Oliver Hume Decision Alert: Victorian Court of Appeal upholds Commissioner's landholder duty assessment based on "substantially one arrangement"

On 8 August 2024, the Victorian Court of Appeal 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, finding that 18 separate investors who acquired 99.99% of the issued shares in a landholder pursuant to a broadly circulated information memorandum (IM) amounted to substantially one arrangement. Accordingly, the Commissioner’s assessment of landholder duty was upheld.

The case is an important reminder that:

• the raising of capital in entities which have pre-existing interests in land is highly complex and can give rise to unexpected outcomes. It is critical to take advice on the duty implications of non-pro-rata unit or share issuances to ensure that the implications are properly understood.
• the drafting of transaction and fund documents remains of critical importance in all duty matters. Understanding how all relevant transaction documents intersect and what an objective characterisation of those documents (and other surrounding circumstances) suggest is key to properly determining the duty treatment of a unit or share issuance.

That being said, determining whether the “associated transaction” rules apply to a particular transaction is a highly fact specific exercise. This decision reinforces that conclusion and it is quite clear that, although the case is of general importance, it does not lay down a general principle that a material fund raise pursuant to an IM by a landholder will give rise to landholder duty.

The Issue

The dispute before the Court turned on whether the Commissioner of State Revenue was correct in assessing landholder duty on the acquisition of 99.99% of the issued shares in Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd (Diamond Creek) by 18 separate investors who acquired the shares pursuant to a broadly circulated IM.

The relevant provisions in the Duties Act 2000 (Vic) provide:

“For the purposes of this Part, a person makes a relevant acquisition if—

1. the person acquires an interest in a landholder—
   1. that is of itself a significant interest in the landholder; or
   2. that amounts to a significant interest in the landholder when aggregated with other interests in the landholder acquired by all or any of the following—
      1. the person; or
      2. an associated person; or
      3. any other person in an associated transaction”

associated transaction, in relation to the acquisition of an interest in a landholder by a person, means an acquisition of an interest in the landholder by another person in circumstances in which—

1. those persons are acting in concert; or
2. the acquisitions form, evidence, give effect to or arise from substantially one arrangement, one transaction or one series of transactions;”

This case turned on whether the Commissioner was correct to consider that the individual acquisitions by each of the investors amounted to “substantially one arrangement” (and accordingly amounted to a “relevant acquisition” under s 78(1)(a)(ii)(C) of the Duties Act 2000 (Vic)).

Background

Diamond Creek (the landholder) is a special purpose vehicle established for the purpose of a property development project at Diamond Creek known as the ‘Diamond Creek project’. In 2011, the Diamond Creek purchased the property at 272 Broad Gully Road, Diamond Creek, Victoria (Property). In 2014, the applicant circulated an IM which sought to raise $1.8 million through an issue of 1.8 million shares in order to fund the development of the Property. The IM was broadly circulated through:

• Oliver Hume’s (the fund managers) website;
• directly sharing the IM with persons on a database maintained by Oliver Hume;
• agency channels as part of consultancy and referral agreements; and
• preparation of a report by a property research group, which distributed the IM to its database of over 7,000 subscribers.

Relevantly, the IM provided that:

• the IM was issued pursuant to the exemption for sophisticated investors under s 708(8) of the Corporations Act 2001 (Cth);
• Diamond Creek was seeking to raise $1.8 million through the issue of 1.8 million shares at $1.00 per share in order to undertake the development of the Property (Project). The minimum application amount was $50,000 for 50,000 shares, with investment thereafter in increments of 10,000;
• applications for shares could only be made using the application form attached to the IM;
• it was a condition of the offer made under the IM that the target subscription of 1.8 million ordinary shares be achieved by 26 June 2014 (ie, the closing date). If this condition was not satisfied, then all application money (without interest) would be returned to the applicants;
• as soon as the target subscription of 1.8 million ordinary shares was achieved, shares would be allotted;
• the number of shares on issue at the date of the IM was 100 with a value of $100 in the name of Synergy Funds Management Pty Ltd (an Oliver Hume controlled / associated entity). Upon completion of the offer, investors would own the overriding majority of the shares in the applicant, being 1.8 million, while Synergy Funds Management Pty Ltd would retain only a ‘nominal interest’;
• investors delegated operations and investment decisions to the Board and to the applicant’s management team; and
• investors agreed to the applicant’s appointment of a Manager, Synergy Property Syndications Pty Ltd (an Oliver Hume controlled / associated entity), to manage the day-to-day affairs of the applicant and to act as manager of the Project.

Additionally, the IM noted that Diamond Creek’s constitution provides that:

• certain property management agreements and investment management agreements entered into by Diamond Creek with an Oliver Hume controlled and/or associated entity could not be terminated unless 90% of the issued fully paid shares vote in favour of a resolution at a general meeting supporting the termination; and
• Diamond Creek’s officers and members must promptly do all things necessary and desirable to wind up pursuant to a members’ voluntary winding-up as soon as the Project was completed.

Ultimately, 18 persons applied for a total of 1.92 million shares in Diamond Creek. This meant that the share offer was ‘oversubscribed’. Given there was an excess of 120,000 shares (above the target amount), Diamond Creek chose to scale back application amounts for three investors. On 2 July 2014, Diamond Creek issued and allotted 1.8 million shares at a price of $1.00 per share (ie, a total of $1.8 million) to the 18 investors. This equated to a 99.99 per cent interest.

