New Landholder Stamp Duty A PAPER BY PAUL ANDERSON NOVEMBER 2009
New Landholder Stamp Duty
Summary New legislation changes the way in which acquisitions of shares in companies and interests in trusts owning land are dealt with, for stamp duty purposes.
Who Does This Impact? Any entity contemplating the takeover of a company or trust and its advisers.
What Action Should Be Taken? Any interested party should be thoroughly familiar with the new provisions.
Contents:
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Old Provisions
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New Provisions
2
Public Entities
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Companies v Trusts
3
Primary Producers
3
Linked Entities
3
Other States
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Example
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Conclusion
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New Landholder Stamp Duty by Paul Anderson
The State Revenue Legislation Further Amendment Act 2009 introduces significant changes to the way in which New South Wales taxes dealings in landholding companies and trusts. The new provisions effectively abandon the former ‘land rich’ duty in favour of a ‘landholder’ duty.
Old Provisions Prior to 1 July 2009, the ‘land rich’ rules applied where a ‘relevant acquisition’ was made in a land rich ‘land holder’. A ‘relevant acquisition’ arose where a person acquired a 20% or greater interest in a land rich private unit trust or a 50% or greater interest in a land rich private company. Where a relevant acquisition was made, duty was payable at transfer rates (up to 5.5%) on the unencumbered value of the proportion of the underlying land, equal to the proportion of the equity acquired in the target. This should be contrasted with the stamp duty payable on shares in a private company which does not own land. In the latter instance, the relevant duty is 6 cents per $10 of the consideration for the acquisition, or its market value, whichever is the greater. This is an effective flat rate of 0.6%. To be ‘land rich’, a private company or trust needed to pass two tests: Firstly, 60% (by unencumbered value) or more of its total assets had to comprise land or interests in land located anywhere. Secondly, $2 million or more of that land had to be located in New South Wales. In calculating the 60% test, certain assets were excluded, e.g. cash, debt securities and shares or units in linked entities. The acquisition of interests in listed companies or trusts was not subject to duty.
New Provisions The new provisions apply to acquisitions in private entities from 1 July 2009 and to public entities from 1 October 2009. Although the entity must still own at least $2 million worth of land in NSW, the 60% test has been removed, i.e. it is no longer necessary that 60% of the entity’s assets must be land wherever situated. This will inevitably expand the tax net. Presently, the Act was mainly of importance to entities whose main business was dealing with land. For example, a manufacturing business who incidentally owns a factory worth more than $2 million will now be caught but not previously. Duty must now be calculated not only on the unencumbered value of land in NSW, but ‘goods’ in NSW held by the entity as well. For this purpose, ‘goods’ does not include stock in trade, materials for use in manufacture or goods under manufacture.
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New Landholder Stamp Duty by Paul Anderson
Public Entities From 1 October 2009, takeovers of public entities will be taxed where a 90% or greater interest is acquired in such an entity. ‘Public entities’ include listed as well as widely held entities. The duty payable is 10% of the duty that would be chargeable on a transfer of all the NSW land or goods of the entity at the general rate. This is an effective rate of up to 0.55%. This represents a significant change. Previously, listed companies and trusts were exempt. Combined with the removal of the 60% test, this means that many takeovers of listed companies and trusts will be caught. An exception worth noting is where the transaction proceeds by way of scheme of arrangement.
Companies v Trusts Companies and trusts are now treated in the same way. The acquisition threshold for a trust was 20% and for a company was 50%. Under the new rules, a 50% interest must be acquired in a private company or trust and 90% in a listed company or trust.
Primary Producers There is a concession that applies to the acquisition of interests in a ‘primary producer’, i.e. an entity whose landholdings wholly or predominantly comprise land used for primary production. In addition to holding land in NSW worth at least $2 million, the landholding of a primary producer must comprise at least 80% of the unencumbered value of all of its property.
Linked Entities A target entity is deemed to hold not only its own property but also a proportion of the land and other assets of each ‘linked entity’. The proportion is equal to the target entity’s proportionate interest in the linked entity. Under the old law, a ‘linked entity’ was essentially a private company or trust in a vertical chain of entities, in which the immediately upstream entity had a 20% or greater interest. Under the new provisions there has been a relaxation of these provisions. 20% has been changed to 50%. If a less than 50% interest exists, the entity is not a ‘linked entity’ of the upstream entity and the tracing exercise ceases.
Other States All other jurisdictions have similar provisions but they differ in detail.
EXAMPLE X Pty Limited is an unlisted manufacturing company which owns its factory in Sydney. The land and buildings are worth $3 million.
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New Landholder Stamp Duty by Paul Anderson
Other assets include plant and equipment of $20 million, intellectual property and goodwill of $5 million and liabilities of $15 million. Y Pty Limited offers to purchase 100% of the equity in X Pty Limited for $13 million. Under the old rules, prior to 1 July 2009, no duty would be payable because although the value of land in NSW exceeds $2 million, the land was less than 60% of the value of its assets. Under the new rules, duty will be payable on the total of the land and plant and equipment (which are ‘goods’), i.e. $23 million. The relevant duty is $1,250,490. If X Pty Limited was a listed company, duty would be payable in the amount of $125,049, being 10% of the amount payable at the general rate. Again, prior to 1 October 2009, no land rich duty would have been payable on this transaction.
Conclusion The new provisions represent a major departure from the existing law with the potential for a significant increase in duty payable on takeovers of companies and trusts. Every entity contemplating a takeover will need to be conscious of the revenue implications and, if necessary, be prepared to take appropriate legal and accounting advice.
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New Landholder Stamp Duty by Paul Anderson
For more information, please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au
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