Stamp duty complexities in Sale and Purchase Agreements: insights from Van Dairy

Care required not to trigger duty or double duty 10 min read

The recent Tasmanian case of Van Dairy¹ suggests that an agreement to procure a sale of property might be liable to duty as an agreement for sale, even if the owner of the property is not a party to it. This is significant because, in the context of this case, it meant the Sale and Purchase Agreement (SPA) triggered adverse stamp duty implications. This included that the purchaser became a land-rich entity before completion, so that a double duty liability was triggered by the transfer of its shares before completion of the land purchase.

To 'change your mind' after the contract is signed involves a major risk of incurring double duty under the landholder duty provisions of each Australian jurisdiction.

The principle in the case is potentially relevant when a corporate or other entity, which wholly controls one or more subsidiaries, undertakes to procure or arrange for those subsidiaries to sell land, shares or other assets held by them to a buyer.² It could potentially apply to impose duty on other agreements where the owners of the relevant sale property are not parties, such as scheme implementation agreements, or global business sale agreements in which parent companies of global groups undertake to procure their subsidiaries in various countries to buy and sell relevant businesses or companies.

We understand that the taxpayers have appealed the decision, and it remains to be seen whether the decision is overturned, or whether it will be followed in other Australian jurisdictions.

The case is also a salutary lesson about the importance of establishing ownership of a special purpose entity before it enters into a contract to acquire land assets, to ensure double duty does not arise under the landholder duty provisions in any Australian jurisdiction.

Key takeaways

• A sale and purchase agreement under which a controlling entity agrees to procure the sale of property by an entity which it controls, can potentially be characterised as a binding agreement for the sale of that property, even though the entity that owns the property is not a party to the agreement. Thus, such an agreement can trigger adverse duty consequences.
• Taxpayers establishing entities to acquire land assets or other property should strive to establish them with the correct or intended ownership prior to signing any contract to purchase the assets. To 'change your mind' after the contract is signed involves a major risk of incurring double duty under the landholder duty provisions of each Australian jurisdiction.
• This is subject to the potential for a taxpayer that is a member of a corporate group being able to rely on corporate reconstruction exemptions and concessions, to obtain an exemption or reduction in duty for a change in ownership within a corporate group of the special purpose entity after it acquires the land assets.

Who in your organisation needs to know about this?

Members of the tax and legal teams, and others involved in negotiating SPAs and global sale agreements, and in establishing special purpose entities to acquire land or other assets.

A summary of the Van Dairy case

Facts

In October 2015, certain Tasmanian properties (the Woolnorth properties) were marketed for sale. They were then owned by two companies named Van Diemen's Land Company (VDL) and Tasman Ferndale Pty Ltd (TFPL), both of which were wholly owned by Tasman Land Company (TLC).

Mr Lu Xianfeng (Mr Lu) wanted to purchase the Woolnorth properties and related assets that were to be sold by interests controlled by TLC. Mr Lu at all relevant times controlled the corporate appellants in the matter. On 30 October 2015, Moon Lake Investments Pty Ltd (Moon Lake) was incorporated, with Mr Lu as the sole shareholder, holding all five shares in the company.

On 20 November 2015, Mr Lu, Moon Lake and TLC executed a written agreement referred to as the SPA. Under this agreement, as per clause 3, TLC agreed to 'procure the sale and transfer to [Moon Lake] of the Assets ... with affect from Closing'. The Assets referenced were owned by 'the group', which consisted of TFPL and VDL, which—as noted above—were wholly owned subsidiaries of TLC.

On 12 January 2016, according to the Moon Lake share register held by the Australian Securities and Investments Commission, Mr Lu's five shares in Moon Lake were transferred to Ningbo Kaixin Investment Co Ltd (Ningbo).

On 24 March 2016, Ningbo's shares in Moon Lake were then transferred to Van Dairy (Hong Kong) Group Ltd (VDHK).

On 31 March 2016, completion of the sale of the land took place. Moon Lake partly funded payment of the purchase price by issuing a large number of shares to VDHK. Moon Lake received the executed land transfers from VDL and TFPL and, on around 4 April 2016, these were lodged to be assessed for stamp duty by the State Revenue Office (SRO), together with payment of estimated duty of over $8 million.

Subsequently the SRO told Moon Lake's solicitors it would give further consideration as to whether Ningbo and/or VDHK had any liability to pay land-rich duty, separately from Moon Lake's liability to pay duty on the acquisition of the Woolnorth properties.

On 28 January 2021, the corporate appellants received a notice from the SRO that it intended to investigate whether Ningbo and/or VDHK had acquired any relevant interest in a land-rich corporation.

On 20 April 2021, Moon Lake received further correspondence from the SRO, which included the following statement:

The acquisition by shares by [Ningbo] on 15 January 2016 and then subsequently by [VDHK] on 24 March each resulted in a separate dutiable transaction under s66 of the Act as at the time of each of those majority acquisitions, Moon Lake was deemed to be a land-rich company.

On 5 July 2021, the SRO informed Ningbo and VDHK that each were liable to pay duty interest and penalty tax in the sum of approximately $10.5 million.

