The Victorian Budget for 2018 / 19 has come and gone and, to the relief of taxpayers, no new taxes or duties were announced. However, some important changes to the Duties Act 2000 (Vic) (the Duties Act) have been proposed in the State Taxation Acts Amendment Bill 2018 (Vic) (Amendment Bill). The Amendment Bill was introduced to Parliament on 1 May 2018.
The Amendment Bill introduces numerous changes to Victoria's stamp duty laws, however we focus below on two measures of particular importance, being:
- the treatment of partnerships for stamp duty purposes; and
- the expansion of the 'foreign purchaser' provisions of the Duties Act.
These two measures are due to come into effect after the Amendment Bill receives Royal Assent, which we expect will occur in June 2018.
Partners in partnerships will be deemed to have an interest in partnership assets
In response to the decision of the Supreme Court of Victoria in Danvest Pty Ltd & Anor v Commissioner of State Revenue  VSC 125 (Danvest, summarised in our May 2017 News Alert), which was affirmed by the Court of Appeal (see  VSCA 382), the Amendment Bill seeks to amend the Duties Act to ensure that the acquisition of an interest in a partnership that holds dutiable property will be subject to duty. An interest in a partnership is not currently expressly stated to be an item of dutiable property under the Duties Act whereas all other states and the territories have specific provisions in their stamp duty legislation that impose duty on acquisitions of partnership interests.
Under the Duties Act, duty is charged on (among other things) a transfer of 'dutiable property' (e.g. land) and 'any other transaction that results in a change in beneficial ownership of dutiable property'. A 'change in beneficial ownership' includes, but is not limited to, 'a change in equitable interests in dutiable property'.
In Danvest, the Supreme Court considered whether the acquisition of interests in a partnership (of which the assets included Victorian land and related plant & equipment) would be subject to stamp duty. Croft J held that such an acquisition was neither a transfer of dutiable property nor did it result in a change in beneficial ownership of dutiable property. The basis of this conclusion was Croft J's confirmation that an interest in a partnership is an equitable chose in action that does not give rise to any present equitable proprietary interest in the assets of the partnership. That reasoning was upheld by the Court of Appeal. It necessarily followed that a partnership interest was not an interest in dutiable property and therefore the acquisition of such an interest was not subject to duty under the Duties Act.
In response to Danvest, the Amendment Bill will insert a new provision into the Duties Act which will explicitly provide that a 'partner in a partnership is taken to have beneficial ownership of each item of partnership property in the same proportion as their partnership interest'. The term 'partnership interest' will be taken to mean the proportion of any surplus to which the partner would be entitled in respect of capital in the partnership, if the partnership were to be dissolved. The value of a partner's beneficial ownership of partnership property is to be determined without regard to any liabilities of the partnership. Unlike the 'net basis' jurisdictions (NSW, ACT and Tas) which calculate duty taking into account the liabilities of the partnership, the new provisions will cause Victoria to be a 'look through' or 'gross basis' jurisdiction (similar to SA, Qld, WA and NT). This means duty will be imposed by reference to the value of the partnership assets that are dutiable property (like land interests) and not by reference to the value of the partnership interest itself.
The Amendment Bill also confirms the manner of tracing of land interests through partnerships so as to impute the partnership's landholdings to partners and head companies or trusts of the partners. These changes are relevant to the landholder duty provisions that impose stamp duty on certain acquisitions of interests in landholding companies or trusts.
The changes to the treatment of partnerships will generally bring Victoria's position into line with other Australian jurisdictions, each of which have specific provisions which can, in certain circumstances, bring the acquisition of an interest in a partnership, or in a landholder that may have an indirect interest in land held through a partnership, to duty.
Importantly, and of benefit to taxpayers, the changes to the treatment of partnerships may also assist corporate groups with structures containing partnerships. In this regard, changes to be made by the Amendment Bill will allow a 'look through' of partnerships to determine whether a 90% or more owned and controlled corporate group exists for the purposes of the corporate reconstruction exemption in the Duties Act.
Expanding the definition of 'foreign purchaser' for the purposes of the foreign purchaser stamp duty surcharge
Victoria was the first of many States to introduce a surcharge rate of duty for 'foreign purchasers' acquiring 'residential property'. The current rate of 'foreign purchaser additional duty' (FPAD) is 7% (meaning a top stamp duty rate of 12.5% after accounting for the general rate of 5.5%).
The Duties Act defines 'foreign purchaser' to include a 'foreign natural person', a 'foreign corporation' and the trustee of a 'foreign trust'. Each of these terms are in turn defined. These definitions are important, as they determine the persons or entities to which the FPAD may apply.
Broadly, for the purposes of FPAD, a corporation is a 'foreign corporation' (under the current definition) if a foreign natural person, foreign corporation or trustee of a foreign trust (alone or together with associated persons) holds or controls more than 50% of the voting power or issued shares of the corporation.
Currently, the interests held in a corporation by foreign natural persons, foreign corporations or trustees of foreign trusts that are not otherwise 'associated persons' are not aggregated for the purposes of determining whether the 'more than 50%' threshold is satisfied.
For example, if an Australian incorporated company (AusCo) is held:
- 50% by Foreign Company X; and
- 50% by Foreign Company Y (not being an 'associated person' of Foreign Company X),
then under the current provisions, AusCo would not be classified as a foreign corporation for FPAD purposes.
However, under the changes to be made by the Amendment Bill, AusCo will be treated as a foreign corporation for FPAD purposes as more than 50% of the shares and / or voting control of AusCo would be held by foreign corporations (despite such corporations not being associated). Equivalent changes will be made for the purposes of determining whether a trust is a 'foreign trust'.
This change will bring Victoria's position on the aggregation of unassociated foreign investors into line with various other States (such as New South Wales and Queensland). It will significantly increase the number of companies and trusts that may be subject to FPAD. Accordingly, when a company or trust contracts to acquire Victorian residential land or invests in a residential landholding entity, careful attention will need to be given to the interests held by all investors in the acquiring company or trust to determine its foreign status for FPAD purposes.