Land Rich Duty 1. Peter Allen and Katrina Parkyn, Allens Arthur Robinson

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1 Land Rich Duty 1 Peter Allen and Katrina Parkyn, Allens Arthur Robinson 1. Introduction 1.1 Background Traditionally, every Australian jurisdiction has imposed stamp duty on transfers of real property and marketable securities. Although duty on transfers of quoted marketable securities has been abolished in all states, and, in some states, also on transfers of unquoted marketable securities 2, all states continue to impose duty on real property transfers. The significant difference between the rates of duty applying to transfers of real property compared with transfers of marketable securities, and the fact that the value of shares reflects the net rather than gross value of underlying assets, led to some purchasers acquiring the shares in a land owning company, rather than a direct acquisition of the underlying land. The so called 'land rich' provisions were introduced as an anti-avoidance measure to combat such arrangements although, as discussed below, the focus has in more recent times shifted from these anti-avoidance origins. 1.2 Overview In broad terms, the land rich provisions which exist in every Australian jurisdiction apply to relevant acquisitions of shares or units in what are termed 'land rich' entities. The types of issues that are relevant to determining whether a transaction is caught by the provisions commonly include: (a) (b) (c) (d) understanding what types of entities are potentially caught by the provisions; determining whether a particular entity is 'land rich'; analysing the trigger for duty in each jurisdiction and the way that duty is assessed on particular transactions; and consideration of whether a particular transaction is exempt from duty (in some cases, it can be equally important to consider whether any previous transactions were exempt from duty). Each of these issues raises a myriad of potentially complex sub-issues, which can vary markedly between the various jurisdictions. 1 This paper is based upon Australian stamp duty laws as at 29 July 2004 and is only intended to provide general information on the topics discussed. It is not intended that this paper provide advice and it should not be relied upon as such. Advice relating to any specific facts and circumstances should be sought prior to acting. 2 Victoria, Tasmania and Western Australia. pjab B v Page 1

2 2. Legislative Framework The land rich provisions are located in the following legislation: (a) NSW-Chapter 3, Part 2 of the Duties Act 1997 (sections 106 to 124); (b) VIC-Chapter 3, Part 2 of the Duties Act 2000 (sections 70 to 89S); (c) Qld-Chapter 3 of the Duties Act 2001 (sections 157 to 204); (d) WA-Part IIIBA, Divisions 2,3, 3a and 3b of the Stamp Act 1921 (sections 76 to 76ATL); (e) SA-Division 5, Part 4 of the Stamp Act 1923 (sections 91 to 102); (f) Tas-Chapter 3, Part 2 of the Duties Act 2001 (sections 59 to 77); (g) (h) ACT-Chapter 3, part 3.2 of the Duties Act 1999 (sections 78 to 95); and NT-Division 8A of the Taxation (Administration) Act 1978 (sections 56C to 56T). 3. Entities to which the provisions apply 3.1 Introduction In each state and territory, other than Western Australia (WA) and Queensland (Qld), the land rich provisions apply to companies and trusts. WA and Qld each have separate regimes for companies and trusts. 3.2 Application to Private Companies The land rich provisions in every jurisdiction apply to what are generally referred to as 'private companies'. Basically, a private company is a company that is not limited by shares or whose shares are not quoted on the Australian Stock Exchange (ASX) or any exchange of the World Federation of Exchanges. In some States, the provisions are not as technically accurate as they could be. However, in practice listed entities are not private companies. 3.3 Application to Listed Companies Recent changes to the WA Act have extended the application of the WA land rich provisions to listed companies where at least a 90% interest is obtained. At this stage, the application of the land rich provisions to listed companies per se is unique to WA although arguably land rich duty can also be imposed in SA on an acquisition which leads to an entity ceasing to be listed after the acquisition has occurred. 3.4 Application to Unit Trusts There is even greater disparity between the jurisdictions in their application of the land rich provisions to unit trusts. (a) NSW The two types of trusts potentially subject to the NSW provisions are: pjab B v Page 2

