Family farms: NSW decides when duty calls

An intergenerational exemption from NSW duty on the sale, transfer, lease or lease assignment of primary production land is found in s274 of the Duties Act 1997 (NSW).

This exemption has existed since the mid-1990s, although many lawyers and farmers alike are unaware of it.

Parliament’s intention was to encourage the children of farming families to stay on the farm and allow their parents to retire without the burden of government taxes.

Game changer

The game changer for this section has come with the introduction of a recent Revenue Ruling DUT 050 from Revenue NSW. For the first time Revenue NSW has provided a ruling that gives guidance on how s274 operates. It clarifies the conditions that need to be met in order to obtain the duty exemption.

The four conditions

The first is that the land must be used for primary production or it must form an integral part of the primary production business. This is the “land requirement”.

The second is that the transferor, or the person directing the transferor, must be a member of the family of the transferee. This is the “identity of transferor requirement”.

Third, the land must be used for primary production in connection with the business carried on by the transferee or by a member of the family of the transferee — whether alone or with others — immediately before the transaction. This is the “identity of the manager requirement”.

Fourth, the business must continue to be carried on by the transferee — whether alone or with others — after the transaction. This is the “continuity of business” requirement.

Who is a family member?

A member of the family of the transferee includes the transferee’s spouse and the following relatives of the transferee or the transferee’s spouse: parent, grandparent, brother, sister, nephew, niece, uncle, aunt, child, grandchild and the spouse of any of the foregoing. “Spouse” includes a de facto spouse, a former spouse and a former de facto spouse.

Who is the person directing the transferor?

This covers the situation where land is owned by another entity — including a deceased estate, a company, trust or superannuation fund — but there exists a level of family control or ownership.

If the transferor is the executor of a deceased estate, then the “person directing” will be the deceased.

If the transferor is a company, then the “person directing” will be the shareholders. Shareholders must be:

• Beneficially entitled to the shares
• Entitled to vote
• Entitled to not less than 25 per cent of the company’s assets on a winding up

having held that entitlement for (a) at least three years prior to the transfer or (b) since the date of the company’s incorporation.

If the transferor is the trustee of a bare trust, then the “person directing” will be the beneficiary of that trust.

If the transferor is the trustee of a discretionary trust, then the “person directing” will be the person(s) who as takers in default, are:

• Entitled to not less than a 25 per cent interest in the trust capital

having held that entitlement for (a) at least three years prior to the transfer or (b) since the date of the establishment of the trust.

If the transferor is a trustee of a private unit trust, then the “person directing” will be the unit holder(s) who:

• Hold units in the trust beneficially
• Are entitled to at least 25 per cent of the unit trust’s assets on a winding up, having held that entitlement for (a) at least three years prior to the transfer or (b) since the date of the establishment of the trust

If the transfer is a trustee of an SMSF, then the member(s) of the SMSF will be the “person directing”.

Look-through provisions

The ruling provides look-through (tracing) provisions for companies, unit trusts and discretionary trusts so that if a subsidiary is the holder of the land, then the exemption still applies to the person(s) who would be the “person directing” the holding entity if the holding entity was the transferor.

What land qualifies?

The land must be used for primary production. This means that the land must be exempt from land tax under the primary production exemption in s10AA of the Land Tax Management Act 1956 (NSW). Revenue Ruling LT097v2 applies to s10AA. This revenue ruling is informative and explains the operation of s 10AA.

Person directing

The exemption applies beyond situations where subsidiaries are wholly owned or simply more than 50 per cent owned by a parent entity.

Continuity of business test

The land must be used in the business carried on by the transferee or a member of the transferee’s family immediately before the land transfer and the same business must continue to be carried on by the transferee (whether alone or with others) after the transfer.

What does ‘control’ mean?

Where the business is carried on by a company or trust related to the transferee, s274 (5AA) states that a reference to a business carried on by a person includes a reference to a business carried on by a company or trust “controlled” by the person.

The ruling states that in determining whether “control” is made out, Revenue NSW will apply the concepts set out in Hancock v Rinehart [2015] NSWSC 646 in that:

• Control is concerned with the ultimate power to decide how an identity acts.
• For a company, control normally resides with the shareholders with majority voting rights.
• A trust is controlled by the trustees or if there is a corporate trustee, then by the persons who control the corporate trustee.
• Where a trust has an appointor who has the power to replace the trustee, then the trust will be controlled by the appointor.

Landholder duty (Land Tax) issues

If the primary production land is held by a company or a unit trust, then ownership of the land may be indirectly passed by transferring shares or units in the landholding entity.

NSW landholder duty may be triggered by this transfer if the unencumbered market value of the NSW land exceeds $2 million and if the transferee acquires 50 per cent or more interest in the landholding company or unit trust.

Section 163A(1)(e) of the Duties Act 1997 (NSW) exempts landholder duty from applying (i) if the land owned by the landholder is used for primary production and (ii) providing the transfer would have been exempt from duty under s274 if the landholder had transferred the land to the person who acquired the interest in the landholder.

What about CGT and GST?

Small-business CGT concessions may apply and where the land is held by a company or an SMSF, the land will need to be transferred out at market value to prevent adverse tax consequences.

Leigh Adams is special counsel, Owen Hodge Lawyers.