Thinking | 9 February 2018
Talking Tax – Issue 106
Transfer of interest in land-owning partnership not liable for stamp duty
In Commissioner of State Revenue v Danvest Pty Ltd & Anor  VSCA 382, the Victorian Supreme Court of Appeal dismissed the Commissioner of State Revenue’s (Commissioner) appeal and held that the sale and purchase of a partner’s interest in a land-owning partnership was not a "transfer of dutiable property" under section 7(1)(a) of the Duties Act 2000 (Duties Act) on the basis that it is not an interest in an estate in fee simple in the land owned by the partnership.
The Commissioner was granted leave to appeal further.
The respondents in this matter (Taxpayers) were initially 20% unit holders in a partnership which held properties on which an aged care business was conducted. In 2014, further to a partnership sale agreement and business sale agreement, the respondents increased their holding to 50% of the units in the partnership. The Commissioner subsequently issued a private ruling to the Taxpayers where he expressed the view that a partner’s interest carried with it a beneficial interest in all the assets of the partnership and that duty was payable under section 7(1)(a) of the Duties Act. He then assessed the taxpayers for duty amounting to $1,751,352. The taxpayers objected to this assessment but the Commissioner disallowed their objections.
In determining that sale and purchase of a partner’s interest in a land-owning partnership was
not an interest in an estate in fee simple in the land owned by the partnership, the Court took time to consider a variety of authorities and provided some notable comments. Some of these are noted below.
Justice Santamaria outlined that the effect of sections 24 and 26 of the Partnership Act 1958 is that partnership property must be held and applied by the partners for the purposes of the partnership and further, that any land or interests therein which is partnership property is treated as between partners as personal estate. On that basis, Justice Santamaria considered that until dissolution and the ascertainment of a partner’s interest following the realisation of assets and the payment of debts and liabilities, it is impossible to say what the available property, if any, of the partnership will be.
Justice McLeish undertook an analysis of seven High Court authorities and made reference to the following positions:
- a partner has no title or entitlement to specific property owned by the partnership
- a partner’s interest in the partnership is an equitable chose in action
- by that chose in action, a partner has a "beneficial interest in each asset of the partnership
- that interest is of a special and non-specific kind
- it consists of an equitable right to a proportion of the surplus after the realisation of the assets and payment of the debts and liabilities of the partnership and
- it does not consist of any title to partnership assets prior to dissolution of the partnership.
This case has significant implications for partnership transactions involving dutiable property, in both Victoria and other jurisdictions, including admission and retirement of partners. If you would like specific stamp duty advice in relation to any of these transactions, please contact Marina Raulings.
Taxpayer entitled to deduct expenditure on gaming machine entitlement fees
In Sharpcan Pty Ltd and FCT  AATA 2948, the AAT set aside the objection decision of the Federal Commissioner of Taxation (Commissioner) and allowed outgoings for gaming machine entitlement fees (such as licence fees to have pokies machines on the taxpayer’s premises) to be deducted under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).The taxpayer (a trustee of a trust) acquired 18 gaming machine entitlements as a result of a competitive auction process held in May 2010 and elected to pay for the gaming machine entitlements under deferred payment terms between May 2010 and August 2016. The taxpayer argued it was entitled to a deduction under section 8-1 of the ITAA 1997 for the amounts paid in acquiring the gaming machine entitlements for the purposes of calculating the net income of the trust estate for the year of income ended 30 June 2010.
The taxpayer’s alternative argument was that the outgoings were deductible over 5 years under section 40-880 of the ITAA 1997.
The Commissioner’s view was that the gaming machine expenditure was capital or was capital in nature, and was not deductible pursuant to section 8-1 or section 40-880.
Pagone DP found that the gaming machine entitlement fees were on revenue account under section 8-1 of the ITAA 1997, stating that the outgoings reflected the expected income stream from the use of the gaming assets which the gaming machine entitlements permitted. Whilst the payment for a right which is required as a condition for trading will sometimes be capital in nature, the payment for the right to trade will not always be an outgoing on capital account. In this case, the outgoing for entitlements in the trustee's business was more like a fee paid for the regular conduct of a business than the acquisition of a permanent or enduring asset.
Pagone DP did not consider it necessary to consider the taxpayer’s alternative argument.
The Commissioner has appealed to the Full Federal Court.
If the Full Federal Court upholds the AAT decision, taxpayers in a number of industries may see merit in reviewing their capital expenditure to determine if an immediate deduction on revenue account is available or at least reasonably arguable based on the latest application of capital-revenue principles.
Legislation and government policy
ATO releases draft ruling on conversion of Bitcoin and other digital currencies to Australian dollars for GST purposes
The ATO has released a draft version of its proposed GST Digital Currency Conversion Determination 2018 (DCC 2018/D1) (GST Determination) which sets out the ATO’s approved method to convert amounts of consideration that are expressed in digital currency into Australian currency (AUD) to work out the value of a taxable supply for GST purposes.Under the GST Determination, broadly, digital currency can be converted as follows:
Amount of digital currency x “your particular exchange rate” on the conversion day.
According to the GST Determination, “your particular exchange rate” means:
- a digital currency exchange rate obtained from a digital currency exchange, or digital currency website, or the agreed rate between the supplier and the recipient, whichever the taxpayer has chosen or
- if the exchange rate for digital currency is quoted in AUD, that rate or
- if the exchange rate for a particular digital currency is only quoted in foreign currency:
- an exchange rate with an amount expressed in a foreign currency from a digital currency exchange, or a digital currency website, or the agreed rate or
- the exchange rate in foreign currency, converted into AUD following the method outlined in Goods and Services Tax: Foreign Currency Conversion Determination (No. 1) 2017.
