Capital Raising Transactions – New Focus On Landholder Duty for Property Funds and Share Transactions

Recent Case

It is not uncommon for a client to consider raising capital that involves a group of investors acquiring interests in companies or trusts.

In each of the states and territories there are varying consequences (or potential consequences) for an acquisition of shares or units in entities that own land through transfer duty, corporate trustee duty or landholder duty.

A recent Victorian case highlights the duty dangers. The case involved a company that owned land that undertook raising capital, and in doing so suffered landholder duty.

18 separate investors' acquisitions were aggregated on the basis that they were treated as occurring as part of 'substantially one arrangement'. This was despite the investors being unrelated and genuinely acting independently of one another – essentially their only connection was that:

• they dealt with the same issuer around the same time in accordance with the terms set out in a widely circulated information memorandum; and
• each transaction was interdependent in so far as the transactions would only occur if a target total of subscription proceeds was met. 

Revenue ruling DA057 (Vic) states

The Commissioner has taken the position that he will not regard acquisitions of interests by independent members of the public as an associated transaction if the acquisitions are made in response to a genuine public offer under a product disclosure statement or prospectus lodged with the Australian Securities and Investments Commission. However, the Commissioner’s position will not apply if it is found that other circumstances exist which indicate that the acquisitions form part of substantially one arrangement one transaction or one series of transactions or the acquirers acted in concert in making the acquisitions

Importantly, the tribunal noted that there is no provision which would appear to authorise the Commissioner to offer this concession.

This reinforces that advisers must be careful in understanding administrative concessions and what can happen if a Commissioner decides not to be bound by a ruling or administrative concession.

Risks for clients

For clients that have raised capital in the past that may have attracted landholder duty or transfer duty, the risks are real in terms of the level of duty (of approximately 6% to 14% (if involving residential-related property), the penalties (up to 90% of the tax) and the unpaid tax interest.

The risks of detection of transactions is substantial with:

(a) information collection by the ATO under Subdivision 396, Schedule 1, Taxation Administration Act 1953 (Cth), which can affect many trustees of real estate property funds into disclose “results in a change to the type, name or number of units in the unit trust that are held by an entity”;
(b) easily available registers like the Australian Securities and Investments Commission and land titles offices that capture much information on capital raising;
(c) the internet has significant ability for past capital raising documentation to be found.

The audit risk is high for clients and their advisers in this space because:

(a) the landholder duty regime is complex and nuanced;
(b) the scope of legal and accounting engagements for a capital raising transaction need to be clear on whether advisers are dealing with the landholder duty, transfer duty or other duty consequences of the transaction or arrangement;
(c) administrative positions of a state or territory office may not be binding on the Commissioner;
(d) administrative concessions and rulings of a Commissioner need to be understood in their context of whether they are binding or not against the Commissioner.