Submission
Commercial Law Section
Land Rich Provisions - Meaning of "Associated Transaction"
To: State Revenue Office of Victoria
A submission from the Commercial Law Section of the Law Institute of Victoria (Submission: CLS32)
Date
13 September 2006
Queries regarding this submission should be directed to:
Contact Person
Téa Paris
Ph
(03) 9607 9489
Contents
1
Introduction.......................................................................................................................................... 3
2
Paragraph 6......................................................................................................................................... 3
3
Paragraph 7......................................................................................................................................... 3
4
Paragraph 11 and 12 ........................................................................................................................... 4
5
Paragraph 19....................................................................................................................................... 5
6
Paragraph 21....................................................................................................................................... 5
7
Paragraph 22....................................................................................................................................... 5
8
Example 1............................................................................................................................................ 5
9
Example 6............................................................................................................................................ 6
10
General Comment ............................................................................................................................... 6
2
1
Introduction
The State Revenue Office (SRO) has issued a draft Revenue Ruling DR19/05DA entitled ‘Land Rich
provisions – Meaning of “Associated Transaction’. The Draft Ruling seeks to explain the factors taken
into account by the Commissioner in determining whether or not there is an associated transaction
and to give examples to illustrate situations where an “associated transaction” would be considered
to have occurred. The definition of an “associated transaction” of an interest acquired in a land rich
landholder contained in s79(9) of the Duties Act 2000 provides that an associated transaction arises
where the acquirers are acting in concert or where these acquisitions arise from substantially one
arrangement, one transaction or one series of transactions.
The Law Institute of Victoria (“LIV”) provides the following comments in relation to the in relation to
the Draft Ruling.
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Paragraph 6
In this paragraph, it is stated that:
“It is also not necessary that the persons who made the acquisitions be associated
persons under the Act”.
We consider the “associated transaction” provisions do not and should not apply to persons who are
“associated persons”, as they are superfluous in that context. The ruling should be amended to make
it clear that it does not apply to persons acquiring interests who are associated persons.
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Paragraph 7
As noted, the Commissioner has a discretion under s79(2) to treat acquisitions as not being by
associated persons if the Commissioner is satisfied that the interests of the persons
(a)
were acquired, and will be used, independently; and
(b)
were not acquired, and will not be used, for a common purpose.
As noted, this does not apply to acquisitions of interests under associated transactions under s79(9).
It might be concluded from this that the concept of an “associated transaction” in s79(9) is not
intended to extend to the circumstances referred to in s79(2). If it was intended to apply to these
circumstances, then why would the Commissioner not be granted a discretion similar to that
contained in s79(2).
We suggest that the associated transaction provisions in s79(9) should be read in this light, that is,
transactions should not be considered to be associated transactions if the interests are acquired
independently and are not acquired, and will not be used, for a common purpose. Although the
wording of the particular sub-sections cannot be ignored, we note that sub-section 79(9) appears in a
context very different to the provisions considered in cases such as Pacific General, Jeffries, and Old
Reynella. Those cases can be of limited assistance in the interpretation of sub-section (9).
Sub-section (9) must be interpreted in context. The context in which it is to be considered includes
the scheme of section 79 in general and, in particular, section 79(1)(a)(ii) and (iii) and section 79(2).
It also appears in the context of Chapter 3, the land-rich provisions.
Pacific General considered a simple aggregation provision contained in Chapter 2 of the Duties Act
1997 NSW. That provision serves a different function, namely preventing ”transaction-splitting” of
dutiable transactions, rather than aggregating acquisitions of interest in landholders. Although some
of the wording in the NSW provision may be similar, it is not identical to the wording of sub-section
3
(9) and it appears in a very different context and for a different purpose. In any event, Pacific
General is not a decision of a superior court and is difficult to reconcile with cases such as Old
Reynella Village and Jeffries. To the extent that that case decided that unilateral actions were
relevant, we note that they were unilateral actions of the purchaser. We consider the better view to
be that an arrangement requires some mutual understanding. At the very least, the arrangement
needs to be one of which the purchaser is party.
We note that the interpretation suggested will focus the enquiry on the acts and intentions of the
purchaser, and acts of the vendor alone should be irrelevant. We suggest that this is the preferred
outcome from a policy perspective as it is the liability of the purchaser that is in issue. Any other view
results in absurd outcomes as referred to below.
In support of this interpretation, we note that:
4
•
Sub-section 79(2)(a) refers to interests being used independently, whilst sub-section 79(9)(a)
refers to persons acting in concert. Whilst the wording differs, it is suggested that these
concepts are merely the converse of each other. If interests are acquired to be used
independently, the acquirers are not acting in concert.
•
Sub-section 79(2)(b) refers to interests being not used for a common purpose, whilst subsection 79(9)(b) refers to the concept of acquisitions forming or arising from “substantially one
arrangement, one transaction or one series of transactions”. Again, whilst the wording differs,
it may be argued that if interests are not to be used for a common purpose, they do not arise
from “substantially one arrangement, one transaction or one series of transactions”. Whilst
cases such as Pacific General may suggest otherwise, it is submitted that those cases should
not influence the interpretation of sub-section (9).
Paragraph 11 and 12
The ruling seems to proceed on the basis that “acting in concert” in section 79(9)(a) is the converse
to acting independently and not for a “common purpose” as referred to in section 79(2), although this
is not explicitly stated.
The Commissioner states in paragraph 12 that where there is no communication between persons
acquiring interests, the acquisitions would not be seen as resulting from those persons “acting in
concert”. However, the draft ruling goes on to state that the Commissioner may still aggregate the
interest if the acquisitions are considered to form, evidence, give effect to or arise from substantially
one arrangement, one transaction or one series of transaction.
