In brief: Corporate mergers and acquisitions commonly involve changes to entities that comprise a corporate group, the holding of property within that group and the ultimate beneficial ownership of that group. Even if those changes occur entirely outside Australia, Australian landholder duty may be payable and, if the transaction is not structured properly from a duty perspective, multiple amounts of duty may be payable on a single transaction. The Crocodile Gold case exemplifies the potential for multiple duty and demonstrates the desirability of comprehensively explaining complex transactions to revenue offices. Partner Adrian Chek (view CV) and Associate Scott Lang discuss the decision and the application of landholder duty more generally.
HOW DOES IT AFFECT YOU?
- An integral part of planning any corporate merger or acquisition is to determine whether any of the entities in the relevant corporate group hold significant interests in land in any state or territory of Australia with a combined unencumbered value above the relevant threshold for that state or territory to render the entity a 'landholder' for duty purposes.
- If a corporate group does include such 'landholder' entities, the parties should seek advice on whether the proposed transactions will constitute 'relevant acquisitions' in those landholder entities (which will be subject to landholder duty) and whether any exemption, such as the corporate reconstruction exemption, could apply.
- Where a restructure does include non-exempt relevant acquisitions subject to duty, the parties liable to pay duty should make comprehensive submissions to the relevant state and territory revenue offices to ensure that the assessment process runs smoothly, and that costly requisition, objection and appeal processes are avoided.
LANDHOLDER DUTY IN BRIEF
The potential application of land rich and landholder duty to corporate mergers and acquisitions is explained in detail in our earlier Focus: Australian Landholder Duty: Avoid the Pitfalls of an Ever Expanding Duty Base.
Broadly, land rich or landholder duty can be triggered where a person (alone or with associates) acquires a 50 per cent or greater interest in a company (or certain types of unit trust) that has landholdings over a particular monetary threshold, or, having already acquired such a 50 per cent or greater interest, their interest increases. Lower thresholds may apply for unit trusts in some jurisdictions.
Importantly for corporate mergers and acquisitions, each state and territory has comprehensive tracing provisions that operate to treat a company as having an interest in any land held by its subsidiaries (in the case of wholly owned subsidiaries, the parent company is effectively deemed to own all of the land owned by those subsidiaries).
CROCODILE GOLD CASE
The Crocodile Gold case involved a complex 'reverse-takeover' of a Canadian company involving multiple entities with similar names, which took place entirely in Canada. In summary, the restructure involved the amalgamation of two Canadian companies under the Business Corporations Act of Ontario1 to become a new company, a process unknown to Australian company law.
Before the restructure, Crocodile Gold Incorporated (a company incorporated in Ontario) (the Ontario Company 1) owned all of the shares in Crocodile Gold Australia Pty Ltd (a company incorporated in Australia) (the Australian Company).
In turn, the Australian Company owned 345 exploration licences, exploration retention licences and mining tenements in the Northern Territory and Western Australia. The combined value of the Northern Territory mining interests was greater than $500,000 (the landholding threshold value in the Northern Territory), meaning that the Australian Company and Ontario Company 1 were land-holding corporations for the purposes of Northern Territory landholder duty.
Separately from that ownership chain, Crocodile Gold Corporation (a company apparently incorporated in Ontario) (the Canadian Holding Company) owned all of the shares in 2214656 Ontario Incorporated (a company incorporated in Ontario) (the Ontario Company 2). Ontario Company 2 was a shelf company, with no substantive assets.
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Under a restructure agreement between Ontario Company 1, Ontario Company 2 and Canadian Holding Company, Ontario Company 1 and Ontario Company 2 agreed to amalgamate and become a new company. This involved the following transactions occurring simultaneously:
- all shares in Ontario Company 1 and Ontario Company 2 being cancelled;
- the formation of a new amalgamated company, also named Crocodile Gold Incorporated (incorporated in Ontario) (the Amalgamated Company);
- the Amalgamated Company issuing approximately 126 million shares in itself to Canadian Holding Company; and
- Canadian Holding Company issuing the same number of shares in itself to the former shareholders of Ontario Company 1.
