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Focus: Tax – May 2008

Recent developments in stamp duty (part 1)

In brief: In the first part of a two-part series on stamp duty changes across Australia, Partner Adrian Chek (view CV) and Senior Associate Katrina Parkyn look at recent changes to stamp duty in Western Australia.

• Duties Act 2008
• General observations on transfer duty
• Landholder duty
• Corporate reconstruction exemption
• Conclusion

Duties Act 2008

The most significant changes to stamp duty in Australia have taken place in Western Australia with the commencement of the recently passed Duties Act 2008 (WA) on 1 July 2008. Once in force, the Duties Act will replace the existing Stamp Act 1921 (WA).

Taxpayers who are contemplating entering into transactions on or around 1 July 2008 should consider seeking advice to determine whether there are any advantages in entering into the transactions before or after this date. This is especially relevant for taxpayers contemplating acquiring interests in entities that own land in WA (see below) or granting securities.

Some of the more substantive changes contained in the new Duties Act are:

• a reduction in the maximum rate of transfer duty from 5.4 per cent to 5.15 per cent;
• the replacement of the traditional 'conveyance of property' provisions with the modern 'transfer of dutiable property' provisions;
• the replacement of the existing unit trust provisions and land-rich company provisions with a landholder regime applying to companies and unit trusts (with land held in partnerships being taxed under the transfer duty provisions in Chapter 2 of the Duties Act);
• the broadening of the corporate reconstruction exemption;
• the introduction of general anti avoidance provisions; and
• the abolition of mortgage duty.

General observations on transfer duty

As in the other states and territories that have already undertaken a stamp duty rewrite, Chapter 2 of the Duties Act adopts a fundamentally different approach to that adopted in the conveyance duty provisions of the current Stamp Act.

In particular, only specified 'dutiable transactions' and specific items of 'dutiable property' are potentially liable to duty. There is no longer the need to consider whether a type of transaction or property falls within the broad general law concepts of 'conveyance' or 'property' respectively. Another significant change is that duty is imposed on transactions, rather than primarily on documents.

In broad terms, Chapter 2 of the Duties Act most closely resembles the provisions of Chapter 2 of the Duties Act in Queensland. Common features include:

• the inclusion of a dutiable transaction for the acquisition (as opposed to transfer) of certain types of new rights relating to dutiable property;
• the concept of a 'business asset' included in the list of dutiable property;
• separate provisions within the chapter dealing with partnerships; and
• separate provisions within the chapter dealing with 'trust acquisitions' and 'trust surrenders'.

There are also some important differences. Some of these reflect the overall policy direction of transfer stamp duty becoming, in essence, a tax based on land.

Under the new Act there are four types of dutiable property:

• land in WA (this is widely defined – see below);
• a right (again, this is defined);
• a chattel in WA; and
• a WA business asset (as defined).

'Land' is defined to include: a mining tenement (or right of occupancy) as defined by the Mining Act 1978 (WA); a licence under the Petroleum Pipelines Act 1969 (WA); any estate or interest in land; and anything fixed to the land including anything that is, or purports to be, the subject of ownership separate from the ownership of the land.

The inclusion of petroleum pipeline licences represents an extension of the definition of land and would appear to be directed at arguments raised by taxpayers that such a licence is not an interest in land for the purposes of the land-rich provisions in the existing Stamp Act. This new definition of land will apply consistently both for transfer duty purposes and landholder duty purposes.

The definition of 'right' is intended to catch certain rights that are related to dutiable property. These include an option, a right of pre-emption, a right to acquire, a right under a joint venture relating to dutiable property of a joint venture, a right to exploit, a right to income and a right to capital growth. Specifically included in the concept of a right are an application for a mining tenement under the Mining Act 1978 and a licence or a water entitlement under the Rights in Water and Irrigation Act 1914 (WA).

Landholder duty

The new landholder regime represents one of the most important policy changes in the Duties Act.

The new provisions not only represent a departure from the current Stamp Act provisions, but also a significant departure from the land-rich provisions employed in most other jurisdictions. Currently, only the Australian Capital Territory and the Northern Territory have landholder regimes. The essential difference between a landholder regime and a land-rich regime is that the former dispenses with a 60 per cent or 80 per cent land-rich ratio threshold as a precondition to taxation of the relevant entities.

