Reducing the cost of being foreign – taxpayer wins first Tribunal decision

In Victoria, foreign purchasers may be liable for an additional 7% stamp duty payable on acquisitions of land-related interests in residential property, known as foreign purchaser additional duty (‘FPAD’).

The FPAD regime is set out in the Duties Act 2000 Vic (‘DA’). At its core are the concepts of ‘foreign purchaser’, ‘land-related interest’ and ‘ residential property’, with the first and last of these being respectively highly technical and wide-ranging. In addition to direct ‘land-related interests’, FPAD extends to certain acquisitions of interests in companies and trusts under the landholding provisions of Chapter 3 of the DA.

In application to land-related interests, fundamentally the FPAD regime requires consideration of whether a foreign purchaser has acquired a land-related interest in a residential property.
Where FPAD prima facie applies to a foreign purchaser that is a certain type of foreign corporation, the Commissioner has discretion to deem that a person (being a ‘foreign natural person’, another foreign corporation or ‘the trustee of a foreign trust’) does not have a controlling interest in the foreign purchaser, with the result that the foreign purchaser ceases to be treated as such and FPAD does not apply. A similar discretion exists in relation to foreign trusts.

The discretion is governed by criteria set out in the DA and in the associated Treasurer’s Guidelines (which elaborate each of the statutory criteria and the matters to be considered).
The first Tribunal/Court decision to consider the application of FPAD and the Commissioner’s discretion to relieve against its application was issued by VCAT in January 2019 – South Wharf Towers Pty Ltd v Commissioner of State Revenue.

The case is summarised below, with observations on some practical implications provided at the end of the article.

Facts and issues

In brief, the facts were:

  • An Australian incorporated company, SWT, purchased land in Melbourne (‘the land’). At the time of purchase, the land had approvals for demolition of the existing buildings and construction of two towers comprising 940 residential apartments and commercial space.
  • SWT was 100% owned by another company, MUD. As MUD was incorporated outside Australia (vis. Hong Kong) it was a foreign corporation for purposes of the DA.
  • SWT was a foreign purchaser of the land for DA purposes, due to being a company controlled (applying the DA test) by another foreign company, namely MUD.
  • Ms Li was the sole director of SWT and a director of MUD. She and her family members owned, through various entities, 80% of MUD.
  • Ms Li and her relevant family members were Australian citizens, albeit resident in Hong Kong.
  • Ms Li and her husband handled SWT’s financial affairs, arranging funding from their entities in China. SWT contractually outsourced the development of the land to another company LMD, with a limited degree of consultation envisaged to occur between LMD and Ms Li. LMD and the entity to which it delegated some of its duties, KMD, were Australian companies controlled by Australian citizens (i.e. not foreign companies for FPAD purposes.).
  • The Commissioner imposed FPAD in relation to SWT’s purchase of the land. He refused to exercise his discretion to deem MUD as not having a controlling interest in SWT and thereby avoid SWT being a foreign purchaser.

SWT objected to the imposition of FPAD on two alternative grounds:

  1. SWT contended that the land was not ‘residential property’ on the basis that ‘residential property’ had to be ‘a place of residence’ i.e. contemplating only an individual home rather than a building with multiple places of residence.
  2. SWT contended that the Commissioner should exercise his statutory discretion to deem MUD not to be a foreign corporation.

The decision – ‘residential property’

The Tribunal found against SWT on the first ground. The definition of ‘residential property’ included the case of an acquisition of land with the intention to construct a building with multiple apartments. [As an aside, we note that a more sophisticated definition of the term has applied since July 2016 and the first ground would not appear to be arguable under the revised definition.]

The decision – exercise of the discretion

The Tribunal held that discretion should be exercised in favour of SWT.

The decision is valuable from the perspective of its analysis of both the statutory requirements and the Treasurer’s Guidelines, which respectively relate to exercise the discretion. The Tribunal also discussed the practical issues of who bears the onus of proof in the context of a challenge to a refusal to apply the discretion, the extent to which the Guidelines govern the discretion, the manner in which the purpose and policy of the statutory provisions creating the discretion inform the application of the discretion, and the sources of such purpose and policy. The purpose and policy were viewed as relevant to determination of both the nature and weight of considerations which were to be evaluated in exercising the discretion.

