1. Background

On 8 August 2024, the Victorian Supreme Court of Appeal (Court) handed down its unanimous decision in Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue [2024] VSCA 175.

The Court dismissed an appeal by Oliver Hume Property Funds (Broad Gully Road) Diamond Creek Pty Ltd (Oliver Hume) against a decision of the Victorian Civil and Administrative Tribunal (VCAT) and thereby upheld the Victorian Commissioner of State Revenue’s (Commissioner) assessment of Oliver Hume to landholder duty.

Below we set out the key reasoning of the Court and the practical implications of the decision, following on from our previous alert in respect of the VCAT decision, Capital raisings: VCAT decision puts spotlight on landholder duty risks. This previous alert contains more detail on the landholder duty regime and the VCAT decision, including the potential impact of the decision on the status of a public revenue rulings issued by the Commissioner.

In short, this decision raises material issues around duty being payable on all capital raises of 20%/50% or more (depending on the entity/jurisdiction) in entities which hold land.

2. Commissioner's assessment of landholder duty

The Commissioner had assessed landholder duty on the acquisition of 99.99% of the issued shares in Oliver Hume by 18 separate investors. The Commissioner 'aggregated' the separate investors' acquisitions under section 78(1)(a)(ii)(C) of the Duties Act 2000 (Vic) on the basis they were 'associated transactions' that gave effect to 'substantially one arrangement', despite the investors being unrelated and acting independently of one another. The only 'uniting factors' were:

• investors dealt with the same issuer around the same time in accordance with the terms set out in a widely circulated information memorandum; and
• each transaction was interdependent, meaning the share acquisitions would only occur if a target total of subscription proceeds was met.

3. Court of Appeal's reasoning

The Court held that the issue of shares to the 18 investors gave rise to a landholder duty liability on the basis that those share issues (and acquisitions by the investors) gave effect to ‘substantially one arrangement’ and were therefore properly aggregated by the Commissioner as a dutiable 'associated transaction'.

The key factors the Court based the finding of the existence of ‘substantially one arrangement’ and therefore the acquisitions being ‘associated transactions’ were:

• The 18 investor acquisitions in the landholding entity were interconnected as no individual acquisition could go ahead unless the targeted total subscription funds of $1.8m was raised.
• The landholding entity was to undertake a single land development project under an entrenched management structure.
• The landholding entity was to be wound up at the end of the project (this underscored the singularity of the entity’s development undertaking).
• The acquisition of the shares in the landholding entity all occurred on the same day and in the same way. This substantially altered the ownership of the landholding entity and contributed to the 'oneness' of the investments.

4. Practical implications

The Court's decision means that any capital raising by a landholding entity which involves a sell down of an interest equal to or greater than the Victorian relevant acquisition threshold (generally being 20% for private unit trusts, 50% for private companies and 90% for ASX listed entities) must give close consideration to the potential application of landholder duty. Whilst this was a Victorian decision, it is likely to have much broader implications – potentially to capital raisings in other jurisdictions, and to other types of multi-party landholder acquisitions.

In assessing whether such duty is likely to be imposed on any particular capital raising, the following questions should be addressed:

• Is each acquisition under the capital raising conditional on other investor(s) acquiring their interest (eg where a minimum total subscription funds being achieved)?
• Is it proposed that the subscription funds be used for a single (eg development) project?
• Are there arrangements beyond an ordinary constitution or trust deed terms, under which the management or future conduct of the landholder is agreed (in this case being management agreements relating to the appointment and activities of a project manager for the proposed land development and agreements to wind up the landholder upon completion of the project)?
• Will the issue of the shares or units under the capital raising occur on the same day and in the same way (as opposed to a circumstance where the raising is 'open-ended' such that new investors are accepted from time to time)?
• Are there any other objective interconnecting factors capable of supplying the necessary 'oneness' to indicate that the acquisitions arise from substantially one arrangement, one transaction or one series of transactions?

The uncertainty created by this decision may see an increase in pre-raising structuring to ensure that the relevant entity is not a ‘landholder’ at the time investor interests are acquired. For example, entering into and holding a call option to acquire land (rather than a contract for sale) during the capital raising period may assist in removing any landholder duty uncertainty.

If the relevant entity is already a 'landholder' (due to it holding direct or indirect land related interests), then any proposed capital raisings should be carefully reviewed and considered having regard to the key factors set out above. The need to remove any landholder duty uncertainty could be achieved by the issue of debt instruments to investors (such as convertible notes) rather than equity interests.

It could be argued that this decision is specifically limited to its facts (eg a single development project), but it will provide the basis for revenue authorities around the country to issue assessments on capital raises and other types of transactions where multiple investors (whether they are known to each other or not) acquire interests in landholding entities under a common structure.

Please contact us for advice if you have any questions regarding how this decision might impact you, your business, or your investments.