Stamp duty imposed on acquisition of units in Hybrid Unit Trust – Ramifications of Victory International Pty Ltd v Commissioner of State Revenue [2025] VSC 484
The recent case of Victory International Pty Ltd v Commissioner of State Revenue has raised a wave of concern as to how the Commissioner of State Revenue (Commissioner) may impose 100% stamp duty on the acquisition of a single unit in a unit trust (hybrid or otherwise).
In the case, Sloss J of the Victorian Supreme Court determined that landholder duty be imposed on the acquisition of units in a ‘hybrid unit trust’. The broad view accepted by the Court and application of anti-avoidance laws poses a threat that many transactions involving units in landholding unit trusts will be subject to landholder duty.
Notably, this case is a pioneer in considering hybrid unit trusts through a landholder duty lens, which questions as to whether the contentious outcome of this case will be applied by the Commissioner or otherwise overturned in time.
The case, whilst triumphant, saw the Commissioner defending his initial assessment on an alternative basis to his initial reasonings, arguing that the trust deed’s broad powers to amend the trust deed and the definition provided by the Duties Act 2000 (Vic) (Duties Act) of “associated person” resulted in each unitholder acquiring 100% interest in the trust.
Background
On 27 September 2011, Victory International Pty Ltd (Trustee) was incorporated, and the Victory Hybrid Unit Trust (Trust) was established, appointing the Trustee as trustee. The initial unitholding in the Trust and shares in the Trustee were acquired by two natural persons on a 51 – 49 basis, being:
100 issued shares in the Trustee;
100 issued A Class Units in the Trust (voting rights only)
100 issued B Class Units in the Trust (income only);
100 issued C Class Units in the Trust (capital only); and
100 issued D Class Units in the Trust (discretionary right to receive income in proportionate right to the B Class unitholders).
Units in all classes were issued for $1.
In November 2011, the Trustee as trustee of the Trust entered a contract to purchase land in Victoria for the purchase price of $9,277,500.00.
In October 2012, the two initial shareholders/unitholders transferred their shares and units (in each class of units in the Trust) to the following three trustee companies:
37% to JY Properties Pty Ltd as trustee for JY Property & Investment Trust;
26% to ZJF Investments Pty Ltd as trustee for ZJF Investments Trust; and
37% to LBZ Pty Ltd as trustee for LBZ Investment Trust
Settlement for the purchase of land occurred in February 2013.
Consequently, in September 2020, the Commissioner assessed landholder duty and alleged liability of the Trustee to pay duty on three relevant acquisitions under the Duties Act. The Trustee was jointly and severally liable under paragraph 85(1)(b) of the Duties Act.
Distribution Rights
The trust deed defined the term ‘Beneficiaries’ broadly to include, inter alia:
Trustee shareholders;
shareholders of unitholders;
employees of the Trust;
relatives of any Beneficiary; and
the trustee of any Trust to which a beneficiary has a beneficial interest.
Distributions from the Trust were governed by clause 17, providing:
17.1 Subject to any distribution of Capitalised Earnings to any one or more Beneficiaries in accordance with the terms of this Clause, on and from the Termination Day, the Trustee shall hold the Trust Fund for the holders of Capital Units.
17.5 Subject to Clause 17.6 hereof, the Trustee: —
17.5.1. [sic] return the Capital to the holder or holders of Units living or in existence at the time of the Termination Day; and
17.5.2 may distribute the whole or any part of the Capitalised Earnings of Trust Fund to the holder or holders of Capital Units living or in existence at the time of the Termination Day in proportion to the total number of Capital Units held by them at the commencement of the Termination Day.
17.6 The distribution of the Trust Fund as expressed in Clause 17.5 hereof is subject to any distribution of the Trust Fund to any one or more of the Beneficiaries.
17.7 At the direction from time to time and at any time of the Voting Unit Holders, the Trustee may distribute the whole or any part of the Capitalised Earnings of the Trust Fund to all or any of the Beneficiaries living or in existence at the time of the direction to the exclusion of the other Beneficiaries and in such shares and proportions and in such manner as the Voting Unit Holders have directed. If the Voting Unit Holders so resolve, the Trustee may distribute the Capitalised Earnings of the Trust Fund to a Beneficiary preferentially to any other entitlement to Capitalised Earnings by Unit Holders.
