When GST was first introduced the States and Territories agreed to stamp duty reform to reduce the stamp duty base. However, in the M&A space, the opposite has occurred and the stamp duty base has expanded.
Historically, the States and Territories have not imposed duty on acquisitions of interests in:
- listed companies;
- companies that do not own freehold land; and
- companies not having substantial land assets.
However, there has been a transformation in the key head of duty that now applies to M&A deals. That head of duty has two models: “land rich” duty and “landholder” duty. Under both models, if there is an acquisition of shares, duty is charged on the unencumbered market value of land owned directly or indirectly by the target company.
Land rich and landholder duty
“Land rich” duty applies to an acquisition of 50% or more of an unlisted company if the company directly or indirectly owns land in Australia and land (consolidated and worldwide) represents 60% or more of total non-excluded property (consolidated and worldwide). Listed companies are not included and the 60% test is key in excluding companies from the duty base that do not have substantial land assets.
“Landholder” duty expands the duty base in two key respects. It applies to acquisitions of 90% or more of listed companies (in some cases at a reduced duty rate). There is no 60% test – only a modest dollar threshold of land in the relevant jurisdiction (the highest of which is $2 million). In addition, in some cases landholder duty is also charged on goods. Given the low thresholds, landholder duty can apply to any industry. It can even apply where the only land assets of a company are tenant’s fixtures.
Victoria and Tasmania are the only jurisdictions currently operating under a land rich model. The other jurisdictions have landholder models except for the Australian Capital Territory which has a hybrid model, namely: no land threshold or 60% test but it only applies to unlisted companies and unit trusts.
Victorian Landholder Bill
On 19 June 2012, the Victorian Parliament passed the Duties Amendment (Landholder) Bill 2012 (Bill) which introduces a landholder model into Victoria from 1 July 2012. At the time of going to press, the Bill was still awaiting Royal Assent.
The landholder regime outlined in the Bill departs significantly from the model adopted in other jurisdictions. From 1 July, a company or unit trust will be a landholder if it holds land in Victoria with a market value of $1m or more (compared to a threshold of $2 million in New South Wales, Queensland and Western Australia). The existing land acquisition thresholds for when a taxpayer acquires a significant interest in a private landholder have been retained, namely 50% for a company and 20% for a trust (compared to 50% in all other landholder duty jurisdictions from 1 July 2012). In addition, landholder duty will apply to acquisitions of 90% or more of listed companies and listed unit trusts.
The Victorian Government has greatly expanded the duty base by introducing the concept of “economic entitlement” to capture transactions that would not otherwise have been relevant acquisitions of private landholders. Economic entitlement is defined very broadly so that if a person acquires shares or units in a landholder or enters into an arrangement in relation to a private landholder under which the person is entitled to participate in dividends, income, rents, profits, capital growth or the proceeds of sale of the land, they will have an economic entitlement. Duty will be payable on the acquisition of an interest of 50% or more in an economic entitlement. For example, it could apply to an arrangement by which a developer agrees to undertake development in return for a fee calculated by reference to the sale proceeds of the land.
Aggregation provisions extended
The Bill also extends the aggregation provisions by removing the 3 year limit on the period to which aggregation could apply. Also, the definition of “associated person” has been expanded so that third parties may now be associated persons.
Implications for M&A transactions
The duty base Australia-wide has therefore expanded significantly for M&A transactions. In the result, the stamp duty implications for an M&A deal need to be assessed very early in the process. Stamp duty efficiency is critical. The potential for multiple incidences of duty for setting up the acquisition structure and on any postacquisition restructure needs to be properly managed.
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