RevenueWA released Revenue Ruling DA 19.2 (DA 19.2) on Monday 8 August 2022 which replaces the previous Revenue Ruling DA 19.1.
DA 19.2 concerns the connected entities exemption (corporate reconstruction relief).
The critical difference between the rulings is that in DA 19.2, the Commissioner of State Revenue has applied a narrow view as to when the Commissioner will take into account the impact of a ‘notifiable event’ (which impacts the grant and revocation of relief).
The repercussion of this is most felt in post transaction exemption applications (as compared to pre-transaction exemption applications).
Now, when the Commissioner is determining a post transaction exemption application, the Commissioner will not consider the impact of a proposed event (that may be a notifiable event that could trigger a revocation of the exemption) if the event has not occurred (i.e. completed) at the time of the Commissioner’s decision.
Background to connected entities exemption
The connected entities exemption provides duty relief on certain transactions between tightly controlled corporations and unit trust schemes that qualify as a family.
Applications for relief can be made pre or post transaction.
An exemption can either be revoked automatically (i.e. section 264A of the Duties Act 2008 (Act)) when a certain notifiable event occurs, or it may be revoked by the Commissioner (i.e. section 265 of the Act).
The exemption will be automatically revoked if the notifiable event involves the controlling entity ceasing to directly/indirectly hold more than 50 percent cent of the securities and control more than 50 percent of the votes that may be cast at a general meeting of a member of the transaction group; and that member holds (including beneficially), any of the property to which the exemption related. The automatic revocation does not apply if the notifiable event results from a public float or a prescribed demerger of a listed entity.
Separately, the Commissioner may revoke the exemption granted if the Commissioner determines the transaction is part of a scheme or arrangement entered into, or carried out, by a person for a purpose of avoiding or reducing any liability of a person for duty; or for the sole or dominant purpose of avoiding or reducing any liability of a person for tax other than duty.
Application of DA 19.2
The Commissioner must, if satisfied the transaction is eligible for relief, exempt the transaction from duty unless:
- the Commissioner is satisfied the transaction is part of a scheme or arrangement that has been or will be carried out for the purpose of avoiding or reducing any liability for duty, or for the sole or dominant purpose of avoiding or reducing any liability for a tax other than duty (ie section 265 exemption);
- the Commissioner is satisfied the exemption would be revoked under section 264A because of the occurrence of a notifiable event referred to in that section; or
- any member of the family has an outstanding tax liability.
DA 19.2 is critical to the application of the second bullet point above.
Specifically, the Commissioners states that “[w]hen determining whether an exemption applies to a relevant transaction, the Commissioner will consider any notifiable events that have occurred at the time the decision is made.
This may include a notifiable event that occurred after the application was made.
An agreement to sell shares or units in a subsidiary corporation or unit trust will not normally be a notifiable event at the time the agreement is made; until the agreement is completed, the parent entity will continue to hold the shares or units and retain the ability to control the associated votes.”
The Commissioner continues with:
“…[i]f, at the time the Commissioner determines an application, a notifiable event has not occurred but there is an agreement, arrangement or understanding that a notifiable event will occur, the Commissioner will not take this event into account in determining whether the event would result in automatic revocation under section 264A (which would prevent the Commissioner from granting an exemption under section 263(4)(b)).”
In contrast, the Commissioner will take into account proposed notifiable events in pre-transaction requests.
Specifically, DA 19.2 states:
“…[w]hen someone requests a ruling on a proposed transaction and advises the Commissioner that a notifiable event is expected to occur after the relevant transaction, the Commissioner will determine the request assuming the notifiable event will occur before the exemption is determined. This means if the notifiable event would result in automatic revocation of the exemption, the applicant will be advised the exemption will not be granted.”
The Commissioner’s approach in DA 19.2 in respect of pre-transaction applications is favourable.
This is because before the proposed transaction for which exemption is sought, if the Commissioner takes the view that a proposed event is a notifiable event that would cause a revocation of the relief, the exemption will not be granted in the first place.
This means that taxpayers have stamp duty certainty before the transactions are entered into, and do not run the risk of having the proposed transaction being exempted, only to have it later revoked.
In contrast, the Commissioner’s approach in DA 19.2 in respect of post-transaction applications is of limited assistance to taxpayers and can expose taxpayers to double duty.
Specifically, as the Commissioner will not consider whether a proposed event is a notifiable event (that will trigger automatic revocation), the Commissioner can grant the exemption only to then subsequently revoke it after the proposed notifiable event occurs.
This is notwithstanding that the taxpayer, in seeking the post transaction exemption, has fully disclosed the proposed event (including providing all relevant information in respect of the executed, but not completed, unit / share sale agreement).
When the exemption is revoked, the duty that was exempted becomes payable (subject to certain reductions).
In addition, penalty tax equal to the amount of that duty may also be imposed.
This means that double duty can be payable.
Noting that RevenueWA issues private rulings in limited circumstances (i.e. generally limited to connect entity exemptions), together with the Commissioner’s approach in DA 19.2, it would appear that the only way for taxpayers to obtain stamp duty certainty (and reduce the risk of the imposition of potentially double duty arising upon a revocation of the exemption), is to seek pre-transaction relief (and not post-transaction relief) particularly where a notifiable event may occur within three years of the exemption.