Watch out for extra transfer duty on property investments via a company or unit trust

Overview

Structuring property investments via a company or unit trust may give rise to landholder duty for non-related investors as highlighted in Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue (Review and Regulation) [2023] VCAT 634.

This decision resulted in an additional $151,235 of duty plus interest and penalties payable to the Victorian State Revenue Office (SRO) given the ‘unity of purpose of the 18 unrelated investors undertaking a specific development that constituted an ‘associated transaction’’ for the purposes of the Duties Act 2000 (Vic) (DA).

Facts

The Oliver Hume Property Funds Group formed a special purpose entity known as Diamond Creek Pty Ltd (Diamond Creek) to purchase land in outer Melbourne with the objective of developing the site for investment returns.

An Information Memorandum (IM) was distributed to sophisticated investors under s 708(8) Corporations Act 2001 (Cth) to raise capital through the issuing of shares. The IM stated at paragraph 5.3 under a heading of ‘General Risk Factors’:

Provided the only dutiable property held by the Company is the Land, the acquisition of Shares by Applicants under this Offer will not attract Victorian transfer duty, unless the landholder duty provisions apply (generally, if the shareholder, or two or more associated shareholders acquire 50% or more shares of the Company).

On 2 July 2014, $1.8 million was raised in the form of 1.8 million shares acquired by 18 investors. Fourteen (14) of these were existing investors from an investment database, 2 were referred by a consultant and 2 were unrelated to the others. A number of SMSF investors were involved. No duty was accessed or paid at the time these investors subscribed for shares.

On 28 February 2019, the SRO informed Diamond Creek that the acquisition in shares of the company had formed substantially one arrangement, one transaction or one series of transactions triggering an assessment of landholder duty.

On 1 July 2020, the SRO issued a notice of assessment in the sum of $168,162.67 including penalty tax and interest.

Landholder Duty

In Victoria, where a person or entity acquires a ‘significant interest’ in a landholder with a total unencumbered land value (ie, ignoring any debt, mortgage, etc) over $1 million, a liability to pay duty may arise under s 77 of the DA.

The threshold for a significant interest is 20% for a unit trust scheme and a 50% for a company, as referenced in the IM to the shareholders.

Relevantly in this decision, landholder duty may also arise where a significant interest is acquired when aggregated with other interests in the landholder by any other person in an ‘associated transaction’ (see s 78(1)(ii)(C) of the DA).

An associated transaction includes where the acquisitions form substantially one arrangement, one transaction or series of transactions (see definition in s 3 of the DA).

Decision

Although each individual shareholder was below the threshold for an individual significant interest, the Tribunal upheld the Commissioner’s assessment that, when aggregated, the share acquisition by the 18 investors formed substantially one arrangement.

The decision noted that an arrangement may be unilateral and that whether a number of acquisitions constituted an arrangement is determined by the actions and motives of the transferor and transferees. When analysing the motives of each party to the transaction the judge found that there was:

• A clear ‘unity of purpose’ between the investors to become shareholders in Diamond Creek despite not being acquainted with one another.
• A clear ‘unity of purpose’ from Diamond Creek to enlist shareholders to carry out a development project.
• A ‘oneness of purpose’ between the investors and Diamond Creek.

This unity of purpose amounted to the 18 unrelated investors forming substantially one arrangement when purchasing shares in Diamond Creek, triggering the landholder duty provisions of the DA.

DA 057 Revenue Ruling

The Tribunal also found it necessary to address a Revenue Ruling by the SRO on associated transactions and landholder duty. In DA 057 the Commissioner stated

While the term ‘associated transaction’ is broadly defined in section 3(1) of the Act, the Commissioner has taken the position that he will not regard acquisitions of interests by independent members of the public as an associated transaction if the acquisitions are made in response to a genuine public offer under a product disclosure statement or prospectus lodged with the Australian Securities and Investments Commission.

In this instance a product disclosure statement or prospectus was not lodged with ASIC. Nonetheless the Tribunal conceded that, subject to restrictions, the IM and share offer could be regarded as an offer to the public at large. However, the Tribunal noted that the Commissioner’s ruling did not have the force of law (as noted in the ruling itself) and that no provision authorises the Commissioner to offer this concession.

Conclusions

Potential investors must be aware that investments in a company or unit trust that include land or dutiable property may give rise to an extra layer of duty if there is a unity of purpose that results in ‘associated transaction’ with other investors.

Note that most state/territories have some form of landholder duty regime in Australia but each with their peculiar differences. Thus, expert advice should be obtained from a lawyer expert in this area in the particular jurisdiction.

As SMSFs are often investing in companies or unit trusts to acquire and possibly to improve or develop property, SMSF trustees should ensure they obtain advice prior to entering such arrangements from an SMSF and tax perspective including state taxes. Note that state tax advice may constitute legal advice and non-legally qualified advisers should be mindful of their professional limitations (see, for example, Galea v Camilleri; The Estate of Patricia Camilleri [2023] NSWSC 206).

Reliance on concessions made in SRO revenue rulings should be exercised with caution given they do not have the force of law.

Related articles:

• SMSFs investing via unit trusts
• Why is it important to have a good company constitution?
• Victoria, NSW and Tasmania foreign purchaser duty update — Discretionary Trusts

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Daniel Butler ([email protected]) Director and Fraser Stead ([email protected]) Lawyer, DBA Lawyers.

DBA LAWYERS

30 August 2023