Revenue Laws Amendment Bill 2018 – The significant and severe taxation changes on the horizon in Western Australia

The Revenue Laws Amendment Bill 2018 (Bill) was introduced into the Western Australian Parliament on 29 November 2018.  Together with the Taxation Administration Amendment Bill 2018,1 the Bill proposes amendments to, among others, the Duties Act2 and the Land Tax Act.3

The Bill contains the next package of taxation austerity measures, this time targeting duty leakage and tightening up exemptions and concessions that have provided avenues for exploitation in the past.  This measure is In line with the McGowan Government's election commitment to repair the State’s finances.

While we wait for Parliament to resume debating the Bill, we discuss some of the more significant proposed changes affecting Landholder duty.4

Broadening the duty base

Rights and assets associated to Land

The Bill introduces a new ‘fixed to land model’ into the Duties Act, which dramatically changes how assets connected to land will be considered going forward.

Under this new model, duty will apply to direct and indirect acquisitions of things fixed to land, regardless of whether they are typically deemed common law fixtures or if they are being acquired independently from the underlying land to which it is fixed.

To accommodate this, the meaning of ‘land’ in the Duties Act is extended considerably.

Further the Duties Act will also regard a right that allows a person to control, access or operate fixed infrastructure to be considered a as a dutiable asset.  Together with statutory licences authorising the ownership, operation or control of infrastructure, these rights will now also be included as land assets for landholder duty purposes.

This gives rise to a broader duty base, so that duty will now apply where a person effectively acquires ownership of fixed infrastructure through a licence or contractual arrangement rather than through an outright purchase.

Landholder Duty

Linked entities

Landholder duty is charged on an acquisition of land through the acquisition of a majority interest in any corporation or unit trust scheme that has an entitlement, either directly or indirectly, to land in WA with an unencumbered value of $2 million or more.

Under current legislation, the value of land to which a holding corporation or unit trust scheme is entitled can be traced through a chain of ownership to ensure full asset ownership of the parent is accounted for.  The following entities are considered linked entities to the landholder:

  • For unlisted entities, a 50% or greater interest in the landholder.
  • For listed entities, a 90% or greater interest in the landholder.

However, legislation has not kept pace with developments in the complexities of modern corporate structures.  As a result of shortcomings in the current drafting of the Duties Act, it is possible to reduce the value of land to which the landholder is entitled by using a combination of subsidiary entities to dilute the landholder’s interest in other related entities that hold land.  The Bill broadens the linked entity provisions to capture these types of scenarios.

Under the Bill, related entities who previously were not liable to pay landholder duty (as the value of their landholdings was below the $2 million threshold), can now be linked and the value of those entities' landholdings aggregated so that the cumulative value of those related entities landholdings meets or exceeds the threshold.  Each entity will then be deemed to be a landholder and duty imposed on the aggregated value of the landholdings.

Acquisitions derived from one arrangement

The introduction of new grouping provisions will limit the ability to defeat, or reduce liability to, landholder duty by separating an acquisition into several acquisitions.  Revisions to the relevant acquisition rules, mean that duty will automatically apply to transactions that result from substantially one arrangement.  Examples of this class of transaction are:

  • An acquisition in a landholder and another entity that only holds chattels. The other entity will be treated as a landholder and duty will be assessed on the total value of all land and chattels under both entities.
  • Acquisitions in two or more entities that are not landholders but together are entitled to land with a combined value of $2 million or more.
  • Acquisitions in two or more entities that, together, have a direct or indirect interest of 50% or more in a landholding entity.

Further, the default position will also apply to the following transactions if they occur within 12 months:

  • Acquisitions in two or more entities by the same person.
  • A transfer of chattels and a landholder acquisition by the same person.

A transaction or an acquisition that becomes dutiable as a result of another acquisition occurring is retrospectively liable and will be assessed or reassessed for duty as required.

These proposed changes will have far reaching effects.

Acquisitions between group entities will need to be carefully analysed to ensure there are no unintended duty consequences.

Connected entities exemption

To counter any unintended effects of the new grouping provisions, the Bill introduces an exemption that will provide duty relief on certain transactions between closely controlled corporations and unit trust schemes that qualify as a ‘family’.

The exemption operates to narrow the scope of duty application and ensure that duty is not incorrectly applied, such as, where a ‘family’ is transferring assets but retaining the same asset base in order to promote a more efficient group structure.

However, to prevent the exemption being exploited, the exemption has an automatic revocation if, within three-years from the exemption being granted, the transferee entity:

  • Is removed from the entity ‘family’.
  • Still holds any of the dutiable property for which the exemption was received.

What's next?

The Bill introduces some of the most comprehensive and significant property taxation changes seen in decades.  If passed by Parliament in its current form, the changes will have a significant impact on:

  • The types of transactions subject to duty in WA.
  • The mechanics of deals going forward.
  • The structure of entities within the same corporate group.

The Bill had its Second Reading in the Legislative Assembly on the second last sitting day of 2018.  With Parliament set to resume on 12 February 2019 the progress of this Bill should be an important consideration for any taxpayer currently negotiating, or contemplating, significant land acquisitions in WA.

Duty advice should be sought to determine whether the significantly broadened tax provisions will impact on your transaction.

07 February 2019
Property Updates
AUTHOR
Peter Beekink
Partner
SERVICES
Property and Leasing


FOOTNOTES

[1] The Taxation Administration Amendment Bill 2018 will improve the administrative and enforcement arrangements in the Taxation Administration Act 2003 (WA) proposed by the Bill.

[2] Duties Act2 2008 (WA).

[3] Land Tax Assessment Act 2002 (WA).

[4] Revenue Laws Amendment Bill 2018, cls 56 – 116.