Are your undertaking a legal restructure of your business? Does your business own real estate in Australia? If so, your restructure may have Australian stamp duty implications.

How could Australian stamp duty affect your restructure?

Australia has eight States and Territories which all have their own separate stamp duty laws. The kinds of assets which are subject to stamp duty and the rates of stamp duty are different in each jurisdiction. Each State and Territory imposes transfer duty on the direct transfer of real estate. Additionally, each jurisdiction imposes a kind of stamp duty known as “landholder duty” on the acquisition of interests in companies and trusts which hold real estate.

Why does landholder duty exist?

Until the mid-1980’s it was possible to structure high value real estate transactions in Australia by selling shares in companies or units in unit trusts without triggering a stamp duty liability, instead of transferring the real estate which would generally incur stamp duty. As a result, the State and Territory Governments were losing revenue. To counter this, the land rich duty provisions were introduced, starting with New South Wales in 1986. The original idea behind the “land rich” duty provisions was to impose stamp duty on the underlying real estate value were a person obtained an interest of more than 50% in a “land rich” company or “land rich” unit trust. Generally, a company or unit trust was considered to be “land rich” in a particular jurisdiction where real estate represented 80% or more of the assets of the entity and the entity was entitled to land worth $1m or more in that jurisdiction.

Where an entity had other valuable assets such as business goodwill it would often be the case that the 80% ratio was not met and as a result land rich duty would not be payable. Over time, the required ratio was decreased from 80% to 60%. The ratio requirement was eventually abolished when “landholder duty” replaced “land rich” duty. As a result of the ratio test being abolished, the potential for “landholder duty” to apply to a dealing in shares or units is considerably greater than was the case for “land rich” duty. Transactions may have occurred in the past where “land rich” duty was not payable because the the required ratio was not met. If those transactions occurred today, it is quite likely that “landholder duty” would be payable.

When is an entity a landholder?

A company or unit trust is a landholder if it holds, either directly or indirectly, land holdings above a certain value. For example, under the New South Wales rules, an entity is a landholder if the entity is entitled to land holdings with a value of $2m or more in New South Wales. It is important to note that being a landholder in one Australian jurisdiction does not prevent an entity from being a landholder in another jurisdiction. It is frequently the case that a single dealing in shares in a company or interests in a trust gives rise to landholder duty in more than one Australian State or Territory.

The thresholds which apply in each Australian State and Territory are set out below.

What are land holdings?

As would be expected, interests in conventional real estate are land holdings for the purposes of the landholder duty rules. This includes fixtures. In addition to capturing conventional interests in real estate, the concept of a “landholding” may, in some cases, extend to mining tenements and petroleum tenements. In the past, disputes often arose about whether particular items of equipment did or did not constitute fixtures, and therefore landholdings. If the item of equipment were a fixture, its value would be counted in determining whether or not its owner was a “landholder”.

To counteract these disputes, the definition of land holding was expanded to include things which were fixed to the land even if they were not fixtures at common law. In some jurisdictions, if an entity is a landholder, the amount of stamp duty payable is worked out based on the value of the land holdings and the value of goods, such as plant and equipment.

When does an entity hold land?

Where a person acquires an interest in a company or trust (i.e. a target entity), in addition to considering the land holdings which are actually owned by the target entity, it is also necessary to consider the land holdings of downstream entities which are deemed to be held by the target entity under the tracing rules which exist in each State and Territory.

Under these tracing rules, an entity which holds an interest of 50% or more in a downstream entity would generally be deemed to hold a proportion of the land holdings of that downstream entity. For example, if Entity A holds 75% of the shares in Entity B, Entity A would be deemed to hold 75% of the land holdings of Entity B. In some States and Territories, the threshold for tracing is less than 50%. For example, in Victoria and the Northern Territory, an entity may be treated as holding a proportion of the landholdings of a downstream entity in which it has a 20% or greater interest.

The comprehensive scope of the tracing rules, coupled with changes to the other thresholds for determining whether or not an entity is a landholder, have greatly increased the potential for companies and trusts to be regarded as landholders for Australian stamp duty purposes which, in turn, increases the potential for dealings with interests in such entities to attract landholder duty.

Does landholder duty apply to transfers between related entities?

Where shares in a company or units in a unit trust are being transferred between related entities, landholder duty can still be payable, even if the transferor and transferee are offshore. Although Australian revenue authorities would have some difficulty in taking legal action against entities outside of Australia, they have other means at their disposal to recover any landholder duty which is payable. For example, in some jurisdictions the liability to pay landholder duty is not just a liability of the acquirer but also a liability of the company or unit trust concerned. This means that the tax authorities can obtain a judgment against the company or the trustee for any unpaid stamp duty liability. The revenue authorities also have, in some cases, the ability to sell the underlying land assets as a means of recovery. Further, if any person in Australia owes money to an entity with an unpaid stamp duty liability, the revenue authorities can also require the Australian entity to pay the money owing to the tax authorities instead of paying it to the person to whom the money is owed.

Corporate reconstruction exemptions

Most jurisdictions in Australia have a corporate reconstruction exemption which may apply so that landholder duty or other forms of stamp duty are not required to be paid when restructures are undertaken within the same corporate group. The requirements for this kind of exemption vary between the jurisdictions.

In some jurisdictions, the exemption is only available where the transferor and transferee have been in the same corporate group for a period of 3 years. A condition of the exemption in some jurisdictions is that the transferor and the transferee of the relevant interest remain in the same corporate group for up to 3 years after the transaction, unless an exception applies. If the transferor and transferee cease to be part of the same corporate group within that 3 year period, this would usually lead to the withdrawal of the exemption. As a result, stamp duty (together with penalties and interest) would become payable.

It is important that any stamp duty issues which might arise out of a restructure are identified as soon as possible before the restructure is undertaken so that applications for corporate reconstruction relief can be made before the transaction occurs. Although applications are no longer required to be made before a transaction is undertaken, it is still advisable to do this so that the relevant revenue authorities can issue rulings confirming the availability of the corporate reconstruction exemption before the transaction occurs.

Although it is preferable to apply for the exemption ahead of the transaction occurring, it is also possible to apply for corporate reconstruction relief after a transaction, provided that the relevant time limits are complied with. These time limits are strictly enforced, which highlights the need for the stamp duty consequences of a restructure to be identified as early as possible.