Transfer of Primary Production Property between family members
Ruling number
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DUT 050
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Tax/benefit
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Duties
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Type
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Duties
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Date issued
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June 2021
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Issued by
| Scott Johnston Chief Commissioner of State Revenue
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Effective from
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June 2021
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Effective to
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-
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Status
| superseded |
Preamble/Background
This ruling provides an overview of the operation of sec.274 of the Duties Act 1997(‘Act’) one of the general exemptions from duty in Chapter 11 of the Act.
Sec.274 is headed ‘Transfer of certain business property between family members’. In broad terms, the purpose of this exemption is to enable land used for primary production (the ‘business property’ referred to in the heading of the section) to be transferred between relevant family members free of duty. As mentioned below, the exemption can also apply where the primary production land upon which the family’s farming operations are conducted is held by associated companies and trusts of which the relevant family members are shareholders or beneficiaries.
Ruling
Terms of the exemption
Sec.274(1) provides that duty under the Act is not chargeable in respect of a transfer or agreement for the sale or transfer of land, a lease of land, or a transfer or assignment of a lease or permit in respect of land, used for primary production together with any other property that is an integral part of the business of primary production, if the Chief Commissioner is satisfied that:
the transferor, lessor or assignor, or the person directing the transferor, lessor or assignor, is a member of the family of the transferee, lessee or assignee, and
the land was land used for primary production in connection with a business carried on by the transferee, lessee or assignee, or by a member of the family of the transferee, lessee or assignee, (whether alone or with others) immediately before the transaction or the date of first execution of the instrument, and
the business is to continue to be carried on by the transferee, lessee or assignee (whether alone or with others).
Transactions to which the exemption applies
- Under sec.274(1), the exemption therefore applies to:
- a transfer, or agreement for the sale or transfer of, land (in NSW) used for primary production
- a lease of land (in NSW) used for primary production
- a transfer or assignment of a lease or permit in respect of land (in NSW) used for primary production
- a transfer of any other property that is an integral part of the business of primary production.
Each of a transfer, and an agreement for the sale or transfer, of land in NSW is a dutiable transaction for the purposes of Chapter 2 of the Act (secs.8(1)(a),8(1)(b)(i),8(2),11(1)(a)). However, if the agreement for sale and/or transfer is in respect of land used for primary production it may be eligible for an exemption under sec.274 of the Act.
A transfer or assignment of an existing lease of land in NSW is also a dutiable transaction under Chapter 2 of the Act (secs.8(1)(a),8(2), 11(1)(a),11(1)(l)). However, if the lease is in respect of land used for primary production, the transfer or assignment of the lease may also be eligible for an exemption under sec.274 of the Act.
A grant of a new lease of land in NSW was formerly chargeable with lease duty under Chapter 5 of the Act. However, with the repeal of this duty the only leases which are now chargeable with duty (as dutiable transactions under Chapter 2 of the Act) are leases in respect of which a premium is paid or agreed to be paid (with the grant of such a lease being chargeable with duty under that chapter as if it were a transfer of the leased land from the lessor to the lessee) secs.8(1)(b)(viii),8(2),9(1),9(2)(a)). If such a lease is granted in respect of land used for primary production, it may be eligible for an exemption under sec.274 of the Act.
Sec.274(1) also applies to a transfer of other (non-land) property which is an integral part of the business of primary production.
The transfer will usually be of the whole interest in the land, but the exemption can also apply to a transfer of a fractional interest in the land.
Meaning of ‘land used for primary production’
Under sec.274(1), the land (in NSW) the subject of the transfer (or agreement for sale) must be ‘land used for primary production’.
In the Act as a whole (including sec.274), the expression ‘land used for primary production’ means land that is exempt from land tax under sec.10AA of the Land Tax Management Act 1956 (‘LTMA’) (Exemption for land used for primary production) (Duties Act 1997 (NSW), sec.6 and Dictionary (Clause 1)).
Under sec.10AA of the LTMA (in summary):
land that is ‘rural land’ (as defined in sec.10AA(4)) is exempt from taxation if it is land used for primary production (sec.10AA(1))
land that is not ‘rural land’ (as defined in sec.10AA(4)) is exempt from taxation if it is land used for primary production, and that use of the land has a significant and substantial commercial purpose or character and is engaged in for the purpose of profit on a continuous or repetitive basis (whether or not a profit is actually made) sec.10AA(2))
‘land used for primary production’ means land the dominant use of which is for: cultivation, for the purpose of selling the produce of the cultivation; the maintenance of animals (including birds) for the purpose of selling them or their natural increase or bodily produce; commercial fishing or the commercial farming of fish, molluscs, crustaceans or other aquatic animals; the keeping of bees, for the purpose of selling their honey; a commercial plant nursery (but not a nursery at which the principal cultivation is the maintenance of plants pending their sale to the general public); and the propagation for sale of mushrooms, orchids or flowers (sec.10AA(3)(a)-(f)).
