Snapshot
- When an interest held in a private company/unit trust increases and the private/company unit trust owns the land, consider whether the land holder duty is payable
- Where the land holder duty is payable, also consider whether the private company/unit trust has any linked entities that own land
In 2018 you acted for your sister Ana in relation to the breakdown of her marriage to Chris.
After Chris discovered that Ana had been cheating on him a long, expensive and messy divorce followed. It was a terrible experience and in hindsight you really should not have acted for Ana, but she was so persuasive, and you were looking for work at the time, so you agreed to take it on.
When you acted for Ana there was a tax issue for Chris (under Division 7A of the Income Tax Assessment Act 1936) when Blue Steel Pty Ltd (“Blue Steel”) – a company where, at the time, all the shares were held by Ana – transferred the lavish apartment in Coogee that it owned to Chris as part of the property settlement. At the time the apartment was worth around $6m. Whilst Blue Steel had been made a party to the proceedings (which you had at the time thought solved the Division 7A issue) there was a ruling (TR 2014/5) you discovered (when it was too late) which reversed the ATO position so far as transfers from a private company to an associate of a shareholder pursuant to Family Court orders go, so that the transfer of the property was taken to be a dividend of an amount equal to the market value of it.
Another lawyer was acting for Chris at the time, so you weren’t too concerned about the issue because it was really Chris’ accountant and lawyers problem to solve. The property settlement was finalised and you never heard anything further about the tax issue so you put the whole debacle to bed and moved on, vowing to never act for a family member ever again.
It’s 4pm on Friday and you are contemplating giving yourself an early mark, when your phone buzzes and the receptionist tells you it is Ana, about an issue she has with Blue Steel.
The last thing you feel like doing is talking to your sister – especially about that damned company – but you take the call.
Ana tells you she has received a letter from Revenue NSW regarding the cancellation of some shares in Blue Steel that occurred prior to the property settlement with Chris.
When Blue Steel was set up, Ana owned 60% of the shares and Chris owned 40%. A couple of years prior to Ana and Chris’ divorce, Ana’s accountant cancelled all of Chris’ shares in Blue Steel. At the time the accountant had spoken with you about it briefly and you advised you thought it sounded fine as long as Chris was ok with the share cancellation and that the accountant was satisfied that there were no tax implications in cancelling the shares. You didn’t give the share cancellation much thought beyond this, as the accountant was looking after it all anyway, and was getting rid of Chris’ shares – not Ana’s, so again you figured it wasn’t your problem.
Blue Steel also owned all of the shares in another private company, Ana Steel Holdings Pty Ltd (“Ana Steel Holdings”). Ana Steel Holdings owned a commercial property which at the time was worth around $10m.
You ask Ana to send a copy of the letter from Revenue NSW and it arrives quickly in your in-box. You see it is a notice of investigation pursuant to Division 2 of the Taxation Administration Act 1996 to determine Ana’s liability to pay landholder duty under Chapter 4 of the Duties Act 1997 (“Duties Act”) in respect of the cancellation of Chris’ shares.
You read through the letter and your heart drops as you realise you did not think about landholder duty when the accountant talked to you about cancelling Chris’ shares…..
The Sting
A liability to pay duty under Chapter 4 of the Duties Act arises when a person makes a relevant acquisition in a landholder.
Whenever there is a change to the shareholding in a company (be it through a purchase, gift, issue, cancellation, redemption or surrender of shares) and that company is considered a landholder and that change results in a person’s interest in the company increasing, there can be a liability for landholder duty.
Blue Steel owned the Coogee apartment worth $6m, so had land holdings in New South Wales with an unencumbered value of more than $2m.
The cancellation of Chris’ shares resulted in an acquisition of an interest by Ana that amounted to a significant interest (for a private company 50% or more) when aggregated with the interest already held by Ana of 60%, which means there was a relevant acquisition for landholder duty purposes (section 149 of the Duties Act).
Because the cancellation of Chris’ shares resulted in a relevant acquisition by Ana, an acquisition statement should have been lodged with Revenue NSW and duty paid.
Duty is chargeable at the general rate on the amount calculated by multiplying the unencumbered value of all land holdings and goods of Blue Steel by the proportion of that value presented by the interest acquired in the relevant acquisition, so the dutiable amount is 40% of $6m ($2.4m) so duty of $114,409 (plus interest and also possibly penalties) will be payable.
You read through the Duties Act, hoping there is some kind of exemption available. You have a faint but fleeting glimmer of hope when you see section 163B gives an exemption where an interest is acquired as a result of a transfer made in accordance with an order made under the Family Law Act 1975, but you then recall that the share cancellation took place well before the divorce, so 163B won’t apply – damn it….
In fact the Duties Act isn’t giving you any comfort at all because as you read through, you realise that Ana Steel Holdings is considered a linked entity of Blue Steel so, under s 158A of the Duties Act, in addition to the Coogee apartment, Blue Steel is taken to also hold an interest in land held by Ana Steel Holdings – being the commercial property valued at $10m.
Author – Amanda Tully – Director & Lawyer