Although the Tribunal considered the Guidelines published in 2015, the discussion will inform application of subsequent versions (which apply fundamentally the same criteria), as well as the application of the comparable absentee owner land tax surcharge regime.

The Discretion – the first statutory head: “the nature and degree of ownership and control”

The Tribunal adopted a legalistic rather than practical attitude to the first statutory consideration of ‘the nature and degree of ownership and control [which MUD] has in SWT’. It rejected the view that that this head supported exercise of the discretion because MUD was 80% owned by Australian citizens and control of it lay with an Australian citizen, Ms Li, who was also the sole director of SWT.  The relevant head required focus on MUD’s relationship with SWT. We note that this anticipates the more clearly articulated consideration in the revised Guidelines.

The Tribunal classified MUD’s 100% ownership of SWT as a matter strongly favouring refusal of the discretion.

The Discretion – the second statutory head: “practical influence to determine, directly or indirectly, the outcome of decisions of the entity”

The Tribunal appeared to accept that this head was concerned with MUD’s actual (rather than theoretical) capacity to influence SWT’s operations. On the facts, the Tribunal concluded that MUD was a passive investor and this favoured exercise of the discretion. Practical influence over SWT’s operational and financial policies was exercised by entities (LMD and/or KMD and Mr and Ms Li) who were not foreign persons. As a legislated factor, the Tribunal gave this head a high weighting.

The Discretion – the third statutory head: “any practice or behaviour of the person affecting the corporation’s financial or operating policies”

The third statutory head is whether any practice or behaviour of MUD affected SWT’s financial or operating policies. The Tribunal was sympathetic to SWT’s contention that the corresponding Guideline exceeded the ambit of the statutory head in requiring consideration of the ability to exert such influence. In an absentee land tax case, VCAT had treated a comparable statutory consideration as relating to such ability. However, because the Commissioner contended that MUD exercised practical influence, the Tribunal noted that it did not need to decide the point in the present case.

As, on the facts of the case, this head largely overlapped with the second head, the Tribunal considered in this instance it should not be accorded any weight and classified it as a neutral consideration.

The Discretion – the fourth statutory head: “other relevant circumstances”

The fourth statutory head is “other relevant circumstances”. The Tribunal considered the scope of this was dictated by the need for the other circumstances to be consistent with the purpose and policy of the FPAD.

The Treasurer’s Guidelines arise for consideration under this head. The Tribunal’s views of the six factors comprising the 2015 version of the Guidelines (‘Guidelines’) are discussed below. The Tribunal also raised a seventh consideration.

(i)  Guidelines – impact on the economy

The first factor under the Guidelines, impact on the economy, has two elements – addition to the supply of housing stock in Victoria and generation of economic activity.

The Tribunal rejected the Commissioner’s contentions that:

SWT was not adding to the housing stock because it acquired the land with residential development approvals in place and so the housing stock would not be increased due to the involvement of the SWT.
Housing affordability would not be improved because SWT was targeting apartment sales at foreign buyers.
As these factual circumstances are frequently encountered, practitioners will find the Tribunal’s analysis highly informative.

SWT’s addition to Victoria’s housing supply and the economic activity generated through the development favoured exercise of the discretion. The first factor was given high weight, having regard to the policy and purpose of the FPAD to improve housing affordability.

(ii)  Guidelines – effect on competition

On the facts, the Tribunal concluded that second factor, the effect on competition, was a neutral consideration. The conclusion was reached on the basis that SWT purchased the property knowing that FPAD was a possibility and proceeded with the purchase anyway.

Although one may question the circularity of the Tribunal’s logic, we suggest it becomes more comprehensible if the focus is the consequences of competition for housing purchasers. We note that competitive disadvantage is no longer an explicit consideration under the October 2018 Guidelines.

