A recent decision of the Victorian Civil and Administrative Tribunal (VCAT) in Oliver Hume[1] has called into question the ‘conventional wisdom’ that participating investors to a capital raise for property developments shouldn’t cause landholder duty issues for those investors.
The case involved a special purpose investment company (Diamond Creek) developing the property at 272 Broad Gully Road, Diamond Creek in Victoria. To fund development costs, Diamond Creek offered 1,800,000 shares at $1 per share to 18 investors on terms pursuant to an Information Memorandum. Offers ranged from $50,000 to $200,000. Participating investors weren’t related to each other and no investor held a significant interest (i.e. 50% or more) when the capital raising was completed.
In Victoria, a person’s acquisition of a landholder interest (that is below 50%), may be aggregated with other persons in an associated transaction which, if it resulted in an aggregated landholding interest of those persons reaching at least 50% (i.e. a significant interest),[2] triggers Victorian landholder duty on the value of those acquisitions at ad valorem rates.
The Commissioner of State Revenue issued a landholder duty assessment against Diamond Creek for $151,235 (not including penalties and interest). This was on the basis that the investors’ acquisitions formed “substantially one arrangement” and as such, are associated transactions.[3] The matter found its way to the VCAT.
Macnamara J at the VCAT found in favour of the Commissioner and upheld the landholder duty assessment. It was held that the acquisitions formed substantially one arrangement. As such, they could be aggregated together for Victorian landholder duty purposes.
The key factors underpinning Macnamara J’s conclusion were that:
- the share acquisitions stemmed from the same offer and terms outlined in the Information Memorandum;
- the share transactions were conditional on each other and were interdependent – i.e. the acquisitions would only take place if the target subscription amount of $1,800,000 was met;
- each investor dealt with Diamond Creek around the same time in accordance with the terms set out in the Information Memorandum;
- the purpose of these transactions was the same – to raise money through an investment vehicle for a single residential development project.
VCAT inferred from these key factors that there was a ‘unity of purpose’ amongst the investors (who were otherwise unrelated and unknown to each other) and with Diamond Creek, as they invested based on the Information Memorandum and agreed to the company’s constitution.
Diamond Creek tried to argue that the Commissioner’s position on the meaning of “associated transaction” in Ruling No. DA.057[4] meant that the Commissioner was bound to follow its own position. That is, it shouldn’t regard share acquisitions by independent members of the public as ‘associated transactions’. However, this argument failed because:
(i) under that ruling, the Commissioner would only take the position if the offer was under a product disclosure statement or prospectus. In the Diamond Creek scenario, the offer wasn’t made under such disclosure requirements. Rather, it was made to sophisticated investors and thus exempt from the disclosure requirements; and
(ii) in any event, the Victorian rulings do not have the force of law.
Arguably, this decision has led to an unfair outcome for the property developer and its investors, as it means that stamp duty was paid twice on the same property in Victoria.
What are the implications for NSW?
Whilst this is a Victorian case (and it may be appealed – watch this space), the VCAT decision may have significance in NSW and other state jurisdictions that have landholder duty regimes.
The NSW landholder provisions are similar to those in Victoria. NSW has also adopted the same language of aggregating acquisitions of landholder interests acquired under “substantially one arrangement.”[5] However, in NSW, there is an additional condition – the arrangement has to be “between the acquirers” for landholding interests to be aggregated.
Further, the Commissioner of State Revenue in NSW must consider a number of circumstances to determine if the acquisitions formed substantially one arrangement between the acquirers. These are:
- whether any of the acquisitions are conditional on entry into, or completion of, any of the other acquisitions;
- whether the parties to any of the acquisitions are the same;
- whether any party to an acquisition is an associated person of another party to any of the other acquisitions;
- the period of time over which the acquisitions take place;
- whether, before or after the acquisitions take place, the interests were, are or will be used together or dependently with one another; and
- any other relevant circumstances[6].
It remains to be seen if the NSW Civil and Administrative Tribunal or a NSW Court would draw the same conclusions as VCAT, if the same scenario applied but the property was situated in NSW.
“Tax debt” saves the day?
Notwithstanding the ability for the NSW Commissioner of State Revenue to aggregate acquisitions under one arrangement (if particular circumstances apply), the NSW landholding regime does contain a “debt interest” exemption to these ‘aggregation rules’.
That is, if an entitlement (to a distribution of the property of a landholder) arises merely because a person has a debt interest in a landholder, it is not an interest in a landholder.[7] For this purpose, a ‘debt interest’, takes its meaning in the debt / equity rules that apply for income tax purposes (i.e. under Division 974 of the Income Tax Assessment Act).[8]
Thus, where capital raisings for NSW property developments are structured to involve offers of ‘debt interest’ securities, those securities shouldn’t be considered ‘landholder interests’ that is capable of being aggregated under one arrangement, even if an arrangement did arise. For instance, property developers could consider using convertible notes (instead of straight ordinary shares, such as was the case in Diamond Creek) as the security being offered to prospective investors.
Further, property developers should also keep in mind the circumstances outlined above when structuring these capital raisings. It is these circumstances that Revenue NSW would consider in a landholder investigation or review of a property development.
In any event, property developers should take great care in structuring their developments to ensure that any capital raisings don’t attract unintended landholder duty consequences (or any other unintended tax, GST or duty consequences for that matter) depending on the location, size and nature of the development.
Contact Coleman Greig’s Taxation Law team if you require more information or for advice regarding appropriate duty, GST, tax or structuring on proposed capital raisings for property developments.
[1] Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue (Review and Regulation) [2023] VCAT 634.
[2] Section 77 of the Duties Act 2000 (Vic).
[3] Section 3 of the Duties Act 2000 (Vic).
[4] Revenue Ruling DA.057 “Landholder Provisions – Meaning of ‘Associated Transaction”.
[5] Section 149(1A) of the Duties Act 1997 (NSW).
[6] Section 149(1B) of the Duties Act 1997 (NSW).
[7] Section 150(1A) of the Duties Act 1997 (NSW).
[8] Section 150(5) of the Duties Act 1997 (NSW).
