Legal Structures Flashcards

1
Q

What might acquisition of re in the wrong legal vehicle involve?

A
  • **lost oppo** to max avail deductions
  • **breaches** of certain mandatory statutory requirements (such as those under the Corporations Act 2001)
  • prohibitive costs in transferring land into correct vehicle (e.g. stamp duties/CGT)
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1
Q

Briefly describe company as a legal vehicle to acquire re.

A

Company - independent legal entity able to do business in its own right; owned by shareholders; run by directors. structure is well understood and readily accepted for purpose of commercial, financing and borrowing negotiations.

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2
Q

Name the important features of company as a legal vehicle structure?

A
  • separate legal entity - limited liab attaching to shareholders/members (as in they’d only be called on to pay unpaid portion of the nominal value of the shares)
  • diff types of coys - most common coy vehicle used for re inv is coy limited by shares (other forms : coy limited by guarantee where a group of members guarantee liabs of the coy is limited with no shares issued, no liability coys in mining industries /other high risk ventures but no very common)
  • contractual arrangements - rights and obligations between shareholders are controlled by the coy’s constitution (enforceable against members, directors and other officeholders; may divide shares into diff classes based on diff voting rights and hence investors end up with diff entitlement to profits), a shareholder’s agreement (regulate the rights although shareholder’s agreement is not mandatory), the Corporations Act and common law
  • transfer of shares - simply sign share transfer form (stamp duty payable on share transfers in some states; most states impose duty on share transfers in landholding/land rich coys, so land transfer stamp duty applies)
  • raising equity by a public offering - coy structure commonly utilised as a vehicle to raise finance involving large numbers of investors in a public offering (offering is controlled by statutory and common laws to ensure investors are best informed of the inv project being offered e.g. income growth, factors affecting capital value etc.)
  • raising bank finance - financiers/banks often require some form of security as coy structure comes with limited liability . could be corporate guarantees (from other coys within the same corp group), directors’ guarantees, mortgages over re, charges over assets of the coy, cash retentions
  • admin & mgmt - again, coy constitution provisions dictate conduct of business. e.g. appointment of directors, calls on shares, transfer of shares, divs, accounts, audit… so all internal affairs of the coy. but coy is effectively bound by the acts of its directors i.e. mgmt of the coy vested in the directors ultimately. so they are responsible for coy’s financial health, impact of each business decision and liability for that matter incurred in relation to business decisions.
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3
Q

What is a unit trust? Why is it called unit trust?

A

It is an equitable arrangement binding trustee to deal with tst prop (and holds the legal title to the re ) for the benefit of the beneficiaries /unitholders;

**reason it’s called ‘unit’ tst is coz the beneficial interests beneficiaries hold in the tst are divided into units.** there is private unit tst (must comply with tst deed and possibly corporations act) and public unit tst (listed or unlisted, must comply with tst deed and the corporations act, and ASIC requirements if listed)

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4
Q

What are the advantages of unit tst (unitisation)?

A

To the investor -

  • readily transferrable ownership,
  • flexibility,
  • liquidity (as in listed tsts),
  • mgmt by a professional mgr,
  • smaller amt of capital required (hence helps investor in diversifying capital into other asset classes if desired;
  • listed tsts became popular for they facilitate diversified ownership of re.
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5
Q

What factors are to be considered when assessing suitability of a unit trust vehicle?

A
  • equitable obligations (i.e. how tst relationship is governed by contract and equitable principles),
  • accepted structure (we wanna know it’s reasonably well understood and accepted),
  • liability of unitholders (most tst deeds will provide for limitation of liability)
  • mgmt (tst should be an administratively convenient vehicle),
  • Corporations Act requirements (unit tst regarded as a managed investment scheme by the Corporations Act, hence trustee needs to know how to comply with relevant obligations under the Act w.r.t. registering the scheme, fs licensing, disclosure requirements …)
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6
Q

Briefly describe what a managed investment scheme is

A

a managed inv scheme is defined by pooling of funds contributed by wholesale and retail investors for the scheme to produce financial benefit to unitholders who hold interests in the tst, whereby unitholders do not have day-to-day control over the operation of the scheme.

