Allens

Tax

Focus: Important changes to Victorian land-rich duty rules

14 June 2012

In brief: Victoria's land-rich duty regime will, from 1 July 2012, be replaced by new landholder duty rules that will apply to a much larger range of transactions than the existing land-rich provisions. Partner Katrina Parkyn (view CV) and Lawyer Jennifer Richards report.

How does it affect you?

  • Victoria's land-rich duty regime will be replaced by new landholder duty rules from 1 July 2012.
  • The new landholder provisions will apply to a far greater range of transactions than the existing land-rich provisions.
  • From 1 July 2012, the acquisition of shares or units in an entity that holds land in Victoria, directly or indirectly (through linked entities), with a total value of $1 million or more may trigger landholder duty at transfer duty rates of up to 5.5 per cent by reference to the value of the Victorian landholdings.
  • Unlike the current land-rich regime, which applies only to unlisted entities, the landholder rules will also apply to listed entities (with duty generally being payable at 10 per cent of the general transfer duty rate).

Overview of changes

The move to a landholder regime in Victoria will involve:

  • the abolition of the 60 per cent land-rich ratio test;
  • the retention of the $1 million Victorian land holding threshold, with duty being phased in for land holdings of between $1 million and $2 million in value;
  • the application of landholder duty to both listed and unlisted companies and trusts (although listed entities will have the benefit of a higher significant interest threshold and lower duty rates);
  • changes to the registration criteria for 'wholesale unit trusts' and a simplified definition of 'widely held trust';
  • the introduction of new anti-avoidance measures targeting the acquisition of 'economic entitlements';
  • the abolition of the 'just and reasonable' exemption in its current form; and
  • expanded definitions of 'associated person' and 'related person'.

A comparison of some of the key changes is summarised below.

Key changes
Old rules New rules
Entities caught
  • Private unit trusts;
  • private companies; and
  • wholesale unit trusts.
  • Private landholders:
    • private unit trusts;
    • private companies; and
    • wholesale unit trusts.
  • Public landholders:
    • listed companies; and
    • public unit trusts (includes listed trusts and widely held trusts).
Threshold land value Two-tier test:
  • $1 million or more of Victorian land; and
  • total landholdings in all places comprise 60 per cent or more of all property (excluding cash and certain liquid assets).
 Single test:
  • entity has landholdings in Victoria with a total unencumbered value of $1 million or more.
Dutiable acquisition
  • 20 per cent or more for private unit trusts; and
  • 50 per cent or more for private companies and wholesale unit trusts.
  • 20 per cent or more for private unit trusts;
  • 50 per cent or more for private companies and wholesale unit trusts; and
  • 90 per cent or more for listed companies and public unit trusts.
Duty rate
  • Transfer duty rates (highest rate being 5.5 per cent).
  • Transfer duty rates (highest rate being 5.5 per cent); and
  • concessional duty rate for listed companies and public unit trusts (equates to 10 per cent of standard transfer duty rates).

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Removal of the 60 per cent test

Under the current law, duty is payable on making a relevant acquisition in an unlisted company, a private unit trust or a wholesale unit trust that is a 'land rich' entity in Victoria. An entity is a 'land rich' if:

  • it has (direct and indirect) landholdings in Victoria with a value of $1 million or more; and
  • its (direct and indirect) landholdings in all places (both inside and outside Australia) comprise 60 per cent or more of the value of all its property.

Under the new landholder regime, the 60 per cent test will be removed, so that the dealings in any company or unit trust that holds land, directly and indirectly through one or more 'linked entities', in Victoria with a value of $1 million or more may be subject to duty. Duty will be phased in for land holdings of between $1 million and $2 million.

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Application to listed entities as well as unlisted entities

Unlike the current land-rich provisions, the new landholder rules will also apply to listed companies, listed trusts and widely held trusts. However, the duty liability will be 10 per cent of the duty that would otherwise be chargeable at transfer duty rates, except where the entity has been listed, or has met the definition of 'widely held trust' for less than 12 months. In those circumstances, the higher general transfer duty rates will apply.

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Significant interest thresholds for a relevant acquisition

The landholder rules will be triggered by the acquisition of an interest in a landholder that alone, or with existing interests, amounts to a 'significant interest'.