Importantly, the investors were not provided with the names or any details of other investors or a copy of application forms submitted by the other applicants. Nor would that information be provided to an investor if requested. At all times the identities of applicants and details of individual applications remained confidential.

Diamond Creek (or the investor) initially did not disclose the acquisition to the Commissioner, however after subsequent correspondence between the State Revenue Office and Diamond Creek, on 1 July 2020, the Commissioner issued a Notice of Assessment to Diamond Creek in respect of the issue of the shares in the sum of $151,235. He also assessed penalty tax in the sum of $7,561.75 and interest of $9,365.92.

In earlier proceedings in the Victorian Civil and Administrative Tribunal, the Commissioner successfully defended the assessment, leading to the present appeal.

The Court’s Decision

On review of the issues for consideration, a unanimous Court of Appeal found that the allotment of shares to the 18 investors on 2 July 2014 (resulting in an aggregated acquisition of 99.99% of the issued shares in Diamond Creek) was liable to landholder duty on the basis that those allotments constituted “substantially one arrangement” and were therefore properly aggregated under the associated transaction limb in s 78(1)(a)(ii)(C).

The Court engaged in a comprehensive review of the relevant authorities and reached the following conclusions on the legal principles underpinning the “associated transactions” test:

• the proper construction of  “associated transaction” turns on the words used, as well as the context and purpose of the legislation. A consideration of landholder duty provisions as a whole evinces a Parliamentary intention to ensure that, as far as possible, any transfer of an economic interest in land is treated similarly for revenue purposes. Where such a transfer is not effected by a simple direct transfer of land, but is rather effected by the acquisition of a "significant interest" in a landholder, it should be taxed in a similar way as if there was a direct transfer of the interest in the land.
• the “substantially one arrangement” limb of the “associated transaction” test focuses on the relationship between the acquisitions and the singular “arrangement” or “transaction” (or ‘series of transactions’). It is not focused on the individuals concerned. That is, the test is not restricted to "knowing conduct", nor even “joint conduct”. Rather, it focuses on the objective terms and circumstances surrounding the acquisitions in order to identify any "oneness" or "unifying factor" to connect the acquisitions.
• as the “substantially one arrangement” test requires an objective characterisation of all surrounding circumstances to determine if there is any relevant “oneness” between the acquisitions, it is relevant to consider whether there is some connection or interdependence between the circumstances by which the persons acquired their interests, such that the acquisitions might be characterised as, essentially, ‘one’ arrangement.

Relying on these principles, the Court concluded there was the necessary “oneness” between the acquisitions by the 18 investors here as:

• the acquisitions were interconnected in circumstances where no individual acquisition could go ahead at all unless a total of $1.8 million was raised. If this condition was not satisfied then all application money was to be returned. The Court considered that, regardless that this condition did not “emanate” from the acquirers, the existence of the condition meant that the acquisitions could not be described as being independent of each other. This was despite the fact that each acquirer may not have met the others, or even communicated with them.

• each of the investors bound themselves through subscribing for shares to the statutory contract represented by the Constitution. The Court said:
  
  “Although this fact, without more, cannot be determinative (as it would operate in the case of any acquisition of shares), the content of that contract was highly relevant in this case. Thus, the terms of the constitution provided that the acquirers, together, had an interest in an entity which was to undertake a single land development project, via an entrenched management structure. The singularity of the undertaking is underscored by the fact that the entity was to be wound up at the end of the project. This ‘singularity’ or ‘oneness’ suggests that, overall, and ‘in substance’, the acquisitions gave effect to a single venture for the development of the Property by [Diamond Creek].”
   
• the effect of the acquisitions of the shares on the same day, and in the same way, was to substantively alter the shareholding in the landholder from being an Oliver Hume entity to an entity owned by a group of private investors (as to 99.99%).

Together, the Court held that these factors evidenced that the acquisitions gave effect to “a singular ‘arrangement’ or ‘plan’ for [Diamond Creek] to conduct a single property development project through an agreed management structure for the benefit of the investors.” The Court also expressly characterised this a “bilateral” arrangement arising from both Diamond Creek and the investors and as a result did not adopt the Tribunal member’s suggestion that a “unilateral” arrangement by Diamond Creek would be sufficient to establish that acquisitions evidenced “substantially one arrangement”. 

Critically however, the Court refrained from deciding whether any one of the above three factors was sufficient to engage the “associated transaction” test. Instead, the Court held that “they together combined to support a finding that the acquisitions formed, evidenced, gave effect to, or arose from, substantially ‘one arrangement’, or alternatively ‘one series’ of transactions.”

Also of note is that the Court appeared to “walk back” some of the conclusions reached by the Tribunal member in the earlier decision, holding that:

• the fact that each investor became bound by the constitution may have been of marginal relevance of itself, but the content of that constitution was highly significant. Many will take comfort from this as it is not the mere fact of becoming bound by a common constitution which will ground a conclusion that acquisitions comprise substantially one arrangement. Rather, it will turn on the precise facts of each case and the terms of the relevant constitution.
• there was merit in the contention that the fact that each investor had a common purpose in seeking to subscribe for equity in Diamond Creek was “of marginal, if any, relevance”. The Court found that it was the three factors explained above which grounded the aggregation conclusion, not the mere unity of purpose arising from the bare desire of each investor to become shareholder.

It is unclear at this stage whether there will be an appeal of the decision.