In determining whether a particular parcel of land is exempt from land tax under sec.10AA of the LTMA -and is therefore ‘land used for primary production’ within the meaning of sec.274 of the Act- the Chief Commissioner will have regard to the principles set out in Revenue Ruling LT097v2 and relevant case law.
In most cases it will be readily apparent (e.g. from land tax records) that the subject land is land used for primary production. However, in cases of doubt- such as where there are multiple uses of the land not all of which are primary production uses (e.g. a quarry) - the taxpayer may be required to provide further information in order to substantiate the claim for the exemption.
Additional requirements: paras (a), (b) and (c) of sec.274(1)
If the land being transferred is ‘land used for primary production’ (i.e. is exempt from land tax under sec.10AA of the LTMA) then the transfer (or agreement for the sale or transfer) of the land will be exempt from duty under sec.274(1) of the Act provided the additional requirements of paras (a), (b) and (c) of sec.274(1) are also satisfied.
Broadly speaking, sec.274(1)(a) is concerned with the identity of the transferor(s) - or person(s) directing the transferor(s)- of the land itself whereas secs.274(1)(b) and 274(1)(c) are concerned with the identity of the person(s) conducting the primary production business on the land both before (sec.274(1)(b)) and after (sec.274(1)(c)) its transfer.
Sec.274(1)(a): the transferor, or the person directing the transferor, must be a member of the family of the transferee
Under sec.274(1)(a) of the Act, the transferor of the land used for primary production, or the person directing the transferor[1], must be a member of the family of the transferee of the land.
Sec.274(6): Meaning of ‘member’ of a transferee’s family
By sec.274(6) of the Act, a ‘member’ of a transferee’s family means each of the following persons:
- the transferee’s spouse[2],
- a parent of the transferee or the transferee’s spouse,
- a grandparent of the transferee or the transferee’s spouse,
- a brother, sister, nephew, niece, uncle or aunt of the transferee or the transferee’s spouse,
- a child or grandchild of the transferee or the transferee’s spouse,
- the spouse of anyone mentioned in para (b), (c), (d) or (e).
As this is an exclusive definition of ‘member’, the exemption does not apply to transfers of primary production land between any other family members e.g. cousins.
Sec.274(3): meaning of ‘person directing’ a transferor of the land
In many cases, the transfer of the land will be between the relevant family members themselves, e.g. a transfer between parents and one or more of their children, or a transfer between siblings (e.g. brothers).
However, sec.274(1)(a) will also be satisfied if the ‘person directing’ the transferor of the land is a member of the family of the transferee (as defined in sec.274(6)).
The phrase ‘person directing’ is defined in sec.274(3) of the Act. This definition covers those situations where the primary production land is held by deceased estates (sec.274(3)(a)), proprietary limited companies (sec.274(3)(b)), bare trusts (sec.274(3)(c)), discretionary trusts (sec.274(3)(d)), private unit trust schemes (sec.274(3)(e)), and self-managed superannuation funds (sec.274(3)(f)).
Sec.274(3)(a): land held by deceased estates
Sec.274(3)(a) refers to the situation where the transferor is acting in the capacity of executor or administrator of a deceased estate i.e. where the land is vested in the transferor in that representative capacity. Here, the ‘person directing’ the transferor (the executor or administrator) is the deceased person Thus, if the deceased person is or was a member of the transferee’s family (such as a parent of the transferee) sec.274(1)(a) (when read with sec.274(3)(a)) will be satisfied.
It is not necessary that the transferring executor/administrator be a member of the transferee’s family (although that will often be the case). Nor is it necessary that the transfer be in accordance with the trusts of the deceased person’s will or intestacy (as is the case with the duties concession in sec.63(1) of the Act). For example, the transferee (who might be only one of several beneficiaries of the estate) may be purchasing the land from the estate so as to enable him or her to continue to carry on the family’s farming activities on the land.
