A recent Victorian Civil and Administrative Tribunal (VCAT) decision has raised red flags for property developers who undertake capital raisings. The decision increases the risk that as a result of such raisings, equity interests acquired by unrelated investors in development entities may be aggregated under the landholder regime. This aggregation of interests may trigger a significant stamp duty liability, for which the developer and investors will be jointly liable.
An overview of the landholder regime
The landholder regime, which was introduced 1 July 2012 and replaces the former land rich regime, operates to impose duty on the acquisition of certain interests in entities that own land in Victoria. The provisions were introduced as an anti-avoidance measure, to deter artificial schemes whereby people would acquire interests in land holding entities as a means to acquire the underlying land, rather than a direct land acquisition which would otherwise attract duty.
The landholder regime applies where a person makes a ‘relevant acquisition’ in a company or unit trust that has land holdings in Victoria of $1 million or more (a ‘landholder’).
Ordinarily, a person will acquire an interest in a landholder on the acquisition of shares or units in that entity. However, a liability to landholder duty can also arise where shares or units in a landholder are redeemed or cancelled, and the interests of the remaining shareholders or unit holders increase.
A person will make a ‘relevant acquisition’ in a landholder entity if:
- the person acquires an interest that is itself a ‘significant interest’ (that is, upon the winding up of the entity, the person would be entitled to 50% or more of the property distributed in the case of a private company, or 20% or more of the property distributed in the case of a private unit trust scheme); or
- when the interests acquired by the person and any other person in an associated transaction are aggregated, these total interests together amount to a ‘significant interest.’
An associated transaction includes any transaction where multiple and unrelated investors obtain an interest in a landholder, where all those transactions are deemed to form collectively ‘one arrangement.’ As a result, duty is assessed on the aggregated amount of the interests acquired in a landholder.
Accordingly, individual acquisitions that are below the ‘significant interest’ threshold (that is, 50% or 20%) can be aggregated with other interests acquired by any person in an ‘associated transaction.’ If the State Revenue Office (SRO) considers that there has been an associated transaction, this can result in unanticipated duty liabilities, particularly where all individual acquisitions are wholly independent.
Landholder duty is calculated based on the deemed percentage acquisition of the underlying land. This is determined by multiplying the unencumbered value of all Victorian land holdings of the landholder, by the percentage interest acquired in the entity. The acquirer will be liable to landholder duty at the same rates applying to land transfers.
The Oliver Hume case
The facts in Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue involved 18 investors who acquired shares in a landholding company. The company sought to raise equity funding from investors with respect to its development project at Diamond Creek, known as ‘Diamond Grove.’ The company initially issued an Information Memorandum which was marketed by a property research group with a large database through which it could promote projects. The company subsequently issued 1,800,000 shares at a price of $1 per share to 18 investors, with investment parcels ranging from $50,000 to $200,000. The Commissioner of State Revenue (Commissioner) issued a landholder assessment to the company for $160,600 calculated on the aggregated interests acquired in the company by all of the investors.
Before VCAT, the Commissioner successfully argued that the subscription for shares in the company by the 18 separate investors were to be aggregated, as the separate acquisitions formed substantially one arrangement.
This was despite the fact that the investors were unrelated to each other, and the Information Memorandum had been marketed broadly to a database. As noted on behalf of the company, there was no identifiable connection between the investors, ‘save that they each responded to the offer.’ Further, while the transactions were interdependent, this was for the purpose of meeting the only requirement that the target investment would be reached.
Judge Michael Macnamara, Vice President of VCAT, concluded there was a clear unity of purpose, to raise equity via the capital raising activity with respect to the company. Further, while the shareholders were not acquainted with each other, they did have a unity of purpose in becoming shareholders in the company. In doing so, they bound themselves to the terms of a share offer and to the terms of a constitution.
Commissioner’s Revenue Ruling DA.057
In the course of the judgment, Judge Macnamara considered Revenue Ruling DA.057 (the Ruling), which provides guidance on how the Commissioner will apply the aggregation rules to acquisitions in landholders.
The Ruling states the Commissioner will not regard acquisitions of interests in a landholder by independent members of the public as being ‘associated transactions’, if the acquisitions are made in response to a genuine public offer under a product disclosure statement (PDS) or prospectus lodged with the ASIC. While the judge accepted that the current Information Memorandum and share offer could be regarded as made to the public at large, the judge noted that the concession in the Ruling for genuine public offers purportedly added a proviso to the Duties Act and make a general rule ‘without any statutory warrant for doing so.’ Furthermore, the judge stated that there was “no provision which could authorise the Commissioner to offer this concession.” In any event, the judge concluded the current matter did not involve an offer to the public where a PDS or prospectus was lodged with ASIC.
The decision has implications for any capital raising activities conducted by landholding entities, where the total interests acquired by investors as a result of those capital raisings equal to, or exceed, the landholder duty thresholds (i.e. 50% for private companies and 20% for unit trust schemes).
In our opinion, the decision is problematic because the facts of the case support the view that the acquisitions are not associated transactions, and should not be aggregated. In particular:
- the Information Memorandum and share offer were not confined in their circulation or limited to a specific group; they widely distributed via a broad database;
- the various investors made their decisions independently; no application was conditional upon the investment by other identified parties; and
- while each investor was bound by the constitution (the ‘statutory contract’), every landholder would be governed by such a document, hence it will exist in all cases. Accordingly, the existence of the constitution cannot, in itself, be a significant factor supporting aggregation.
We consider it would have been appropriate for VCAT to view the Information Memorandum and share offer as being analogous to public offers or prospectuses, which the Commissioner has accepted in his Ruling ought not to be aggregated. Arguably, the Information Memorandum and share offer are essentially indistinguishable from a public offer, and it would have been within the purpose and intent of the aggregation provisions to permit the concession to apply to capital raisings that are akin to public offers and prospectuses.
Given the judge’s comments that there is no provision in the Duties Act “which could authorise the Commissioner to offer this concession” as set out in the Ruling, it is uncertain if the SRO will continue to apply this concession to exclude genuine public offers from aggregation.
Where a liability to landholder duty arises in the context of capital raisings, the company and investors are jointly and severally liable to pay such duty. The Commissioner will typically issue the assessment directly to the company (or unit trust scheme). The landholder will need to assess if it can recoup those costs on a pro rata basis from its investors. It may be necessary to include a mechanism in the transaction documents whereby the entity can recover any potential duty liability from its investors. In terms of project costings, it would be prudent to factor in potential landholder duty costs.
Developers may alternatively consider other structures through which investors can contribute capital rather than via equity subscriptions. For example, investors could loan start-up funds to developers via development agreements. Such contributions would provide developers with capital, while ensuring lenders do not have any interests in the landholder as shareholders or unit holders. However, care would need to be taken with respect to the economic entitlement provisions.
Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue (Review and Regulation)  VCAT 634.
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