3 private unit trust schemes; and wholesale unit trust schemes. Public unit trust schemes are not subject to the land rich provisions. A wholesale unit trust scheme is a unit trust scheme 3 in which not less than 80% of the units are held by 'qualifying investors', provided that each qualifying investor holds less than 50% of the units in the unit trust scheme or, if a qualifying investor holds units in more than one capacity, the qualifying investor holds less than 50% of the units in each capacity. It is worth noting that as the definition of wholesale unit trust scheme is currently drafted, there are circumstances in which a trust could potentially qualify as both a wholesale unit trust and a public unit trust. This is a concern since public unit trust schemes are not subject to the land rich provisions at all. It is suggested that the definition of wholesale unit trust should be amended to make it clear that a wholesale unit trust is a unit trust that is not a public unit trust. Hopefully, this is how NSW administers the provision in any event although legislative or administrative clarification of the point would be useful. Upon approval by the Commissioner, a unit trust may be regarded as a wholesale unit trust if, in the Commissioner's opinion, it will satisfy the above requirements within 12 months (or longer if the Commissioner allows), provided that the only units issued in that 12 months (or the longer period) from the time the Commissioner gives the relevant approval are issued for the purpose of the unit trust becoming a wholesale unit trust. The NSW definition of 'qualifying investor' is an interesting one. To be a qualifying investor an investor must fit into one or more of the following categories: (A) trustee of a complying superannuation fund which has not less than 300 members; (B) trustee of a complying approved deposit fund which has not less than 300 members; (C) (D) (E) (F) (G) trustee of a pooled superannuation trust; trustee of a public unit trust; life company if its holding of units in the unit trust is an investment of a statutory fund maintained by it under the Life Insurance Act 1995 (Cth); custodian for a trustee or life company referred to above, in its capacity as such a custodian; or trustee of another wholesale unit trust scheme. In our experience, these classes of qualifying investor do not necessarily reflect the funds management industry view of what constitutes a wholesale investor. Another concern is that, based on the categories listed, any trust in which foreign investors hold 20% of the interests is unlikely to qualify as a wholesale unit trust. 3 Defined in sch 2 of the Duties Act 1997 (NSW). pjab B v Page 3

4 Any foreign investors are unlikely to fit within a class of qualifying investor. Hopefully, this is an oversight which will be corrected. A private unit trust is any unit trust that is not a public unit trust scheme or a wholesale unit trust scheme. As noted earlier, public unit trust schemes are not subject to the land rich provisions. A public unit trust scheme is any one of the following: a listed trust, being a unit trust scheme any of the units in which are listed for quotation on the ASX or any exchange of the World Federation of Exchanges; a widely held trust, being a unit trust scheme which has not less than 300 unitholders none of whom, individually or together with any associated person, is beneficially entitled to more than 20% of the units in the trust; (iii) an imminent public trust (ie one which the Commissioner is satisfied will satisfy or within 12 months (or such longer period as the Commissioner may determine) and in which the only units issued during the 12 months (or the longer period) are for the purpose of the unit trust becoming a public unit trust). (b) Vic On 13 May , Vic introduced changes which are broadly consistent with the changes which took effect in NSW in November Vic has adopted the NSW concept of distinguishing between private, wholesale and public unit trusts. There are however, some notable differences in the relevant definition of each type of trust. Public Unit Trusts Like NSW, public unit trusts are outside the land rich provisions. There are 4 categories of public unit trust in Vic: (A) (B) Listed Trust This is a unit trust in which all of the units are listed for quotation on the ASX or another recognised exchange and are traded on that exchange. Previously it was enough for some but not all of the units to be listed for quotation (which is still the position in NSW) and there was no requirement that the units be traded. There is no guidance as to the level or frequency of trading required in order for units to be regarded as being 'traded' for the purposes of the section. Widely Held Trust Basically, this only applies to registered managed investment schemes under the Corporations Act 2001 (Cth) which have at least 300 beneficial unitholders, none of whom 4 State Taxation Acts (Tax Reform) Act 2004 pjab B v Page 4

5 either individually or with their associates are beneficially entitled to more than 20% of the units in the scheme. 5 (C) (D) Registered Imminent Public Unit Trust Scheme This basically allows a trust to register for public unit trust treatment during its start up phase if the Commissioner is satisfied that the trust will become listed or widely held within 12 months after the later of the day on which the first units in the trust were issued or the date of the prospectus or product disclosure statement for the offer of units to the public. Units issued before the trust becomes listed or widely held must be issued only for the purpose of the trust becoming listed or widely held. Registered Declared Public Unit Trust Scheme This allows the Commissioner to declare a trust to be a public unit trust if he is satisfied that it should be so registered. There is no guidance in the legislation as to the circumstances in which the Commissioner would be so satisfied although the application form available from the Vic State Revenue Office website indicates some of the matters the Commissioner would consider including: (1) whether the scheme was established for a particular investor or group of investors; (2) the degree of ownership and control a particular investor or group of investors has over the scheme; (3) whether the purpose and nature of the scheme is effectively public; and (4) whether there are any factors preventing the scheme from being registered as an imminent public unit trust. A public unit trust does not include a unit trust that is, or was at any time, a wholesale unit trust (including an imminent wholesale unit trust) or was eligible for registration as such. In other words, a trust cannot transition from wholesale to public unit trust status. Once a trust is a wholesale unit trust (as defined), it will never be public and therefore never be outside the land rich provisions (unless, of course, it ceases to be land rich). This is likely to cause significant problems in practice for any wholesale unit trusts which subsequently seek to become listed. Under the current provisions, such trusts will continue to be subject to the Vic land rich provisions. The policy rationale for this approach is unclear, particularly given that there is no such restriction upon a private unit trust becoming public. 5 Section 89A of the Duties Act 2000 (VIC) provides a temporary concession from this 20% threshold for widely held trusts which have 're-purchase facilities' which results in a temporary breach of the 20% threshold. If the requirements of the section are met the threshold is temporarily increased to 25%. pjab B v Page 5

