|Ruling number||DUT 028|
|Date issued||4 May 2004|
|Issued by||Peter Achterstraat|
Chief Commissioner of State Revenue
|Effective from||14 November 2003|
|Effective to||30 June 2009|
Part 2 of Chapter 3 of the Duties Act 1997 imposes duty on acquisitions of interests in certain landholders. The provisions are a continuation and expansion of the policy introduced in Division 30 of Part 3 of the Stamp Duties Act 1920 of imposing duty on the acquisition of shares or units in a land rich company or unit trust as if it were an acquisition of the land held by the company or trust.
Various Revenue Rulings were published in relation to the land-rich provisions in the Stamp Duties Act. A number of principles outlined in those rulings were incorporated into the legislation with the commencement of the Duties Act.
The main purpose of this ruling is to identify the ongoing relevance of the principles applied under the Stamp Duties Act to the operation of the land rich provisions introduced with effect from 14 November 2003 in sections 106 - 124 of the Duties Act.
A "landholder" (section 106 (1)) is a private unit trust scheme, a wholesale unit trust scheme, or a private company, each of which is defined in the Dictionary to the Duties Act. A landholder is 'land rich' under section 106 (2) if it has land holdings in New South Wales with an unencumbered value of $2,000,000 or more, and its land holdings in all places comprise 60% or more of the unencumbered value of all its property. The 'land holdings' of a landholder is defined in section 107 (1), subject to three deeming provisions.
Section 108 (1) deems both the vendor and purchaser under an uncompleted agreement for the transfer of land to be separately entitled to the whole of the land. Section 122 provides for a reassessment of the duty payable upon completion or rescission of the agreement, as appropriate. The combined effect of sections 108 (1) and 122 is to identify the land holdings of a landholder at a given point in time (being the time at which a liability to land rich duty may arise), where the landholder is in the process of buying or selling land. One consequence of this is that an agreement for transfer cannot be used to manipulate the landholder's land holdings at that time. This clarifies and expands on the principles outlined in Ruling SD 111.
Sections 109 and 110 deem property held by linked entities and in discretionary trusts to be land holdings of the parent entity or beneficiary respectively. Section 109 (3) provides that the value of the constructive landholding in a linked entity is determined by a notional winding-up of the linked entity (or other links in the chain of ownership). Paragraphs (g) & (h) of section 106 (3) further provide that shares or units in a linked entity or interests in a discretionary trust are not counted in determining the 60% test.
For the purposes of determining whether a landholder is land rich (and the amount of duty payable), the proportionate value of land and other property of the linked entity will be substituted for the shares or units in the linked entity in the balance sheet of the parent landholder. Similarly, property held under a discretionary trust will be substituted for the interest of the beneficiary in the trust.
A liability to duty under the land rich provisions is triggered by a "relevant acquisition" (section 114) of an interest in a land rich landholder, which in turn refers to a "significant interest". Section 111 (2) identifies a significant interest by reference to an entitlement on distribution of the property of the landholder, being an entitlement to 20% or more in the case of a private unit trust scheme, and 50% or more in the case of a wholesale unit trust scheme or a private company. A relevant acquisition is the acquisition of an interest that is of itself a significant interest, or that when aggregated with other specified interests results in a significant interest, or that increases a significant interest.
However, not all interests are taken into account in determining a significant interest. The land rich provisions are not intended to apply to interests acquired prior to the date on which the original land-rich provisions took effect. This is so even if an acquisition after that date results in a significant interest or an increase in a significant interest. Subsection (3) provides that an interest in a landholder is not counted if the interest concerned:
is an interest in a unit trust scheme acquired before 10 June 1987, or
is an interest in a private company acquired before 21 November 1986, or
was acquired at a time when the landholder did not hold land in New South Wales.
