Property funds beware: implications of the…

The Victorian Court of Appeal has entrenched as law a broad meaning of “associated transactions” in its recent decision involving Oliver Hume Property Funds and the Commissioner of State Revenue.

The case unanimously dismissed the taxpayer’s appeal from a decision of Judge Macnamara in VCAT,^[1]which affirmed the Commissioner of State Revenue’s decision to impose landholder duty on the acquisition of an interest in a landholder company by 18 investors who were not known to each other and who invested for their own individual purposes on the basis that the interests were acquired in an “associated transaction”.

In this article, we unpack the decision in Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue [2024] VSCA 175 (8 August 2024).

Key takeaways

The Court of Appeal has entrenched as law a broad meaning of “associated transactions” for the purposes of the landholder duty provisions in Chapter 3 of the Duties Act 2000 (Vic) (the Act). When assessing acquisitions, the focus is not on the intention of the acquirers, but on an objective characterisation of whether the transactions form one arrangement or one series of transactions.
Where acquisitions in a landholding entity are interdependent on each other, then – even if the acquirers are completely independent from each other (as was the case here) – there is a strong likelihood that these acquisitions will be found to be “associated transactions” that can be aggregated to result in a relevant acquisition.
Consequently, in Victoria at least, every land development project for which a Special Purpose Vehicle (SPV) is used to raise equity must now consider the possibility that acquisitions of shares or units in the SPV at the same or similar time may be aggregated to give rise to a relevant acquisition.
Accordingly, developers will need to establish an SPV and have all investors acquire their interests before any contracts to purchase land are executed.
Investors could find themselves jointly and severally liable for a landholder duty liability resulting from the aggregation of interests acquired by other, independent investors.
While this decision is only binding authority in Victoria, the Duties Acts of some other jurisdictions contain similar provisions by which acquisitions in landholders can be aggregated where they arise from what is substantially one arrangement. Therefore, this decision could have a far-reaching impact.
Taxpayers must be cautious when relying on public guidance issued by state revenue offices, because a Court may disregard any concession given by a Commissioner and will look at the words of the legislation.

Background

The Oliver Hume Group (the Group) established the Applicant as an SPV for the purpose of a property development project at Diamond Creek. The Applicant issued an Information Memorandum (IM) to investors on the Group’s database and as part of consultancy and referral agreements. The Group sought to raise $1.8 million to fund the development of the property at Diamond Creek. The Group has no preference for how, or from where, the investors were sourced. It was a condition of the IM that the target of $1.8 million be achieved by 26 June 2014. Ultimately, on 2 July 2014, the applicant issued 1.8 million shares to 18 investors, raising $1.8 million. The investors were unrelated to each other, and indeed did not know who else had invested.

Relevantly, consistent with the terms of the IM, the Applicant’s constitution:

entrenched a management agreement for the project that could only be overturned by a vote of 90 per cent of the members of the Applicant; and
committed the members of the Applicant to a voluntary winding up at the end of the project.

It was common ground in this case that the Applicant was a “landholder”. Despite the fact that none of the investors individually acquired an interest of 50 per cent or more in the Applicant, the Commissioner of State Revenue determined that a relevant acquisition had nonetheless occurred, deeming a relevant acquisition of a 99.99 per cent interest in the Applicant. This was on the basis that the individual interests acquired by each investor were “associated transactions”, meaning that they could be aggregated such as to meet and exceed the 50 per cent threshold.

This case primarily concerned the second limb of the definition of “associated transaction”, which is defined at subsection 3(1)(b) of the Act to mean:

"associated transaction", in relation to the acquisition of an interest in a landholder by a person, means an acquisition of an interest in the landholder by another person in circumstances in which—

….

(b) the acquisitions form, evidence, give effect to or arise from substantially one arrangement, one transaction or one series of transactions;

The Applicant appealed the Commissioner’s decision to VCAT. VCAT, constituted by Justice Macnamara sitting as Vice President, affirmed the Commissioner’s assessment. The Applicant then appealed the decision to the Court of Appeal of the Supreme Court of Victoria.

The Applicant’s submissions

Essentially, the Applicant’s submission was that the acquisitions of interests by the investors in the Applicant were not “associated transactions” under the second limb of the definition.” It argued:

It would be unlikely for Parliament to intend to produce a result where individuals with no connection to each other should find themselves jointly and severally liable for the whole duty, even if they themselves only acquired a small interest.
If there are multiple acquirers, there must be some ‘unity of purpose’ or a sufficient degree of ‘oneness’ between them, which was not the case here. The investors were all independent of each other in that each made their own independent decision to subscribe and that they were indifferent about who else subscribed.
Regardless of the need to achieve the target of $1.8 million, the offers made by each investor were not interdependent. It was fortuitous as to whether the target of $1.8 million was reached, and the $1.8 million requirement did not emanate from any of the acquirers.
In the alternative, even if the need to achieve $1.8 million was relevant, it did not justify aggregation.