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7
Q

What are managed investment schemes’ obligations under the Corporations Act?

A
  • registration of managed inv schemes - mgmd inv scheme is required to be reigstered if interests in the shceme are issued not only to whole sale clients and has more than 20 members (reminder: investing > $500k; or netassets >$2.5m within the preceding 2 years as per accountant, gross income each of the last 2 FYs> $250k; or a person as such controls a coy or tst to invest in the scheme; or is a professional investor e.g. FS licensee)
  • operating a registered managed inv scheme - operator must be a public coy and licensed to operate responsibly (acting honestly, exercising reasonable care and diligence, acting in the best interests of membets, treating members fairly), there must be a constitution and compliance plan w.r.t. the scheme which meet the corporations act requirements
  • licensing requirements of the operator of a managed inv scheme - as in must hold an AFSL for services provided w.r.t. the scheme at min (then we also worry about experience, fame, character, education, capacity, care, skill, accountability, insurance requirements…)
    * **Note**: ::if scheme has >20 investors or if trustee/mgr is in the business of promoting schemes, then operator may still be required to hold an AFSL even if the scheme is unregistered (offered to only to wholesale clients)::
  • raising equity by public offering - responsible entity of the tst (could be mgmr or tstee) have to prepare and issue regulated doc, a PDS to potential investors
  • stamp duty - recall if unit tsts are land-rich, the stamp duty is payable on transfer of units
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8
Q

Briefly describe what partnership is as a legal vehicle?

A
  • unlimited liability attaching to each partner (1 fails the other then has unlimited liab for the debts and obligations of the partnership) ;
  • control involves greater trust than coy structure (coz one partners are bound by the acts of partners e.g. 1 partner executing a contract binds other partners to the contract) although by participating in the partnership through a special purpose subsidiary coy, partners can avoid exposure of the entire group to partnership liabs;
  • mgmt involves agreement on the accounting and tax treatment and mgmt can be undertaken by a mgmt committee equivalent to a board of directors in a coy;
  • dissolution - if partnership is deemed to be dissolved then there can be deemed disposal of depreciation prop and trading stocks for tax purposes; note that if parties are in receipt of income jointly or parties jointly and serverally are liable for total debts of the venture, then they can be construed as a partnership for tax purposes even if the partners do not call the arrangement a partnership.
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9
Q

What types of joint venture are there?

A
  • incorporated joint venture - a coy formed by investors as a separate legal entity. advantage: familiarity with corporate law, ease of admin and ease with share transfer
  • unincorporated joint venture - an association of investors lacking both corporate form and equity capital, brought to existence by contract. reason this is chosen over partnership: oppo to keep separate accounts and tax independence (albeit tax independence limited if joint venture is in joint receipt of income, in which case income may be taxed as a partnership)
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10
Q

How can we assess the suitability of an unincorporated joint venture as a vehicle for prop acquisition/re venture?

A

must assess contract, liability (joint venturer’s proportionate share of joint venture debts is unlimited), objectives, mgmt (jv not a legal entity so can’t contract, borrow, employ staff or own prop. mgmt normally undertaken by a special purpose coy/committe), accounts (again jv not a legal entity, so each joint venturer free to select its own basis for accounting), regulation (some JVs can be treated like managed inv schemes), fiduciary relationship (e.g. principal & agent - not to gain personal benefit without consent of the other person, not to act in ways that conflict with interests of the other party, not to exploit opps derived from jV relationship for personal benefit)

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11
Q

Describe what a stapled structure is as a legal vehicle?

A

investors hold units in a unit tst and securities in the associated coy ( coz units in the tst and securities in the coy are contractually stapled together), no tax on the trust income, income tax only payable by investors/unitholders, coy generally in a trading business (earning mgmt and dvelopment income, any income derived from coy is subject to tax at corporate tax rate, coy pays tax on dist and franked divs to investors)

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12
Q

What is property syndicate as a legal vehicle?

A

a number of investors entering an unlisted collective investment arrangement to acquire interest in direct prop (could be acquiring a unit tst or coy ) ; often appoints one of the participants or a 3rd party as syndicate mgr; syndicates are regulated as managed inv schemes and operator required to hold an AFSL , if retail clients PDS must be provided

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13
Q

What is SMSF as a legal vehicle?