The broad discretion offered by clause 17.7 allowed a distribution of capital from the trust fund at any time to any of the broadly defined classes of Beneficiaries at the direction of the Voting Unit Holder. In absence of a distribution under this power, clause 17.1 provided that the trust fund be held by the Trustee for the unitholders of capital units upon termination of the trust.
Question to be considered
The issue to be considered was whether the transfer of units equated to a relevant acquisition for landholder duty purposes. In Victoria, identifying a relevant acquisition requires consideration of the following questions:
is the Trust a ‘unit trust scheme’ for the purposes of the Duties Act;
do the capital units confer an ‘interest’ on the unitholders (i.e. an entitlement to receive a distribution of property from the ‘landholder’ upon the ‘landholder’s’ winding up); and
what percentage of interest is conferred by the units.
Unit Trust Scheme
Subsection 3(1) of the Duties Act defines a ‘unit trust scheme’ as:
Any arrangements made for the purpose, or having the effect, of providing, for persons having funds available for investment, facilities for the participation by them, as beneficiaries under a trust, in any profits, income or distribution of assets arising from the acquisition, holding, management or disposal of ay property whatever pursuant to the trust.
The Trust was deemed to be a ‘unit trust scheme’ for the purposes of the landholder duty provisions.
Interest
Section 79 of the Duties Act defines ‘interest’ as:
(1) A person has an interest in a landholder if the person has an entitlement (otherwise than as a creditor or other person to whom the landholder is liable), whether directly or through another person, to a distribution of property from the landholder on a winding up of the landholder.
(2) A person who, by virtue of subsection (1), has an interest in a landholder has a significant interest in the landholder if the person, in the event of a distribution of all the property of the landholder immediately after the interest was acquired, would be entitled to –
a. In the case of a landholder that is a private unit trust scheme – 20% or more of the property to be distributed.
Whilst the Trustee argued that given the broad discretionary powers in the trust deed concerning the distribution of capital, no ‘interest’ had been acquired, the Court held that the question was to ‘entitlement’, specifically whether upon winding up of the landholder, the units held entitle the holder to participate proportionately with other unit holders in a distribution of the property of the trust on its vesting.
As mentioned, clause 17.1 of the trust deed of the Trust provided for the Trustee to hold the trust fund for unitholders of capital units. Because of this, the Court held, at paragraph 281 of the judgement:
Accordingly, as each of the Transferees is the holder of C Class Units, which are the ‘Capital Units’ that effectively entitle the holder to participate proportionately with other holders of C Class Units (in direct proportion to the number of C Class Units held) in a distribution of the property of the Victory Hybrid Unit Trust on its vesting, each of them has the requisite ‘entitlement’ to a distribution of property from the landholder on a (statutory) winding up of the landholder, and thus has an ‘interest’ in the landholder by virtue of s 79(1).
This was held, particularly for this hybrid unit trust, because the discretionary power available to distribute capital was available prior to winding up.
Percentage of interest conferred:
Section 89H of the Duties Act is commonly recognised as an anti-avoidance provision, used to increase artificially reduced entitlements. It provides:
(1) This section applies to any calculation, for the purposes of this Part, of the entitlement of a person (the interested person) to participate in a distribution of the property of a landholder, whether on a winding up, a vesting of trust property or otherwise
(2) A calculation is to be made based, firstly, on a distribution carried out in accordance with the constitution of the landholder, and with any law relevant to the distribution, as in force at the time of distribution, and the entitlement of the interested person is to be evaluated accordingly.
(3) Next, a calculation is to be made based on a distribution carried out after the interested person, and any other person whom the interested person has power to direct with respect to such a distribution or who is, in relation to the interested person, an associated person, has exercised all powers and discretions exercisable by them—
a. to effect or compel an alteration to the constitution of the landholder; and
b. to vary the rights conferred by units or shares in the landholder; and
c. to effect or compel the substitution or replacement of units or shares in the landholder with other units or shares in it—
in such a manner as would maximise the value of the entitlement, and the entitlement of the interested person is to be evaluated accordingly.
(4) The results obtained by an evaluation of the interested person's entitlement in accordance with subsections (2) and (3) are then to be compared, and whichever evaluation results in a greater entitlement is the correct evaluation, for the purposes of this Part, of the entitlement, unless the Commissioner, being satisfied that the application of this subsection in the particular case would be inequitable, determines otherwise.
