The Victorian Court of Appeal has delivered its view on the scope of the 'substantially one arrangement' aggregation rule in a landholder duty context. How this rule applies is relevant for fund managers looking to onboard investors into a real estate fund, as it raises the risk of an additional round of duty.
The Court of Appeal in Oliver Hume found in favour of the Commissioner of State Revenue, holding that the interests acquired by 18 unrelated subscribers for shares in the course of a company's equity capital raising were made under substantially one arrangement. This meant that their respective interests were aggregated, resulting in the subscribers together acquiring a 'significant interest' in the landholder company and thereby attracting landholder duty.
The decision is significant because, prior to this litigation, there was a view that acquisitions should not be aggregated under the 'substantially one arrangement' test in the absence of communication between the acquirers. The Tribunal and now the Court of Appeal have confirmed that this view is not correct.
Background to the dispute
In 2011, an Oliver Hume company (Landholder) purchased a parcel of land at Diamond Creek in Victoria. At the time, the Oliver Hume group held all of the shares in the Landholder. Oliver Hume also lent money to the Landholder.
In 2014, the Landholder issued an Information Memorandum seeking subscriptions totalling $1,800,000 to repay the loan and to fund development costs. If that target was not met, the subscription monies would be returned and no shares issued.
The Information Memorandum was marketed and distributed through various channels, including the fund manager's website and database, as well as third party agencies and a property research group. Subscriptions were received from 18 unrelated investors. Following a scale back of the applications, each investor received shares representing between 2.8% and 11.1% of the total issued shares, but the group were together issued shares constituting 99.99% of the capital in the Landholder.
The Commissioner, after conducting an audit, assessed the Landholder with duty in respect of the share issue.
Reasoning
In Victoria, landholder duty is payable if a person acquires an interest of at least 50% in a company that is a landholder. That threshold may be met by a single transaction or by aggregation, including with interests acquired by an 'associated person' or any other person in an 'associated transaction'.
The key issue in dispute in Oliver Hume concerned the definition of 'associated transaction', which in relation to a person's acquisition of an interest in a landholder, means an acquisition of an interest in the landholder by another person in circumstances in which:
'(a) those persons are acting in concert; or
(b) the acquisitions form, evidence, give effect to or arise from substantially one arrangement, one transaction or one series of transactions'.
The Court observed that while paragraph (a) connotes subjective intention, paragraph (b) focuses on the objective terms and circumstances between the acquisitions and the singular arrangement, transaction or series of transactions. The Court found support for this in the legislative history of paragraph (b), as well as the broader purpose of the legislation, which is to treat, as far as possible, any transfer of an economic interest in land similarly for revenue purposes.
In assessing whether the respective acquisitions by the incoming investors form, evidence, give effect to, or arise from substantially one arrangement, the Court highlighted the unifying element of 'oneness'. This was said to reflect '... some connection or interdependence between the circumstances by which the persons acquired their interests, such that the acquisitions might be characterised as, essentially, 'one' arrangement.'
Whether the features of an arrangement embody the required 'oneness' so as to be an 'associated transaction' requires an 'objective characterisation process.' This calls for 'objective interconnecting factors.' This assessment is necessarily objective to reflect Parliament's purpose of ensuring that not only people, but dealings, are taxed 'consistently and equitably' despite their form – that regard instead be had to the substance of what transpired.
The Court did not consider it relevant whether the investors were known to each other or were independent subscribers. Instead, the Court relied upon the following:
- no individual acquisition could proceed unless the target for
the equity raise was met (and if not met, all application money
would be returned);
- in subscribing for the shares under the terms of the relevant
constitution, the investors undertook a single venture, being the
acquisition of an interest in a special purpose vehicle that had an
entrenched management structure, was established to undertake a
single land development project, and which would be wound up at the
close of the project; and
- effectively, on the same day, the 18 investors acquired, in the same way, 99.99% of the shares in the Landholder.
