Landholder Duty Triggered Without Ownership Change: Tao v Commissioner

A recent decision of the Victorian Civil and Administrative Tribunal whereunder landholder duty was triggered absent any change in beneficial ownership has shed light on the operation of the “acquisition of control” duty provisions in Victoria.

On 11 July 2024, Senior Member Tang of the Victorian Civil and Administrative Tribunal (VCAT) delivered a potential landmark decision in Tao v Commissioner of State Revenue (Tao).¹

The decision in Tao, which represents the first time that the operation of s 82 of the Duties Act 2000 (Vic) (the Act) has been considered by a tribunal or court, is significant for various reasons, including (inter alia) the peculiarity of landholder duty applying absent any change in beneficial ownership, as well as the novelty of Senior Member Tang’s construction and application of the Commissioner of State Revenue’s (the Commissioner’s) “unfettered discretion” under s 82(1)(b) of the Act.

Background: change in control of the trustee

The key background facts in Tao were:

• In 2011, a special purpose vehicle (SPV) was established by three individuals (Messrs Constantinou, Tao and Wiemer) to carry on a joint venture to conduct property development in Melbourne. Establishment of the SPV involved:
  • Incorporation of 66WR Pty Ltd (66WR), with
    Mr Constantinou as its sole shareholder, director and
    secretary;
  • Entry by 66WR into a deed (with a third party as settlor) to establish the WCT Unit Trust (the trust); and
  • Issuance of units in the trust at a price of $1 per unit as follows:²
  • 50 units to Maclaw No. 547 Pty Ltd (Maclaw) as trustee for The Mountain Highway Unit Trust;
  • Fredco Incorporated Ltd (Fredco) as trustee for Nomsec No. 1 Ltd; and
  • Amber Investments Pty Ltd (Amber);
• Later in 2011, 66WR entered into a contract to purchase a development site in Lynbrook, Victoria (the relevant property), of which it took possession in February 2012.
  To fund the acquisition of the relevant property and meet development costs, a $2.79m loan was obtained by 66WR from Southern Finance (the loan). Southern Finance’s loan book, including the loan, was acquired by Bendigo and Adelaide Bank (Bendigo Bank) in March 2013 pursuant to an unrelated transaction;
• Subsequent events, including allegations of “serious mismanagement” as director of 66WR being levelled against Mr Constantinou, and the loan owing to Bendigo Bank by 66WR falling into arrears, led to Mr Tao replacing Mr Constantinou as the sole director and shareholder of 66WR, without any change to the ownership of the trust;
• In 2019, more than five years after Mr Tao replaced Mr Constantinou as the sole director and shareholder of 66WR and following a forced sale of the relevant property and deregistration of 66WR, the Commissioner issued a notice of assessment to Mr Tao whereunder ad valorem duty of $199,650 (plus penalties and interest of $49,912.50 and $22,383.51, respectively) were imposed. The landholder duty assessment was predicated on the foregoing events constituting a “relevant acquisition” by Mr Tao in the trust because of either:
  • Acquiring a “significant interest” in the trust pursuant to s 78 of the Act; or
  • “Control” of the trust pursuant to s 82 of the Act; and
• The first ground was dropped by the Commissioner before the matter reached VCAT, meaning that only the application of s 82 was at issue in Tao.

Legislation

Broadly, s 82 provides that where a person acquires, directly or indirectly, “control” over a private landholder other than by a “relevant acquisition”, they will be deemed to have made a “relevant acquisition” in the landholder of:

• 100%; or
• A lesser percentage determined by the Commissioner to be appropriate in the circumstances.

According to the conjunctive operation of ss 3 and 71(1) of the Act, s 82 extends to trusts that have landholdings in Victoria with a total unencumbered value of at least $1,000,000.

Relevantly, s 82(2) provides as follows:

“(2) For the purposes of subsection (1), a person acquires control over a private landholder if the persons acquires the capacity to determine or influence the outcome of decisions about the private landholder’s financial and operating policies, taking into account —

(a)    the practical influence the person can exert in addition to any rights the person can enforce; and

(b)    any practice or behaviour affecting the private landholder’s financial or operating policies (even if that practice or pattern of behaviour involves the breach of an agreement or a breach of trust).”

Section 82 operates discretely from s 81 of the Act, which deals with the acquisition of economic entitlements.

Decision

In Tao, Senior Member Tang determined that:

• When Mr Tao became the sole director and shareholder of 66WR, he obtained “control” over the trust for the purposes of s 82;
• Having regard to the text, context and purpose of the provisions, it was not necessary for Mr Tao to have also obtained a beneficial interest in the trust for s 82 to be engaged; and
• It was appropriate for the “relevant acquisition” that was deemed to have occurred under s 82 to be reduced to account for Mr Tao’s pre-existing economic interest in the trust.