6 Wholesale Unit Trusts The Vic wholesale unit trust concept is similar to that in NSW, except that: (A) (B) (C) the scheme must register with the Commissioner to be regarded as a wholesale unit trust (there is no self assessment of such status); the scheme must not be established for a particular investor. the third requirement is that either: (1) the trustee must hold directly or indirectly an interest in not less than 3 parcels of land. At least 2 of those interests must have an unencumbered value of $10 million or more. It is unclear what constitutes a 'parcel' of land, although the Commissioner may treat 2 or more parcels as a single parcel if he is satisfied that it is appropriate to do so having regard to the ownership of the parcels, their proximity and use; or (2) at least 6 unitholders in the trust, who are not associated, have a subscription under the scheme of not less than $3 million. Like NSW, wholesale unit trusts must satisfy a requirement that not less than 80% of the units in the scheme are held by qualified investors. No qualified investor (alone or with their associates) can hold 50% or more of the units in the scheme. The Commissioner can refuse registration as a wholesale unit trust if he believes it is being sought for the purposes of, or as part of a scheme or arrangement with a collateral purpose of, avoiding or reducing land rich duty. Presumably though what the Commissioner is concerned about (and would focus on) is any manipulation of the requirements for wholesale unit trust status. The definition of 'qualified investor' for the purposes of the Vic provisions is substantially the same as in NSW, except that the Commissioner also has a discretion to approve an investor as a qualified investor if he is satisfied that it is investing in a capacity that corresponds to a capacity referred to above under the law of an external territory or country outside Australia. There is scope for a trust to be registered as an imminent wholesale unit trust. To be registered as such, the Commissioner must be satisfied that the trust will meet the criteria for wholesale unit trust status within 12 months after the day on which the first units were issued to a qualified investor and the units issued before the trust meets the criteria for registration as a wholesale unit trust have been or will be issued only for the purpose of meeting those criteria. This process offers an important concession for wholesale unit trusts during their start up phase. pjab B v Page 6

7 If an imminent public or imminent wholesale unit trust fails to meet the criteria for registration as listed, widely held or wholesale status, as the case may be, within the 12 month period, the trust is treated as a private unit trust for the whole of that period and the acquisition of any 'significant interest' during that time 'becomes a relevant acquisition' which is liable to duty. Penalties and interest accrue if the duty is not paid within 3 months from the date the liability to duty arose (ie the date of the relevant acquisition). It is not altogether clear whether the relevant acquisition (and hence the liability to duty) is taken to have occurred on the day on which the significant acquisition occurred (ie the actual date of the acquisition) or alternatively on the date that the acquisition 'becomes a relevant acquisition'. The conservative view is that it is the former, although the matter is not entirely free from doubt. Registration as a declared public unit trust, imminent public unit trust, wholesale unit trust or imminent wholesale unit trust is effective for: (A) (B) 3 years in the case of a declared public unit trust or wholesale unit trust; 12 months in the case of an imminent public unit trust or imminent wholesale unit trust. Registration can be renewed on application. (c) Tas and the ACT In Tas and the ACT a private unit trust scheme is a unit trust scheme that is not a public unit trust scheme. 6 Public unit trust schemes are not subject to the land rich provisions. Therefore, the focus is on whether a particular trust is a public unit trust. Some points to note about the public unit trust test (set out in the previous footnote) are: paragraph (a) refers to a trust in which any of the units are listed for quotation. This is in contrast to the new Vic provisions; 6 Public unit trust scheme means a unit trust scheme: (a) (b) (c) any of the units of which are listed for quotation on the ASX or on a recognised stock exchange; or that is a managed investment scheme within the meaning of chapter 5C of the Corporations Act applies and in respect of which (1) some or all of the units have been offered to the public and (2) no fewer than 50 persons hold units in it; or that, in the opinion of the Commissioner, will satisfy paragraph (a) or (b) within 12 months after the Commissioner gives written notice of that opinion to a person who has requested the Commissioner to express that opinion in relation to the unit trust scheme. The definition of public unit trust also includes certain unit trusts covered by the Corporations Act provisions prior to the introduction of the managed investment scheme regime. Such trusts must however meet similar 'public offer' and spread of ownership tests as managed investment schemes. pjab B v Page 7