For example, if a person was the holder of a 49 per cent entitlement in a private company prior to 21 November 1986, the acquisition of an additional 2 per cent after that date would not be dutiable under Chapter 3, as the 49 per cent entitlement is not an 'interest'. Similarly, if a person was the holder of a 19 per cent entitlement in a private unit trust scheme prior to 10 June 1987, the acquisition of an additional 2 per cent after that date would not be dutiable. This confirms the approach adopted in Ruling SD 117.
Paragraph (c) above refers to a situation in which a person acquires an entitlement in a landholder before the landholder acquired land in New South Wales. For example, if a person acquires a 49 per cent entitlement in a private company on a date on which the landholder did not hold any land in New South Wales, and the landholder subsequently acquired sufficient land to make the landholder 'land rich', the acquisition of an additional 2 per cent after the landholder became land rich would not be dutiable under Chapter 3, as the 49 per cent entitlement is not an 'interest'. This confirms and clarifies the approach adopted in part B of Ruling SD 156.
The application of section 111 (3) as outlined above effectively quarantines those interests from the operation of the land rich provisions. This should be distinguished from interests acquired under circumstances where the acquisition will not be subject to duty (such as exempt acquisitions under section 119), but where the entitlements acquired are still 'interests' for the purposes of determining whether a person has a significant interest.
For example, an acquisition of an interest solely from a pro rata increase in the interests of all shareholders or unitholders is an exempt acquisition under section 119 (1)(c). This confirms the approach adopted in part A of Ruling SD 156. Note, however, that a pro rata acquisition is still an 'acquisition of an interest' for the purposes of the land rich provisions, so that it will still be counted in determining whether a subsequent acquisition is dutiable if it results in or increases a significant interest.
A further example is an acquisition of an interest under a will, which is an exempt acquisition under section 119 (1)(d) but is still an acquisition of an interest for the purpose of determining whether a subsequent acquisition results in or increases a significant interest. Similarly, an interest acquired more than three years prior to a relevant acquisition will not be dutiable under section 118, but is still an interest that is counted in determining that the later acquisition is a relevant acquisition requiring the lodgement of a statement under section 115. This continues the approach adopted in Ruling SD 191.
Section 113 provides that a liability to land rich duty arises 'when a relevant acquisition is made'. Section 112 (1) provides that a person acquires an interest if the person obtains an interest or the person's interest increases, regardless of how it is obtained or increased. Section 112 (2) lists some (but not all) of the means of acquiring an interest, including the purchase of a unit or share. As indicated in Ruling SD 149, it is accepted that, in the case of an agreement to purchase shares or units, there is not an acquisition of an interest until the agreement is completed. The agreement would be completed by payment of the purchase money by the purchaser, and the execution and delivery at the same time of a transfer document by the vendor.
A relevant acquisition is defined in section 114 by reference to a significant interest. In determining a significant interest, the interest being acquired is aggregated with other interests in the corporation:
held by the person or an 'associated person' (defined in the Dictionary to the Act), or
acquired by another person or other persons under transactions that form, evidence, give effect to or arise from what is substantially one arrangement between the acquirers.
In determining whether the acquisitions are substantially one arrangement, any relevant matters will be taken into account, including the following:
any interdependency between the acquisitions, including whether any of the acquisitions are conditional on any of the other acquisitions;
whether the persons from whom the interests are acquired are the same or associated persons;
the period of time over which the acquisitions take place;
whether the acquirers' interests will be used together; and
whether the interests were used together before the acquisitions.
Unlike the similar provision in section 25 of the Duties Act, section 114 refers to substantially one arrangement "between the acquirers". Consequently, the disposal of a 100% interest in a land rich landholder to unassociated parties (none of whom acquires a significant interest) who do not have knowledge of the identity or purposes of the other acquirers would not constitute one arrangement between the acquirers.
When a trustee of a trust acquires an interest in a landholder, the beneficial owners under the trust have not made an "acquisition" of an "interest" and would not be required to lodge a statement under section 115. Similarly, when the beneficial ownership under a trust is changed, but there is no change in the legal ownership, there has been no "acquisition" of an "interest" for the purposes of the land rich provisions.