Sec.274(3)(b): land held by proprietary limited companies
Sec.274(3)(b) refers to the situation where the transferor is a proprietary limited company i.e. where the land is an asset of such a company (in its own right). Here, the ‘person directing’ the transferor is a shareholder or shareholders in the company who:
- are beneficially entitled to those shares, and
- are entitled to vote at meetings of the company, and
- are entitled as shareholders to not less than 25% of the assets of the company on a winding-up, being an entitlement that existed for at least 3 years prior to the date of the transfer or that existed from the date of incorporation of the company.
Thus, the relevant members of the transferee’s family must hold shares in the transferor (the company which owns the land) to which they are beneficially entitled (i.e. not holding as trustee), and those shares must carry both voting rights and an entitlement to not less than 25% of the assets (which includes the primary production land) of the company on its winding -up -being an entitlement that they have held for at least the last 3 years preceding the transfer or since the company was incorporated (if this was less than 3 years ago).
Example 1
A wheat farming property is owned by a proprietary limited company called Flanders Farm Pty Ltd. This company has issued four ordinary shares which are held beneficially by Ned Flanders (2 shares) and his two sons Todd and Rodd (1 share each). They have held these shares for more than 3 years. Flanders Farm Pty Ltd transfers the property to Todd.
In this example, the relevant members of the transferee (Todd)’s family are his father Ned and brother Rodd, and between them these persons hold (beneficially) voting shares in the transferor which carry an entitlement to at least 25% (here, 75%) of the assets (including the land) of the transferor on its winding-up; accordingly, they are the ‘person[s] directing’ the transferor (the company) within the meaning of sec.274(3)(b) of the Act
Sec.274(3)(c): land held by bare trusts
Sec.274(3)(c) refers to the situation where the land is held by a person (whether an individual or company) in their capacity as trustee of a bare trust. Here, the ‘person directing’ the transferor (the trustee under the bare trust)[3] is a person who is a named beneficiary of the bare trust. Sec.274(3)(c) cannot apply to the transfer if the beneficiary under the bare trust (who is taken to be directing the transfer by the trustee of the bare trust) is a company rather than an individual -because a company cannot be a member of the family of the transferee as defined in sec.274(6).
Sec.274(3)(d): land held by discretionary trusts
Sec.274(3)(d) refers to the situation where the land is being transferred by a person (whether an individual or company) in their capacity as trustee of a discretionary trust i.e. where the land is an asset of such a trust. Here, the ‘person directing’ the transferor (the trustee of the discretionary trust which holds the land) is a person or persons who are entitled (as takers in default of appointment) to not less than a 25% interest in the capital of the trust, being an entitlement that existed for at least 3 years prior to the date of the transfer or that existed from the date of establishment of the trust.
With most discretionary trusts, the beneficiaries of the trust fall into two categories:
- the discretionary objects - the persons among whom the trustee may (at its discretion) appoint (distribute) the income and/or capital of the trust fund; and
- the takers in default of appointment - those beneficiaries who take the income and/or capital of the trust fund in default of any contrary appointment (distribution) by the trustee in favour of any one or more of the discretionary objects.
Under sec.274(3)(d), the relevant family members must have an aggregate beneficial entitlement, in their capacity as takers in default of appointment, to at least 25% of the capital of the trust (which includes the primary production land) and they must have held that entitlement for at least the last 3 years prior to the transfer or since the trust was set up (if this was less than 3 years ago).
Example 2
A mixed farming property named ‘Greenhills’ is registered in the name of a company called Greenhills Pastoral Pty Ltd in its capacity as trustee of a discretionary trust known as the Greenhills Family Trust which was founded 30 years ago by John Hicks and his wife Nicole for the benefit of their family. They have two sons, Keith & Barnaby. The trust is a typical discretionary trust under which the discretionary objects are John and Nicole, their children and grandchildren and their respective spouses, with their children being entitled to the income and capital of the trust fund in default of any contrary appointment by the trustee. (At present, Keith and Barnaby are unmarried and have no children.) Greenhills Pastoral Pty Ltd, in its capacity as trustee of the discretionary trust, transfers ‘Greenhills’ to Barnaby.
In this example, the ‘person directing’ the transfer of the primary production land by the trustee of the discretionary trust (which holds the land as part of the trust capital) is the transferee (Barnaby)’s brother Keith, who in his capacity as one of the two default beneficiaries of the trust (the other being the transferee himself) has a beneficial entitlement to not less than 25% (here, 50%) of the capital of the trust.[4] Accordingly, the transfer of the land complies with sec.274(1)(a) (when read with sec.274(3)(d)) of the Act.