A
  • increasing popluar vehicle to acquire re inv due to low tax rate 15% on income earned by super fund.
  • highly regulated by SIS legislation which generally prohibits borrowing and charging of super fund assets
  • but with LRBA (limited recourse borrowing arrangement), smsf can go for a leveraged purchase of re (lender only given limited recourse security tied to prop acquired using the loan and no other assets of the smsf)
  • generally re loans taken out by smsf cannot be used to fund re development activities (way too risky)
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14
Q

What are the regulatory requirements when raising equity capital from investors?

A
  • disclosure requirements - help investors make informed decisions via use of **PDS to retail clients** who are potentially acquiring interests in a **registered** scheme. what PDS must contain is governed by the Corporations Act ; if it is an **unregistered scheme**, then **an information memorandum** instead (e.g. where all clients are wholesale clients). either way, issuer of the doc **must ensure disclosures made a re not misleading or deceptive**
  • ::other key regulatory requirements::
    • if offering interests to **retail clients**, the responsible entity/trustee must hold an **AFSL** to operate the particular scheme (which must be registered with ASIC) ;
    • scheme must have a **constitution and compliance plan** that meet the corporations act requirements
    • **auditor** must be appointed (for reviewing compliance plan)
    • at least half of the board of the responsible entity/trustee MUST be **external members** ; if not , entity must appoint a compliance committee(majority of which are exernal members)
    • financial advisers should be prohibited from receiving conflicted remuneration (as per FOFA) - think upfront and trail commissions to adviser from re fund inv
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15
Q

What is the general principle on stamp duty?

A

It is legislation that is state-based. and it is payable on the ‘dutiable value’ which is either the consideration paid or unencumbered val of the dutiable prop transferred, whichever is higher .

discussion of stamp duty highlights the need to consider most appropriate legal structure for a re project (coz say if you chose the wrong structure and were to restructure a transaction, you’d normally have to pay additional duty)

16
Q

Can transfers of shares/units attract marketable securities duty even if the coy or tst is NOT land rich?

A

Yes, it still an in some states/territories. However marketable securities duty rates are lower than land rich duty rates.

17
Q

Can transfers of shares/units attract marketable securities duty even if the coy or tst is NOT land rich?

A

Yes, it still an in some states/territories. However marketable securities duty rates are lower than land rich duty rates.

18
Q

What is the notification requirement when foreign investor applies for an approval for acquiring interest in Aus RE?

A

generally, FIRB (foreign inv review board) must be notified of foreigner’s proposal to acquire interest in Australian re;

all proposed acquitions by foreign persons must be **individually submitted and examined by FIRB unless exemption applies**.

for safety, always obtain FIRB approval before expressing any contract that involves a potentially notifiable transation lest an offence ensues.

19
Q

What is the definition of foreign person in the RE investment context?

A
  • private foreign persons/entities (natural person /citizen of a foreign country can be considered an ordinarily resident in Australia if s/he has actually been in aus for 200 days in the preceding 12 months and there is no legal limitation on that person’s continued presence in aus; otherwise s/he is well and truly a foreign person
  • any corporation, business or tst in which there is a **substantial foreign interest .** - i.e. a **holding of >=15% of more by a single non-resident** person/foreign corporation, or holding of **>=40% in aggregate by 2 or more non-resident persons or foreign corps and assoc.
  • foreign govts or sovereign wealth funds - all foreign govts and related entities must notify FIRB to get prior approval before making a direct inv in aus, no matter what the inv value is.
  • temporary resident foreign persons - foreign temp residents buying resi prop - required to obtain FIRB approval. **conditions apply even if acquisitions are approved:**
    * if developed prop - must sell it when foreigner departs aus. approval limited to the one prop, and prop cannot turn into inv prop.
    * if prop for development - construction must start within 24 mths of purchase.
19
Q

What is the definition of foreign person in the RE investment context?

