A recent decision in the Victorian Civil and Administrative Tribunal (VCAT) has raised concerns about how stamp duty applies when a landholding entity raises capital from unrelated investors.
This article aims to summarise the issue and key findings by VCAT. It will also provide insight for property developers and fund managers on mitigating double duty risks when acquiring land and raising capital.
The issue: landholder duty thresholds
In Victoria, if a Trust or Company owns land valued above $1 million, a “relevant acquisition” in the Trust or Company triggers landholder duty. The thresholds for triggering duty are as follows:
- Trust: 20% or more
- Company (private): 50% or more
The issue in question was whether duty would apply if a group of genuine unrelated investors acquired shares in a landholding company, with each investor individually holding a stake below the relevant acquisition threshold.
The findings: aggregation of investor subscriptions
In the recent decision of Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue (Review and Regulation)  VCAT 634, the Victorian Commissioner successfully argued for the aggregation of subscriptions for shares in a landholding company by 18 separate investors. On July 2, 2014, Diamond Creek offered 1,800,000 shares at $1 per share to the 18 investors, with individual investment amounts ranging from $50,000 to $200,000.
Consequently, Victorian landholder duty was assessed based on the total percentage acquired in the company by all 18 investors (99.9%). This was the case even though:
- The 18 investors were unrelated.
- Each investor made an independent investment decision and was not reliant on others.
- No single investor held a significant interest (50% or greater) in the company.
The Commissioner argued that the investors’ acquisitions were related, connected, and interdependent in a way that was integral to the circumstances. The key factors supporting this argument were:
- The transactions stemmed from the same offer and terms outlined in the information memorandum (IM).
- The transactions were conditional on each other and interdependent, as they would only occur if the target subscription was met.
- The purpose of the transactions was the same: to raise $1,800,000 as part of a syndicated managed investment vehicle for a residential development project.
- The investors applied to invest around the same time and under the same offer, with documents defining the common purpose and binding provisions.
- It is possible to infer a unity of purpose among the investors, as they invested based on the terms in the IM to support the development of the property and agreed to the company’s constitution, which established the management structure.
The decision also raises concerns about an administrative concession previously granted by the Victorian State Revenue Office for product disclosure statements or prospectuses lodged with the Australian Securities and Investments Commission (ASIC).
The applicability of the Commissioner’s position, as stated in a revenue ruling, is now uncertain. Furthermore, it remains unclear how Revenue Offices outside of Victoria will respond to this decision.
The conclusion: careful tax planning and structuring is crucial
While there is a possibility of further objection to this case by Oliver Hume, it highlights the need for careful tax planning, especially in property fund or syndicated structures.
We advise property developers and fund managers to approach entity setup, land acquisition, and capital raisings with caution. It is crucial to navigate these processes carefully to mitigate potential double stamp duty risks.
If you have any questions or would like further guidance on the implications of this decision on stamp duty, please don’t hesitate to reach out to our team.