Conversely, a transfer from a trustee to a beneficiary has the potential to be subject to land rich duty. However, in circumstances where a transfer of shares or units from a trustee to a beneficiary is subject to nominal duty, but would trigger a liability as a 'relevant acquisition', consideration will be given to applying section 119 (2) so that the acquisition would be exempt on the grounds that it would not be just and reasonable for the land rich provisions to apply. Similar consideration will be given where a transfer of shares or units to a new trustee is subject to nominal duty.
The above paragraphs confirm the approach adopted in Ruling SD 253.
Section 118 (7) provides that no duty is chargeable in respect of a relevant acquisition in a landholder that is a primary producer if its land holdings comprise less than 80% of the unencumbered value of all its property. For acquisitions of primary producers, this provision effectively retains the 80% land rich test that applied before 14 November 2003. A primary producer is a landholder whose land holdings wholly or predominantly comprise land used for primary production as defined in section 274.
Where a person acquires a relevant interest in a primary producer, the land holdings of which are 60% or more but less than 80% of the unencumbered value of all its property, an acquisition statement must still be lodged, but no duty is payable. However, section 118 (8) requires the person who made the acquisition to notify the Chief Commissioner if the landholder ceases to be a primary producer at any time within 5 years of the acquisition. At that time, duty will be assessed on the acquisition, with duty chargeable on the date on which the landholder ceased to be a primary producer.
Section 123 provides that certain acquisitions for the purpose of securing financial accommodation are not subject to land rich duty (although a statement is still required to be lodged). This continues the concession provided by section 99K of the Stamp Duties Act, as applied by Ruling SD 121.
It is accepted that 'securing financial accommodation' in this context should not be given a narrow interpretation, and would include gaining, obtaining and procuring financial accommodation. Accordingly, an arrangement will not have to involve a security in the sense of a mortgage to be eligible for the concession.
Section 123 (2) provides that duty is chargeable 5 years (or such longer period as the Chief Commissioner allows) after the acquisition if the property has not been reacquired, or conveyed to a third person in exercise of the mortgagee's power of sale. This provision allows the Chief Commissioner to prevent the concession being used to acquire a significant interest in a land rich landholder without payment of ad valorem duty by means of a sham financing arrangement.
The period of 5 years need not be specified at the time the financing arrangements are entered into. Therefore, an open-ended arrangement may still be eligible for the concession, although duty may be payable after 5 years if the shares or units have not been re-transferred. No duty is payable on the re-acquisition (section 123 (3)). If the shares or units have been transferred to a third party otherwise than in exercise of the mortgagee's power of sale, duty is payable on the original statement, and the subsequent transfer may also be subject to the land rich provisions.
Clause 35 (3) of Schedule 1 to the Duties Act contains a transitional provision dealing with acquisitions in private unit trust schemes made before and after the commencement of the new land rich provisions on 14 November 2003. The intention of the provision is to prevent a
If a person a cquired an interest in private unit trust scheme prior to 14 November 2003 that was not a majority interest, any further acquisition on or after that date that results in an aggregated interest of 20% or more is a relevant acquisition. If those acquisitions occur within 3 years, section 118 would on its face require duty to be charged on the aggregated interests. However, if those aggregated interests entitle the person to less than 50% of the property of the landholder, clause 35 (3) provides that only the acquisition after 14 November 2003 is chargeable with duty.
For example, if a person acquires 15% before 14 November 2003 and a further 20% after that date, duty is chargeable only on the 20% interest. If person acquires 25% before 14 November 2003 and a further 10% after that date, duty is chargeable only on the 10% interest. But if a person acquires 25% before 14 November 2003 and a further 25% after that date, clause 35 (3) does not apply, and duty is chargeable under section 118 on the aggregate 50% interest if the relevant acquisition occurs within 3 years of the prior acquisition.