Double duty wipes out your capital gains for years

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Written by Leigh Adams 

Stamp duty is not dead. Not yet. In fact even though there is talk about abolishing it, it is unlikely that any abolition will extend to landholder duty.

It can be very difficult to recognise when landholder duty will apply.

Ask John, he will tell you. His clients, Audrey and Robert, wanted to acquire some commercial property in the south of Sydney worth $1.8m. It included a caravan park and other businesses.

John had advised Audrey and Robert to buy the land through their non-geared family unit trust (Unit Trust). He also said to them that their self-managed super fund could buy some of the units under regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (Cth) which allows superfunds to acquire that which would otherwise be an in-house asset.

As the vendors needed time to buy another property, John was able to negotiate a lengthy settlement of 6 months for Audrey and Robert. They were very happy with that.

Consistent with good tax advice, John had arranged for the first tranche of units in the unit trust to be issued to Audrey and Robert equally between them on the basis that all issued units were fully capitalised. Immediately before the exchange of contracts, the trust was established with each of Audrey and Robert acquiring 10 units at a price of $9,000 each. This money – totaling $180,000 – was used as the deposit for the purchase of the land.

Audrey and Robert knew they were getting good advice and thought to themselves that they had picked their professional advisor very well.

John explained to Audrey and Robert that when the time came for payment of stamp duty, and indeed the balance of the purchase price, they could simply just acquire a second tranche of fully funded units. Three cheers for John!

But alas – such a scenario gives the taxman four bites at the cherry.

First Bite

Regardless of the date of settlement, stamp duty is payable within three months of the date of exchange of contracts for the purchase of the land. When John contacted Audrey and Robert about issuing further units to fund the duty and the balance of the purchase price, over four months had passed. The Unit Trust was liable for fines and interest on the duty that was going to be paid out of time.

Second bite

When John was arranging to pay the duty for the purchase, he explained to the OSR officer that the funds to pay for the balance of the purchase price were coming from the issue of additional units in the trust.

The OSR officer asked him whether landholder duty would apply. John broke out into a cold sweat and immediately delved in to Chapter 4 of the Duties Act to find out what the OSR officer was talking about.

From John’s reading, he concluded that landholder duty would not apply because the value of the land was under $2m. Then he read on:  plant and equipment “affixed” to the land was to be included in the valuation for the purpose of the landholder duty provisions.

John arranged for a valuation to take place. The caravans were bolted to the land for safety reasons. So they were fixtures too, John assumed.

The whole of the plant and equipment, including the caravans, came to $200,000. And surprisingly, the caravans on their own, came to 50% of that sum.

Then John remembered that under the common law, something affixed to real property is not a fixture if the parties did not intend it to be permanently affixed. Clearly the caravans were not intended to be permanently affixed because John was told that the vendors had been intending to redevelop the land in the years to come to make a theme park. Audrey and Robert wanted to do the same thing.

Accordingly John instructed the valuer of the plant and equipment to do another valuation and this time, not to include the value of the caravans.

The land itself was valued at $1,800,000. When only adding the value of the non-caravan plant and equipment to the land, the value of the land came to $1,900,000. That was under the threshold!

Or was it?

John got a surprise when he supplied the relevant material (including the second valuation) to the Office of State Revenue.

In his haste, John had not read the section of the Duties Act which provided that the meaning of “affixed” in the Duties Act means what it says. The meaning is not impacted by whether or not it was intended to remove the fixtures at some time in the future.

Accordingly the assessment of the value of the land for landholder duty was to be calculated on the value being $2,000,000 and not $1,900,000. Landholder duty would apply. How would he explain this to Audrey and Robert?

Third bite

The acquisition of the second tranche of units equally between Audrey and Robert resulted in Audrey and Robert making a ‘relevant acquisition’ in a landholder under s.149(1) of the Duties Act. This triggered a liability to pay duty at ad valorem rates under s.148.

Section 149 captures this transaction even though Audrey and Robert, as owners of the second tranche of units, own them in the same proportion as they held the initial tranche of units.

So the Unit Trust will pay stamp duty on the value of the land acquisition and in addition, Audrey and Robert will pay stamp duty at the same rate on their acquisition of the second tranche of units to fund the purchase. They are paying stamp duty twice.

The good news in relation to the third duty problem is that under s.163H of the Duties Act, the Commissioner has discretion to waive duty in circumstances where Parliament did not intend Chapter 4 of the Duties Act to apply – see White J’s judgment in Milstern Nominees Pty Ltd v Chief Commissioner of State Revenue [2015] NSWSC 68 in which his Honour held at [31] that the Commissioner’s discretion under s.163H should be exercised where ‘there was no intent to avoid duty’ and where the relevant acquisition of [units] ‘would have no practical consequence as to the way in which the land held… would be appointed or enjoyed.’ The decision was also to the effect that if the ‘beneficial or economic ownership’ was unchanged, then the Commissioner should grant the waiver.

Accordingly, John will have to tell Audrey and Robert that an application will need to be made under s.163H seeking an exemption from duty which would otherwise apply to the acquisition of the second tranche of units by Audrey and Robert.

The good news for Audrey and Robert is that they have good prospects be being successful, even if their opinion of their advisor John goes down a few notches. Applications cost time and money. Submissions are required. Costs are involved. Why didn’t John tell them beforehand?

Provided the additional units acquired in the second tranche are acquired by the same unitholders in equal numbers and for equal consideration, John should be saved from a potential action in professional negligence.

Fourth Bite

The fourth problem with this arrangement is that where it is proposed that a related self-managed super fund acquire some or all of the units either just before the settlement or just after the settlement, Chapter 4 is triggered again and the Commissioner is entirely unlikely to extend a waiver in those circumstances.

Whilst regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994 (Cth) allows superfunds to acquire units in a unit trust and thereby acquire an indirect interest in land, the landholder provisions must be taken into account from the get-go of the advice rather than as an afterthought once the arrangement has begun to be implemented.

Even if the self-managed super fund was a fund with just Audrey and Robert as members and trustees and even if Audrey and Robert held exactly the same membership balances, there are clearly arguments that could be raised to the effect that the ‘beneficial or economic ownership’ of the units would not be the same after the self-managed super fund acquired the second tranche.

For example, but without limitation, the implications of ‘conditions of release’ from the fund could bear heavily on the issue.

There are only a handful of cases on this intriguing scenario.


The prospects of successfully applying for an exemption under s.163H are substantially better if the additional units are acquired by (and only by) existing unitholders in the same proportions and to the same value as they held them beforehand.

Any capital gains anticipated by a unit trust acquiring land may be scuttled by one or more rounds of unanticipated landholder duty when the interest in the land is being acquired.

Landholder duty remains a stalwart feature of our state’s current tax system and it is likely to become independent of any reform to stamp duty. It must not be underestimated when advising on asset protection, business structures or succession planning.

For further advice on these issues, please contact Leigh Adams or Georgia Adams at Owen Hodge Lawyers on 1800 770 780 or via email at [email protected].

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