Proposed Stamp Duty Changes

The State government’s proposed abolition of stamp duty on the transfer of business assets and shares in private companies and the phasing out of stamp duty on the transfer of commercial real property, as well as the eventual abolition of stamp duty in relation to transactions of a unit trust scheme, make restructuring of a business less expensive and consequently more manageable.

We say ‘proposed’ abolition because the State Budget proposals, many of which came into effect from 18 June 2015, are presently contained in the Statutes Amendment and Repeal (Budget 2015) Bill 2015^[1] which is not expected to be passed for some time.  In the meantime, Revenue SA will provide ex gratia relief as if the Bill has been passed.

As well as a number of other measures, such as amendments to the Land Tax Act 1936 and other amendments to the Stamp Duties Act 1923,^[2] the Bill proposes to give effect to the following:

• a broad definition of land to apply throughout the Act;
• removal of the $1 million landholder threshold;
• phased abolition of stamp duty on non-residential and non-primary production land (essentially on commercial land);
• abolition of stamp duty on most non-real property transfers;
• abolition of stamp duty on share transfers;
• abolition of stamp duty on the issue, redemption and transfer of units (in unit trusts) from 1 July 2018; and
• corporate re-construction exemption (which is dealt with in another article in this report).

Land

The introduction of a broad concept of land, to be applied throughout the Act, is aimed at ensuring any asset having any sort of connection to any type of land is captured.  This will be important when looking to apply both the phased abolition of duty on non-residential and non-primary production land and the abolition of stamp duty on most non-real property transfers.

The main things included in the concept of land introduced by the Bill are:

• an estate or interest in land (including land covered by water);
• an option or right to acquire land or an interest in land;
• anything fixed to land whether or not they constitute fixtures at law;
• a mining tenement, certain pipelines and an interest conferred by a forestry property (vegetation) agreement.

The extension to things connected to the land is a significant expansion from the inclusion of only fixtures to land. However, provisions of similar effect have existed in the Act prior to the Bill.

Landholder Threshold

The abolition of the $1million threshold that previously needed to be reached before stamp duty under the landholder provisions^[3] would apply comes into effect on 1 July 2018.

After this time a consideration of whether there is an acquisition or increase of a prescribed interest, for the purposes of the landholder provisions of the Act, will need to be made each time there is a transaction involving shares or units regardless of the value of any land held by the company or unit trust.

Whilst stamp duty on share transfers is to be abolished from 18 June 2015 and stamp duty on unit transfers^[4] is to be abolished entirely from 1 July 2018, if a sufficient interest in an entity which holds land^[5] of any value is acquired or increased, the landholder provisions will still apply. Although this will include an entity which merely has a leasehold interest, there should be no resulting duty payable if commercial rent is payable and the lease has no inherent value.

Commercial Land

There is to be a phased abolition of stamp duty on non-residential and non-primary production land. This means that from 1 July 2016 to 30 June 2017 the sale of a commercial property will attract 66 2/3% of the stamp duty that otherwise would have been payable, from 1 July 2017 to 30 June 2018 such a sale will attract 33 1/3% of the stamp duty that otherwise would have been payable and from 1 July 2018 there will be no stamp duty payable.

According to Information Circular 76^[6], released by Revenue SA to further explain the 2015-16 State Budget stamp duty measures, the landholder threshold removal will only apply where control of an entity holding residential and primary production land changes. Presumably, this is premised on there being, from the time of removal of the threshold, a complete abolition of duty on commercial land.

We do, however, have some concerns about the present drafting of the Bill in this regard. The abolition only refers to a “conveyance or transfer” of residential and primary production land. What it fails to do is refer to transactions where an entity notionally acquires an interest in residential and primary production land and thus ensure stamp duty on such transactions is also abolished. As presently drafted we can’t see why the landholder provisions won’t still apply and attract duty after the time of the abolition.

Another issue of note here is the debate that may be needed to be had about the classification of land as residential or primary production land. The Circular provides that the land use codes issued by the Valuer-General’s office will generally be relied on for this purpose. If there is any disagreement with these codes, presumably the issue will need to be taken up with the Valuer-General’s office before Revenue SA will change its stamp duty assessment.