8 paragraph (b) refers to units having been offered (as opposed to issued) to the public. One may question whether there are any circumstances in which units may be offered although ultimately not issued to the public. There can also be issues in determining how many persons to whom units must be offered, in order to constitute an offer to the 'public'. This issue was considered by the High Court in Corporate Affairs Commission (SA) v Australian Central Credit Union (1985) 157 CLR 201. That case concerned the issue of whether an offer of units by a credit union to its 23,0000 members was an 'offer to the public' under the prescribed interest provisions of the then Companies (SA) Code. On the relevant facts, the High Court ruled that the offer made by the credit union was not an 'offer to the public'. The case demonstrates that determining what constitutes an 'offer to the public' is not purely a question of how many persons to whom the offer is made. Other factors, such as the nature of an subsisting relationship between the offeror and the members of the group, the nature and content of the offer and the significance of any particular characteristic which identifies the group, are also relevant. (d) SA The South Australian land rich provisions apply to private unit trust schemes. A private unit trust scheme is a unit trust scheme in which: less than 50 persons holds units; or 50 or more persons hold units if 20 or fewer persons hold 75% or more in number or value of the units on issue, but does not include a unit trust scheme that is an approved deposit fund or pooled superannuation trust within the meaning of the Superannuation Industry Supervision Act 1993 (Cth). It is important to note that unlike the other jurisdictions, the quotation of units in a trust does not, of itself, preclude the land rich provisions from applying to a unit trust scheme. However, item 24D of the second schedule to the Stamp Act 1923 (SA) provides an exemption from all stamp duties in respect of a conveyance of a quoted financial product which should extend to land rich duty. An interest in a managed investment scheme registered under Chapter 5C of the Corporations Act is a financial product. Note however that item 24D applies to conveyances only, and not an issue of units. This can present problems in the context of a public float, where the unit trust does not, at least initially, meet the requisite 'spread' requirements. (e) NT The NT provisions do not apply to a 'unit trust scheme that is not a private unit trust scheme'. Therefore, the provisions only apply to private unit trust schemes. A private unit trust scheme is a unit trust in respect of which the deed: pjab B v Page 8

9 has not been approved for the purposes of Chapter 5C of the Corporations Act 2001 (or the corresponding provisions of the law in force in a state or another territory); or has been approved for the purposes of Chapter 5C, or the corresponding provisions of the law in force in a state or another territory, but at least one of the following applies: (A) (B) (C) no units have been issued to the public; fewer than 50 persons are beneficially entitled to units under the scheme; 20 or fewer persons are beneficially entitled to 75% or more of the total issued units under the scheme. Special rules apply for the purposes of determining the number of persons beneficially entitled to units. Basically the rules treat all units held by certain associated persons (widely defined) as though they were held by the one person. The drafting of these grouping provisions can have a very wide application in the case of units held by trustees. Acquisitions in listed unit trusts are excluded from land rich duty by virtue of section 56K(1A)(a) of the NT Act. This section provides that there is no obligation to lodge a dutiable statement in relation to an acquisition if, at time the interest is acquired, the 'corporation is quoted (ie. listed) on a recognised financial market'. Section 56T deems the land rich provisions to apply to unit trust schemes as if the scheme were a corporation. Therefore, the exemption in section 56K(1A)(a) should also apply to listed unit trust schemes. (f) Qld and WA In Qld and WA, trusts are not covered by the land rich provisions so called. Trusts are governed by entirely separate provisions which, although have some conceptual similarities, are substantially different in many ways. 4. When is an entity land rich? 4.1 Overview To determine whether an entity is 'land rich' there are generally 2 tests to apply. The first test is whether the direct or indirect land holdings of the entity include land located in the relevant jurisdiction which has a value equal to or greater than a relevant threshold. This is $500,000 in Tas and the NT. It is $1 million in Vic, Qld, WA and SA. It is $2 million in NSW. It is nil in the ACT. Except for New South Wales, there has been no attempt to bring these thresholds in line with market increases. The second test is the ratio of the entity's land-holdings in all places (world-wide) compared with its total assets (ignoring certain liquid and other excluded assets see part 4.3 below). The current ratio is 60% or more in NSW, Vic and WA (down from 80%); 80% or more in Qld, Tas and SA and nil in the ACT and NT. As discussed below, the tests for determining the value of an entity's land holdings and other property are applied on a 'subsidiary' (or in NSW and Vic, 'linked entity') inclusive pjab B v Page 9

10 basis. This means that in order to determine whether an entity is land rich you are, in addition to the landholdings and other property of the entity in which a relevant interest is acquired, also required to take into account interests held by relevant downstream entities. In Queensland, the two tests are applied separately to the parent and then to the parent and subsidiaries together. If the corporation is land rich under either of these tests, it is a land rich corporation. This prevents a (parent) company which is land rich in its own right from failing the land rich tests on the basis that it has subsidiaries with significant non land assets. The issues commonly raised by the land rich tests in the various states include: What landholdings are caught? What assets do you count (or not count) for the purposes of calculating the total value of the entity's assets? As highlighted below, there are some notable differences between the various jurisdictions. How and to what extent is property (including land) held by downstream entities relevant? 4.2 What landholdings are caught? For the purposes of the land rich provisions in NSW, Vic, Tas and the ACT, a landholding is an interest in land other than the estate or interest of a mortgagee, chargee or other secured creditor or a profit a prendre. 7 However, an interest in land: is not a land holding of a private company unless the interest of the private company in the land is a beneficial interest; and is not a land holding of a unit trust scheme unless the interest is held by the trustees in their capacity as trustees of the scheme. In Qld, a corporation's land holdings means: (a) the corporation's interest in land and anything fixed to the land that may be separately owned from the land other than: a security interest; or an interest in a trust; (b) rights held by the corporation that: relate to, or affect, the use of the corporation's land and other land; and enhance the value of the corporation's land; (c) an interest in land, and anything fixed to the land, that is the subject of a purchase agreement or sale agreement made by the corporation. 7 As to the nature of a profit a prendre refer to paper by Michael Perez, "Equitable Interests" available at pjab B v Page 10

