The New South Wales Parliament introduced legislation on 17 June 2009, following the State Budget, that will significantly affect property trusts. The provisions, in combination with the Federal Government’s changes to withholding tax, will be a significant benefit for wholesale property trusts and will further encourage foreign investment in the property trust sector.
The changes follow lobbying from the Property Council of Australia (PCA) and closely reflect corresponding legislation in Western Australia (that was itself largely based on the PCA model).
Summary of key changes
Under the existing legislation there are complex differences between LPTs, wholesale funds, private unit trusts and companies. The new legislation will simplify this into two categories—public entities and private entities—however, land rich duty can apply to both.
The new provisions:
- treat companies and trusts the same, removing the previous discrimination against trusts
- introduce a 90 per cent acquisition threshold for land rich duty on acquiring interests in LPTs and widely held trusts (reflecting the compulsory acquisition threshold in a takeover of an LPT)
- apply a 50 per cent acquisition threshold for all other trusts, whether wholesale or not
- trace downstream entities only through interests of 50 per cent or more, rather than the previous 20 per cent (consistent with the acquisition threshold of 50 per cent)
- remove the ‘60 per cent land’ test from the threshold of determining whether an entity is land rich, so that the only threshold is whether the entity holds land worth at least $2 million, and
- charge duty on land and chattels, where this was previously only land.
How might these changes affect you?
The good news
The new provisions remove a series of former tests relating to wholesale funds and increase the acquisition threshold for all private trusts to 50 per cent. This change will benefit the Australian property funds industry by eliminating stamp duty on some joint venture interests and wholesale syndicates. Combined with the Federal Government’s introduction of the ‘MIT withholding tax’ provisions, foreign investors acquiring joint venture interests in New South Wales land can now have lower stamp duty and withholding tax costs.
The bad news
However, not all of the changes followed the PCA model: in particular removing the 60 per cent land test and applying land rich duty to LPTs and widely held trusts.
The first of these changes will not have a significant effect on most traditional property trusts or staples, but could be adverse for land-holding funds that are not pure property trusts (such as infrastructure funds) and stapled entities that elect to top-hat (under Subdivision 124Q of the Income Tax Assessment Act 1997 (Cth)). These entities will be land rich despite having significant non-land assets.
The application of land rich duty to takeovers goes against the trend of more than a decade in removing stamp duties that affect listed entities. The duty payable will be 10 per cent of the duty that would be chargeable on a transfer of all of the underlying New South Wales land of the listed entity. While most of the new legislation is intended to start from 1 July this year, these provisions affecting listed entities are scheduled to commence on 1 October. The property industry expects some consolidation within the LPT sector and this leaves only a brief window for that consolidation to take place without New South Wales stamp duty.
Matthew Stutsel, a partner in our Funds Management team, was involved in developing the PCA model on which the positive changes in this legislation were based.
This article was written by Matthew Stutsel, Partner, Sydney.
More information
For information regarding possible implications for your business, contact