Sweeping changes to the duties act set to significantly affect numerous transactions
From 1 July 2012, Victoria’s land-rich regime was replaced by new landholder duty rules, which brought Victoria largely into line with all other Australian jurisdictions (except for Tasmania).
The landholder duty rules apply to a much larger range of transactions, and are of significant importance for clients with entities that have a direct or indirect interest in property or who acquire an interest in such entities.
- The rules apply in relation to landholders (i.e. companies or trusts) which own or are deemed to own a direct or indirect interest in land in Victoria with an aggregate unencumbered value of $1 million or more. There is no longer the requirement that such land represent 60% or more of the landholder’s total assets.
- Duty is payable at rates of up to 5.5% on an acquisition of an interest of:
- 20% or more in private unit trust;
- 50% or more in private companies and wholesale unit trusts; or
- 90% or more in listed companies and public unit trusts (although these entities will enjoy concessional duty rates in certain circumstances).
- Duty will also be payable where a person, either alone or together with an ‘associated person’, acquires an ‘economic entitlement’ that amounts to an interest of 50% or more in a landholder. This has significant implications for the property development market where it is common for developers to enter into arrangements with landholders to develop property in consideration, for example, for receiving a percentage of sale proceeds when such property is sold.
When does duty liability arise?
A liability to duty arises if a person makes a ‘relevant acquisition’ in a landholder. A ‘relevant acquisition’ occurs when a person acquires an interest in a landholder that constitutes the acquisition of a ‘significant interest’ or a further interest in the landholder (such interests are described above in the key points section).
An often overlooked acquisition is where a person, either directly or indirectly, acquires control over a private landholder, other than by a ‘relevant acquisition’ under Chapter 3 of the Duties Act 2000 (Vic). When this occurs, on acquiring that control the person is taken to have made a ‘relevant acquisition’ of an interest in the landholder of 100% unless the Commissioner determines otherwise.
An example of this type of this type of acquisition would be where a majority shareholder (owning, for example, 99% of the issued shares) of a land rich private company grants for valuable consideration an unlimited and irrevocable power of attorney over the rights attaching to its shares in the company to a minority shareholder (who owns 1% of the shares). In this example, the agreement between the parties is that, whilst the majority shareholder will remain registered owner of the shares, the minority shareholder will be able to use the voting rights in respect of such shares to its advantage. In such circumstances, the minority shareholder will be considered to have acquired control of the landholder and to have made a ‘relevant acquisition’ of an interest of 99%.
Abolishment of the 60% threshold
Under the new rules there is no longer the requirement that the landholdings of an entity (in all places both inside and outside Australia) comprise more than 60% of the value of all of the entity’s assets in order for an acquisition of an interest in such entity to be dutiable.
Therefore, transfers of interests in any company or unit trust that, directly or indirectly through ‘linked entities’ or by reason of the constructive ownership provisions, holds land in Victoria with an unencumbered value of $1 million or more may be subject to duty under the new rules. It is noted that duty will be phased in (i.e. applied at proportionate rates) for acquisitions in entities with landholdings of between $1 million and $2 million.
Aggregate timeline scrapped
Previously, the timeframe over which interests may be aggregated (i.e. to work out whether a ‘significant interest’ had been acquired) was generally limited to transactions that had occurred within the preceding three years. This enabled persons to gradually increase their interest in a land rich entity over a long period of time without attracting duty.
The above timeframe is now unlimited (i.e. the three year aggregation rule has been removed), however duty will only be payable on the portion of the interest acquired within the preceding three years (i.e. if a person owned 30% of a company in 2000, but then acquired a further 20% in 2012, duty would only be payable on the additional 20% interest acquired). Therefore, this change can be considered subtle, rather than major.
‘Economic Entitlement’ changes
As noted above in the key points section, duty will also be payable where a person acquires an ‘economic entitlement’ in a landholder, such entitlement amounting to a 50% or more interest in that landholder, giving them rights to:
- participate in the dividends or income of the landholder;
- participate in the income, rents or profits derived from the landholdings of the landholder;
- participate in the capital growth of the landholdings of the landholder;
- participate in the proceeds of sale of the landholdings of the landholder;
- receive any amount determined by reference to the above; or
- to acquire any entitlement described above.
It is interesting that the above has been introduced, given the problems with housing affordability in Victoria. For example, in many circumstances, the State Revenue Office may effectively be receiving duty twice from the one transaction (i.e. firstly when a development arrangement is entered into to develop land and secondly when the land in question is sold). Therefore, it is highly likely that the extra duty payable by developers will no doubt be passed on to home buyers by way of an increase to the purchase price. If this has the effect of slowing the property market further, then there is a real risk that this could lead to the stifling of investment in Victoria if other jurisdictions appear more attractive, given that the ‘economic entitlement’ provisions are unique to Victoria.
‘Just and Reasonable’ exemption replaced
Lastly, the ‘just and reasonable’ exemption, where an exemption from duty could be granted by the Commissioner where he was satisfied that it would not be just and reasonable to impose duty, has been replaced with a narrower exemption targeted at ‘anomalous duty outcomes’.
Under this new exemption, where the duty payable exceeds the amount of duty that would be payable had the transaction been a transfer of the land (i.e. rather than an acquisition of an interest in a landholding entity), then the Commissioner may exempt that excessive portion of the duty payable.
What to do next?
We recommend that client’s who are involved in the property develop market or in any other transactions with landholders contact us so that we may familiarise them with the ‘economic entitlement’ rules, as they will be applicable to a vast range of transactions in this sphere.
Moreover, Pointon Partners has extensive experience in advising all stakeholders of the duty implications of various transactions, and assisting those stakeholders achieve the best duty outcomes possible for such transactions.
If you have any queries regarding the above, or regarding any other aspect of property law, please contact Ted Vlahos on 03 9614 7707.