On 17 June 2009, the NSW Government released draft legislation giving effect to the major changes to land rich duty announced in the NSW mini-budget of 11 November 2008. The changes, which are contained in the State Revenue Legislation Further Amendment Bill 2009 (Bill) and which will mostly apply from 1 July 2009, may significantly impact both existing and new transactions, including potentially imposing duty on dealings in entities with modest land holdings.
Move from “land-rich” to “landholder” model
Under the existing provisions, land-rich duty applies to acquisitions of “significant interests” in private companies and private unit trusts (landholders) that are “land-rich”. These transactions are called “relevant acquisitions”. A landholder is “land-rich” if it holds NSW land with an unencumbered value of $2m or more (land value test) and landholdings (wherever located) represent 60% or more of its total property (land ratio test).
Under the new provisions, the land ratio test will be removed. That is, land-rich duty will apply to acquisitions of “significant interests” in landholders that breach the land value test (i.e. hold NSW land with an unencumbered value of $2m or more). This may have the effect of bringing more entities within the land-rich provisions.
Increase in acquisition threshold for private unit trusts
Under the existing provisions, a 20% or greater interest in a private unit trust constitutes a “significant interest”.
Under the new provisions, the 20% acquisition threshold for private unit trusts will be lifted to 50%, which will align it with the acquisition threshold for private companies. This may have the effect of taking some private unit trust transactions outside of the land-rich provisions.
Land-rich provisions extended to public unit trust and listed company takeovers
The existing provisions only apply to private unit trusts and private companies.
The new provisions will be extended to also apply to public unit trusts and listed companies (public landholders) from 1 October 2009. However, an acquisition threshold of 90% will apply, i.e. a person must acquire a 90% or greater interest in a public landholder for land-rich duty to apply. Further, as a concession, the land-rich duty will be calculated as just 10% of the duty that would otherwise be payable on a transfer of the underlying NSW landholdings and NSW goods.
Land-rich duty base extended to goods
Under the existing provisions, land-rich duty is only imposed on the NSW landholdings of the landholder. As a result, duty savings were sometimes available by acquiring shares or units and paying land-rich duty rather than taking a direct transfer of the land and goods and paying transfer duty.
Under the new provisions, this anomaly will be rectified and land-rich duty will be imposed on the NSW landholdings and NSW goods of the landholder, subject to an exception where the Commissioner is satisfied that the unencumbered value of all NSW goods comprises not less than 90% of the total unencumbered value of all NSW landholdings and NSW goods.
Change to constructive ownership rules
Under the existing provisions, a landholder is taken to also hold an interest in land or other property held by a “linked entity” in addition to any land and property the landholder holds in its own right. A “linked entity” is an entity in which at least a 20% interest is held.
Under the new provisions, the definition of “linked entity” will be restricted to entities in which at least a 50% interest is held. This may take some entities outside the land-rich provisions and may result in a preference for up-stream transactions.
Change to quarantining rules
Under the existing provisions, interests in a landholder that were acquired at a time when the landholder did not hold land in NSW or before the land-rich provisions were introduced were not counted in assessing whether a further acquisition constituted a “relevant acquisition” and triggered land rich duty.
Under the new provisions, such interests will now no longer be quarantined, with one exception. For example, if an interest of 60% in a private company had been acquired prior to introduction of the land-rich provisions and the remaining 40% is acquired on or after 1 July 2009, the 40% interest will now be subject to land-rich duty. Under the existing provisions, a relevant acquisition would not occur because the 60% interest is quarantined and the 40% interest, on its own, does not exceed the 50% acquisition threshold. The one exception is that quarantining will apply to interests in a landholder that were acquired at a time when the landholder did not hold land in NSW but only for the period of 12 months after the landholder first acquires NSW land. Taxpayers will need to be mindful of this change to the quarantining rules in the early phase of establishment, seeding and funding of units trusts in particular.
General anti-avoidance provisions introduced
The general anti-avoidance provisions contained in the Bill will apply to schemes entered into on or after 1 July 2009 and to schemes put in place before 1 July 2009 to the extent that they are carried out on or after 1 July 2009.
The provisions are targeted at “artificial, blatant or contrived schemes” where there is a sole or dominant purpose of enabling liability for duty to be avoided or reduced. The provisions operate in a similar way to the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936.
Accordingly, from 1 July 2009 consideration will need to be given to the potential application of these general anti-avoidance provisions to transactions that have the effect of minimising land-rich duty.
What do the changes mean for you?
Going forward, the land rich provisions may impact entities that were not previously exposed to the provisions, such as manufacturing businesses that own their own premises.