A VCAT decision has upheld the use by the SRO of a rarely used landholder duty provision originally introduced as an “anti-avoidance” measure - despite the taxpayer not acquiring any further units in a Victorian landholding unit trust. This decision confirms the breadth of the landholder provisions that can capture taxpayers that obtain the capacity to make financial decisions over landholding companies or trusts.
What happened?
On 11 July 2024, in Tao v Commissioner of State Revenue (Review and Regulation) (2024) VCAT 637, the Victorian Civil and Administrative Tribunal held that a taxpayer made a relevant acquisition upon acquiring control over a landholder.
This was due to the taxpayer being the sole director of a company that was a trustee of a unit trust that held land and making financial decisions concerning the unit trust. Critically, the Tribunal held that it was appropriate to take account of pre-existing interests held in the landholder, even where they were not held directly.
Legislation
In Victoria, where a person acquires control over a landholder, duty can be charged under the landholder duty provisions under section 82 of the Duties Act 2000 (Vic). Refer to our summary of section 82 of that Act here.
Under subsection 82(1), a relevant acquisition in a landholder under section 82 is deemed to be of 100% of the landholder unless the Commissioner determines a lesser percentage is appropriate in the circumstances.
Background Facts
66 William Road Pty Ltd was the trustee of the WCT Unit Trust, which held a development property in Victoria with a value above $1 million. WCT Unit Trust was a ‘landholder’ for the purposes of subsection 71(1) of the Duties Act 2000 (Vic).
Units in the WCT Unit Trust were held:
50 units by Maclaw No. 547 Pty Ltd as trustee for The Mountain Highway Unit Trust;
25 units by Fredco Incorporated Limited as trustee for Nomsec No. 1 Limited; and
25 units by Amber Investments Pty Ltd, a company of which Mr Tao was the majority shareholder.
On 11 February 2014, Mr Tao acquired 4 shares in 66 William Road Pty Ltd and on 6 March 2014 he became the sole director and secretary of the company.
On 31 May 2019, the Commissioner of State Revenue issued a notice of assessment to Mr Tao imposing duty of $199,650.00 (plus penalties and interest) on his acquisition of 4 shares in 66 William Road Pty Ltd and his appointment as the sole director/secretary of that company.
Despite neither Mr Tao nor Amber Investments Pty Ltd acquiring any further units in the WCT Unit Trust, Mr Tao was assessed on the basis that he made a ‘relevant acquisition’ in the WCT Unit Trust as a result of acquiring control of that trust under section 82 of the Duties Act 2000 (Vic).
Issue before VCAT
The main issue was whether Mr Tao acquired control of the WCT Unit Trust for the purposes of section 82. This turned on:
1. whether Mr Tao acquired the ‘capacity to determine or influence the outcome of decisions about the WCT Unit Trust’s financial and operating policies’; and
2. if so, whether that was sufficient to engage section 82 or if it was also necessary that Mr Tao also obtain an interest in the WCT Unit Trust which is equivalent to a beneficial interest.
Mr Tao also sought leave at the hearing to rely on an additional ground, which the Tribunal granted:
3. if Mr Tao held a ‘significant interest’ in the WCT Unit Trust, should it be reduced to 75%, to take account of the 25% interest in the trust already held by Amber Investments Pty Ltd.
1. Did Mr Tao obtain control of the WCT Unit Trust when he acquired the shares in and became the sole director of 66 William Road Pty Ltd?
Mr Tao argued that he was responsible for the ‘day to day management’ of 66 William Road Pty Ltd and was simply fulfilling decisions set by the unitholders of the WCT Unit Trust and did not have control of WCT Unit Trust’s financial and operating policies as required to engage the change of control provisions in section 82.
The Commissioner contended that when Mr Tao acquired the shares in 66 William Road Pty Ltd and became its sole director, he ‘acquired not just the capacity, but the practical ability, to determine or influence [WCT Unit Trust’s] financial and operating policies’ and that he ‘did not have the capacity to determine’ those matters before he became a director.
The Tribunal held that Mr Tao acquired the capacity to determine or influence the outcome of decisions about the WCT Unit Trust’s financial policies when he was appointed the sole director of 66 William Road Pty Ltd as evidenced by making decisions about its bank loans at [78]:
78 To that extent, they continued to exercise some ‘influence’ as to those matters. Nevertheless, as properly accepted by Mr Tao (see [48]), and made clear in Bendigo Bank’s final email (see [39]), Mr Tao was responsible for making strategic decisions concerning the WCT Unit Trust (e.g. as to the loan) as the sole director and shareholder of 66WR Pty Ltd.
Critically, the Tribunal also note that no effort was made to remove Mr Tao’s level of control at [79].