Assessment, objection and appeal
After lodging documents with the Commissioner of Territory Revenue (the Commissioner) in relation to the issue of shares by the Amalgamated Company, the Canadian Holding Company received three separate landholder duty assessments for three of the stages of the restructure (the amalgamation and the two share issues). The Canadian Holding Company accepted the amalgamation assessment and successfully objected against the assessment of the share issue it made.2 The Commissioner rejected its objection against the assessment of the share issue made by the Amalgamated Company. The Canadian Holding Company appealed to the Northern Territory Supreme Court against that rejection.
Justice Kelly noted that the issue for determination was whether the issue of shares by the Amalgamated Company to the Canadian Holding Company meant that the Canadian Holding Company had 'acquired' an interest in a land-holding corporation within the meaning of section 56C(1) of the Stamp Duty Act 1978 (NT) (the Duties Act), which relevantly contained the following definition of 'acquire':3
acquire, in relation to an interest or a shareholding in a land-holding corporation, includes acquire the interest or shareholding in any of the following ways:
(a) the allotment or issue of a share, not being the issue of a share to a member on registration of the corporation; …
Her Honour noted that the answer to the issue was governed by Canadian law, on which the parties were not in dispute; rather, it was the application of the Duties Act to the implications of the Canadian law that the parties disputed.4 The Canadian Holding Company argued that the issue of shares was an issue of shares by the Amalgamated Company.5 The Commissioner argued that the issue of shares in the Amalgamated Company was effectively an issue of shares in Ontario Company 1, which was a land-holding corporation.6
After reviewing the Ontario Business Corporations Act and relevant Canadian case law, Justice Kelly held that 'the issue of shares in the amalgamated company cannot be said to be an issue of shares in one of the pre-amalgamation companies. Although the pre-amalgamation companies continue to exist in the amalgamated company, the amalgamated company is not identical to either of them.'7 It was irrelevant that one of the pre-amalgamation companies (Ontario Company 2) was a shelf company, or that the Amalgamated Company had the same name as one of its constituent companies, Ontario Company 1.8 Accordingly, the Canadian Holding Company did not 'acquire' an interest in a land-holding corporation when the Amalgamated Company issued it with shares, and no landholder duty was payable on that transaction.
Given the facts of the Crocodile Gold case and the specific issue on which Justice Kelly was required to give judgment, the case might have a limited future application. Having said that, it stands as an important reminder of how landholder duty issues should be dealt with when planning and executing a corporate merger or acquisition.
When planning such a transaction, a key preliminary step is to determine which entities in the relevant corporate group hold interests in land in Australia and, if so, whether the combined value of those interests is higher than the threshold value in any state or territory so that the relevant entity is considered a landholder in that state or territory.9 As the Crocodile Gold case demonstrates, this determination should be made regardless of whether all steps in the transaction occur outside of Australia, as those steps may involve a foreign entity being liable to landholder duty in respect of the value of the Australian landholdings held by one or more of its subsidiaries.
If one or more entities in the group are landholders, from a landholder duty perspective, particular care should be taken to structure the transaction to minimise the number of relevant acquisitions in landholding entities and to satisfy the requirements of any relevant exemptions (potentially the corporate reconstruction exemptions). For instance, in Crocodile Gold it appears that the taxpayer's initial submissions to the Commissioner did not even deal with the issue of whether landholder duty was payable on the amalgamation, despite the taxpayer subsequently acknowledging that duty was payable on the amalgamation.10
Where the restructure is particularly complex, such as when it involves foreign entities entering into mergers or amalgamations unknown to Australian law, the relevant steps should be thoroughly explained to the relevant state and territory revenue offices in submissions. In some cases, it may be useful to obtain opinions from foreign counsel in relation to the nature of the steps unknown to Australian law and attach those to the submissions. This should help to expedite the duty assessment process and avoid costly requisition, objection and appeal processes. For example, it would appear that in the Crocodile Gold case, significant time and cost savings may have been made if full disclosure of all elements of the transaction had been made to the Commissioner in initial submissions. The dispute over the nature of the Canadian amalgamation process might also have been resolved earlier if it had been explained in initial submissions supported by an opinion from Canadian counsel.