11 In Qld, regard should be had to the definition of 'interest' in the Acts Interpretation Act 1936 (Qld). It is a wide definition and captures a much broader range of interests in land than might usually come to mind. Arising from the decision in Commissioner of Stamp Duties (Qld) v MIM Holdings Limited (99 ATC 4145), paragraph (b) is an interesting extension to what might ordinarily be regarded as an interest in land. In SA, the focus is on the 'land assets' of the entity which covers any interest in land, including a right to explore for minerals, petroleum or other substances on land or to recover minerals, petroleum or any other substance from land'. This extended definition is notable as it picks up interests which might not be caught in some other states. For example, Qld specifically excludes a right to explore for minerals or petroleum from being an interest in land 8. Whether an interest in an exploration or other mining tenement would amount to an interest in land in other jurisdictions depends upon the construction of the applicable mining and petroleum legislation. The WA and NT legislation is concerned with whether a corporation is 'entitled to land'. In this context, entitled means 'beneficially entitled' 9. Land includes a mining tenement 10 and also includes any estate or interest in land and anything fixed to land including anything that is, or purports to be, the subject of ownership separate from the land. 4.3 Excluded Assets All jurisdictions, other than the ACT and NT 11, focus on the proportionate value of the entity's landholdings compared with other assets. At a practical level, this is often what determines whether a particular entity is land rich, given the present low dollar value thresholds. The relevant threshold varies between 60% and 80% depending on the jurisdiction. As noted, there is no threshold in the ACT or NT where the only test is whether the entity has landholdings worth more than the relevant dollar threshold (which is $500,00 in the NT and nil in the ACT). In the jurisdictions where there is a threshold test certain property is excluded in working out the unencumbered value of all of the entity's property (necessary to determine whether the threshold test is satisfied). In NSW, the following types of property are not counted: cash, whether in Australian or other currency; money on deposit with any person, negotiable instruments or debt securities; 8 Refer to the definition of 'land' in schedule 6, Duties Act 2001 (Qld) which specifically excludes from the definition of land certain exploration interests arising under Qld mining and petroleum legislation. 9 Section 76(1) Stamp Act 1921 (WA); section 56C(1) Taxation (Administration) Act 1978 (NT) 10 Refer to definition of 'mining tenement' in section 76(1) of the Stamp Act 1921 (WA). 11 The absence of any proportionate threshold means that the NT and in particular ACT provisions can apply to virtually any private company or private unit trust that owns land in these jurisdictions (subject to the requirement in the NT that the total NT landholdings be worth at least $500,000). pjab B v Page 11

12 (iii) (iv) (v) (vi) (vii) (viii) loans that, according to the terms, are to be repaid on demand by the lender or within 12 months after the date of the loan; if the land holder is a private unit trust scheme or a wholesale unit trust scheme, loans to persons who, in relation to a trustee or beneficiary of the scheme, are associated persons; if the land holder is a private company, loans to persons who, in relation to the company or a majority shareholder or the director of the company, are associated persons; land use entitlements; units or shares in a linked entity of the land holder; and property consisting of an interest as a beneficiary in a discretionary trust. In addition, property is not counted if the land holder is unable to satisfy the Commissioner that the property was obtained otherwise then to reduce, for the purposes of the land holder provisions, the ratio of its landholdings in all places, whether within or outside Australia, to the unencumbered value of all its property. The position in Vic, Tas and Qld is substantially the same, except that: (a) (b) (c) Qld and Vic also exclude amounts paid (ie the deposit) and due (ie the balance owing) under uncompleted agreements for the sale of land made by the corporation or a relevant downstream entity; Qld excludes amounts of unpaid capital; and Qld does not exclude land use entitlements. The categories of excluded assets in SA are substantially the same as in the other states already mentioned (broadly, cash and other liquid assets). The categories of excluded assets in WA are quite different. In addition to the types of property outlined above the following are also excluded: property consisting of rights or interests under a sales contract (including a forward sales contract) relating to minerals, primary produce or other commodities; a licence or patent or other intellectual property (including knowledge or information that has a commercial value) relating to any process, technique, method, design or apparatus to: (A) (B) locate, extract, process, transport or market minerals; or grow, rear, breed, maintain, produce, harvest, collect, process or transport or market primary products; (iii) (iv) stores, stockpiles or holdings of minerals or primary products (processed or unprocessed) produced by the company or a related person; future tax benefits (whether in the nature or tax losses, capital losses, foreign losses or foreign tax credits) under the Income Tax Assessment Act 1997 or the Income Tas Assessment Act 1936 or similar benefits under the laws of another jurisdiction. pjab B v Page 12

