Transferring Shares, Cancelling Shares or Varying Shares? Landholder Duty, Corporate Trustee Duty and Other Risks for your Firm to Manage

There are significant ways to trip up on the seemingly simple task of transferring, varying or cancelling shares in a company. 

Risk

As recent experience with federal and state revenue offices shows, it is quite easy for long term historical records for share transfers, variations and cancellations (ASIC searches are easily relied upon by revenue offices to create investigations) to be matched with the ownership of land or other valuable assets.

Reason 1: Does corporate trustee duty apply?

Example: a transfer of shares in a corporate trustee company 

ABC Pty Ltd is the corporate trustee of a discretionary trust, which owns land and business assets.

Irrespective of what percentage of shares is acquired, in Queensland, corporate trustee duty could be payable if, amongst other things, “the acquisition is part of an arrangement under which any person obtains, directly or indirectly, a benefit relating to the property held by the corporate trustee on trust”.

reason 2: Does landholder duty apply?

Example: a transfer of shares in a corporate trustee company

If the corporate trustee owns “land-holdings” in Queensland, then landholder duty may apply to a dealing in shares in the corporate trustee.
 
That is, in Queensland, there is a specific rule that surprises many clients and advisers that the corporate trustee is taken to have land-holdings if that “land” is held on trust AND where the trustee is a beneficiary of the trust.
 
Example: a transfer of shares in a company that is not a trustee, and does not own land
 
In some states and territories, there are rules that state that a beneficiary of a discretionary trust is taken to own or otherwise be entitled to the property of the trust.
 
A company that falls within the class of beneficiaries of the trust would be regarded as owning any land of the trust, and to the extent that the total value of the land held in the trust exceeds the threshold in that jurisdiction, the company would be treated as a landholder for the purposes of landholder duty.

Reason 3: Does income tax (including CGT) apply?

Example: Mum and Dad own 100% of the shares in a trustee company. Those shares have negligible cost base.
 
Dad transfers his shares in the trustee company to his wife.
 
In the past, the trustee company has received unpaid present entitlements from a connected discretionary trust in its own right and not as trustee.
 
There is income tax or CGT on the transfer of shares. 

Reason 4: Is there some restriction or server consequence for the share transfer?

Not all share transfer are free from restriction, limitation or conditionality.

Examples include:

1. Restrictions in the Corporations Act on redemptions and cancellations.
2. Rights of pre-emption.
3. Security interests over the shares - are the shares subject to a register or unregistered security interest?
4. Non-compliance with a provision in the constitution or other agreement.
5. Foreign Investment Review Board, and Foreign Acquisitions and Takeovers Act 1975 (Cth) breaches, penalties and risks for advisers "aiding and abetting".

Next steps and free checklist

As these practical, common examples show, any transfer of shares needs a transfer of risk moment to clients and for clients to understand the risk, and in most cases, for advice to be provided to the client on the risks. 

This creates opportunities for advisers to provide more consulting and, from the professional's perspective, the ability to provide quality advice to protect clients.

Please contact us at cca@mcw.com.au to get a checklist for your accounting firm, law firm or financial planning firm to assist staff in reminding clients and staff not to do share transfers or redemptions/cancellations of shares until advice has been provided to the client on the various risks.