A
  • private foreign persons/entities (natural person /citizen of a foreign country can be considered an ordinarily resident in Australia if s/he has actually been in aus for 200 days in the preceding 12 months and there is no legal limitation on that person’s continued presence in aus; otherwise s/he is well and truly a foreign person
  • any corporation, business or tst in which there is a **substantial foreign interest .** - i.e. a **holding of >=15% of more by a single non-resident** person/foreign corporation, or holding of **>=40% in aggregate by 2 or more non-resident persons or foreign corps and assoc.
  • foreign govts or sovereign wealth funds - all foreign govts and related entities must notify FIRB to get prior approval before making a direct inv in aus, no matter what the inv value is.
  • temporary resident foreign persons - foreign temp residents buying resi prop - required to obtain FIRB approval. **conditions apply even if acquisitions are approved:**
    * if developed prop - must sell it when foreigner departs aus. approval limited to the one prop, and prop cannot turn into inv prop.
    * if prop for development - construction must start within 24 mths of purchase.
20
Q

When might foreign investors be exempted from applying for approval on acquiring interest in aus re inv?

A
  • acquisition of residential re - overarching policy is that foreign inv in resi res should increase the housing stock . Hence:
    * block of vacant land - yes, foreigner can seek approval to buy vacant land to build dwelling (must start within 24 mths of purchase)
    * redevelop on existing prop - yes , can apply to redevelop an existing dwelling (long as it increases housing stock in aus e.g. demolish1 build 2 on the same piece of land. andstart within 24 mths of purchase, no tenancy prior to construction, and council development approval is granted)
    * new dwellings (“as new” dwelling from initial buyer, not rented out for more than 12 mths, or purchased directly from developer and not been occupied for 12mths.) no approval if new dwelling results from refurbishment/reno of an established resi dewlling
  • re incidental to normal business activities
  • commercial re
  • public tsts/ coys
  • integrated tourism resort
  • thresholds and exemptions for US investors - more favourable thresholds and exemptions now exist for us investors following the australian-us free trade agreement .
21
Q

for all the proposed acquisitions submitted to FIRB, approval is usually granted **unless proposal is judged contrary to national interest**

acquisitions of re that don’t fall into one of the categories are not normally approved. What are these categories?

A

* residential re for development
* commercial re for development
* developed non-resi commerical prop
* development under construction or planned (off the plan ok, refurbished from non-resi to resi okay too)

NOTE: failing to develop prop in accordance with the relevant undertaking (e.g. got approval to develop resi prop on vacant land but failed to commence construction within 24 months), OR sell prop prior to development -> breach of the relevant undertaking, thus owner commits an offence here under the FAT Act

NOTE also, if proposal comes from a foreign govt, aus govt must assess if inv is commericial in nature or if investor may be pursuing broader political/strategic objectives judged contrary to aus’ national interest.

22
Q

Where rural land is used for business of primary production, how can foreign persons seek approval to acquire an interest in the rural land ?

A

Firstly, foreign persons must seek approval to acquire an interest in a primary production busn where the total val of land is > $15m

FIRB then assesses application running it through a rigorous national interest test where national interest considerations incl.:
* effects of inv on national security, competition, economy, community and other govt policies.
* type of investor and how much this investor operates independently of foreign govts
* inv does not adversely affect sustainability of aus’ national agricultural resources

23
Q

What must aus govt consider if a foreign investor’s rural land acquisition proposal is in agriculture?

A

Aus govt considers the proposal’s effect on: quality and availability of aus’ agricultural resources, agricultural production/productivity, aus’ capacity to remain a reliable supplier of agricultural production to domestic community and trading partners, biodiversity, employment and prosperity (local and regional )

24
Q

Describe the advantages that a company or unit trust structure offers a real estate developer/investor.

A
  • The structure is widely accepted and understood.
  • the duties and responsibilities of the various participants are reasonably clear
  • shares or units may be traded (although consent of the board or trustee/responsible entity may be required (if the shares or units are not quoted on an exchange)
  • legal protection is provided by the Corporations Act and common law, including fiduciary principles
  • funds may be raised from investors, including on the stock market or other public offering
  • there is an opportunity to defer tax through optimising depreciation allowances.