13 Paragraph (iv) is unique to WA. In the other states and territories, it remains an open question as to whether tax losses constitute property of a corporation (see EIE Ocean BV v Commissioner of Stamp Duties (Qld) [1998] 1 Qd R 36). This is only a summary of the relevant categories and despite some similarities between states, there are sometimes subtle, yet important, differences in the way that a particular category is expressed. It is always necessary to look closely at the particular categories, since it can mean the difference between the entity being, or not being, land rich. 4.4 Tracing Landholdings Every jurisdiction has comprehensive tracing provisions which basically mean that, in addition to any interest in land or other property that an entity holds in its own right, it is also taken to hold an interest in land or other property held by certain downstream entities. Traditionally, tracing focussed on the interests of subsidiaries, which generally required an economic interest in the downstream entity of more than 50%. However, in recent times, this requirement has changed and some states now provide for tracing through to downstream entities in which the head entity has an economic interest of 20% or more. (a) NSW and Vic In NSW, landholdings are traced between entities where there is a 20% or more ownership relationship between the entities. In order for an entity to be a linked entity of a unit trust or a private company (the principal entity), the principal entity must be entitled to receive not less than 20% of the unencumbered value of the property of the underlying entity if all the persons in the chain (other than the principal entity) were to be wound up. Example: A company (the head company) has a 20% interest in company B which in turn has a 20% interest in company C. As the head company would not be entitled to 20% or more of the unencumbered value of all the property of company C, company C will not be a linked entity of the head company (even though company C is a linked entity of company B). The head company would only be entitled to 4% of the unencumbered value of property of company C. The provisions preclude tracing through any public unit trust scheme, wholesale unit trust scheme or a company whose shares are listed on the ASX or an exchange of the World Federation of Exchanges. Special rules apply for tracing interests through discretionary trusts. In general terms, any beneficiary in whose favour capital of the trust may be applied (whether following the exercise of a discretion or on default) is taken to own or be entitled to 100% of the property the subject of the trust. The position in Vic is substantially the same as in NSW, requiring you to trace through to the land and other property to which an entity is entitled to through a linked entity. However, under the Vic provisions, there is no minimum ownership requirement for an entity to be a linked entity of another entity. Rather than focussing on pjab B v Page 13

14 ownership interests in an entity in order to identify it as a linked entity, the focus is on the head entity's entitlement to underlying land and other property of ultimate underlying entities (regardless of ownership interests). According to the explanatory memorandum to the State Taxation Acts (Tax Reform) Act 2004 which introduced the new Vic provisions: [The] section requires the Commissioner to look at any property held separately from the land holder and if 20% or more of it would move up to the land holder if any holding structures were wound up, it is to be included. The relevant entitlement of the land holder is to the property, not necessarily linked to any linked entity. Consequently, under the Vic provisions the interest that an entity holds in land or other property held by a downstream entity is the proportion of the land or other property that the entity would be entitled to receive if all linked entities in the chain were wound up (as opposed to the entire interest held by the downstream entity). Land or other property is not counted (ie not attributed to the entity for land rich duty purposes), unless at least 20% of it is received ultimately from linked entities on a winding up. You do not trace through land or other property held by natural persons (even those acting as trustee) or through any public unit trust or listed company. (b) ACT and Tas The position in the ACT and Tas is more traditional (in a land rich duty sense). In addition to any interest in land or other property that it may hold in its own right an entity is taken to hold an interest in land and other property held by its subsidiary. The value of the land or other property that an entity is taken to hold by virtue of its interest in a subsidiary is that portion which the entity would be entitled to on a winding up of the subsidiary and every other subsidiary in the ownership chain. In other words, an entity is only attributed with an interest in the land and other property of a downstream entity to the extent that the upstream entity would be entitled to that property on a winding up of the downstream entity. A private company (Company A) is a subsidiary of another private company (Company B) if the Company A is a subsidiary of Company B within the meaning of the Corporations Act 2001 (Cth). The Corporations Act concept of subsidiary also covers control, as well as voting and ownership interests held in a downstream entity. A private company is a subsidiary of a unit trust scheme if the trustees of the scheme, in their capacity as trustees of the scheme, have a majority interest in the private company. A 'majority interest' means an interest of more than 50%. A unit trust scheme is the subsidiary of a private corporation if the corporation has a majority interest in the scheme. There are no provisions setting out when a unit trust scheme will be the subsidiary of another unit trust scheme. However, if the head trust has a beneficial interest in pjab B v Page 14

