Stamp Duty Amendments

Effect on Business Sales and Unit Transfers

In our Winter Report we wrote about the Government’s announcement in the 2015/2016 budget that it would be abolishing stamp duty on non-real property transfers and phasing out stamp duty on non-residential and non-primary production property (visit www.dwfoxtucker.com.au/2015/09/proposed-stamp-duty-changes/) .

This was announced to mean:

• No stamp duty on business transfers;
• Abolition of stamp duty on unit transfers, except where the trust held land;
• Phasing out of stamp duty on transactions involving non-residential and non-primary production property.

Since the announcement, legislation has been passed to enact the changes.  The legislation in its draft form was criticised by industry bodies as not achieving the stated objectives, and we have previously outlined some problems that we perceived from the draft legislation.

The Statutes Amendment and Repeal (Budget 2015) Bill 2015 was passed without significant amendment and taxpayers and practitioners are now faced with the problem of applying the legislation.  On top of this, the Commissioner of State Taxation’s application of the law is not consistent with what was expected under the announcement.  The result is that a number of transactions that, under the announcement, were expected to be exempt are now being brought back into the stamp duty net.

This article will examine two issues in particular.  Firstly, the effect of the Commissioner’s view that all assignments of lease are dutiable, even if they have no market value, and secondly, the stamping of transfers in a unit trust.

Using Leases to Impose Duty on Business Transfers

A leasehold interest comprises an interest in land for the purposes of the Stamp Duties Act 1923 (the Act).  Consequently, the transfer of a leasehold interest constitutes a conveyance or transfer of land.  Where the conveyance or transfer of such interest is liable to stamp duty, the transaction will be a “dutiable land transaction” for the purposes of the Act.

The significance of this is that where an arrangement includes a dutiable land transaction, stamp duty will be payable in respect of not only the conveyance or transfer of land, but also in respect of the conveyance or transfer of “prescribed goods”.

Prescribed goods are defined in section 104B(4) of the Act to mean goods that have a significant connection with the land, but does not include the following:

1. goods that are stock-in-trade;
2. materials held for use in manufacture;
3. goods under manufacture;
4. goods held or used in connection with land used for primary production;
5. livestock;
6. a motor vehicle or trailer;
7. a ship or vessel.

As we pointed out in our previous article, it is generally accepted that where a market value (or above market value) rent is being paid under a lease, the interest of the lessee has no value.  Where the rental is less than the considered market rate, however, the interest of the lessee is considered to have value.

On this basis, it is arguable that stamp duty is only payable, and therefore that there is only a dutiable land transaction, in respect of the assignment of the lessee’s interest where the lessee is paying less than market rent.

The Commissioner has now taken the position that all assignments of lease are dutiable, even if they have no market value.  This is on the basis that all leases have a nominal value so, even where they are assigned for no consideration, there will be nominal stamp duty payable.  The result is that all assignments of lease will be liable to stamp duty of at least $1.00, thereby resulting in a dutiable land transaction.  Consequently, any transaction that involves the assignment of a lease will also bear stamp duty in respect of any goods with a significant connection to the land the subject of the lease being assigned that are prescribed goods.

Most significantly, this means that many business sales which were expected to be exempt from stamp duty at the time of the announcement are in fact dutiable to the extent that they convey an interest in prescribed goods.  Where the prescribed goods are transferred as part of a dutiable land transaction that involves land other than residential or primary production land (i.e. commercial land), the Commissioner is allowing the taxpayer the benefit of the current one third^[1] reduction in stamp duty, despite this not being as yet contained in the legislation.^[2]

So what exactly are prescribed goods?  Firstly, prescribed goods must be goods.  Accordingly, goodwill, intellectual property, debtors and stock are all outside the scope of prescribed goods and will not be dutiable.  However, it is difficult at this stage to have any certainty beyond that.  The problem lies in determining what amounts to a ‘significant connection’ to the land, given that this phrase is not defined in the Act.  It is relevant to note that fixtures and anything “fixed to the land” are considered for the purposes of the Act to be part of the land, and are therefore assessable in respect of the conveyance of the land.  Prescribed goods will therefore exclude these assets.

Examples of prescribed goods provided by Revenue SA include shop counters and refrigerated display cabinets, presumably on the basis that they are not fixed to the land.  This is even if the lessee has an obligation to remove the goods at the end of the lease.  It would seem to us there is scope to argue against this view on the basis that these assets, while having a significant connection to a business conducted on the land, do not have a significant connection to the land itself which may be used for some other purpose without these items.

So how far can prescribed goods go?  If you take a supermarket business, for example, it seems that the Commissioner would consider the shop counters and all fridges and freezers to be prescribed goods, but what about items such as shelving, cash registers and point of sale systems?  We would argue that these are not prescribed goods given that they can be easily removed and are not fixed to the land in any way.  Another example is the sale of a hotel business operated from leased premises.  The Commissioner’s view is that all built in bar fridges and other built in furniture are prescribed goods, but what about other items such as beer taps and lines, commercial kitchen equipment and bar stools and tables that are bolted to the ground?

There are any number of examples of items that could, on the Commissioner’s view, be considered prescribed goods.  Aside from the monetary liability that this creates for the purchaser, it imposes a significant administrative burden on both the taxpayers and the Commissioner in identifying prescribed goods.

Given these issues, we would hope that the Government takes advantage of the opportunity to amend the legislation to address the problems currently arising when it legislates the early operation of the one third reduction in stamp duty.