The application of this provision to the general power to amend the terms of a trustee deed (found in many trust deeds) was a first.
It is interesting to note the Courts decision to apply this provision to maximise entitlement, given that once ‘interest’ was established, by virtue of the respective capital unitholding percentages acquired (37%, 26% and 37%), all being over the 20% ‘significant interest’ threshold, imposition of duty had been established.
The Commissioner’s position to apply section 89H to a distribution of capital on a vesting of trust property was accepted and given the broad definition of ‘associated persons’ under the Duties Act, which includes the trustee and each beneficiary of the trust, the Court held that s 89H could apply to wide powers of amendment within the trust deed. This is discussed at paragraph 292:
However, when one looks at the steps prescribed by s 89H(3)(a) and (b) and (c), it is clear that the entitlement calculation to be undertaken thereunder is one that does involve the relevant persons (being the interested person and any associated person(s)) exercising all of their powers and discretions to effect an alteration to the constitution and to vary the rights conferred by the units in the trust and to effect or compel the substitution of units in the trust with other units in the trust, ‘in such a manner as would maximise the value of the entitlement’ of the interested person. That extensive process, which the appellant acknowledges is ‘directed to “maximising” specific, unexercised winding-up rights that have been conferred on a ...unitholder, or associated person’, is reflective of the fact that s 89H is ‘anti-avoidance in nature’.
On this reasoning, the Commissioner asserted that the total interest acquired was 300%, due to the amendment right that, if exercised, might provide each unitholder with 100% interest in the Trust. This reasoning was accepted by the Court.
Interestingly, the Court and Commissioner did not consider that an amendment of the trust deed to enact the theoretical entitlement (resulting in the trust deed exclusively entitling one unitholder of the others) would be a breach of the Trustee’s fiduciary duties to the unitholders. It was also unaddressed that a transfer of 100% of units in a trust could only ever confer a maximum entitlement of 100% of the landholding and could therefore never confer an interest over 100%.
The Court decided to exercise its discretion under section 89H(4) to reduce the maximised duty from 300% to 100% given the Commissioner’s satisfaction that further imposition of duty would be inequitable.
Victorian landholder duty
This case invokes the question of whether all land acquisitions are intended to be caught by the landholder duty provisions. The commentary made by Sloss J echoed much of the second reading speech by the Treasurer on the introduction of the provisions in 2012. This largely stated that the landholder duty provisions have evolved into its own head of duty, intending to capture all land acquisitions regardless of the method of acquisition.
The interpretation provided by Sloss J has been seen as a repeated categorical error, initially made by the Treasurer as of 2012 and an inadequate basis for assessing duty.
Impacts
Whilst hybrid unit trusts have historically been considered a kind of discretionary trust and therefore have escaped the landholder duty provisions, this may no longer be the case. Trust deeds are each unique and as such, hybrid unit trusts do not simply fall into one category. In identifying whether an ‘interest’ is bestowed on the capital unitholders, determining the rights conferred by the trust deed is of primary importance – as held by the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53.
Many hybrid unit trust deeds provide broad discretionary powers upon winding up, meaning that no ‘interest’ is conferred on the capital unitholders. The impact of this decision may result in the Commissioner asserting landholder duty be imposed on all acquisitions of capital units in hybrid unit trusts that hold land.
Going forward, all dealings with capital units in a landholding hybrid unit trust should be navigated carefully, as they may be caught by landholding duty. Each hybrid trust deed should be reviewed in light of this decision and capital entitlements need to be confirmed before landholder acquisitions are effected.
The decision of the Court to favour the Commissioner’s broad view of section 89H poses a risk for all unit trusts. The typically broad amendment powers found in unit trust deeds (despite prevented by significant income tax, trust law and other restrictions) still allow for the theoretical amendment of trust deeds to confer the entirety of capital distribution rights on and all unitholders.
Based on this hypothetical and the decision discussed, any unitholders in unit trusts (hybrid or otherwise) may have their interests maximised to 100% - this may even capture individuals acquiring a minimal parcel of units in a listed trust.
For more information, please contact:
Alasdair Woodford
Principal
T: 03 5225 5217 | M: 0436 456 144
E: awoodford@ha.legal
Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M: 0491 307 550
E: jflanagan@ha.legal
Ella Handreck
Lawyer
T: 03 5225 5206
E: ehandreck@ha.legal