This could raise problems with vacant land which is zoned as, for example, primary production but which is subdivided, with an intent to undertake a development, before the land is conveyed. In this case land will potentially pass, while in the course of development, from being primary production land to commercial land to become residential land. Ordinarily, a dispute about duty payable stands to be resolved by objection to the Commissioner and, if necessary, the Treasurer and Supreme Court, but here the issue will lie with the Valuer-General and there is no mechanism under the Act for disputing the Valuer-General’s classification. There is also the problem of how land which is not in a zone at all is treated.

Non-Real Property Transfers

The abolition of stamp duty on non-real property transfers, as contained in the Bill, will mean many business assets will no longer be assessable for stamp duty. Mechanisms such as Division 122^[7] asset rollovers into a company, whether to resolve issues arising from Division 7A^[8], for estate planning purposes or otherwise, may therefore become more financially accessible.

One issue to note in undertaking a transaction involving business assets is that there may be some assets, for example plant and equipment (unless the business is a primary production business), that are not covered by the abolition.  The Bill provides that the abolition will apply to all property other than land or prescribed goods.  Prescribed goods is a defined term meaning goods the subject of an arrangement that includes a dutiable land transaction^[9] and the term includes goods that have a significant connection with the land.^[10]

It would appear from the Circular that the goods ‘significant connection’ to land is intended to be given more weight than the drafting of the Bill presently provides.  It is possible that an amendment will be made to implement such an intent before the Bill is passed as, without it, the latter part of the definition adds little to the requirement that the goods be the subject of an arrangement including a dutiable land transaction.

It would appear that dealings with assets such as intellectual property and goodwill, not being classifiable as ‘goods’, will not attract stamp duty. Also safe are the specific assets excluded from being prescribed goods, namely:

• goods that are stock‑in‑trade;
• materials held for use in manufacture;
• goods under manufacture;
• goods held or used in connection with land used for primary production;
• livestock;
• a motor vehicle or trailer; and
• a ship or vessel.

In a transaction involving land in which any goods other then these are transferred, careful consideration should be given to whether the goods will be considered prescribed goods and their transfer stampable.

What concerns us is what if there is, for example, a lease at an arguably under market value rent assigned as part of a business sale or rollover. If market value rental is payable under a lease there is usually considered to be no inherent value in the lease and no stamp duty chargeable. The situation is different where the rental is less than the considered market rate. There is, therefore, scope as the Bill is presently drafted for assignment of such a lease to be a ‘dutiable land transaction’ (since the lease will be within the broad new definition of land and will be considered to have a value and be chargeable with duty). If this course is followed by Revenue SA, any goods of the business being sold that are not within the above exemptions will be assessable to duty.

Of course, if the lease with less than market value rental is over a commercial property, this concern should not be an issue after 1 July 2018 because the lease will, after that time, be covered by the abolition of duty relating to this type of land.  Interestingly, there is no provision for any phased reduction of duty on prescribed goods related to commercial land to match the phasing out of stamp duty on such land.

Treatment of the sale of a partnership interest will be an interesting area to keep an eye on.  Previously, the sale of a partnership interest was itself a stampable transaction.^[11] Now, although stamp duty on the partnership interest itself (being property that is not land or prescribed goods) is abolished, duty is able to be levied by looking through to the equitable interests of a selling partner in any land^[12] and prescribed goods owned by the partnership.  Thus, where there is no land or prescribed goods owned by a partnership there will be no stamp duty on transactions involving changes in interests in the partnership. This will avoid needing to evidence the value of such a partnership interest or to demonstrate that it has no value, such as has been the case with interests conveying only an entitlement to income.

Shares

The long-awaited abolition of stamp duty on share transfers is covered by the Bill.  This exemption does not, however, override the operation of the landholder provisions.  These continue to levy ad valorem duty on transactions as a result of which a prescribed interest^[13] in a land holding entity is acquired or increased.

Units

There are issues surrounding the treatment of units in the Bill. We expect further clarification and possibly amendments to be made. Accordingly, we defer our comments on these provisions to the second part of this article.