The bases for each of the preceding determinations are considered in further detail below.

Obtaining control

Regarding whether Mr Tao obtained “control” over the trust on becoming the sole director and shareholder thereof, Senior Member Tang found that Mr Tao was, from that point, responsible for making strategic decisions concerning the trust as the sole director and shareholder thereof (eg in relation to the loan that was in arrears and had become an existential threat to the trust), notwithstanding his consultation of Messrs Constantinou and Wiemer on relevant matters, and the direct involvement of the former in negotiations pertaining to the loan.

Accepting that the concept of control over “financial and operating policies” envisaged by s 82 is focused on the strategic direction of a landholder, as opposed to its day-to-day management, Senior Member Tang held that, contrary to submissions by Mr Tao’s counsel that Mr Tao was simply executing policy decisions that had already been initially determined by the unitholders of the trust, Mr Tao had acquired the capacity to determine or influence the outcome of decisions about the trust’s financial and operating policies and that this constituted control thereover. It appears that the fact that the status of the loan had become an existential threat to the trust, causing relevant decision-making to take on a strategic character, was a relevant consideration of Senior Member Tang in arriving at his view.

No incremental beneficial interest 

Despite conceding that, having regard to material extrinsic to s 82 and predecessor provisions,³ “it may seem incongruous that duty is imposed under section 82 on a change in control of a trustee that is not also accompanied by a change in the beneficial ownership of the land held by that trustee”,⁴ Senior Member Tang ultimately rejected submissions by the applicant, calling for a purposive approach to the interpretation of the provision. Senior Member Tang instead accepted the Commissioner’s submission that the words that would need to be read into the provision would be “enormous”, which, per the majority decision of the High Court in Taylor v The Owners — Strata Plan No. 11564,⁵ would materially transcend what can be achieved through an exercise of statutory interpretation.

Commissioner’s discretion

In response to contentions by Mr Tao’s counsel that that an adjustment to reduce the percentage of the deemed “relevant acquisition” to reflect Mr Tao’s pre-existing economic interest in the trust via Amber, and despite submissions made on behalf of the Commissioner that such an adjustment would be erroneous, Senior Member Tang held in favour of Mr Tao on the basis of his view that the Commissioner’s discretion under s 82(1)(b) was in place to counteract the potential for the default presumption of 100% to give rise to inappropriate outcomes (eg where a person who has obtained control has only incrementally increased an existing interest).

Notably, it was held that the appropriate reduction would not be the full 25% interest held in the trust by Amber (as contended by Mr Tao’s counsel), but rather 15% (ie 60% of 25%, to reflect that Mr Tao personally held six of the 10 shares that Amber had on issue and therefore stood to
receive 60% of any distributions Amber received from the trust). 

Pursuant to the decision, the penalty was required to be correspondingly reduced, and interest recalculated by applying the market rate to the reduced amount of landholder duty.

Key implications

In addition to providing valuable edification on the task of statutory interpretation, Tao has several significant
implications for Victorian landholder duty. Issues to consider include:

• The imprudence of relying on statements or undertakings on the State Revenue Office (SRO) website. In Tao, it
  was observed that the Commissioner’s approach in the relevant circumstances was contrary to an undertaking on the SRO website. However, it was implicitly affirmed that, according to the earlier VCAT decision in Winnett v Commissioner of State Revenue,⁶ the Commissioner was not estopped;
• The need for caution when acquiring shares and becoming the sole director of a corporate trustee of a trust that directly holds land in Victoria, specifically the need to consider whether the acquisition gives the holder the capacity to determine or influence the outcome of decisions about the landholder’s financial and operating policies; and
• If “control” in a trustee is acquired, the need to confirm the value of Victorian landholdings, and whether the acquirer holds any pre-existing interest(s) in the landholder, even where those interests are not held directly to determine whether (1) the provisions are attracted, and if so, (2), if the quantum of the “relevant acquisition” can be reduced.

The implications of Tao are not expected to transcend Victoria due to the lack of similar provisions in other jurisdictions. The economic entitlement and acquisition of control provisions are only contained in the Victorian Duties Act 2000. 

The taxpayer has lodged an appeal from VCAT, and the hearing date of the appeal will be on 25 March 2025.
 

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your local RSM office.

References

1. [2024] VCAT 637.
2. Maclaw is an entity associated with Mr Constantinou, whereas Fredco and Amber are associated with Messrs Wiemer and Tao, respectively.
3. Former s 79(5) to (7) of the Act.
4. [2024] VCAT 637 at [102].
5. [2014] HCA 9.
6. [2019] VCAT 403.