The key differences between the new landholder regime and the existing land-rich rules are:

• The new regime will apply to both corporations and unit trusts. Unit trusts will no longer be subject to the separate look-through provisions in section 73D of the existing Stamp Act.
• In the case of unlisted companies or trusts, the threshold for a dutiable acquisition will become 50 per cent or more (as opposed to 'more than 50 per cent' under the current land-rich company regime). For listed entities, the acquisition threshold remains at 90 per cent or more.
• The 60 per cent land-rich ratio test has been removed. This means it will no longer be necessary to value non-land property for the purposes of determining whether there is a liability.
• The minimum threshold value of land in WA has been increased from $1 million to $2 million.

The tracing rules have been broadened so as to trace through 'linked' entities, requiring an interest of 50 per cent or more (or 90 per cent in the case of a listed corporation or unit trust scheme).

In a case of unit trusts, the new regime results in a substantial overall reduction in the breadth of the tax base. The threshold for duty will now be 50 per cent (or 90 per cent if the trust is listed), whereas under the current Stamp Act it is zero per cent. The $2 million threshold will also reduce the extent of application of the provisions to unit trusts. Further, the 50 per cent threshold should largely remove the necessity for categories of widely held trusts and wholesale trusts. However, the new regime is broader, to the extent that it traces through linked entities rather than relying on the existing tracing provisions in s73D.

In the case of companies, the provisions on the whole represent a significant extension to the tax base. This is mainly as a result of the removal of the 60 per cent land-rich ratio threshold.

There is a subtle, yet important, change to the aggregation provisions. For the purposes of determining whether an acquisition has satisfied the threshold for a dutiable acquisition, the existing Stamp Act provisions generally only require (subject to certain exceptions and various transitional rules) interests acquired in the preceding three years to be aggregated.¹ Under the new landholder rules there is no such limitation and therefore the timeframe for aggregation is unlimited. Consequently, while it has been possible under the existing provisions for a person to gradually increase their interest over time without triggering land-rich duty, this will no longer be the case.

The timeframe over which a person acquires their interest will be taken into account in the calculation of duty (generally, duty will be calculated only by reference to acquisitions made in the preceding three years, unless the interest was acquired under an arrangement entered into within three years before or after the relevant acquisition in question). However, the unlimited timeframe for aggregating acquisitions, coupled with the move to a landholder rather than land-rich regime, means that the new provisions are likely to apply to a greater number of transactions than the existing Stamp Act provisions. There are specific transitional rules dealing with interests acquired before 1 July 2008. Interests acquired before 1 July 2008 are, in certain cases, 'grandfathered' in that they are not taken into account when calculating duty on acquisitions made on or after 1 July 2008. This 'grandfathering' may be especially relevant for taxpayers who are currently considering acquiring interests in entities that own land in WA. Taxpayers in this position should seek appropriate professional advice on the structuring options available to them.

The Duties Act also has some fairly unique timing rules that explain when a relevant acquisition is taken to have occurred, which, although broadly similar to the rules in Queensland, also contain some important differences. One such difference relates to the treatment of 'put and call' options. As a general rule, where there is an agreement to acquire an interest in a landholder (conditional or not) the acquisition is taken to have occurred when the agreement is made.² However, where a simultaneous put and call option that applies to an interest in a landholder comes into existence, the call option is taken to be an agreement for the making of an acquisition. The effect of this is to treat the acquisition as having been made at the time the simultaneous put and call option is entered into and brings forward the timing of the liability for landholder duty. There are provisions dealing with reassessment if the deemed agreement is not completed (for example, if both options expire without being exercised or are rescinded or cancelled by agreement).

Corporate reconstruction exemption

The new corporate reconstruction provisions are another area of major policy change.

The main changes are:

• Extension of the corporate reconstruction exemption so that it now applies to both companies and unit trusts that are members of the same 'family'. Previously, the exemption only applied to corporate groups. The exemption has also been extended to cover stapled entities and their subsidiaries.
• Removal of the pre-association test. The existing corporate reconstruction provisions contain a pre-association requirement, which generally means that the relevant companies in the group must have been at least 90 per cent related for at least three years before the transaction. Under the new provisions, there is no such requirement.³
• Removal of the five-year post-association clawback period.⁴ Instead, the five-year clawback period has been replaced with a three-year period during which, in certain circumstances, transactions have to be notified to the Commissioner of State Revenue. This is to give the Commissioner an opportunity to consider whether the obtaining of the exemption was part of a scheme or arrangement to avoid duty on another transaction or to avoid another WA tax.

