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Focus: Australian landholder duty: avoid the pitfalls of an ever expanding duty base

10 September 2014

In brief: An increased focus on taxing indirect real property transfers has seen the 'land-rich' or 'landholder' duty rules expand significantly over the years, resulting in far more transactions being liable to duty. One area in which the potential application of the expanded landholder duty rules can be easily overlooked (with potentially disastrous consequences) is transactions undertaken by foreign entities that indirectly (through a chain of entities) have Australian 'land' assets. Partner Katrina Parkyn and Senior Associate Jennee Chan report.

How does it affect you?

  • The ever-expanding scope of the landholder duty rules has the potential to impact on any corporate group with land assets in Australia. The concept of 'land' for these purposes includes traditional interests in land (such as freehold and leasehold interests) but also extends, by statutory definition, to mining tenements and things that are fixed to land which may be owned separately from the land (for example, tenant's fixtures).
  • The types of transactions that commonly give rise to potential landholder duty issues include: mergers and acquisitions, demergers and intra-group reorganisations (including those that involve entities based outside Australia that hold, directly or indirectly, assets in Australia).
  • Australian landholder duty can be a significant transaction cost, including for international transactions that may not have an obvious connection with Australia. Any corporate group (including those based outside Australia) that has land assets in Australia may be impacted by these rules. While failing to address landholder duty considerations can prove costly, early planning can alleviate the pain.

Landholder duty: overview

It is important to bear in mind that stamp duty in Australia (including landholder duty) is a state-based tax. As such, the exact rules for determining the types of entity that will be regarded as a landholder in a particular state or territory do vary. The following comments provide a general guide as to the operation of the landholder duty rules. While some jurisdictions have separate (and arguably more onerous) regimes for dealings in landholding trusts, those rules are outside the scope of this article.

When is an entity a landholder?

Broadly speaking, an entity will be regarded as a landholder in a particular state or territory if its total landholdings in that state or territory (whether held directly or indirectly) have a value equal to or greater than the prescribed minimum threshold. The relevant threshold varies from as low as $1 in the Australian Capital Territory to $2 million in Queensland, New South Wales and Western Australia.1

In addition to any land held by the entity directly, each state and territory has comprehensive tracing provisions that operate to treat an entity as having an interest in land held by subsidiaries and other entities. Historically, tracing was only required where an entity held a 50 per cent or greater interest in another entity. However, the tracing requirements have changed over time and some states now require tracing through to the underlying landholdings of an entity where a parent entity has a 20 per cent or greater interest.

These tracing rules extend to entities incorporated outside Australia, with the result being that a foreign entity may be regarded as a landholder for Australian duty purposes by virtue of landholdings held through subsidiaries (or other entities in which the foreign entity has an interest).

Historically, it was also necessary that the entity's total landholdings (world-wide) represent at least 60 per cent of its total assets (80 per cent in some jurisdictions). However, in recent years, this test has been removed in all states other than Tasmania. The removal of this test, coupled with an expansion of what constitutes 'land' for duty purposes, has increased the number of entities regarded as landholders.

Example 1:
UK Head Co, a company registered in the United Kingdom, holds 100 per cent of the shares in Hospital UK Hold Co, a company also registered in the United Kingdom.

Hospital UK Hold Co in turn holds 100 per cent of the shares in Hospital Aust Hold Co.

Hospital Aust Hold Co holds 100 per cent of the shares in Perth Hospital Co, a company that owns a hospital site in Perth, Western Australia. The Perth property has an unencumbered value of $50 million.

Hospital Aust Hold Co also holds 100 per cent of the shares in Sydney Hospital Co, a company that owns a hospital site in Sydney, New South Wales. The Sydney property has an unencumbered value of $50 million.

In this example, each of UK Head Co, Hospital UK Hold Co, Hospital Aust Hold Co and Perth Hospital Co would be regarded as a landholder in Western Australia because each would be deemed to own the hospital land in Western Australia. Each of UK Head Co, Hospital UK Hold Co, Hospital Aust Hold Co and Sydney Hospital Co would also be regarded as a landholder in New South Wales, due to their interest in the Sydney hospital land. Consequently, dealings in the shares of UK Head Co, Hospital UK Hold Co, Hospital Aust Hold Co, Perth Hospital Co or Sydney Hospital Co may trigger the application of landholder duty.

When is landholder duty triggered?

In broad terms, landholder duty is triggered when a person (alone or when their interest is aggregated with that of associated or related persons) makes a 'relevant acquisition' in a landholder.

If the landholder is a private (ie unlisted) company, duty is triggered by the acquisition of a 50 per cent or greater interest or, where a 50 per cent or greater interest is already held, an increase in that interest.

If the landholder is a public (ie listed) company, duty is typically not triggered unless there is an acquisition of a 90 per cent or greater interest. This is generally confined to takeover type scenarios.

The rules are triggered by the acquisition of a relevant 'interest' in a landholder. While shares in a company or units in a unit trust will usually constitute an interest, an interest may also be acquired through other means such as, for example, a variation of rights attaching to existing shares or units, through acquiring an 'economic entitlement' in a landholder or acquiring 'control' of a landholder. The potential for duty to be triggered through things other than an acquisition of equity can be easily overlooked.