What constitutes a significant interest depends on the nature of the entity in which the interest is acquired:

Type of entity Significant interest threshold
  • Private unit trust
20 per cent or more
  • Private company
50 per cent or more
  • Wholesale unit trust1
50 per cent or more
  • Listed company or public unit trust
90 per cent or more (but concessional duty rate equal to 10 per cent of the standard transfer duty rate)

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Unlimited timeframe for aggregation

A more subtle, but important, change is that under the new rules, the timeframe over which interests may be aggregated to work out whether a 'significant interest' has been acquired will be unlimited.

This is a change from the current land-rich rules, which generally only require transactions that have occurred within the preceding three years to be aggregated to work out whether a significant interest has been acquired. With the removal of the three-year aggregation rule, the timeframe for aggregating previous acquisitions will be unlimited.

Consequently, while it used to be possible for a person gradually to increase their interest over time without triggering a relevant acquisition (and therefore not pay any duty), this will no longer be the case. Consequently, the new provisions are likely to apply to a greater number of transactions than they have previously.

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Wholesale unit trusts and widely held trusts

Some of the criteria for registration as a wholesale unit trust will be relaxed; in particular:

  • the 'qualified investor' threshold for wholesale unit trusts will be reduced from 80 per cent to 70 per cent; and
  • new categories of 'qualified investors' will be added.

The definition of 'widely held trust'will also be simplified, so that the only requirement is that the trust have at least 300 unit holders, none of whom, alone or with associates, is entitled to more than 20 per cent of the units in the trust. The requirement that the trust also be a registered managed investment scheme, or that its units have been offered to the public under a prospectus or product disclosure statement lodged with the Australian Securities and Investments Commission, will no longer apply.

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New anti-avoidance measures

There is a new anti-avoidance measure targeted at the acquisition of 'economic entitlements' in relation to private landholders (which includes wholesale unit trusts) that would not otherwise give rise to a dutiable acquisition. Broadly, the acquisition by a person, alone or with associated persons, of an economic entitlement amounting to an interest of 50 per cent or more in a private landholder is deemed to be a relevant acquisition and subject to duty.

What constitutes an economic entitlement is defined very broadly, to include, for example, an entitlement to participate in the income, rents or profits derived from the landholdings of the landholder, or an entitlement to participate in the capital growth or proceeds of sale of the landholdings. It also extends to an entitlement to receive an amount determined by reference to any such matters.

Despite the apparent anti-avoidance nature of the provision, it operates regardless of whether the arrangements had a purpose of avoiding landholder duty.

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'Just and reasonable' exemption abolished

The current land-rich provisions make provision for an exemption from duty to be granted where the Commissioner of Taxation is satisfied that it would not be 'just and reasonable' to impose duty. The circumstances in which this exemption should be applied has been the subject of much litigation between taxpayers and the Commissioner in recent years.

Under the new provisions, the 'just and reasonable' exemption will be abolished in its current form, and replaced with a new, narrower exemption targeted at 'anomalous duty outcomes' where the duty payable under the landholder provisions exceeds the amount of duty that would be payable had the subject of the transaction been a transfer of the underlying Victorian land.

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Definition of 'associated persons' expanded

The already wide definitions of 'associated person' and 'related person' are being expanded further, so that persons will be taken to be associated or related (as applicable) where they share a common associate. For example, where person A and person B are both associated with person C, persons A and B will themselves be deemed to be associated.

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What next?

The changes will apply from 1 July 2012. However, the Bill to introduce the proposed changes does not contain any transitional provisions dealing with the treatment of contracts to acquire interests in landholding entities that are entered into before 1 July 2012 but completed after that date. It would appear that the duty consequences of these transactions will be governed by the usual rules for determining when an interest has been acquired that may give rise to a duty liability. Typically, an interest is acquired at the time a person obtains beneficially an entitlement (other than as a creditor or other person to whom the landholder is liable) to a distribution of property from the landholder on a winding up of the landholder.

Parties involved in uncompleted transactions for the acquisition of shares or units in an entity that has Victorian landholdings may wish to consider whether it would be appropriate to bring forward their acquisition to before 1 July 2012.

Footnotes
  1. This is referring to 'wholesale unit trusts' that are registered as such under the Duties Act 2000 (Vic). Queensland also has the concept of a wholesale unit trust for duty purposes; however, the criteria of what is a wholesale unit trust in Queensland differ from the criteria for registration in Victoria. The Australian Capital Territory also has its own wholesale unit trust regime for landholder duty purposes. However, the Australian Capital Territory has recently announced the proposed abolition of its wholesale unit trust regime, with effect from 1 July 2012.

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