Not all discretionary trusts are the same; in particular, some of them do not have any takers in default. With these discretionary trusts, the trustee must (at its discretion) distribute all the income and capital of the trust fund among one or more of the discretionary objects, with none of these beneficiaries having any default entitlement to the trust property. If the primary production land is an asset of such a discretionary trust then any transfer of the land to any one or more of the beneficiaries of the trust cannot qualify for any exemption under sec.274 of the Act.
Sec.274(3)(e): land held by private unit trusts
Sec.274(3)(e) refers to the situation where the land is being transferred by a person (whether an individual or a company) in their capacity as trustee of a private unit trust scheme[5] i.e. where the land is an asset of such a trust. Here, the ‘person directing’ the transferor(s) (the trustee(s) of the private unit trust) is a unit holder or unitholders in the unit trust scheme who:
- hold the units beneficially, and
- are entitled (as unit holders) to not less than 25% of the assets of the unit trust scheme on winding up, being an entitlement that existed for at least 3 years prior to the date of the transfer, or from the date of establishment of the trust.
Thus, the relevant family members must have an aggregate beneficial entitlement, in their capacity as unitholders in the private unit trust scheme, to at least 25% of the assets of the unit trust on its winding up- and they must have held these units for at least the last 3 years prior to the transfer of the land or since the unit trust was established (if this was less than 3 years ago).
Example 3
A mixed farming property (sheep and pigs) named Hoggett Heaven is registered in the name of Babe Enterprises Pty Ltd in its capacity as trustee of a private unit trust scheme known as the Hoggett Family Unit Trust. The unit trust is a fixed unit trust scheme under which each of the unitholders has a present entitlement (including on a winding up of the trust) to all the income and capital of the trust in proportion to the number of units held by them. The unit trust has 100 issued units. These are held by Arthur and Esme Hoggett (30 units each), their daughter Zoe and her husband Paul (20 units each). Each unitholder has held his/her units for more than 3 years. Babe Enterprises Pty Ltd in its capacity as trustee of the trust transfers Hoggett Heaven to Zoe and Paul (who have taken over the operation of the family’s farming business following the retirement of Arthur and Esme).
In this example, the ‘person(s) directing’ the transfer of the primary production land by the trustee of the private unit trust scheme (which holds this land as an asset of the trust) are Arthur and Esme Hoggett (the parents and parents-in-law respectively of the transferees of the land) who between them hold (beneficially) units in the transferring unit trust carrying an entitlement to at least 25% (here, 60%) of the assets of the trust (including the land) on a winding-up of the trust (and they have held these units for more than 3 years).
However, sec. 274(3)(e) will not apply -and sec.274(1)(a) will therefore not be satisfied- if the units in the private unit trust held by the relevant family members:
- are not held beneficially (but as trustee)
- do not carry any fixed entitlements to the trust property on a winding-up of the trust (e.g. if they carry an entitlement to income only, or if the distribution of the capital of the unit trust is at the discretion of the trustee (as with some hybrid trusts))
- have not been held by them for the requisite 3-year period.
Sec.274(3)(f): Land held by self-managed superannuation funds
Sec.274(3)(f) refers to the situation where land is being transferred by a person (whether an individual or a company) in their capacity as trustee(s) of a self-managed superannuation fund[6] i.e. it is an asset of that fund. Here, the ‘person directing’ the transferor(s) (the trustee(s) of the self-managed superannuation fund) is a person who is a member of the fund.
Thus, where the primary production land is held by a self-managed superannuation fund it is enough that any person is both a member of the family of the transferee and a member of the fund itself.
Sec.274(4): Land held by subsidiary entities
The operation of both sec.274(3)(b) (land held by proprietary limited companies) and sec.274(3)(e) (land held by private unit trusts) is extended by sec.274(4) of the Act, to cover the situation where the primary production land is held by subsidiary entities.
Sec.274(4) provides that in the case of a transfer by a proprietary limited company or (private) unit trust scheme (a ‘subsidiary entity’) that is owned by another proprietary limited company or unit trust scheme (‘the parent entity’), a person is taken to be a person directing the subsidiary entity if the Chief Commissioner is satisfied that, had the parent entity been the transferor, the person would be the person directing the parent entity under sec.274(3).