15 the property held by the subsidiary trust there would seem to be no need for such a definition. Special rules apply tracing interests through discretionary trusts. The provisions are substantially the same as in NSW. There is however, an ability for the Commissioner to disregard tracing if he is satisfied that the application of the provisions in the particular case would be inequitable. No equivalent discretion exists in NSW although the Commissioner does have an overriding discretion to treat a particular acquisition as an exempt acquisition if he is satisfied that the application of the provisions in a particular case would not be just and reasonable. (c) Qld A corporation's land holdings and property include those of any subsidiary (unless the land holdings are held by the subsidiary on trust and the corporation or another subsidiary of it is not a beneficiary of the trust). This is referring to the Corporations Act concept of subsidiary. In addition, each of the following is a subsidiary of a corporation: a trustee of a trust if the corporation or a subsidiary of it is a beneficiary of the trust (a relevant trust); an unlisted corporation in which: (A) (B) the trustee of a relevant trust (ie a trust referred to in paragraph ) has a majority (ie more than 50%) interest; or a majority interest is held on trust and the trustee of a relevant trust is a beneficiary of that trust. An unlisted corporation or trustee is also a subsidiary of a corporation if it is a subsidiary of a subsidiary of the corporation. This allows for comprehensive tracing of subsidiaries. In Qld, there is no limitation on the extent of tracing. Once an entity is as a subsidiary of another entity, that other entity is attributed with 100% of the value of the subsidiary's land and other property. (d) SA The underlying land and other assets of an entity includes the entity's notional interest in the assets of its related entities but only where the entity has a majority interest (discussed below) in the related entity, including through a chain of interests. Entities are related entities if: one has a direct interest (ie holds a share or unit) in the other; or a series of such relationship (ie direct interests) can be traced between them through one or more other related entities. A majority interest is defined to mean a 'proportionate interest' in the entity of more than 50%. A proportionate interest is defined as: pjab B v Page 15

16 (A) (B) for a person or group having a direct or indirect interest in the entity-the percentage representing the extent of that interest; or for a person or group that has both a direct and indirect interest in the entity-an aggregate percentage representing the extent of both of those interests. A person has a direct interest if they are the legal and beneficial owner of the share, or control the exercise of rights attached to the share. A person or group's direct interest is expressed as a proportionate interest being the highest of the following percentages: (1) voting rights at a general meeting of shareholders; (2) entitlement to participate in dividends or distributions of income; and (3) entitlement to participate in the distribution of assets on a winding up of the private entity. Consequently, an entity can be attributed with a notional interest in the assets of an underlying related entity based on its ability to vote or receive dividends. A right to capital (on winding up or otherwise) is not required in order for the tracing rules to apply (compare NSW and Vic). An indirect interest can be traced through one or more private entities even where there is a 50% or less interest held between private entities in the chain. However, an indirect interest cannot be traced if one of the entities in the chain is a listed company. (e) WA The position in WA is largely similar to that in Qld. In general, a company is taken to be entitled to the whole of the interest held by its subsidiary (ie. to the extent that the subsidiary is entitled), and not just the amount referable to the company's interest in the subsidiary. (f) NT In the NT, a corporation is deemed to be entitled to land or other property to the extent that a subsidiary is entitled to that land or other property (which is akin to Qld and WA). Notably, a trustee of a trust in which a company or its subsidiary has an interest (or, in the case of a discretionary trust, may benefit from) will only be regarded as a subsidiary if, at the time of the relevant acquisition, the company or subsidiary is entitled to more than 50% of the value of the property held by the trust. This is a significant concession compared with the other states which, it is submitted, is more consistent with subsidiary treatment of corporations (ie. there must be a majority interest in the trust for its property to be attributed). pjab B v Page 16

17 4.5 Uncompleted contracts In each jurisdiction, specific rules apply where a land holder has entered into an agreement to buy or sell land and/or other property. Broadly, both parties under an uncompleted agreement for the transfer of land are taken to be separately entitled to the whole of the land. In other words, the most advantageous position for the revenue is adopted. Each jurisdiction has provisions dealing with the reassessment of duty if the contract is completed, rescinded or annulled. The SA provisions do not deal specifically with uncompleted contracts in relation to land or other property. There is however a specific provision dealing with the valuation of interests in land under uncompleted contracts or options. Section 100 provides: If an interest in land consists of an interest arising under a contract or option to purchase the land, the interest is to be valued, for the purposes of this Part, by subtracting from the market value of the land the amount that the purchaser under the contract or the holder of the option would be required to pay in order to complete the purchase. In other words, the purchaser is treated as having an interest equivalent only to the amount of any deposit it has paid. This is a significant departure from the position in most other states. In WA, NSW and Vic the following rules apply to uncompleted contracts relating to property other than land: where the land holder is the seller-the agreement is taken to have been completed; where the land holder is the acquirer-the agreement is disregarded. The effect of these rules is that property, other than land, which is subject to contract is not counted for the purposes of working out whether an entity is land rich. 5. Trigger for duty 5.1 Relevant Acquisition If an entity is 'land rich' the final requirement to trigger a liability to duty is a relevant acquisition, being the acquisition of a sufficient percentage interest in the land rich entity. In NSW, Vic and the NT a relevant acquisition arises, broadly speaking, where a person acquires an interest of 50% or more (although the trigger is 20% or more for private unit trusts (not being wholesale trusts) in NSW and Vic). In Qld, Tas, WA, SA and the ACT the threshold is more than 50%. Duty is also imposed on the acquisition of a 'further interest' (ie increasing an existing majority interest). pjab B v Page 17

