New partnership provisions
The Duties Act 2000 (“Duties Act”) charges duty on a transfer, or change in beneficial ownership, of dutiable property (e.g. land or an interest in land), unless an exemption applies. To this end, the acquisition of an interest in a partnership that holds land could be dutiable.
In Commissioner of State Revenue v Danvest Pty Ltd & Anor  VSCA 382 (“Danvest”), the Victorian Court of Appeal considered whether an interest in a partnership, the property of which included land in Victoria held by a nominee on behalf of the partners, amounted to dutiable property. The Court of Appeal upheld the Supreme Court’s decision that it did not, on the basis that the interest was not a vested proprietary interest in any specific property of the partnership, and therefore the acquisition of the partnership interest did not give rise to a duty liability.
The State Taxation Acts Amendment Bill 2018 (“Bill”) introduces new partnership provisions in order to overcome the decision in Danvest.
The new provisions deem a partner in a partnership to have beneficial ownership of each item of partnership property in the same proportion as the partner’s partnership interest (being the proportion of any surplus to which the partner would be entitled in respect of capital if the partnership were to be dissolved). Below is an example to illustrate the change.
A partnership consists of two partners, with each partner having contributed equally to the capital of the partnership and each being entitled to a 50% share of any surplus in respect of capital on dissolution of the partnership. The partnership property consists of Victorian land. The registered proprietor of the land is a company that holds the land as nominee for the partners.
Following the decision in Danvest and subject to the terms of the Partnership Agreement, as the law currently stands if a new partner buys out the interest of an existing partner, the new partner should not be liable to pay stamp duty in respect of their acquisition.
However, under the new partnership provisions the new partner would be deemed to acquire a 50% beneficial interest in the land held by the partnership and would be liable to pay stamp duty on that acquisition.
New aggregation test for the Foreign Purchaser Additional Duty provisions
Foreign purchasers (including foreign corporations) are liable to pay additional stamp duty at a rate of 7% when they acquire residential property in Victoria, including land intended for residential development. A foreign corporation includes a corporation in which a foreign person or entity has a controlling interest of more than 50%. Currently, for the purposes of determining whether there is a foreign controlling interest, the Duties Act does not allow interests of persons who are not associated to be aggregated. Accordingly, a corporation may be wholly owned by shareholders who are all foreign persons, however, provided those shareholders are not associated persons and no one shareholder holds a controlling interest of more than 50%, the company would not be regarded as a foreign corporation.
The Bill introduces a new aggregation test, such that all interests held by foreign persons or entities (whether associated or not) are to be aggregated. Below is an example to illustrate the change.
A corporation with four equal shareholders, each either a foreign natural person, a foreign corporation or a trustee of a foreign trust, acquires a residential development site in Toorak for $5 million. None of the shareholders are associated persons.
Currently, the corporation would not be a foreign corporation, despite being subject to foreign control. This is because the Act currently does not allow for the aggregation of the interests of the shareholders, and as each one only has a 25% interest in the corporation, no one shareholder has a controlling interest. Accordingly, the corporation would be liable to pay stamp duty at the standard rate of 5.5%, which amounts to $275,000.
Under the new test, the shareholders’ interests would be aggregated, such that the same corporation would be a foreign corporation, which is liable to pay the foreign purchaser additional duty of 7%. Accordingly, the corporation would have to pay stamp duty at the rate of 12.5%, which amounts to $625,000 (i.e., an extra $350,000 under the new test).
When do the new provisions apply from?
The Bill has been read a second time and debate on the Bill has now been adjourned until 22 May. Once it has been passed by both Houses of Parliament, it will then be presented to the Governor of Victoria for Royal Assent. The new provisions referred to above will apply from the day after Royal Assent is received.
The Bill also introduces a number of other stamp duty changes, including an exemption for foreign purchasers who jointly purchase a principal place of residence with an Australian spouse or domestic partner, and principal place of residence exemptions and concessions for first home buyers who are members of the Australian Defence Force.
Entities that are currently planning any of the following transactions should immediately consider whether there is an opportunity to transact prior to the date that the Bill receives Royal Assent:
- The acquisition of an interest in a partnership that holds Victorian land;
- The acquisition of residential property (including land for residential development) through a corporation with multiple foreign investors who are not associates; and
- The acquisition of an interest in a corporation or unit trust that holds Victorian residential property by multiple foreign investors who are not associates.
Furthermore, any entities that have previously paid duty in respect of acquisitions of interests in partnerships that hold Victorian land should consider whether there is an opportunity to seek a refund of the duty paid on the basis of the decision in Danvest.
Please contact your Pitcher Partners expert if you wish to discuss the changes and potential opportunities referred to above.