Example 4
Thus, assume that in the example given at para [13] above:
- the primary production land is owned by Flanders Farm Pty Ltd
- all the shares in Flanders Farm Pty Ltd are owned by another company called Flanders Family Holdings Pty Ltd
- he 4 issued ordinary shares in Flanders Family Holdings Pty Ltd are held (beneficially) by Ned Flanders (2 shares) and his two sons Todd and Rodd (1 share each)
- the land is still to be transferred by Flanders Farm Pty Ltd to Todd.
In this revised example, the proprietary limited company which will be the transferor of the primary production land (Flanders Farm Pty Ltd) is owned (here, 100% owned) by another proprietary limited company (Flanders Family Holdings Pty Ltd). Under sec.274(4) of the Act Flanders Farm Pty Ltd is thus the ‘subsidiary entity’ and Flanders Family Holdings Pty Ltd is the ‘parent entity’. Further, if the parent entity had been the transferor of the land instead of the subsidiary entity the relevant family members (being Todd’s father Ned and brother Rodd) would have been the ‘persons directing’ the transfer by the parent entity within the meaning of sec.274(3)(b) of the Act. Sec.274(1)(a) (when read with secs.274(3)(b) and 274(4) of the Act) is therefore satisfied.
Sec.274(4) is not limited in its operation to wholly owned subsidiaries (as in the example given at para [17] above) or to subsidiaries in the Corporations Act 2001 (C’Wth) sense (which requires more than 50% ownership of the subsidiary entity[7]). In practical terms, this means that the ‘subsidiary entity’ may have more than one ‘parent entity’ for the purposes of sec.274(4) of the Act.
Example 5
A farming property is owned by Company C (a proprietary limited company). All the shares in Company C are owned by two other proprietary limited companies, Company A and Company B, each of which holds 50% of the shares in Company C. Each of Company A and Company B, in turn, is owned by a married couple (Mr and Mrs Clampett) and their daughter Elly May (with Mr Clampett holding 25%, Mrs Clampett 25% and Elly May 50%). Following the retirement of Mr and Mrs Clampett from the family’s farming business, Company C transfers the farming property to Elly May.
In this example, Company C is the ‘subsidiary entity’ and each of Company A and Company B (the companies which together own Company C) is the ‘parent entity’ for the purposes of sec.274(4) of the Act. Further, if each of these parent entities had been the transferor of the primary production land instead of the subsidiary entity then Mr and Mrs Clampett (as the parents of the transferee, together holding 50% of the shares in each of Company A and Company B) would have been the ‘persons directing’ each of these transferors within the meaning of sec.274(3)(b) of the Act. ec.274(1)(a) (when read with secs.274(4) and 274(3)(b)) of the Act would then be satisfied.
Combination of different parts of sec.274(3)
As a matter of administrative practice, the Chief Commissioner may also allow taxpayers to combine different parts of sec.274(3) (if necessary, also applying sec.274(4)) in appropriate cases.
This is best illustrated by the following typical example:
Example 6
A farming property is owned Company A. All the shares in Company A are owned by Company B. All the shares in Company B are owned by Company C. (Each of Company A, Company B and Company C is a proprietary limited company.) Whilst Company B holds its shares in Company A in its own right, Company C holds its shares in Company B in its capacity as trustee of a discretionary trust.
In this example, the Chief Commissioner will regard sec.274(1)(a) (when read with secs.274(3)(b),274(3)(d) & 274(4) of the Act) as being satisfied if on the facts of the particular case the transfer of the land would have fallen within sec.274(3)(d) had the land been held by the discretionary trust directly instead of indirectly through the three companies (each of which is ultimately owned by the discretionary trust).
Note: There may be other examples of such combinations of different parts of sec.274(3).
Sec.274(5): No other cases in which a person is considered to be a person directing a transferor
Sec.274(5) provides that, except as provided by sec.274(3) and sec.274(4), there are no other cases in which a person is considered to be a person ‘directing a transferor’ within the meaning of sec.274(1)(a) of the Act.
This provision makes it clear that, unless the transfer of the land falls within a relevant part (or parts) of sec.274(3) (if relevant, also applying sec.274(4) of the Act), it cannot qualify for an exemption under sec.274 of the Act. Examples include transfers of primary production land held by non-proprietary companies (such as a listed or unlisted public company) discretionary trusts which do not have any takers in default, public unit trusts or regulated superannuation funds which are not self-managed.