For the reasons referred to above, we submit that the provisions should be interpreted such that
where the parties do not act with a common purpose or object, the acquisitions should not be
considered to form, evidence, give effect to or arise from substantially one arrangement, one
transaction or one series of transactions. As correctly pointed out later in paragraph 18, there must
be some essential unity, or unifying factor between the acquisitions for this to apply. If there has
been no communication between parties making acquisitions, we do not consider that the interests
should be aggregated, at least not where the interest are to be used independently and not for a
common purpose.
The ruling states that persons acting under a common purpose or object are subject to s79(2), even
if those persons acquire those interests separately and for their own benefit. We consider that an
associated transaction should only be taken to arise on the grounds of two or more persons acting in
concert where the parties act under a common purpose for a joint benefit.
If two persons acquire interests in an offering, they will always have a common purpose of acquiring
an interest, but whether they are partaking of an associated transaction should depend on whether or
not they act independently or for a common purpose. The ruling should be amended to make it clear
that there must be a joint benefit connected to a common purpose to be an “associated transaction”.
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5
Paragraph 19
In this paragraph, it is stated that an arrangement under s79(9) “may include arrangements between
vendors for the disposal of their interests”. Such arrangements in our view are irrelevant in the
statutory context of duty on acquisition of interests by purchasers. Vendors are not subject to duty
under the Act. If the purchaser is not party to any arrangement, it does not matter whether the
vendors have entered into an arrangement themselves.
We do not consider that the Pacific General case or Lutovi Investment (referred to in paragraph 16)
should be considered as authority for the interpretation of s79(9). Those cases were decided under
different statutory provisions and, in particular, provisions which do not follow the scheme of section
79 of the Act (see comments above under paragraph 7).
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Paragraph 21
In this paragraph, it is suggested that an associated transaction may arise under the conversion
provisions of s89C.
We consider this is confusing. Section 89C is specific to conversions of private to public trusts. If a
transaction does not fall within its terms, then the conversion of a private to a public unit trust should
not be subject to the “associated transaction” provisions, as this is a case of “double jeopardy” under
the Act.
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Paragraph 22
A number of the examples suggested in this paragraph are unclear and the underlying principles
need to be clarified.
The second dot point suggests that offering something for sale “as a whole” is not the making of a
“genuine sale”. We query how this conclusion can be drawn. If a fund manager offers a 30% interest
for sale to the public or to professional investors, on the basis that the offer is conditional on the
parcel being fully sold, on what basis can it be said that the interests comprising the 30% stake are
not “genuinely available for separate sale.”?
The sixth and seventh dot points are non-specific: the reference to a relationship between acquirers
confuses “associated persons” with “association transactions” – they should be separated (see also
comment on paragraph 6 above).
“The period of time over which interests were acquired” in the final dot point provides little guidance
as to what time period is likely to be of interest to the SRO and what is not.
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Example 1
If the Commissioner’s views as set out in paragraphs 16 & 19 are correct, it is hard to see why
Example 1 would not involve an aggregation of all the interests offered under the product disclosure
statement as well as the interest acquired by the Cornerstone investor. There is clearly an
arrangement or understanding between Company A, Company B and the Cornerstone Investor to
offer 50% interest to the public through a product disclosure statement. If the Commissioner takes
the view that a unilateral arrangements between the vendors is sufficient to result in an aggregation,
example 1 should result in an aggregation of all the interest offered to the public.
This merely highlights the ridiculous results that would follow if the interpretation advanced in
paragraphs 16 to 19 of the draft ruling is correct.
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9
Example 6
We consider the SRO’s approach in Example 6 is inappropriate and should be reviewed. The focus
should be on acquirers who act in concert and end up acquiring a joint interest of 20% or more, to be
used for a common purpose. If the vendor is making a conditional private placement to independent
professional investors, the acquirers are not acquiring a joint interest.
It is somewhat difficult to draw any fundamental distinction between the result in Example 6 and that
in Example 1. In each case, there is a unilateral arrangement involving the vendor or vendors. In
each case, there is a minimum level of subscriptions. In each case, the purchasers acquire
independently and will hold their interest independently of each other. Yet in Example 1 the
Commissioner considers that the interests will not be aggregated, whilst in Example 6 it will result in
associated transactions. In reality, there are likely to be many examples which exhibit some of the
characteristics of Example 1 and some of the characteristics of Example 6. Given that there is little
or no guidance offered as to why different results flow from the two examples, we question what
guidance is being offered by the draft ruling.
As set out earlier, we consider that section 79(9) of the Act should be interpreted in a manner where
acquisitions by purchasers that are acting independently and which are not acquired for a common
purpose should not be treated as an associated transactions.
To focus on actions or intentions of the vendor or vendors is bad policy for a number of reasons.
Firstly, the liability is that of the purchaser and, as a matter of policy, the purchaser’s liability should
not depend upon the actions of the vendor. The purchaser may or may not be in a position to even
know the circumstances by which the vendor has come to offer the interest for sale.
Second, as a matter of equity, like transactions should result in like tax consequences. A simple
comparison of Example 1 and Example 6 in the draft ruling indicates that this would not be achieved
on the Commissioner’s proposed interpretation. Often offers will be made to both the public and to
professional investors. There should be no difference between how the two are treated.
10 General Comment
The guiding principle in interpreting the aggregation provision should be to encourage an
interpretation where rather than one person alone acquiring a relevant interest, there is a deliberate
ploy to have two or more persons, each of whom are below the threshold, acquire a significant
interest. Example 6 in particular strays from that philosophy. Any focus on vendors also strays from
that philosophy.
Landrich is about a person acquiring a significant interest. Aggregation is no more and no less than
a protection to prevent a purchaser splitting the acquisition by having their alter ego join in the
acquisition.
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