18 The particular provisions in each jurisdiction are discussed in further detail below. (a) NSW and Vic A liability for land rich duty arises when a relevant acquisition is made. However, in every case this is dependent upon a person acquiring an interest in the land holder. A person has an interest in a land holder if the person has an entitlement (other than as a creditor or other person to whom the land holder is liable) to a distribution of property from the land holder on a winding up of the land holder or otherwise. The Vic provisions speak of a person having a 'beneficial entitlement' to a distribution of property from the land holder. NSW refers only to the person having an 'entitlement' (which suggests a legal interest). A person may acquire an interest in a land rich land holder if the person obtains an interest or the person's interest increases in the land holder regardless of how it is obtained or increased. A relevant acquisition can arise in 1 of 4 ways. (iii) (iv) a person acquires a 'significant interest'; a person acquires an interest that, when aggregated with other interests held by that person or an associated person, amounts to a significant interest; a person acquires an interest that, when aggregated with other interests acquired by the person or other persons under substantially one arrangement between the acquirers (referred to in Vic as an 'associated transaction'), amounts to a significant interest; or a person who has a significant interest in a land holder, whether alone or on an associate inclusive basis, acquires a further interest in the land holder. For the purposes of determining whether an acquisition has given rise to a relevant acquisition, the Vic provisions only require transactions which have occurred within the preceding 3 years to be aggregated under either paragraphs or (iii). There is no such limitation in NSW and therefore, for the purposes of working out whether a relevant acquisition has occurred in NSW, the time frame for aggregating previous acquisitions is unlimited. While NSW excludes from the calculation of duty acquisitions made outside the three year period, a relevant acquisition can occur earlier under the NSW provisions, leading to duty on any additional interests acquired in the last three years. Consequently, while it is possible in Vic (and some other jurisdictions) for a person to gradually increase their interest over time without triggering a relevant acquisition (and therefore not pay any duty), this is not the case in NSW and therefore the NSW provisions can apply to a greater number of transactions when compared with the provisions in the other jurisdictions. Similar issues arise in the NT, ACT and Tas. The time frame over which a person acquires their interest does pjab B v Page 18

19 become relevant to the calculation of duty on a relevant acquisition (broadly speaking duty is calculated only by reference to acquisitions made during the preceding 3 years). What constitutes a significant interest varies depending on whether the entity in which the interest is acquired is a private unit trust scheme, a wholesale unit trust scheme or a private company. A person who has an interest in a land holder has a significant interest in that land holder if, in the event of a distribution of all the property of the land holder immediately after the interest was acquired, the person would be entitled to: in the case of a private unit trust scheme- 20% or more of the property distributed; in the case of a land holder other than a private unit trust scheme (ie a wholesale unit trust scheme 12 or a private company) 50% or more of the property distributed. The introduction of the 20% threshold for private unit trust schemes is a radical change from the previous provisions. Changing the trigger for private companies, and wholesale unit trusts to '50% or more' (where it was previously more than 50%) is a more subtle, but still important, change. Broadly speaking, to determine whether a significant interest has been acquired (which is relevant to paragraphs -(iii) above), you do not count an interest acquired before the date of commencement of the relevant land rich provisions 13 or at a time when the land holder did not hold land in NSW or Vic, as the case may be. The new Vic provisions also contain a particular 'relation-back' rule for the purposes of determining whether a person has acquired a 'significant interest'. The rule is designed to counter potential avoidance schemes where a person who acquires an interest also acquires the right to obtain an additional interest outside the 3 years (and thus defeat the 3 year aggregation rules discussed above). To address this section 79(4) provides that when the subsequent interest is acquired, the earlier interest and any interests aggregated with it (ie. which occurred within 3 years), are all taken to have occurred as one acquisition. Similar provisions exist in other jurisdictions, notably Qld, WA and the NT. Deemed Relevant Acquisition The recent Vic amendments have introduced the concept of a relevant acquisition being triggered as the result of a person gaining or acquiring 'control' over a land rich entity. The concept of acquiring 'control' is different from acquiring an 'interest' and is a significant departure from the previous provisions. 12 Includes an 'imminent wholesale unit trust scheme' in Victoria 13 Different in each state for unit trusts and private companies pjab B v Page 19