Common scenarios that can trigger a liability include:

  • An intra-group transfer of shares in a company that indirectly holds Australian land. While duty is typically only triggered on the acquisition of a 50 per cent or greater interest, the rules provide for the interest of the acquirer to be aggregated with that of all related or associated persons. As such, in an intra-group transfer context, there is the potential for duty to be triggered by a less than 50 per cent dealing.
  • Interposing a new parent company between an existing head company that indirectly holds Australian land and its shareholders.

Example 2:
UK Head Co decides to interpose a new parent company, Health Holdings, between itself and Hospital UK Hold Co. The transaction involves UK Head Co transferring all of the shares in Hospital UK Hold Co to Health Holdings.

Health Holdings would be regarded as making a relevant acquisition of the shares in Hospital UK Hold Co (ie a landholder). This is notwithstanding that all parties to the transaction, ie the transferor, transferee and target, are non-residents of Australia.

Rate of duty and consequences of non-payment

Where duty is triggered, duty is imposed at transfer duty rates (which vary from 4.5 per cent to 5.75 per cent, depending on the state or territory) on the value of the entity's landholdings multiplied by the interest acquired in the relevant acquisition. Some states2 also impose duty on the value of goods held by the entity (in addition to its land).

Example 3:
The duty implications of interposing Health Holdings in example 2 above, in the absence of any relevant exemption, would be as follows:

  1. Duty would be payable in New South Wales at a rate of approximately 5.5 per cent on the unencumbered value of the land and chattels in New South Wales owned (or deemed to be owned) by Hospital UK Hold Co. If the New South Wales land and chattels are worth $50 million, the New South Wales duty payable would be approximately $2.75 million.
  2. Duty would be also payable in Western Australia at a rate of approximately 5.15 per cent on the unencumbered value of the land and chattels in Western Australia owned (or deemed to be owned) by Hospital UK Hold Co. Based on a value of $50 million, the Western Australian duty payable would be approximately $2.575 million.

A failure to lodge and pay any applicable duty within the prescribed time limits will usually result in the imposition of penalties and interest, in addition to the primary duty.

In some states, an outstanding liability for landholder duty may operate as a statutory charge over the underlying Australian landholdings.

What counts as 'land'?

It is only the value of an entity's landholdings which count towards the relevant threshold for determining whether or not the entity is a landholder. If an entity is a landholder, the value of its landholdings is also used to determine the amount of duty payable on a relevant acquisition (being the event that triggers a liability to duty).

Each jurisdiction defines 'land' differently. Broadly, however, it includes traditional interests in land such as freehold and leasehold interests. By statutory definition, it may also extend to mining tenements, petroleum tenements and items that are 'fixed to land' even if those items are owned separately from the land (for example, tenant's fixtures).

Given the broad definition, it is possible for entities that would not traditionally be regarded as holding 'land' to fall within the scope of these provisions. For example, while a property trust would be an obvious landholder, it is less obvious that a finance company may also be a 'landholder' as a consequence of operating leases provided to customers in respect of plant and equipment fixed to land.

Corporate reconstruction exemption

One area in which landholder duty issues can easily be overlooked is in the context of internal reorganisations. While most Australian states and territories provide some form of exemption from duty for corporate reorganisations, the requirements for relief are prescriptive and the process for claiming an exemption requires an application to be made to the relevant state revenue office within prescribed time limits.3

This makes it important to ensure that any duty exposure is identified in a timely manner so that an application for exemption can be made if appropriate. The identification of an exposure outside the application time limits (for example, during a subsequent due diligence exercise) could mean that duty that could otherwise have been avoided would become payable, plus penalty tax and interest.

An exemption may be granted subject to certain post-transaction conditions, including the requirement that transaction parties remain part of the same corporate group for a prescribed post-association period.

If an exemption is obtained in relation to an intra-group transaction, it is important to properly manage any post-transaction conditions attached to the approval. Failure to meet the post-transaction conditions may trigger a revocation or clawback of the original exemption (plus penalty tax and interest). As such, when considering stamp duty mitigation strategies, it is relevant to consider any other planned transactions, because seeking an exemption may not always be the most efficient strategy if another transaction planned for the near future would trigger a clawback of any exemption granted.

Example 4:
Two years after the transaction in Example 2 above, UK Head Co decides to sell all of the shares in Health Holdings. In the course of a due diligence exercise, it comes to light that Health Holdings had not been aware of its liability for Australian stamp duty in respect of its acquisition of Hospital UK Hold Co.

Had Health Holdings applied for corporate reconstruction exemption in Western Australia within one year after it acquired Hospital UK Hold Co, it is likely that an exemption from duty would have been granted in respect of the Perth property. However, as the transaction is now outside the prescribed time limit for seeking corporate reconstruction exemption, Health Holdings is liable for duty on the value of the Perth property, plus penalty tax and interest.

However, Health Holdings is still within the time limit to apply for corporate reconstruction exemption in New South Wales.

Footnotes
  1. As at 1 July 2014, the relevant thresholds were: $2 million in Queensland, New South Wales and Western Australia; $1 million in Victoria and South Australia; $500,000 in the Northern Territory and Tasmania; and $1 in the Australian Capital Territory.
  2. Currently limited to New South Wales, Western Australia and South Australia.
  3. Applications must be made within one year post-transaction in the Australian Capital Territory, Western Australia and South Australia; three years in Victoria and five years in New South Wales. There is no time limit in Queensland and the Northern Territory. Tasmania does not have corporate reconstruction exemption.

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