Transfers of Units

Under the amendments, transfers of units in a unit trust that does not hold land (or an interest in land) will be exempt from stamp duty.  Further, stamp duty will be phased out in respect of unit transfers in trusts that hold non-residential and non-primary production land (i.e. in unit trusts that hold commercial land) with the effect that from 1 July 2018 no stamp duty will be payable in respect of the transfer of such units.  Until then, duty will be reduced by one third for transactions occurring between 7 December 2015 and 30 June 2017 and by two thirds for transactions occurring between 1 July 2017 and 30 June 2018.  This applies to both conveyance duty under section 71 and landholder duty under Part 4 of the Act.

Where the unit trust holds residential or primary production land, a transfer of units will continue to be dutiable at full rates under both section 71 and the land holder provisions of the Act until 1 July 2018, at which time conveyance duty under section 71 will be abolished and the $1M threshold under the land holder provisions will be removed.  The result is that unit transfers will become solely dutiable under the land holder provisions.  Given that these provisions only operate in respect of transactions that result in a person or group becoming the owner of 50% or more of the units in the trust, unit transfers that don’t meet this threshold will not be dutiable.

Currently section 71(4) of the Act deems a unit holder to have an interest in each asset of the unit trust.  The transfer of a unit is therefore a conveyance of the unit holder’s deemed interest in each of these assets.  The amendments operate such that the transfer of an interest in each asset of the unit trust other than land and prescribed goods is now exempt from stamp duty.  The result is therefore that stamp duty in respect of a unit transfer is now to be calculated only by reference to the value of the interest in the land and prescribed goods that are conveyed by the unit transfer.

Prior to the amendments, the value of a unit for the purposes of assessing conveyance duty under section 71 of the Act was determined by reference to the net assets of the unit trust.  As a result of the amendments, the value of the unit is now to be calculated by reference only to the net value of the land and prescribed goods held by the trust.

In working out the ‘net value’, the Commissioner will deduct from the value of the land and the prescribed goods the whole of any liability secured against the land and a portion of any business or commercial loans that are not secured over any assets of the trust.  The portion is determined by reference to the value of the land and prescribed goods calculated as a proportion of the total value of the assets of the trust.  This is not legislated, it is simply an administrative position taken by the Commissioner.  An example of this valuation methodology is provided below.

As noted above, until 1 July 2018, transfers of units in a trust will be subject to both conveyance duty under section 71 and land holder duty under Part 4 of the Act.  Land holder duty will only apply where the value of the land in South Australia held by the trust is more than $1M and where the transaction results in a person or group holding 50% or more of the units in the trust.  Landholder duty is calculated by reference to both the value of the South Australian land held by the entity and the value of the “South Australian goods” held by the entity.  South Australian goods has a similar, although not identical, definition to prescribed goods and it is expected that in practice the Commissioner will treat the same assets as both South Australian goods and prescribed goods.  A rebate is then applied under section 102A(7) of the Act to reduce landholder duty by the amount of the conveyance duty paid under section 71 in respect of the transfer of the interest in the land and the South Australian goods.  This is to reflect that taxpayers would otherwise be paying duty twice in respect of the transfer of an interest in these assets – once under section 71 and again under the landholder provisions.

However, there is a problem with the rebate.  Section 102A(7) was inserted prior to the amendments when conveyance duty was paid on the net value of all assets of the trust and, accordingly, was drafted such that the provision applied to rebate only a percentage of the conveyance duty equal to the value of the land and goods calculated as a percentage of the total value of all assets of the trust.

While the Act has been amended to remove conveyance duty in respect of the transfer of an interest in assets other than land and prescribed goods, section 102A(7) has not been amended.  The result is that only a portion of the conveyance duty remains rebatable, even though conveyance duty is now paid only in respect of the transfer of an interest in land and goods and therefore should be rebated in full.  This is a significant oversight and one which results in additional duty being payable as demonstrated by the example below.  The Commissioner is aware of this problem and we believe will be rectifying it in due course.  In the meantime, however, taxpayers may need to apply for ex gratia relief to get the benefit of a full rebate of the conveyance duty.

The following example demonstrates how duty will be calculated on the transfer of units.  Assume the unit trust has the following assets and liabilities:

Assets       South Australian land $2m 
Cash $200k 
Debtors $50k 
Stock on hand $500k 
Plant & equip $300k (significant connection with the land)

Liabilities Loan (secured by mortgage against the land) $1m 
Creditors $30k 
Bank facility (secured by charge over assets) $500k

Stamp duty on a transfer of 50% of the units in a unit trust would be calculated as follows:

1. For conveyance duty purposes (section 71) duty is calculated as follows:

Value of the units:

Assets:     Land $2m 
Plant & equipment $300k 
Less

Liabilities: Loan (secured by mortgage against the land) $1m

Bank facility $377,000 (being 75.4%^[3] of the liability)

NET VALUE = $923,000

Value of units transferred (50%) = $461,500

Stamp duty = $19,405

Less: 1/3 reduction ($6,468.33)

Stamp duty payable = $12,936.67

2. For land holder purposes (Part 4) duty is calculated as follows:

Value of interest acquired:

Assets:     Land $2M

Plant & equipment $300,000

TOTAL:    $2,300,000

Value of interest transferred (50%) = $1,150,000

Stamp duty = $57,080

Less Rebate (section 102A(7)) = $9,754.25 being 75.4%^[4] of $12,936.67

Landholder duty payable = $47,325.75

Total duty payable in respect of the transaction (under section 71 and Part 4) is therefore $60,262.42

By comparison, a transfer of a 50% interest in the land and prescribed goods themselves would have resulted in stamp duty of $57,080 (based on a value of the interest transferred of $1,150,000).  The difference in stamp duty lies in the rebate under section 102A(7).  If a full rebate is given for the conveyance duty, then no additional stamp duty is payable over and above what would have been payable on a transfer of a 50% interest in the assets themselves.