Recently, the Victorian Court of Appeal (Commissioner of State Revenue v Danvest Pty Ltd & Anor  VSCA 382) – “the Danvest Case”) considered whether the transfer of a partnership interest attracts duty where the partnership assets include freehold land.
Prima facie, the case raises an opportunity for partnership restructuring in Victoria. One may anticipate a legislative response in the near term.
The Duties Acts of Victoria (“DA 2000 Vic”), NSW (“DA 1997 NSW”) and Queensland (“DA 2001 Qld”) take different approaches to imposing duty on transfers of interests in partnerships. This note focuses on the implications of such transfers where freehold land is a partnership asset.
Victoria and, to a degree, NSW take a traditional approach. Queensland has a dedicated regime taxing partnership interests.
A partnership interest is not included in the Victorian definition of “dutiable property”. However, land (more specifically, estates in fee simple in land) is dutiable property (s. 10(1)(a) DA 2000 Vic.). In the Danvest Case, the Commissioner contended that a transfer of an interest in freehold land occurs where there is a transfer of an interest in a partnership that has the land as a partnership asset.
Alternatively, the Commissioner relied on the further Victorian provision (s. 10(1)(ac) DA 2000 Vic.) that “an interest in any dutiable property” (with certain presently non-relevant exceptions) is also dutiable property. The Commissioner contended that a person acquiring an interest in a partnership which has land as a partnership asset was acquiring an “interest in dutiable property” within the meaning of s. 10(1)(ac).
The Victorian Court of Appeal analysed the nature of a partner’s rights in respect of partnership land. It concluded that a partner did not have a proprietary interest in specific assets of the partnership at any time prior to dissolution of the partnership. A partner’s interest in a partnership is an equitable chose in action – the applicable chose in action being the “equitable right to a proportion of the surplus after realisation of partnership assets and payment of the debts and liabilities of the partnership”. In short, a partner “has a presently existing equitable chose in action which does not, prior to dissolution [of the partnership], represent a proprietary interest in partnership assets”.
The fact that a partner only had a chose in action also had the result that a person acquiring an interest in a partnership which has partnership land did not acquire an interest in the land for purposes of s. 10(1)(ac). In other words, the acquisition of a partnership interest did not constitute acquisition of an “interest in any dutiable property”.
It should be noted that the DanvestCase did not involve the retiring partner separately transferring any title to partnership land to the incoming partner/the existing partner who acquired a greater share in the partnership. Under the partnership agreement, a separate company (“the Manager”) was to manage the partnership and all partnership property was to be held by the Manager “in its name in trust for the Partners as an entirety and deal with that property as directed by the Partners”. Although not an issue before the Court, we note that this circumstance avoided conventional imposition of transfer duty outside of the partnership arrangements.
In contrast to Victoria, under the NSW approach a partnership interest is “dutiable property” where the partnership has partnership property that is NSW land or other dutiable property (s. 11(1)(i) DA 1997 NSW). The NSW legislation (s. 9A DA 1997 NSW) also deems a transfer of a partnership interest to occur in certain circumstances and provides that such deemed transfer is a transfer of dutiable property.
Where a partnership interest is acquired, duty is payable on a proportion of the consideration (or value) of the partnership interest. Basically, the proportion is the fraction which the unencumbered value of all dutiable property of the partnership bears to the unencumbered value of all assets of the partnership. Special provision is made for cases in which the person acquiring the partnership interest becomes the owner of the partnership land pursuant to separate transfer of land.
NSW has a provision (s. 11(1)(l) DA 1997 2000) which is comparable to the Victorian s. 10(1)(ac). Practically speaking, whether it is necessary to have regard (in the context of transfer of a partnership interest ) to the comparable NSW provision in any circumstance is probably a moot point.
The foregoing Victorian and NSW approaches are to be contrasted with Queensland’s specific taxing regime set out in Part 7 of the DA 2001 Qld. That regime encompasses the circumstance in which a person acquires an interest in partnership that either holds dutiable property or has an indirect interest in dutiable property. An indirect interest in dutiable property exists where a partnership (“the relevant partnership”) has a partnership interest or a trust interest in a partnership/ trust that holds the dutiable property. An indirect interest also exists where more than one partnership/trust is interposed between the relevant partnership and the dutiable property.
The DA 2001 Qld imposes duty in relation to the acquisition of a partnership interest on the greater of:
- the amount of the consideration given for the partnership interest and referrable to the dutiable property and/or indirect interest in the dutiable property held by the partnership; or
- the aggregate value of the applicable proportion of the value each dutiable property or each indirect dutiable property interest that can be traced back to the partnership – as illustrated in Schedule 4 of DA 2001 Qld.
The Danvest Case does not appear to be relevant to the Queensland duties legislation.
In the aftermath of the Danvest Case, one might anticipate legislative change. It will be interesting to see whether the change is modelled on the NSW approach or the Queensland approach, or takes some other form.