When interests in a landholder are transferred, such as through issuing shares, there will be a question of the duty payable on those transactions. Whichever State or Territory is involved, much turns on whether the acquisitions “form, evidence, give effect to or arise from substantially one arrangement, on transaction or one series of transactions”, to quote the Victorian Duties Act 2000 (other jurisdictions also attempt to aggregate transactions which arise from substantially one arrangement).
On 8 August 2024, the Victorian Court of Appeal found that a fairly typical capital raising via share issue actually was substantially one arrangement, and in so doing raised serious questions about the duty payable not only on future capital raisings involving the acquisition of an interest in a landholder, but also on historical transactions (Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue [2024] VSCA 175).
The capital raising in the Oliver Hume case
Oliver Hume owned land in Victoria to the value of $2.75m, and wanted to raise $1.8m of capital via the issue of 1.8m shares to finance a single development of it. It sought to do so by circulating an Information Memorandum to promote the development to potential investors through numerous channels, which said:
- the target subscription of $1.8m of shares must be achieved by 26 June 2014 (the closing date). If this was not achieved, then all application money (without interest) would be returned to the applicants;
- as soon as the target subscription of 1.8m shares was achieved, the shares would be allotted;
- only 100 shares had been issued by the Taxpayer at the time. Therefore it was understood that if the subscription target was met and shares newly issued then the investors would together be holding 99.99% of the issued shares in the Taxpayer;
- the Taxpayer would appoint an external project manager to manage the development project through a management agreement; and
- there would be special provisions in the Taxpayer’s constitution to the effect that the management agreements could not be terminated except by way of a 90% vote of the shareholders, and that once the project was completed the Taxpayer must do all things necessary or desirable to wind itself up. The constitution of the Taxpayer itself contained terms regarding the management agreement and winding up at the completion of the project.
Potential investors were not provided with the names or details of other potential investors or copies of any application forms submitted by other investors (nor would any of that information be provided if requested). At all times, the identities and details of the investors remained confidential.
Eighteen investors applied for 1.92m shares in the Taxpayer and so 1.8 million shares were issued (with the balance being scaled back from certain investors). No individual investor had acquired a sufficient number of shares to take their interest to 50% of the Taxpayer.
The Victorian Commissioner determined that the Taxpayer was a “landholder” for the purposes of the Duties Act 2000 (Vic), which was not a contentious issue. However the Commissioner also determined that the transactions pursuant to which the 18 investors had acquired their shares were “associated transactions” and therefore those interests should be aggregated in testing whether the 50% threshold for a duty liability was met. Since that amounted to a 99.99% interest, the Commissioner charged $151,235 in duty.
Core issue: was there "substantially one arrangement", or "one series" of transactions?
The core provision considered in Oliver Hume was section 78(1)(a)(ii)(C) of the Act: a person may make a relevant acquisition for landholder duty purposes if they acquire a significant interest in the landholder:
"...that amounts to a significant interest in the landholder when aggregated with other interests in the landholder acquired by...any other person in an associated transaction". [emphasis added]
An "associated transaction" in relation to the acquisition of an interest in a landholder by a person, is defined under the Act as:
“…an acquisition of an interest in the landholder by another person in circumstances in which –
(a) those persons are acting in concert; or
(b) the acquisitions form, evidence, give effect to or arise from substantially one arrangement, on transaction or one series of transactions". [emphasis added]
Oliver Hume was concerned with item (b) – did the acquisition of the issued shares in the Taxpayer by each of the 18 individual investors arose from "substantially one arrangement", or alternatively "one series" of transactions?
What amounts to an "associated transaction" under the Duties Act
As there had been no previous judicial consideration of the concept of an "associated transaction", the Court reviewed cases which considered similar provisions such as section 24 of the Act (which relates to the aggregation of transfers of dutiable property only, not acquisitions in landholder entities). This also included a review of stamp duty cases which considered the same issue in other jurisdictions which have aggregation provisions similar to section 24.
The Court cautioned that care ought to be taken in utilising cases which concern different legislation, since legislative provisions "must be construed according to their own unique language, purpose and context. Each also turns on its own particular factual context". However, it noted that in considering whether there is some "oneness" or "unifying factor", a number of those cases highlighted the importance of some "interdependence" or other connection between the relevant transactions.
The key principles noted by the Court were:
- while it may be accepted that one purpose of an "associated transaction" provision is to combat attempts to evade tax by "contract-splitting", there is no requirement for there to be a tax avoidance purpose, or other "intent to defraud";
- a consideration of Chapter 3 of the Act as a whole evinces a Parliamentary intention to ensure that any transfer of an economic interest in land is treated similarly for revenue purposes. Where a transfer is not by direct transfer, but by acquisition of a significant interest in a landholder, that transfer should be taxed in a similar way as if it were a direct transfer of the land;
- the focus of the language in paragraph (b) of the definition of “associated transaction” is not on the individuals concerned, but on the relationship between the acquisitions and the singular "arrangement" or "transaction" (or "series of transactions"). This immediately distinguishes the definition from the concept of an "associated person", which focuses on the relationships between people. On that basis, item (b) is focused on the objective terms and circumstances of the transactions, not the acquirers’ subjective knowledge or intentions; and
- whether the acquisitions are “associated transactions” is based on factors that indicate any "oneness" or "unifying factor" between the acquisitions. The connection between the transactions cannot be merely casual or fortuitous.
In applying those principles, the Court concluded that the acquisitions made by the 18 investors were interconnected in circumstances where no individual acquisition could proceed unless a total of $1.8m was raised. The acquisitions could not be described as relevantly independent of each other (despite the fact that none of the investors knew the others, or even communicated with them).
The terms of the constitution were important in this case, as they said the acquirers, together, had an interest in an entity which was to undertake a single land development project. The singularity of the undertaking, or "oneness", suggests that overall and "in substance" the acquisitions gave rise to a single venture for the development of the Victorian property by the Taxpayer.
Finally, the effect of acquisitions of the shares occurring on the same day and in the same way was to substantively alter the shareholdings in the Taxpayer.
Accordingly, regardless of whether the acquirers were personally acquainted with one another, or whether they were "independent subscribers", the acquisitions were associated transactions. The Taxpayer’s appeal was dismissed on that basis.