The Victorian State Revenue Office has released an exposure draft legislation detailing the landholder duty model, which is due to come into effect from 1 July 2012.
The draft legislation is essentially similar to the original proposed design features detailed in the consultation paper that was released in September 2011 (refer to the Moore Stephens website Resources Section) save for a few modifications approved by the Government following the public consultation process. The draft legislation also addresses the provisions relating to the conversion of trusts / companies (from public to private or vice versa), trust registration provisions and the widely held trust provisions, which were previously under review when the consultation paper was released.
While the modifications from the original design features of the landholder duty model provide a slight relief for landholders, there is much left to be desired from the model. Landholders are still vulnerable to a wider application of the duty provisions than currently under the Victorian land rich duty model resulting in paying significantly more duty. The landholder duty model also remains unfavourable in comparison to other states such as NSW, Queensland and Western Australia.
The Government is undertaking further consultation on the technical drafting of the landholder duty model however this does not include any more discussions surrounding the design parameters of the model.
The new landholder duty model
The new model will consist of the following key design features:
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Taxable landholding entities
The new model will not only extend taxable landholding entities to include listed companies and listed unit trust schemes (as proposed in the consultation paper) but widely held trusts and registered declared public unit trust schemes will also become landholding entities. The rate of duty for these entities will be 10% of the general rate of transfer duty.
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Retention of land value thresholds
The current land value threshold of $1 million or more will remain. Duty will be phased-in between $1 million and $2 million, which is only a marginal increase from $1.5 million as proposed in the consultation paper.
The retention of the current land value threshold of $1 million is one of the main reasons Victoria will be seen as an unfavourable investment destination in comparison to NSW, Queensland or Western Australia where the current land value threshold is $2 million of the unimproved value or market value of land.
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Removal of Land Rich Ratio
The 60% landholding threshold test is removed.
Even though it is no longer relevant to test whether land is a significant asset in comparison with the entity's remaining asset, a taxpayer is only required to acquire a significant interest in Victorian landholdings with an unencumbered value of $1 million or more for the taxpayer to be liable to landholder duty. This substantially broadens the application of the landholder duty provisions and a major impediment towards generating investment in Victoria.
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Acquisition thresholds
Acquisition thresholds for unlisted unit trusts schemes will be maintained at 20%. This is in contrast to private companies and wholesale unit trust schemes that have a 50% threshold. Once again this leaves Victoria at a disadvantage to NSW, QLD, WA, SA and TAS which all have a 50% acquisition threshold.
Acquisition thresholds for listed companies, listed trusts, widely held trusts and registered declared public unit trust scheme will be at 90%.
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Definition of interest
The consultation paper had proposed to extend the definition of interest. Such an expansive definition would no doubt cast a wider net in which taxpayers would be caught as having an interest in Victorian landholdings.
Following public consultation, the Government has agreed to not revise the definition of interest and would therefore maintain the current definition of interest, i.e. an entitlement to a distribution of property at winding up.
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Definition of fixtures
Under the new model, 'land' will also include any items physically affixed to land whether or not it constitutes a fixture at common law. Such fixtures would need to be owned by the landholder or a linked entity of the landholder. This definition will be unique to Victoria and once again unnecessarily complicates calculations.
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Tracing of landholdings
The land tracing threshold will remain at 20% for tracing land held indirectly by a landholder through linked entities, irrespective of whether land was held indirectly through listed or unlisted entities. By contrast, the land tracing threshold in NSW, Western Australia and South Australia is at 50% for unlisted companies and unlisted unit trust schemes and there is no tracing through listed entities.
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Timeframe for aggregation of interests
The consultation paper had proposed to remove the three (3) year timeframe for aggregation of interests in order to identify whether a taxpayer had acquired a significant interest under the current land rich entity rules. Hence all interests acquired by a taxpayer would be taken into account when determining if a relevant acquisition had been made. However duty will only be charged on those acquisitions occurring within the three (3) year period.
The draft legislation has adopted this feature and as such, there is no timeframe when determining if a taxpayer had made a relevant acquisition but duty will only be charged on acquisitions made within three (3) years of a relevant acquisition. However this is subject to transitional rules, which are discussed below.
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Just and reasonable discretion
The draft legislation removed the discretion to exempt a transaction from land rich duty if the Commissioner determined that the application of the provisions would not be just and reasonable. However, a new discretion instead has been introduced to reduce the duty payable where the acquisition resulted in an anomalous duty outcome.
Other key aspects of the landholder duty model
The draft legislation also clarifies circumstances in which conversion of a private unit trust scheme to a public unit trust scheme or a conversion from a private company to a listed company will be dutiable. The duty chargeable at conversion is imposed at 10% of the general rate of transfer duty.
When the consultation paper was released, the widely held trust provisions were still under review. In the draft legislation, widely held trusts are now included as taxable landholding entities and the acquisition threshold and duty consequences of a relevant acquisition in a widely held trust landholder are aligned to listed entities. The definition of widely held trusts in a duties' perspective has also been simplified to focus on the number and spread of unit holders.
In the instance that a taxpayer has not made a relevant acquisition in a landholder, the taxpayer may still be liable for landholder duty if the taxpayer acquired, within a three (3) year period, an economic entitlement to an interest of 50% or more in the income or capital relating to the landholder (or its linked entity) or the landholdings of a landholder (or its linked entity).
Taxpayers who are liable for duty are now required to make payment within thirty (30) days and acquisition statements must be prepared and lodged within thirty (30) days after the date of the relevant acquisition. This is a big shift in landholders' administrative obligations as a generous timeframe of three (3) months is provided under the land rich entity model.
Transitional arrangements
The Government has introduced transitional rules in the draft legislation to accommodate the changes in the aggregation rules. The transitional arrangements in place for acquisitions made in the following landholders are per below:
- Listed companies – relevant acquisitions in listed companies will be quarantined and only acquisitions made after 1 July 2012 will be included in determining whether a relevant acquisition has been made.
- Private unit trust scheme, private company, wholesale unit trust scheme or public unit trust scheme – acquisitions made prior to 1 July 2009 will not be aggregated with an acquisition by a taxpayer on or after 1 July 2012.
No duty will be charged on interests acquired prior to 1 July 2012 in other public landholders when aggregated with other interests acquired after 1 July 2012 that amount to a relevant acquisition.
The way forward
It is unfortunate that Victoria has gone its own way and introduced its own unique landholder duty model. This has increased the complexity of acquiring land owning entities in Victoria and has made acquiring land owning entities in other states more attractive.
If you are in the process of buying or selling a business you should not delay as a number of entity acquisitions that are currently not subject to land rich duty will be subject to landholder duty from 1 July 2012.
Should you require any further information please contact your Moore Stephens Relationship Partner.
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