Secs.274(1)(b) and 274(1)(c): persons carrying on the primary production business both before and after the transfer of the land
- As already noted (at para [6] above), whilst sec.274(1)(a) (when read with secs.274(3) and 274(4)) is concerned with the identity of the transferor(s) -or person(s) directing the transferor(s) of the land itself, secs.274(1)(b) and 274(1)(c) (which can be considered together) are concerned with the identity of the person(s) conducting the primary production business upon the land both before and after its transfer.
Thus:
- under sec.274(1)(b), the subject land must have been used for primary production in connection with a business carried on by the transferee or by a member of the family of the transferee (whether alone or with others) immediately before the transfer of the land
- under sec.274(1)(c), this primary production business must continue to be carried on by the transferee (whether alone or with others) after the transfer of the land.
These linked requirements are additional to, and separate from, the requirement (of sec.274(1)(a)) that the transferor, or the person directing the transferor, be a member of the family of the transferee.
In any given case, both sec.274(1)(b) and sec.274(1)(c) must be satisfied. Thus, it is insufficient that the subject land might have been used for primary production in connection with a business carried on by the transferee or a member of the family of the transferee (and in either case whether alone or with others) immediately before the transfer of the land, if that business is not going to continue to be carried on by the transferee (either alone or with others) after the transfer of the land.
In many cases, the primary production business will be carried on by the transferee and/or other members of the transferee’s family themselves, both before and after the transfer of the land.
Example 7
In the straightforward case of the family farm passing between generations such as from father to son, the family’s primary production business will often have been carried on by the father and/or son prior to the transfer, and by the son alone after the transfer.
However, it is not uncommon for the primary production business to be carried on by an associated private company or a trading trust (usually a discretionary trust but sometimes a unit trust). It is to address this situation that sec.274(5AA) of the Act provides that a reference in sec.274 (specifically, in sec.274(1)(b) and 274(1)(c)) to a business carried on by a person includes a reference to a business carried on by a company, or under a trust, that is controlled by the person.
As explained by Brereton J (NSW Supreme Court) in Hancock v Rinehart (2015) 106 ACSR 207 at 250-253:
- 'control’ of an entity (including a company and a trust) is concerned with the ultimate power to decide how an entity acts, as distinct from proprietorship,
- in the case of a company, control normally resides with those shareholders who, via the voting rights attached to their shares, have the ability to carry a resolution by majority at a general meeting of the company and thus to determine the composition of the company’s board of directors (who direct the company’s operations),
- typically, those who own a company will also control it,
- in the case of a trust, it is generally the trustee -rather than the beneficiaries- who can decide how the trust will act; accordingly, the trust will be controlled by the trustee(s) -or in the case of a corporate trustee by the person(s) who control that company,
- however, if the trust -like many discretionary trusts- also has an appointor who in that capacity has the power to remove the trustee and appoint a replacement trustee, then the trust will be controlled by that appointor.
These general principles will be applied by the Commissioner in determining who controls any company or trust which carries on the family’s primary production business on the land, for the purposes of secs.274(1)(b) and 274(1)(c) of the Act. However, ultimately this question will depend on the facts of the particular case.
In determining whether a company carrying on the primary production business is controlled by a person (whether the transferee and/or a member of his or her family), the Chief Commissioner will have regard mainly to the identity of the directors of the company (who manage its business) as well as its shareholders (and the voting power attached to the relevant shareholdings).
In determining whether a trust carrying on the primary production business is controlled by a person (whether the transferee and/or a member of his or her family), the Chief Commissioner will mainly have regard to whether the person is the, or a, trustee of the trust or controls a corporate trustee of the trust. If the trust also has an appointor who has the power to remove and appoint trustees for the trust (as is often the case with discretionary trusts) then the Chief Commissioner will also have regard to whether the transferee or a member of the family of the transferee (commonly, a parent of the transferee) occupies that role.
The operation of sec.274(5AA) (when read with both sec.274(1)(b) and 274(1)(c)) of the Act can be illustrated by the following example:
Example 8
A beef cattle property is owned by Mary Smith. She wishes to transfer the property to her son Robert Smith. The primary production business is carried on by a company called Smith Family Holdings Pty Ltd in its capacity as trustee of a discretionary trust (the Smith Family Trust). Mary Smith is the sole director and shareholder of the trustee. She is also the appointor of the discretionary trust, in which capacity she has the power to remove and appoint trustees for the trust. Following the transfer of the land to Robert, it is proposed that the primary production business will continue to be carried on by the trustee of the discretionary trust. Robert is one of the beneficiaries (and the only taker in default) of the discretionary trust.