79 While, between them, the two other unit holders in the WCT Unit Trust could have used the power in clause 30 of the Trust Deed to remove 66WR Pty Ltd as trustee of the WCT Unit Trust and brought any control exercised by Mr Tao to an end, the fact is that they never did so. Moreover, at a practical level, Mr Constantinou had already lost control of Maclaw547 by the time that Mr Tao became the sole director of the company (see [53]) and, as such, Mr Constantinou was not even in a position to exercise any voting power held by his company.
2. Can section 82 be engaged in the absence of Mr Tao acquiring any interest in the WCT Unit Trust equivalent to a beneficial interest?
Mr Tao argued that the Commissioner had sought to make dutiable a transaction that did not give rise to an acquisition of a legal or beneficial interest in the landholder. At no stage did Mr Tao obtain any further unit-holding in the WCT Unit Trust nor did Mr Tao acquire any benefit or ability to exercise rights as a unitholder when he became the sole shareholder and director of 66 William Road Pty Ltd.
The Commissioner contended that construction of section 82 of the Act does not leave room for an equivalence test.
The Tribunal held that it was not necessary that Mr Tao also obtained an interest equivalent to a beneficial interest in the WCT Unit Trust for section 82 of the Act to be engaged at [96]:
96 Turning to the context, it is important to recognise that section 82 only applies where there is no relevant acquisition under sections 79 (i.e. of a direct or beneficial interest in a trust) or 81 (i.e. of a synthetic or economic interest in a trust). This, of itself, suggests that section 82 is not intended to be linked to any beneficial or synthetic interest in the trust.
The Tribunal also conceded a reduction in the extent of the ‘relevant acquisition’ [ground 3 – see below] was appropriate at [96]:
98 Another important aspect of the context is the provision in both sections 81 and 82 for a reduction in the extent of the ‘relevant acquisition’ where the Commissioner determines that to be ‘appropriate in the circumstances’.[86] As contended for Mr Tao in relation to Ground 3, this recognises it may be inappropriate to levy duty on the entirety of the prima facie relevant acquisition if a person has a pre-existing direct or synthetic interest. Again, this rather suggests that control is not directly linked to the holding of such interests.
3. Is it appropriate in the circumstances to determine a percentage less than 100% as the relevant acquisition?
Mr Tao contended that it was appropriate that the percentage of the relevant acquisition be reduced to 25% to take account of the interest in the WCT Unit Trust held by Amber Investments Pty Ltd.
Controversially, the Commissioner submitted that Mr Tao had failed to establish the ‘nature or extent of any control interest held prior to the relevant acquisition, personally or in combination with Amber Investments Pty Ltd’ and that duty should be assessed on the basis of a “100% acquisition”.
The Tribunal held that the appropriate reduction was 15%. This was on the basis that Mr Tao held 60% of the shares in Amber Investments Pty Ltd. That is the reduction was 25% units held by Amber Investments Pty Ltd in the WCT Unit Trust proportionate to the 60% of the shares held by Mr Tao in Amber Investments Pty Ltd.
Crucially, the Tribunal held that it was appropriate to take account of pre-existing interests held in the landholder, even where those interests are not held directly at [124]:
124 Nevertheless, in circumstances where the Landholder Regime has been accepted as an anti-avoidance provision, to prevent the indirect acquisition of a landholder without paying duty, I consider it appropriate to take account of pre-existing interests held in the landholder, even where those interests are not held directly.
Decision
The Tribunal held that when Mr Tao acquired the shares in and became the sole director of, 66 William Road Pty Ltd, he acquired the capacity to determine or influence the outcome of decisions about the financial and operating policies of the WCT Unit Trust and therefore obtained control of it for the purposes of section 82 of the Act. This was despite the fact that no further interests in WCT Unit Trust were acquired directly by Tao or indirectly by his interest in Amber Investments Pty Ltd.
It was appropriate however that the relevant acquisition which was deemed to have occurred under section 82 of the Act, be reduced to reflect the pre-existing indirect economic interest held by Mr Tao, namely to 85%, which reduced the amount of duty from $199,650.00 to $169,702.50 (with the penalty and interest to be reduced accordingly as well). The Tribunal ordered that the Assessment be set aside and remitted to the Commissioner for reassessment.
Key Observations
It is important to keep in mind that the Victorian landholder legislation contains economic entitlement, control and anti-avoidance provisions that are intended to deal with circumstances whereby, without acquiring a significant interest, a person acquires or obtains particular rights over a landholder.
Therefore, great care should be taken before changing the directorships of landholding entities and ownership of shares of corporate trustees of landholding unit trusts.
Please contact us with any questions in relation to the landholder duty regime or any other State Tax issues.
