Tips and Traps on Acquisitions or Restructures

I have noticed that when planning a transaction or restructure, duty (formerly stamp duty) is often the poor cousin to income tax/capital gains tax considerations of a proposal. That is, advisers will focus on the federal tax implications of a proposal to ensure clients understand the implications, but little thought may be given to the duty implications of the proposal until the 11th hour. Fair enough to a point - federal tax will generally be a more significant consideration, but it is also important to consider the state tax implications of a proposal early when planning a transaction to ensure there are no unexpected imposts.

This article summarises some of the traps which can be overlooked, especially if planning starts too late.

The article is written in the context of Western Australian (WA) duties. There may be differences in other jurisdictions, which I am happy to assist via separate enquiries.

1. A Duty Liability is Triggered on Contract

Entering into a binding contract to acquire dutiable property such as land in WA or a WA business asset will generally trigger a liability for duty, even if the contract is conditional. On that basis, the contract is required to be lodged with RevenueWA within 2 months of execution.

2. The Difference in the Assets Subject to Duty on an Asset Acquisition versus an Entity Acquisition

Sometimes an important part of planning a transaction can be advising a client on the implications of acquiring the assets of an entity or the entity itself (for example, the shares in a private company or units in a unit trust). The driving force behind the decision will be commercial factors such as whether the purchaser is prepared to inherit the history of the target company/unit trust.

It will also be useful for the acquirer, who will normally pay the duty, to understand that if the shares in a company or units in a unit trust are acquired, duty will be assessed under the landholder regime, if certain thresholds are met. In those circumstances, duty will be assessed on the unencumbered value of the land assets and most chattels of the company/unit trust and its linked entities. Broadly, linked entities are entities in which the target holds a direct or indirect interest of at least 50%.

By way of comparison, if the purchaser acquires the assets of the target, duty is assessed under the transfer duty regime on a broader range of assets in WA, with no threshold. That is, land, most chattels, and certain intangible assets such as goodwill, intellectual property and customer contracts.

3. Calculation of Duty under the Landholder Duty Regime

When the shares in a company or the units in a unit trust are acquired, and certain thresholds are met, landholder duty will be payable. In those circumstances, the duty is assessed on the unencumbered value of the land assets and most chattels of the landholder (target entity) and its linked entities. If not properly advised, clients can be surprised to learn that the price paid for the shares is only partly relevant to the duty payable.

To take an extreme example, if X pays $2 for 100% of the shares in Company Y which holds land worth $10m in WA, but company Y also has liabilities with a total of $10m, then landholder duty will generally be assessed on $10m, being $506,000. This is notwithstanding that the value of the company is arguably $2, being the price paid for the shares.

4. Calculation of Duty under the Transfer Duty Regime

When dutiable property is acquired, such as land, chattels and intangible business assets located or deemed to be located in WA, transfer duty will be payable. In those circumstances, duty is assessed on the higher of the consideration paid, inclusive of GST and any liabilities assumed and the market value of those assets.

Where the parties are unrelated and dealt at arm’s length, the Commissioner may be prepared to accept that the consideration paid is equal to the market value. Clients can be surprised to find that they are required to pay duty on any GST payable (a tax on a tax!). Accordingly, obtaining any relevant GST concession, such as the GST free supply of a going concern can be relevant for managing duty outcomes, as well as GST.

5. Concessions and Exemptions

Duty exemptions and concessions are complex and contain specific conditions and exceptions. It is important to understand early whether the expected duty relief will in fact be available.

Specifically, the connected entity exemption can be available on certain restructures of corporate groups. A pre-transaction decision may be applied for from the Commissioner in advance to confirm the availability of the exemption. I usually recommend this if time permits, as the Commissioner has relatively broad powers not to grant the relief in certain circumstances if left until after the transaction.

Even if a favourable pre-determination is given by the Commissioner in advance, it is important to lodge the relevant exemption application with the Commissioner after the transaction. This is a very simple process if a favourable pre-transaction decision has been given. In this regard, if the exemption is not applied for within 12 months after the transaction, then the exemption is not available, and there is no ability for the Commissioner to extend the time period.

6. Be Mindful of Public Announcements

“Quality land is what this business is all about, and we have lots of it”.

The above is an extract of a quote by the former President and CEO of an entity known at that time as Placer Dome Inc. The statement was made in advance of an acquisition that eventually became the subject of a dispute before the High Court of Australia, and the statement was reproduced in the decision (refer Commissioner of State Revenue v Placer Dome Inc [2018] HCA 59 at paragraph 31).

The High Court was tasked with determining whether 60% or more of the value of all property of Placer Dome was land. Whilst I am in no way suggesting that the above quote was determinative of the issue before the High Court, the quote serves as a reminder that public statements are read by Government authorities, Courts and investors alike and should be carefully scrutinised by all relevant advisers before release.

Conclusion

It is important to consider duty and other state taxes early in planning any transaction or restructure. Although commercial issues will and should always drive a transaction, understanding both the federal and state tax outcomes will be relevant to ensuring clients understand all implications of a proposal under consideration.