The Court decided that it was unnecessary to express a view on whether any of the individual factors alone would satisfy the 'associated transaction' definition.
Differences from the Tribunal decision
Although the Court unanimously upheld the earlier decision of the Tribunal, on appeal the Court diverged on a number of issues, including that:
- the total acquisition of a 99.99% interest in identical
circumstances and at the same time gave effect to a singular
arrangement, that was bilateral (and not unilateral as viewed by
the Tribunal) in that it involved both the investors and the
Landholder;
- the mere existence of the statutory agreement by an investor to
be bound by the terms of a company constitution is not a
determinative factor. However, the content of the company
constitution was highly relevant in this case because the
constitution provided that the company was to be wound up at the
end of the project; and
- a shared objective to obtain equity may be marginally relevant, if at all. However, where the objective characterisation of the dealing supports a singular purpose, for example to undertake a property development, the existence of that unifying purpose can be taken onto account in determining if there is 'oneness'.
Impact of Oliver Hume under the CIPT regime
Oliver Hume was a case involving residential land. But what if the Landholder had acquired commercial or industrial land on or after 1 July 2024? On that date, the Commercial and Industrial Property Tax Reform Act 2024 (Vic) (CIPT Reform Act) came into operation.
In such a hypothetical transaction, it would appear that:
- the purchase of the land would be subject to transfer duty in
the usual way at the rate of 6.50% (assuming it is the first
transaction in relation to the land on or after 1 July 2024);
- the purchase of the land would be an entry transaction for the
purposes of the CIPT Reform Act; and
- the acquisitions of shares made by the investors would still be a relevant acquisition in a landholder. Assuming that the Landholder does not own any other land, the entire dutiable value of the land holding would be excluded when assessing landholder duty with the result that no landholder duty would be payable on the capital raising.
If the land ceased to have a qualifying use (for example it becomes residential land), a change of use duty would be imposed which, broadly, would be equal to the amount of landholder duty which was exempted on the capital raising (with a 10% discount for each calendar year since the capital raising). However, the change of use duty arises only if, among other things, the person who made the relevant acquisition as part of the capital raising continues to hold an interest in the landholder at the time of the change in use.
On that hypothetical example, the change of use duty would apply to those shareholders which obtained an interest in the capital raising and who still held their interests in the Landholder when the change of use occurred.
CIPT would not apply to the property if it has become residential land.
The above suggests that the double duty issue in Oliver Hume should not arise in Victoria in relation to commercial or industrial land, unless there were to be a change in its use to residential. In that event, a number of Victorian taxes could potentially apply, including the change in use duty and windfall gains tax. Oliver Hume would, however, suggest that the risk of double duty has to be particularly considered in any capital raising in relation to residential land, in addition to careful consideration of the application of foreign purchaser additional duty to such acquisitions.
We understand that an amending Bill to the CIPT Reform Act is to be introduced in the Spring Session of Parliament – so stay tuned!
What now?
The decision is fact specific. Different issues arise for capital raisings by listed entities or widely held trusts. The issue will also not arise if the target entity is not a landholder when the capital raising occurs. Promoters of real estate projects using a special purpose vehicle to raise equity should take advice on structuring of the offer to reduce the risk that the issuance of equity in the course of raising capital may be subject to landholder duty.
The concept of 'substantially one arrangement' is not unique to Victoria, with the other States and Territories having broadly similar rules. Although the decision is not binding on the courts of another jurisdiction, any entity looking to raise capital for a real estate project in another jurisdiction should consider the possible implications of Oliver Hume.
The arrangement will clearly need to meet the landholder's commercial objectives of raising sufficient funds to develop the project, but query whether debt may play a greater role to allow flexibility in the raising of capital. In that case, in addition to the stamp duty (and land tax) issues, a variety of income tax issues including the new thin capitalisation regime and debt deduction creation rules will need to be considered. It is also possible that there may be FIRB notification requirements.
It is presently unknown whether the taxpayer will apply for special leave to appeal to the High Court of Australia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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