The Commissioner’s submissions

Necessarily, the Commissioner’s case was that the acquisitions of interests by the investors in the Applicant were “associated transactions” under the second limb of the definition. The Commissioner argued:

The connection between the investors was that which arises from the circumstances surrounding the offer of shares on the terms of the IM.
Even accepting that the investors were not known to each other and did not coordinate their applications, this does not necessitate the conclusion that their respective acquisitions of shares were not “associated transactions” for the purposes of the Act.
The second limb of the definition of an “associated transaction” does not focus upon the relationships, conduct or community of purpose between the acquirers, as that is covered by the first limb.
There were four key connections between the acquisitions:

Each acquisition could not proceed unless others proceeded at the same time on the same terms adding up to a total amount raised of $1.8 million.
Each acquirer bound themselves to a constitution that entrenched a management agreement that could only be overturned by a vote of 90 per cent of the members of the Applicant.
Each acquirer bound themselves to a voluntary winding up at the end of the project, which showed that the Applicant was a single purpose vehicle.
There was also a common intention to make this company one that was controlled by a small number of investors (as to 99.99 per cent), rather than being a 100 per cent member of the Group.

The Court of Appeal’s decision

In relation to the second limb of the definition of an “associated transaction” – which was the key issue in the case – the Court of Appeal held as follows:

This definition does not require the relevant acquirers to have any intention at all. Rather, the focus is on the objective terms and circumstances surrounding the acquisitions. This is in contrast to the first limb of the definition which requires that acquirers ‘act in concert’.
Parliament intended for the landholder provisions to ensure that any transfer of an economic interest in land is taxed in a similar way to a direct transfer of the interest in land.
The focus is not on the individuals concerned but on the relationship between the acquisitions and the singular ‘arrangement’ or ‘transaction’ (or ‘series of transactions’).
It is still necessary that there is, objectively, some ‘oneness’, connection or interdependence between the circumstances by which the persons acquired their interests, such that the acquisitions might be characterised as, essentially, ‘one’ arrangement.

In relation to the particular facts of the case, the Court of Appeal found as follows:

It was important in this case that no individual acquisition could go ahead at all unless a total of $1.8 million was raised. Because of this, the acquisitions could not be described as relevantly independent of each other despite the fact that each acquirer may not have met the others, or even communicated with them.
The terms of the Applicant’s constitution were highly relevant, as these terms showed that the acquirers, together, had an interest in an entity which was to undertake a single land development project, via an entrenched management structure. The singularity of the undertaking was underscored by the fact that the entity was to be wound up at the end of the project. This ‘singularity’ or ‘oneness’ suggested that, overall, and ‘in substance’, the acquisitions gave effect to a single venture for the development of the land by the Applicant.

Accordingly, the Court of Appeal held that the acquisitions were “associated transactions” for the purposes of the Act and therefore that the appeal should be dismissed.

Reliance on public rulings and other guidance

Before VCAT, the taxpayer argued that the Commissioner had departed from public revenue ruling DA.057, which provided guidance on the Commissioner’s views of the meaning of the term “associated transaction”. In the ruling, the Commissioner stated:

… the Commissioner has taken the position that he will not regard acquisitions of interests by independent members of the public as an associated transaction if the acquisitions are made in response to a genuine public offer under a product disclosure statement or prospectus lodged with the Australian Securities and Investments Commission.

However, in the Court of Appeal decision, there was no mention of DA.057 or the Commissioner’s departure from the legislature in that ruling. Perhaps the taxpayer did not raise this as an appeal point because it accepted that as the IM had not been lodged with ASIC that it did not strictly fit within the DA.057 concession. Or it could have considered that Justice Macnamara’s comments (at [71]) in his VCAT decision – that there was no evident statutory policy to justify the concession granted – were unhelpful and would detract from its other appeal points.

While public rulings often state they do not have the force of law, they are useful guidance for taxpayers to understand their tax obligations, particularly in a self-assessment regime. Accordingly, taxpayers will frequently rely on public rulings and other guidance issued by revenue offices when determining whether or not a particular transaction is dutiable. Both the Queensland Revenue Office and Revenue WA have issued guidance on this topic. However, going forward taxpayers need to be very cautious of relying on such guidance because the Courts are focused on interpreting the legislature, not guidance that have no force of law.

The taxpayer has until 5 September 2024 to lodge an application for special leave with the High Court of Australia. At the time of writing this Insight, no application had been lodged.

If you have any comments on or questions about this article, or on the Court of Appeal’s decision and its implications more broadly, please contact Kathryn Bertram and Lachlan Smithers.

^[1]Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue (Review and Regulation) [2023] VCAT 634 (14 June 2023).