A recent Victorian Civil and Administrative Tribunal (VCAT) case highlights the broad provisions that may apply to capture duty involving landholding entities – in this case, changing the Directors even if there is no change in beneficial ownership.
The case overview
On 11 July 2024, the decision in Tao v Commissioner of State Revenue (Review and Regulation) [2024] VCAT 637 (Tao’s case) was handed down whereby the Commissioner was successful in arguing that when Tao became the sole Director of a trustee company of a unit trust that was a landholder, this triggered Section 82 of the Duties Act 2000 (Duties Act) and this resulted in triggering a stamp duty liability.
The issue
Originally, stamp duty was a tax on instruments transferring land.
However, duty also applies to transactions treated as land transfers. In this case, Section 82 considers ‘acquisition of interests in certain landholders’ as land transfers. The main question was whether Tao becoming the sole shareholder of the trustee company gave him the capacity to control the trust by determining or influencing its financial and operating policies.
Key background facts
In 2011, Mr. Constantinou, an experienced property developer, partnered with Mr. Tao and Mr. Wiemer to form the WCT Unit Trust for property development in Melbourne. This involved:
- Incorporating 66WR Pty Ltd, with Mr. Constantinou as the sole shareholder and director.
- Establishing the WCT Unit Trust.
- Issuing trust units to entities associated with the parties as follows –
- 50 units to Maclaw No. 547 Pty Ltd (Maclaw547) as trustee for The Mountain Highway Unit Trust
- 25 units to Fredco Incorporated Limited (Fredco) as trustee for Nomsec No. 1 Limited; and
- 25 units: Amber.
- Amber is an entity associated with Mr Tao. Maclaw547 and Fredco were entities associated with Mr Constantinou and Mr Wiemer respectively.
- Purchasing a property for $2.7 million, funded by loans from Southern Finance, Mr. Tao, and Mr. Wiemer.
Due to financial difficulties, leading to loan arrears and impending bank receivership actions, Mr. Tao replaced Mr. Constantinou as the director of 66WR Pty Ltd in early 2014 and attempted to refinance the loan.
Key factors considered
The Commissioner argued that Mr. Tao gained control of the WCT Unit Trust pursuant to Section 82 of the Duties Act when he became the sole director and shareholder of 66WR Pty Ltd in February/March 2014 and gave him the ability to influence the trust’s financial and operating policies. Key evidence included:
- Mr. Tao’s post-appointment actions, including communications with their external bank, showed he had taken charge of the trust’s strategic direction.
- Witnesses, including Mr. Constantinou and Mr. Wiemer, confirmed Mr. Tao’s leading role in refinancing efforts and other key decisions.
- The Trust Deed’s absolute discretion clauses supported Mr. Tao’s control over the trust’s policies.
- The ability of unit holders to remove the trustee was deemed irrelevant as the focus was on Mr. Tao’s control during his directorship.
Other considerations included Mr. Tao’s continued consultation with Mr. Constantinou and Mr. Wiemer, the theoretical power of unit holders to remove 66WR Pty Ltd as trustee (which was not exercised), and Mr. Constantinou losing control of his associated entity, limiting any real influence.
Key takeaways
The Tao case serves as a reminder that in Victoria, duty provisions are far-reaching and therefore any restructure should be reviewed carefully before execution and changing directors. Example scenarios requiring caution includes:
- Changes in control: Becoming the sole director and shareholder of a trustee company can be seen as gaining control over the trust’s policies. Document and disclose these changes, and understand the tax implications.
- Refinancing efforts: Taking responsibility for refinancing loans means your actions are scrutinized for control. Maintain transparent communication and detailed records.
- Consultation with stakeholders: Consulting others doesn’t eliminate your control in strategic decisions. Document consultations and aim for collective decisions.
- Major financial decisions: Making major financial decisions shows strategic influence. Use board approvals to share decision-making power.
- Trust deed provisions: Unit holders’ ability to remove a trustee doesn’t change the current trustee’s control. Regularly review trust deed provisions and comply with governance rules.
- Handling financial challenges: Be transparent when managing financial difficulties. Communicate proactively with lenders and stakeholders.
- Liquidation and asset sales: Handle the sale of assets to repay loans carefully. Seek legal and financial advice, and document actions.
- Family and business relationships: Family ties with business partners can complicate control perceptions. Maintain professionalism and transparency.
- Documenting decisions: Document strategic decisions well. Keep detailed minutes and approvals to show collective decision-making.
By being cautious in these scenarios, taxpayers can better manage their responsibilities and avoid potential legal and tax issues related to control and influence over trusts and entities.