The GST Determination is proposed to take retrospective effect from 1 July 2017. Comments for this GST Determination are due by 15 February 2018. Should you wish to have your voice heard in respect of this ruling, please contact Michael Parker.
ACCIV and AMIT twinning? Proposed ACCIV tax regime
The release of the proposed tax rules for the new corporate collective investment vehicle (CCIV) is a welcome development for fund managers considering the structuring options for future funds or conversion of existing funds into CCIVs.
Although eagerly awaited, some issues need to be resolved before the new regime becomes the game changer that the Australian funds management industry was banking on. In August 2017, the Federal Government released a bill proposing the creation of a new type of CCIV – a company structure that has the flow-through benefits of a trust. The motivation for its introduction and the details of the CCIV regulatory requirements are discussed in detail in our earlier publication.
By way of background, the typical Australian managed funds vehicle – the unit trust – was thought to be less understood by foreign investors than corporate vehicles, limiting access to foreign capital for local fund managers. Now. the CCIV is a corporate managed funds vehicle similar to those popular in Europe and Asia. The CCIV (together with the proposed limited partnership collective investment vehicle – LPCIV) has been promoted as a way of increasing foreign investment into Australia and for Australian fund managers to:
- encourage Australian fund managers to promote and export their funds management expertise and services overseas and
- compete in international markets by offering products recognised by overseas investors particularly under the Asia Region Funds Passport.
In December 2017, the Federal Government released an exposure draft outlining the proposed tax regime for CCIVs.
For more of our comments on this exposure draft, click here or contact us to discuss how these new rules may affect the choice of structure for proposed funds or the potential conversion of your existing funds to CCIVs.
Changes to Victorian Absentee Owner Land Tax Surcharge for Trusts
Absentee Owner Surcharge (AOS) Exemption for Absentee Trusts
The Victorian Government has inserted section 3BA into Land Tax Act 2005 (Vic) (Land Tax Act) to extend the AOS exemption to absentee trusts (which previously only existed for absentee corporations) to give the Commissioner a discretion to disregard foreign beneficiaries of an absentee trust, and thereby treat the trust as an Australian trust for Victorian land tax purposes.
Exemptions for foreign beneficiaries can apply from 1 January 2018.
Like the AOS exemption for absentee corporations, the exemption for absentee trusts depends on the Treasurer’s discretion, which is based on a number of criteria.
The guidelines for the exemption criteria have been published in the Government Gazette on 5 January 2018. Broadly, the exemption is intended to relieve trusts that are Australian-based, exhibit good corporate behaviour, operate commercially in Victoria and whose commercial activities contribute to the Victorian economy by utilising local inputs (labour, material and services). On this basis, it appears that the exemption is not intended to apply to passive property investors.
The Treasurer will also have regard to the nature and degree of a foreign beneficiary’s interest in the trust and practical influence of the beneficiary on the administration and conduct of the trust.
We note though that even if the exemption is granted by the Treasurer, the trust may still constitute a foreign trust for foreign purchaser additional duty purposes (currently, 7%).
Changes to Absentee AOS for land held through a Trust Chain
The Victorian Government has inserted section 46IAA into the Land Tax Act. This change applies exclusively to land held by a trust in a chain of trusts, such as land held by a sub-trust in a head trust/sub-trust structure.
From the 2018 land tax year, where the taxable land is held by a sub-trust, the AOS will be calculated on a proportion of the underlying land equal to the proportion interest the foreign beneficiary owns directly/ indirectly in the underlying land held by the trust.
This contrasts to the foreign purchaser additional duty, which can apply in full where a sub-trust is not 100% owned by foreign beneficiaries (provided that the foreign beneficiaries have a “substantial interest” in the sub-trust, through the head trust).
For example, if a head trust owns 40% of the units in a sub-trust (holding land), the surcharge would apply to 40% of the value of the land held by the sub-trust. Similarly, if the head trust owns 40% of the units in a unit trust that in turn owns 100% of the sub-trust, the surcharge would apply to 40% of the value of the land held.
More examples can be found under the new Schedule 1A of the LTA.
Please contact Marina Rauling if you have any queries in relation to either the absentee owner land tax surcharge or foreign purchaser duty surcharge, for either Victoria or any other jurisdiction. We note that these foreign taxes now apply or have been announced for Victoria, New South Wales, Queensland, Western Australia, South Australia and the Australian Capital Territory.
Land Tax Assessment for Land Held by Discretionary Trust may automatically include NSW Land Tax Foreign Person Surcharge
We are aware that some trustees of discretionary trusts that own land in NSW have noted that their recent Land Tax Assessment includes the 2% foreign person land tax surcharge. Revenue NSW may automatically apply the land tax foreign person surcharge on properties where the title indicates that it is owned through a discretionary trust.If you are a trustee of a discretionary trust and recently received a Land Tax Assessment notice from Revenue NSW, we recommend that you check your notice to determine whether it includes an assessment for the NSW land tax foreign person surcharge (an additional 2% from the 2018 land tax year).
However, Revenue NSW generally has a policy to give trustees of discretionary trusts an opportunity to amend their trust deed to exclude foreign persons as beneficiaries. After the deed is amended, the land tax foreign person surcharge should not apply to future assessments and the trustee should apply for any prior surcharge assessed to be refunded. Furthermore, if the trust intends to make any further acquisitions of land in NSW, the trust should not qualify as a foreign trust for the purposes of the NSW foreign purchaser duty surcharge (currently 8%).
If you are the trustee of a discretionary trust that owns land in NSW, and may require your trust deed to be amended to exclude foreign persons as beneficiaries for the purposes of the NSW land tax foreign person surcharge, we recommend that you contact Trust Law expert James Whiley or Marina Raulings. Prior to any amendment, the duty and capital gains tax implications of the proposed amendment should be thoroughly considered.
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