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The recent decision, Oliver Hume Property Funds Diamond Creek Pty Ltd v Commissioner of State Revenue, has implications for landlords undertaking capital raisings.
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Lessons from the Oliver Hume decision for landlords
13 September 2024
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Brief summary of the facts
The applicant established a company (Oliver Hume), which purchased a Victorian property in 2011 to undertake a specific property development project.
Subsequently, Oliver Hume raised $1.8m by issuing 1.8 million shares to 18 unrelated ‘sophisticated’ investors.
A condition of the capital raise was that the target of 1.8 million shares (and $1.8m of funds) be achieved, or all application money would be returned to all investors.
At all times, the identities of the investor remained confidential and so each investor did not necessarily know the identity of any other subscribers.
Given Oliver Hume owned Victorian land worth more than $1m, it was a landholder for the purposes of the Duties Act 200 (Act).
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Relevantly, the Act imposes landholder duty on acquisitions of a ‘significant interest’ in a landholder.
In the case of a private company landholder, a ‘significant interest’ is an acquisition of 50% or more - and that 50% threshold can be reached by a single acquirer, or, in some cases, the interest of one person may be ‘aggregated’ with other persons.
The ‘aggregation’ with other persons may occur if a person acquires their interest with others in an ‘associated transaction’.
Relevantly, acquisitions are ‘associated transactions’ if they ‘form, evidence, give effect to or arise from substantially one arrangement, one transaction or one series of transactions.’
The Commissioner of State Revenue (Commissioner) assessed Oliver Hume on the basis that the investors acquired their interests via an ‘associated transaction’.
Oliver Hume objected to the decision, which was disallowed, and it referred that decision to the President of the Victorian Civil and Administrative Tribunal (VCAT). VCAT affirmed the Commissioner’s decision and so Oliver Hume appealed to the Victorian Supreme Court of Appeal.
Issue
The primary issue was whether the individual investors acquired their shares in Oliver Hume pursuant to an ‘associated transaction’.
The parties acknowledged that there had been no judicial consideration of the concept of an ‘associated transaction’ in the Act.
The Supreme Court of Appeal (Court)
The Court unanimously dismissed Oliver Hume’s appeal.
The Court reiterated that the proper construction of the concept of an ‘associated transaction’ turns on the words used, as well as the context and purpose of the legislation.
Under the definition of an ‘associated transaction’ under the Act, the question is whether the acquisitions of shares by each investor ‘form, evidence, give effect to or arise from substantially one arrangement, one transaction or one series of transactions’.
The Court emphasised that the focus of the language of ‘associated transaction’ in the Act is not on the individual investors concerned, but on the relationship between the acquisitions and the singular ‘transaction’ or ‘arrangement’ (or series of transactions). In this respect, the concept of an ‘associated transaction’ is to be distinguished from the concept of an ‘associated person’.
While an ‘associated person’ focuses on the relationship between people, the concept of an ‘associated transaction’ turns on the objective circumstances rather than the subjective knowledge or intentions of the acquirers. This distinction was said to be consistent with Parliament’s intention to tax not only people, but ‘dealings’ too.
The Court considered the following three factors to be important in reaching its conclusion that the transaction was an ‘associated transaction’:
- no individual acquisition could go ahead unless a total sum of $1.8m was raised (or the money would be returned). Accordingly, even if the acquirers may not have met each other or even communicated with each other, the acquisitions could not be described as independent of each other;
- under Oliver Hume’s constitution, the acquirers, together, had an interest in an entity which was a special purpose vehicle to undertake a single land development project (and would be wound up after completion) such that the acquisitions by each investor gave effect to a single venture through an agreed management structure; and
- the effect of the acquisitions of the shares in Oliver Hume on the same day, and in the same way, was to substantively alter the shareholding in Oliver Hume from being an Oliver Hume entity to an entity owned by a group of private investors (as to 99.99%).
These factors arose irrespective of whether the acquirers were personally acquainted with one another, or whether they regarded themselves as independent investors.
Revenue Ruling DA.057
Revenue Ruling DA.057 outlines the Commissioner’s view of the meaning of the term ‘associated transaction’ and provides that 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, the Commissioner’s position will not apply if it is found that other circumstances exist which indicate that the acquisitions form part of substantially one arrangement, one transaction or one series of transactions or the acquirers acted in concert in making the acquisitions.’
Unlike public rulings issued by the Federal Commissioner of Taxation – which are legislatively mandated to be binding – rulings issued by the Commissioner of State Revenue are not legally binding.
It remains unknown whether the Commissioner will withdraw this ruling.
Takeaway
Unrelated parties can be participants to an ‘associated transaction’.
All fundraises by landholders should consider this decision carefully - and a potential landholder duty liability should be taken into account and reflected in the landholder’s post raise position.
Landholders that are not special purpose vehicles should not assume that the decision does not apply to them.
Similarly, landholders should not assume that a capital raise without a minimum threshold cannot be an ‘associated transaction’.
Landholders should seek advice prior to any investment funding round.
Jeremy Makowski, partner, Coghlan Duffy Lawyers
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