In this example, the primary production land is owned by Mary Smith herself -not the family discretionary trust (which operates the primary production business on the land). She will therefore, be the transferor of the land. Further, she is a member of the family (being a parent) of Robert, the transferee of the land. Accordingly, sec.274(1)(a) of the Act is satisfied in this case. However, for the transfer to be exempt from duty under sec.274 it is also necessary for secs.274(1)(b) and 274(1)(c) of the Act to be satisfied. In this regard, the primary production business is being carried on -and will continue to be carried on -by the discretionary trust. This trust is controlled by Mary Smith, both in her capacity as the sole director and shareholder of the corporate trustee of the trust and in her capacity as the appointor of the trust (giving her control over the identity of the trustee of the trust).
In this situation:
- sec.274(1)(b) (when read with sec.274(5AA)) would be satisfied, as the land would have been used for primary production in connection with a business carried on under a trust controlled by a member of the family of the transferee (Mary Smith, the mother of the transferee) prior to the transfer
- however, sec.274(1)(c) (when read with sec.274(5AA)) would not be satisfied, because the trading trust (which will continue to be the sole operator of the family’s primary production business) is not controlled by the transferee of the land (Robert). (The fact that he is the sole taker in default under the discretionary trust is irrelevant to the application of both sec.274(1)(c) and 274(5AA).)
The position would be different if, prior to the transfer, Robert was to obtain control of the discretionary trust (e.g. by him replacing his mother as the sole director and shareholder of the corporate trustee and as the appointor of the trust[8]). In that event, the primary production business would continue to be carried on under a trust which is now under his control (in addition to him being the sole taker in default under the trust). Sec.274(3)(c) would also be satisfied if, prior to the transfer, Robert was to enter into a partnership agreement with the trustee of the discretionary trust for them to operate the primary production business together as partners -for then the primary production business would be carried on by the transferee together with another person (the trustee of the discretionary trust) both immediately before and after the transfer.[9]
Transferee must be an individual and not acquire the land as a trustee
As is apparent from the terms of:
- sec.274(1)(a) -under which the transferor, or the person directing the transferor (as defined in secs.274(3) and 274(4)), of the land must be a member of the family of the transferee
- secs.274(1)(b) and 274(1)(c)- under which the transferee or a member of the family of the transferee (whether alone or with others) must carry on the primary production business on the land both before and after the transfer (including through a company or trust which they control (sec.274(5AA))
- the definition of ‘member’ of a family in sec.274(6) the transferee of the land used for primary production must be a natural person (individual), being a relevant member of the family of the transferor(s), or the person(s) directing the transferor(s), of the land. The exemption therefore cannot apply to a transfer to a company (including one controlled by relevant family members).[10]
It is also the intention of the exemption that the individual(s) who is or are the transferee(s) take the transfer of the land beneficially and not as trustee(s) e.g. as the trustee(s) of their own family trust. This is confirmed by sec.274(5A) of the Act, which provides that sec.274 does not apply if the transferee acquires the land concerned as a trustee. Where that is the case, it is irrelevant that the transfer would have fallen within sec.274(3)(d) or 274(3)(e) had the transferee trust been the transferor of the land under the transfer (i.e. if the land had already been an asset of that trust).
Landholder duty equivalent of sec.274 (sec.163A(1)(e))
As noted at para [4] above, the exemption in sec.274 applies primarily to a transfer, and/or an agreement for the sale or transfer, of land in NSW (i.e. the land which is being used for primary production). It also applies to an assignment of an existing lease of such land, as well as the grant of a new lease of such land (being a lease in respect of which a premium is paid or payable). These are all dutiable transactions under Chapter 2 of the Act, with the freehold or leasehold interest in the land itself being the subject-matter of the dutiable transaction.
However, in the case of primary production land which is an asset of a proprietary limited company or a private unit trust (being the situations referred to in secs.274(3)(b) and 274(3)(e)), the relevant family member(s), instead of acquiring the land directly from the company or trustee of the unit trust, might (say) acquire all the shares in the company or units in the unit trust (thereby giving them complete control of the company/unit trust’s land). If the land has an unencumbered value of $2 million or more, such an indirect acquisition of the land will generate a liability to pay landholder duty under Chapter 4 of the Act.[11]
Any such liability is subject to the availability of the exemption in sec.163A(1)(e) of the Act -one of the exemptions from landholder duty in Part 4 of Chapter 4 of the Act. This section provides that an acquisition by a person of an interest in a landholder (here, the company or unit trust which holds the land) is an exempt acquisition if the landholding of the landholder comprises land used for primary production and the Chief Commissioner is satisfied that, had the landholder transferred the land to the person acquiring an interest as a result of the acquisition immediately before that acquisition, the transfer of the land would not be chargeable with duty under the Act because of the application of sec.274.