Transactions to which exemption can apply

There are two types of transactions to which the exemption can apply:

• A 'relevant consolidation transaction'. This is, broadly, directed at the situation where an entity (the head entity) acquires at least a 90 per cent interest in another entity (the affected entity) and issues shares or units to the holders of shares or units in the affected entity in proportion to their existing holding of shares or units. A transaction is not eligible for relief if, immediately before the acquisition, the head entity held dutiable property, a vehicle or an interest in a corporation or unit trust. According to the Explanatory Notes, this is to prevent the exemption from applying to transactions that result in property that would otherwise attract duty coming into the family.
• A 'relevant reconstruction transaction' between entities that are at least 90 per cent related (or are members of a stapled group). This includes a number of dutiable transactions, including a transfer of, or agreement to transfer, dutiable property between group members and an acquisition by one group member of an interest in another group member, if landholder duty would be chargeable.

An application for exemption must be made within 12 months after the date of the transaction. There is also provision for seeking a pre-determination in advance of the relevant transaction.

A transaction that otherwise satisfies the requirements for relief will not be granted an exemption if any member of the corporate group has an outstanding tax liability.

Conclusion

The Duties Act is more than just a 're-write' of the existing Stamp Act. There have been substantial policy changes, especially in terms of the types of transactions and property that are subject to duty and in the area of landholder duty and corporate reconstruction relief. Taxpayers who are considering entering into transactions that relate to property in Western Australia should considering seeking advice to determine the impact that these changes will have on their particular transactions and whether there are any advantages in entering into the transactions before or after 1 July 2008.

The second part of this series on stamp duty changes across Australia will focus on recent stamp duty developments in other states and territories, such as:

• substantial changes to the Australian Capital Territory landholder rules;
• extension of the land-rich rules in New South Wales and Tasmania;
• introduction of relief from Victorian land-rich duty where a stapled entity is reorganised through the interposition of a new head trust between the existing stapled security holders and the stapled entity; and
• amendments to the trust 'look through' provisions in South Australia to overcome the High Court decision in CPT Custodian Pty Ltd v Commissioner of State Revenue; Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd [2005] 224 CLR 98.
  

Footnotes

1. There are certain circumstances in which interests acquired more than three years prior to an acquisition can be aggregated. For example, if a person acquires an interest in a land-rich corporation (the initial interest) and within a prescribed period (the length of the prescribed period depends on when the initial interest was acquired) enters into an option to acquire a further interest, which is subsequently exercised, the initial interest is treated as being acquired within the three years preceding the later acquisition. This is intended to prevent manipulation of the three-year aggregation rule.
2. There is an exception where the entity is not a landholder at the time the agreement was made but is a landholder when the agreement is completed. In that event, the person is taken to acquire the interest when the agreement is completed (ie at the time the entity is a landholder): s176(3) Duties Act.
3. According to the Explanatory Notes, the existing pre-association test was intended to prevent a corporate group acquiring a company that owns WA property without incurring a duty liability (by acquiring a non land-rich company) and then stripping its assets via the corporate reconstruction exemption. The introduction of a landholder duty regime will mean that, in most cases, the acquisition of the company will attract duty, if it is entitled to WA land (unless it is below the $2 million threshold). This means that in most cases the pre-association test will not be necessary and so the decision has been made to remove it altogether.
4. According to the Explanatory Notes, the post-association test in the current provisions is intended to prevent the packaging of assets for sale in a corporate structure that would not be dutiable under the land-rich provisions (ie by ensuring that the company was not land-rich). Again, the introduction of the landholder regime means that the purchase of most entities that are entitled to WA land will be subject to duty and so the policy decision has been made to remove the post-association requirement.
   

For further information, please contact:

• Adrian ChekPartner, Sydney
  Ph: +61 2 9230 4800
  Adrian.Chek@aar.com.au
• Peter AllenPartner, Brisbane
  Ph: +61 7 3334 3350
  Peter.Allen@aar.com.au
• Michael PerezPartner, Melbourne
  Ph: +61 3 9613 8500
  Michael.Perez@aar.com.au
• Katrina ParkynSenior Associate, Brisbane
  Ph: +61 7 3334 3323
  Katrina.Parkyn@aar.com.au

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