(iii)  Guidelines – impact on the community

The third factor, community impact, explicitly encompasses the need for the purchaser’s contribution to Victorian housing stock to be significant and the need for the purchaser to contribute to the Australian economy. However, the consideration extends to other community benefits – SWT drew attention to the proposed development contributing to meeting a local community plan, an increase in the amenity and vibrancy of a Melbourne precinct, and the donation of land for a public park.

Economic contribution involves the need to show a considerable level of Australian participation in the putative foreign purchaser’s (i.e. SWT’s) Victorian activities. The Tribunal helpfully clarifies that such Australian participation is the nub of the undefined term ‘Australian-based’, which is used elsewhere in the Guidelines.

The Tribunal concluded that the requirement for Australian participation could be met through SWT acting through KMD. It was not necessary for SWT to act through employees or directors.

Economic contribution also involves consideration of the level of use of Australian building services and Australian supplies of materials in the development of the land. The evidence established that SWT, as principal, would engage Australian professional consultants and construction contractors through the agency of KMD.

The Tribunal rejected the Commissioner’s argument that SWT was a passive investor (not contributing economically) and MUD was the active entity due to its central role in financing the development, with SWT being a shell. The need for MUD to provide finance was explained.

In the circumstances, the Tribunal concluded that the third factor favoured exercise of the discretion and, as this factor ‘goes to housing affordability’, it should be given a high weighting.

(iv)  Guidelines – compliance with Foreign Investment Review Board requirements

SWT’s compliance with FIRB requirements favoured the discretion’s exercise. However, the Tribunal ascribed a low weighting as its relevance to FPAD’s purpose and policy was not clear to the Tribunal.

(v)  Guidelines – character of the controlling interest

The Tribunal decided that the fifth factor, ‘the character of the controlling interest’, included consideration of whether Victorian landholder duty referrable to changes in the chain of ownership of MUD had been recognised and paid. This was classified as a matter of high weight and, on the facts, militated against exercise of the discretion.

(vi)  Guidelines – independence of management

The consideration of the sixth factor, ‘independence of management’ of SWT, was given medium weight and favoured exercise of the discretion. On the facts, the Tribunal discounted the practical influence arising from the financial support from a foreign person, vis. MUD, and the lack of documentation of that financial support. MUD was effectively a flow through vehicle for funds being provided by Ms Li and her family, with Ms Li and her husband making the decisions concerning SWT.

(vii)  Tribunal’s further consideration

The Tribunal raised, as a possible further consideration, the relevance of the Charter of Human Rights and Responsibilities Act 2006 (Vic). It concluded that the Charter was not ‘a relevant consideration for the present case although it may well be engaged in other matters concerning the imposition of FPAD’.

The discretion – reaching the conclusion

The Tribunal noted that the positive heads/factors of high weight in favour of exercise of the discretion outnumbered the negative ones of high weight and overall the positive heads/factors outnumbered the negative ones. In these circumstances, the Tribunal considered the discretion should have been exercised.

Practical implications of the decision

We suggest that the key practical implications of the decision include:

  • Prior to purchase, there is a need for careful attention to identifying the manner in which both the acquisition and the development of the dutiable land will be undertaken.
  • In particular, there is a need to consider the extended context of the purchase and development process – including the financing arrangements (of the purchase and the development), commercial decision-making during the development process, influence that the various entities may be able to exert (and where such influence is not intended, addressing this through appropriate legal or other structures ), the nature of the development, the certainty of the development occurring .
  • It may be desirable to document the role of each of the entities involved in the purchase and development (and, we should add, act in accordance with that documentation). Timely consideration/assembly of other contemporary evidence will also be needed, including being able to establish with sufficient certainty that the development will eventuate.
  • In addition to the time-relevance of any re-structuring of any entity (and the need to comply with domestic and foreign law), it should not be overlooked that restructuring of direct/indirect interests in a landholding entity may have duty implications in Victoria and failure to meet these may have implications for exercise of the discretion.

This article was prepared by Andrew Orange and Jennifer Ferguson. If you have any questions, or wish to seek advice on matters referred to in this article, we can be contacted on (03) 8662 3200 or consult@webbmartinconsulting.com.au

This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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