Fund managers and property developers beware: capital raisings under the duty spotlight

In August 2024, the Victorian Court of Appeal handed down its decision in Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue [2024] VSCA 175 (Diamond Creek case), upholding the earlier decision of the Victorian Civil and Administrative Tribunal (VCAT) against the taxpayer.

In this matter, 18 separate and independent investors acquired 99.99% of the issued shares in a ‘landholder’ entity pursuant to a broadly circulated information memorandum (IM). The court found that these acquisitions constituted ‘substantially one arrangement’, leading to landholder duty being assessed on the acquisition of the shares in the landholder, in addition to the duty paid on the purchase of the landholder’s underlying property – effectively, double duty.

The Diamond Creek case underscores the complexity of raising capital in entities with pre-existing land interests and highlights the importance of seeking proper duty advice. 

In 2011, Oliver Hume Property Funds Group established a special purpose vehicle (SPV) to acquire and develop land in Victoria. In 2014, the SPV issued an IM seeking to raise $1.8 million for development of the land. 

In making an investment, investors had to agree to the SPV appointing Synergy Funds Management Pty Ltd (an Oliver Hume Property Funds Group entity) for day-to-day management and project oversight. Additionally, the SPV’s constitution included terms that required a 90% shareholder vote for the termination of the management agreement and winding up of the SPV after completion of the development.

The IM was issued to ‘sophisticated investors’ and was therefore not lodged with ASIC. 

On 2 July 2014, the SPV successfully raised capital by issuing 1.8 million $1 shares to 18 unrelated investors. These investors were connected only in that they dealt with the same issuer (the SPV) and participated in the investment based on the IM. Crucially, investors did not receive information about other investors’ identities or application details. Even if requested, such information remained confidential throughout the process.

In 2020, the Victorian Commissioner of State Revenue (Commissioner) 'aggregated' the separate investors' acquisitions for landholder duty purposes, on the basis they were 'associated transactions' that gave effect to 'substantially one arrangement', assessing landholder duty of $151,235 plus penalty tax and interest.

Landholder duty applies where a party acquires an interest in a landholder exceeding a certain threshold (a ‘significant interest’). Relevantly, a significant interest in a Victorian landholding private company is 50% (and 20% for private unit trust schemes). A landholder is a company or unit trust with interests in Victorian land with a market value of at least $1 million. 

A significant interest can be acquired in several ways, such as:

• in one investment by a person (for example, a person makes a single acquisition of 50% of a landholding private company);
• by multiple smaller investments by the same person over a set period of time (for example, a person makes a number of acquisitions over a set period that add up to at least 50% of a landholding private company); 
• by associated persons in aggregate acquiring at least 50% of a landholding private company; and
• by persons in aggregate acquiring at least 50% of a landholding private company as part of an associated transaction. 

Relevantly, an ‘associated transaction’ includes acquisitions made from substantially one arrangement, one transaction, or one series of transactions.

Revenue Ruling DA.057 (Ruling) provides guidance on how the Commissioner applies the associated transaction rule. The Ruling states, among other things, that the Commissioner will not consider acquisitions of interests in a landholder by independent members of the public as being ‘associated transactions’, if the acquisitions are made in response to a genuine public offer under a product disclosure statement or prospectus lodged with the ASIC.

VCAT upheld the Commissioner’s decision to aggregate the acquisitions made by investors in the SPV, even though the investors were unrelated and acted independently, because the acquisitions were part of ‘substantially one arrangement’ – that is, part of an associated transaction for landholder duty purposes. 

VCAT found that: 

• the acquisitions shared a ‘unity of purpose’ in that they originated from the same offer and were governed by the same IM terms;
• though independent, each acquisition was contingent upon the others – they could only proceed if the target subscriptions were met; and
• the purpose of all acquisitions was identical, and investors voluntarily accepted the terms specified in the SPV’s structure. 

Interestingly, VCAT noted that the Commissioner’s concession in the Ruling regarding capital raisings under a PDS or prospectus lodged with ASIC was not representative of the law, and upon which the Commissioner had no power to rule. This finding was not disturbed by the Victorian Court of Appeal.

The taxpayer appealed. However, the Court of Appeal agreed with VCAT. 

The court found several factors demonstrated that the acquisitions had a ‘oneness’ and ‘unity of purpose’ and were therefore ‘associated transactions’. These included:

• The acquisitions were interconnected in circumstances where no individual acquisition could go ahead at all, unless the minimum subscription amount was met. 
• The investors bound themselves when they subscribed to the IM and agreed to the statutory contract under the SPV’s constitution. The terms of the constitution demonstrated the singularity of the undertaking. 
• The effect of the acquisition of the shares on the same day and in the same way was to alter the shareholding in the landholder from being an Oliver Hume entity to being an entity owned by a group of private investors. 

These factors arose regardless of whether the investors were personally acquainted. Although no single factor was determinative in itself, in combination, they revealed an interconnectedness between the acquisitions that amounted to ‘substantially one arrangement’ or ‘one series’ of transactions, for a singular purpose: to undertake a property development. 

What might previously have been seen as an ‘industry practice’ in raising capital for property developments may give rise to substantial duty exposures going forward. Property capital raisings for property acquisitions and developments must be carefully considered. 

Potentially, the decision in the Diamond Creek case can be confined to its facts. Indeed, there were several factors that may have been unique to the capital raising for the SPV. The capital raising would not have gone ahead unless a minimum fund raise was achieved. The SPV was to undertake a single land development project with a close-knit management structure. The acquisition of the shares in the SPV all occurred on the same day and in the same way. The SPV was to be wound-up at the end of the project. Are these enough to distinguish the application of the decision?

However, it would not be a surprise if the Victorian State Revenue Office (SRO) were to seek to apply the decision more broadly. Will we see an uptick in reviews and investigations? Of greater concern, will the SRO seek to review historical and existing capital raisings? And should taxpayers review existing arrangements and consider ways to manage any potential historical exposures?

Additionally, the validity of Revenue Ruling DA.057 has come into question. Will capital raisings under a PDS or prospectus now be treated by the SRO as ‘associated transactions’ for landholder duty purposes? 

Although a Victorian decision, the Diamond Creek case’s implications may potentially extend across state borders. Given similar landholder duty regimes in other Australian jurisdictions, questions now arise as to whether the duty net could expand to include a broader range of capital raisings and unrelated-party transactions, especially within the real estate funds industry.

In all this uncertainty, what remains certain is that fund managers and property developers need to seek proper advice when raising initial or further capital for property projects. Fund managers and property developers may also consider reviewing historical and existing arrangements and seek ways to manage any exposures. Otherwise, they – and investors – may find themselves subject to a significant duty bill.