The operation of this landholder duty exemption can be illustrated by the following example:
Example 9
An apple orchard property at Bilpin is owned by a proprietary limited company called Granny Smith Enterprises Pty Ltd. The 4 ordinary shares in this company are held by Granny Smith (2 shares) & her two grandsons, Bill and Ben (1 share each). They are also the only directors of the company. The company also operates the primary production business on the land. Granny Smith wishes to cease her involvement in the business and to give her grandsons complete control of it. To that end, she resigns as a director of the company and transfers all of her shares in it to Bill and Ben (1 share each). The company (now solely owned and directed by Bill and Ben) remains the owner of the land and the operator of the business. The apple orchard property is valued at $3 million.
In this example, the acquisition by Bill & Ben of their grandmother’s shares in Granny Smith Enterprises Pty Ltd (the landholder) would be a relevant acquisition (and therefore liable to landholder duty) under Chapter 4 of the Act.
However, this acquisition would be an exempt acquisition under sec.163A(1)(e) of the Act because:
- the landholding of the landholder comprises land used for primary production (the apple orchard property)
- had the landholder transferred this landholding to Bill and Ben immediately before they acquired their grandmother’s interest in the landholder, the transfer of the land to them would have been exempt from duty under sec.274 of the Act. In this way, the landholder duty exemption in sec.163A(1)(e) of the Act ‘mirrors’ the general exemption in sec.274 of the Act.[12]
Revenue NSW requirements for claiming the exemption
Any taxpayers claiming an exemption from duty under sec.274 of the Act must complete Form ODA 071 (‘Application for Exemption-Transfer of Land used for Primary Production Between Family Members’).
The transfer of the land can be stamped electronically through eDuties or by a registered EDR client. However, in cases of doubt the taxpayers (or their legal representatives) should obtain a private ruling beforehand.
Footnotes
- ^ In the case of an agreement for the sale of the land, the transferor is the vendor under the agreement and the transferee is the purchaser under the agreement (cf. secs.9(2)(c) & 13 of the Act).
- ^ Spouse includes a former spouse, a de facto partner and a former de facto partner
- ^ For the meaning of a ‘bare trust’ see Revenue Ruling DUT 041 (v2) at paras [9]-[16] (and cases there cited). (This is a public ruling on the operation of the bare trust provisions in Part 2A of Chapter 4 of the Act.)
- ^ John and Nicole (as the parents of Barnaby (and Keith)) are also members of the family of the transferee; but they are not persons directing the transfer of the land by the trustee of the discretionary trust because they are not takers in default -being discretionary objects only.
- ^ Under the Dictionary to the Act (Clause 1), a ‘private unit trust scheme’ is a unit trust scheme that is a not a public unit trust scheme (being a listed trust or a widely held trust (both as defined)).
- ^ Under the Dictionary to the Act (clause 1), a ‘self- managed superannuation fund’ means a complying superannuation fund within the meaning of sec.42A of the Superannuation Industry (Supervision) Act 1993 of the Commonwealth. Under that Act (secs.10(1), 17A & 17B) a ‘self-managed superannuation fund’ is essentially a superannuation fund with no more than 4 members and where those members are either the trustees of the fund or directors of a corporate trustee of the fund i.e. the fund is managed by the members of the fund themselves. A complying superannuation fund within the meaning of sec.42A of that Act is essentially a superannuation fund of this kind which has complied with all the statutory requirements for all regulated superannuation funds. Thus, sec.274(3)(f) will not apply to primary production land held by a superannuation fund which is not a self—regulated one and/or which is not a complying fund.
- ^ Corporations Act 2001 (C’Wth), sec.46
- ^ Assuming this change of appointor is authorised by the trust deed
- ^ In this situation (where the transferee is not the sole operator of the primary production business) there would be no need for the transferor to relinquish her existing control of the discretionary trust (which is now operating the business in partnership with the transferee).
- ^ However, under sec.274(3)(b) a proprietary limited company may be the transferor of the land.
- ^ See secs. 163A(1)(e) & 163D of the Act
- ^ Sec.163A(1)(e) is not the only landholder duty exemption which can apply to an otherwise relevant acquisition in a primary production company (or unit trust); see also sec.163D of the Act