Grouping of related corporations

LTA-008

This ruling replaces Revenue Ruling LT-002 which was withdrawn following the decision in Tadcaster Sorrento Pty Ltd v Commissioner of State Revenue [2015] VCAT 611.

Preamble

The Land Tax Act 2005 (Act) imposes land tax on the taxable value of all taxable land that a person owned as at 31 December of the year preceding the tax year. Land tax is assessed on an aggregate basis, and where the total taxable value of all taxable land owned by a taxpayer exceeds the tax-free threshold, a progressive scale of tax rates applies. This means that the higher the total taxable value of taxable land, the higher the rate of tax that may apply.

Where lands are owned by a number of corporations which are commonly controlled, each corporation has the benefit of the tax free threshold applying to their landholdings.  Further, by holding lands among a number of commonly controlled entities, corporate landowners may avoid the aggregation effect, intentionally or not.

To protect the aggregation principle enshrined in the Act, there are provisions to address this division of landholdings between different corporations which are commonly controlled. These provisions are set out in ss47 to 50 of the Act and are commonly known as the grouping of related corporations provisions.

Two or more corporations are related for the purposes of s47 if:

1. A corporation has control over another corporation by holding more than 50% of the issued share capital, or more than 50% of the voting power at a general meeting or controlling the composition of the board of directors of the corporation; or
2. Two or more corporations are controlled by a person or two or more persons acting together where the person holds or persons together hold more than 50% of the shares, or more than 50% of the voting power at a general meeting or control the board of directors in each of the corporations; or
3. More than 50 per cent of the issued ordinary share capital of a corporation is held by another corporation and its shareholders; or
4. The corporations are related to a common corporation.

Where two or more corporations are related, they may be grouped and treated as if they were a single corporation under s 50 of the Act if the Commissioner so determines.

The purpose of this ruling is to explain the relevant factors that the Commissioner will take into account in exercising his discretion to group related corporations. 

Ruling

Commissioner's discretion

The Commissioner may group related corporations and treat them as a single corporation for the purposes of the Act after taking into consideration various relevant factors. The discretion is expressed in broad terms and can be exercised in relation to each related corporation within the group for each tax year.

In exercising his discretion, the Commissioner will consider whether related corporations in a particular landholding structure are essentially controlled by a single corporation, person or set of persons. If so, the Commissioner is likely to group the related corporations and treat these corporations as one single entity. This places such related corporations on a level playing field with natural persons or other corporations that own multiple lands and whose landholdings have been aggregated and assessed accordingly. The grouping provisions therefore support the aggregation principles established by the Act.

The discretion to group related corporations can be exercised at any particular time to treat these corporations as a single corporation for the relevant tax year (Numo Pty Ltd and others v Commissioner of State Revenue 2016 VSC 274). In other words, the Commissioner’s determination can apply retrospectively to group the related corporations for the prior tax years.

The Commissioner has broad powers to assess or reassess the tax liability of taxpayers under ss8 and 9 of the Taxation Administration Act 1997 (TAA) respectively and cannot be stopped from exercising those powers.  If the related corporations were previously assessed for land tax individually and the Commissioner subsequently exercises his discretion to group these related corporations, he may assess or reassess them as one single corporation within the period allowed under the TAA (see Revenue Ruling GEN.014 – Assessments and Periods of Retrospectivity). 

Factors to be considered in the exercise of discretion

The relevant factors that the Commissioner will take into account in exercising his discretion have been considered by the Victorian Civil and Administrative Tribunal in the case of Tadcaster Sorrento Pty Ltd v Commissioner of State Revenue [2015] VCAT 611.

None of the factors on its own is a determining factor for the Commissioner to exercise his discretion to group. The Commissioner will apply the factors set out in this ruling to the particular ownership structure and circumstances of the relevant related corporations on a case by case basis.

Intention to avoid land tax

The Commissioner may consider the presence of intentional avoidance or evasion of land tax as a factor in exercising his discretion to group related corporations. While this is a highly significant factor, it is not a determining factor for the exercise of the discretion.

The Commissioner will have regard to the purpose and history of the ownership structure and ownership of the land in question, tax planning and consequences of the structure, the effect of grouping the companies for land tax purposes and other relevant reasons for the ownership structure.

Degree of relatedness

The fact that corporations are related corporations is not in itself sufficient to justify the exercise of the discretion to group. The Commissioner will take into account the degree of relatedness of the corporations as measured by the extent of ownership and the control over the composition of the board of management of the corporations, the subject of the discretion.

The Commissioner will have regard to the extent of the shareholding by a corporation, person or persons together in the other corporation or the number of votes that can be cast by a person or corporation at the general meeting of the other corporation.

A substantial number of shares held by the same corporation, person or persons together is indicative of a high level of control and therefore indicates a high degree of relatedness. Similarly, if the corporation, person or persons together can control the appointment or removal of a large number of directors in the corporation, it is a factor indicating a high degree of relatedness.

Essentially the Commissioner will consider whether there is unity of effective ownership in each of the related corporations and whether the landholding structure is essentially controlled by one common interest. If this is so, the discretion to group the related corporations is likely to be exercised.

The degree of control by the directors of the day to day operation of each related corporation

The Commissioner will have regard to the degree of day to day operational control exercised by the directors of the related corporation. The greater degree of control, the more likely the Commissioner is to group the related corporations. 

The degree of interrelationship between each corporation

The Commissioner will have regard to the degree of interrelationship between the related corporations. If there is a strong degree of relationship between or amongst the corporations, it is more likely that the Commissioner will exercise his discretion to group. An example of a high degree of interrelationship is where there are common business operations between the related corporations and the ultimate profits flow to the same or common shareholders of those corporations.

Conversely, if the corporations do not have connection with each other in terms of their management, activities or operations, this would be a factor militating against grouping the related corporations.

Use of the land

This factor takes into consideration the purposes for which the land was acquired and used, or the control by a person or corporation over the manner in which the land is to be used. If there are joint activities or common usage of the land between any of the related corporations, or the land use operations of the related corporations are similar or identical, this will be a strong factor for the Commissioner to consider exercising his discretion to group.

Other relevant factors

The factors set out in this ruling are factors that the Commissioner will take into consideration in the exercise of his discretion to group related corporations. However, as the discretion is broad, these factors are not exhaustive and the Commissioner may have regard to other relevant factors that will support his determination to group in any given case. The Commissioner may detail the relevant factors in his determination.

Effect of grouping

Related corporations that are grouped will be assessed as a single corporation. They are jointly and severally liable to pay the tax and one corporation within the group will receive an assessment on behalf of the group. That corporation, and the other related corporations within the group, will be entitled to equitable rights of indemnity between themselves.

Commissioner of State Revenue

Please note: Rulings do not have the force of law. Each decision made by the State Revenue Office is made on the merits of each individual case having regard to any relevant ruling. All rulings must be read subject to Revenue Ruling GEN.001.