On 2 September 2021, Ningbo and VDHK each lodged notices of objection with the Commissioner regarding the 5 July 2021 assessments. The Commissioner disallowed their objections (apart from a reduction in the quantum of each assessment). The assessments, as revised, were the subject of challenge in the case.

Issues

The most significant issue from a duty viewpoint was whether the SPA was an uncompleted agreement for the sale of land, despite the fact that the owners of the land were not parties to the agreement. If so, it meant the SPA had the effect of causing Moon Lake to be a land-rich corporation both at the time of the transfer of its shares to Ningbo and then to VDHK, triggering multiple duty.

The decision on whether the SPA was an uncompleted agreement for the sale of land

Under section 60(1) of the Duties Act 2001, a private corporation was land rich if:

• it had land holdings in Tasmania where the unencumbered value is $500,000 or more; and
• its land holdings in all places, whether within or outside Australia, comprised 60% or more of the unencumbered value of all its property.

A land holding included any interest in land, with some exceptions that were not relevant to the facts of the case.³

Under section 61(4), the vendor and the purchaser under an uncompleted agreement for the sale of land were each taken to be separately entitled to the whole of the land. While the land-rich duty provisions in Tasmania were subsequently replaced by landholder duty provisions (removing the 60% requirement), there is an equivalent provision in section 79(1) of the current Act. In addition, all Australian jurisdictions have an equivalent provision in their landholder duty legislation.

Before the Supreme Court of Tasmania, Ningbo and VDHK argued that s61(4) did not deem Moon Lake to be entitled to the whole of the land the subject of the SPA as it was not a purchaser under an uncompleted agreement for the sale of land. The basis of this argument was that the SPA was a contract between TLC and Moon Lake. The land was not owned by TLC, but by companies controlled by TLC. Ningbo asserted that this is different from TLC itself selling the land to Moon Lake.

Acting Justice Marshall noted that the proper interpretation of s61 was central to the resolution of this issue. Firstly, his Honour noted that the expression 'agreement for the sale of land' was not defined in the Act. In turning to the ordinary natural meaning of the words, his Honour held:

"The ordinary natural meaning of the words is to provide a description of an agreement which results in the sale of land. The words in the section are not "an agreement for the sale of land by a vendor and its purchase by a buyer".

This approach highlights that the words 'for the sale of land' are the key element of the description of the agreement and should not be construed narrowly or pedantically. The words indicate binding agreements by which the sale of land is effected. On the facts of the case there was no doubt TLC was able to secure the sale of the land to Moon Lake as required under the SPA. Therefore, Moon Lake was a purchaser under an uncompleted agreement for the sale of land, and was treated as holding an interest in the land for the purposes of s61(1) of the Act.

The court also referred to the judgment of Justice Fullagar in Hall v Busst, where his Honour said there were 'three essential elements' required for a concluded agreement including the parties, the subject matter and the price.⁴ All three were satisfied in Van Dairy, including the parties.

Implications

Corporate reconstruction exemptions and concessions

For the purposes of changing the structure of a corporate group or changing the holding of assets within a corporate group, a taxpayer may seek to consider corporate reconstruction exemptions and concessions. A corporate group broadly consists of a parent corporation and its subsidiaries where there is at least 90% ownership.⁶ Where such an exemption or concession is available, it provides some flexibility to change the ownership of a landowning entity within a corporate group even after it has acquired land or entered into a contract to acquire land.

By way of example, the Duties Act 1997 (NSW) relevantly provides for a duty concession for corporate reconstruction transactions. For eligible transactions that occur on or after 1 February 2024, the duty is reduced to 10% of the duty that would otherwise be payable.

Section 273B applies to a transaction if the Chief Commissioner is satisfied, on application by a party to the transaction, that—

• the transaction is a corporate reconstruction transaction, and
• the transaction, or the series of transactions of which the transaction is a part, is undertaken for the purpose of either or both of the following—
  • changing the structure of a corporate group,
  • changing the holding of assets within a corporate group, and
• the transaction, or the series of transactions of which the transaction is a part—
  • is not undertaken for a purpose of avoiding or reducing duty under this Act on another transaction, and
  • is not undertaken for the sole or dominant purpose of avoiding or reducing a liability for tax, other than duty under this Act, under a law of an Australian jurisdiction.

All Australian jurisdictions have broadly similar exemptions or concessions, including Tasmania. The Tasmanian exemption was presumably not available in Van Dairy for the transfers of shares in Moon Lake. In the case of the first transfer from Mr Lu to Ningbo, Mr Lu, as an individual, could not have been a member of a relevant corporate group. In the case of the second transfer from Ningbo to VDHK, presumably the two companies were not part of the same corporate group as defined under the duties legislation.

Actions you can take now

• Exercise caution when establishing the ownership of a purchaser entity and seek to have the correct ultimate shareholders in place prior to the signing of a contract to acquire land or completion of the purchase. Be aware of the double duty risk if you 'change your mind' later.
• Consider the duty implications of entering into sale and purchase agreements, including where the intended seller or purchaser of the property is not a party to the agreement. Seek timely advice.