a direct transfer of the land would have attracted transfer duty and hence it appears that the discretion would not be exercised.
Key Takeaways
The key takeaways are as follows:
1. landholder duty can arise in unexpected circumstances and any time that there is a transaction that affects an interest in a company or unit trust (whether by way of unit/share transfer, redemption or issue), landholder duty should be considered;
2. landholder duty can arise ever where an acquisition is made in a company or unit trust that does not own land;
3. a particular area of risk is in relation to groups that have discretionary trusts that own land. This may cause any companies or unit trusts in the group to be a landholder; and
4. dealings in the shareholdings of a corporate trustees of a discretionary trust can have landholder duty implications even if the only assets owned by the trustee are trust assets.
Matthew McKee, Partner at Brown Wright Stein, is an experienced tax and superannuation lawyer who regularly provides tax and commercial related advice to accountants, financial planners, small to medium enterprises and private clients. Matthew regularly advises on income tax, capital gains tax (CGT), fringe benefits tax (FBT), GST, stamp duties and the SIS Act. Matthew has experience in managing all aspects of taxation disputes, including: Managing Australian Taxation Office (ATO)/Office of State Revenue (OSR) audits and investigations, voluntary disclosures; Preparing taxation objections and private ruling applications; Conducting tax litigation in the Administrative Appeals Tribunal and Federal Court; and Negotiating settlements and payment arrangements with the ATO. Matthew also provides advice on trusts and structuring as well as commercial issues including asset and business acquisitions and disposals, share sale agreements, shareholder and joint venture agreements. Contact Matthew at MPM@bwslawyers.com.au
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[1] This article is based on the landholder duty provisions in New South Wales. Each State and Territory of Australia has landholder duty and there are many similarities in the respective regimes. However, there are also differences.
