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LSB April 2018_Web

TAX FILES Aggregation of

TAX FILES Aggregation of land for land tax: disregarding minor interests ANDREW SHAW, SHAW LAWYERS nvisible, I feel like I’m invisible, you “Itreat me like I’m not really there, and you don’t really care…” (Alison Moyet, “Invisible” (1984)) A recent decision of the Supreme Court of South Australia is a timely reminder of the anti-avoidance provisions in section 13A of the Land Tax Act 1936 (S.A.) that allow the Commissioner to disregard minority interests in land for land tax purposes: see ACN 068 691 092 Pty Ltd v Commissioner of State Taxation (S.A.) [2017] SASC 195. BACKGROUND Land tax is imposed on all land in South Australia, subject to certain exceptions and exemptions. The “owner” of land is liable for the land tax. Land tax is imposed on the owner for each financial year based on the circumstances existing at midnight on 30 June in the preceding financial year. 1 Land tax is calculated on the aggregate site value of all land owned by the same “owner” (known as the “aggregation principle”). 2 The aggregation principle has a significant impact on the amount of land tax chargeable, because land tax is calculated on a sliding scale after applying a tax-free threshold ($353,000). If land is aggregated, only one tax-free threshold applies. The taxing rate increases as the taxable value of all land owned by the same “owner” increases. A mechanism commonly employed to avoid aggregation (at least until 30 June 2008) was for different entities to hold minority interests in each property (typically 1% - 10%), thereby creating separate “ownerships” for land tax purposes. Example: Blackacre is owned by Trumpco Pty Ltd (as to 99%) and Donald (as to 1%). Whiteacre is owned by Trumpco Pty Ltd (as to 99%) and Melania (as to 1%). Ownership of each property is therefore different, so they are 32 THE BULLETIN April 2018 separately assessed for land tax. The aggregation principle does not apply. Each property is entitled to its own tax-free threshold. COMMENCEMENT OF SECTION 13A Section 13A is an anti-avoidance provision. It commenced at midnight on 30 June 2008. It is titled “Commissioner may determine that minor interest is to be disregarded”. The purpose of section 13A was explained by the Supreme Court in Kyren v Commissioner of State Taxation [2013] SASC 58 as follows: “The Act imposes a progressive tax on the aggregation of land held in common ownership. Aggregation can be circumvented by the creation of minor interests which, because of their small size, offer no threat to the management of the land by the predominant owner and are relatively inexpensive to create. The manifest purpose of s 13A of the Act is to prevent the evasion of the aggregation provision by creating interests in land that are less than a majority interest and which are created for the purpose of reduction of land tax”. 3 Section 13A introduced two qualifications to the “different ownerships” rules: 1. Minority interest of 5% or less is automatically disregarded If a person’s interest in land is 5% or less (prescribed interest), that interest is automatically disregarded for land tax purposes unless the Commissioner is satisfied “that there is no doubt that the interest was created solely for a purpose, or entirely for purposes, unrelated to reducing the amount of land tax payable in respect of the land, or any other piece of land… ” 4 If the prescribed interest is disregarded, the land is then aggregated with other land owned by the co-owner. This is automatic: it does not require any decision by the Commissioner. Example: Donald’s 1% ownership of Blackacre, and Melania’s 1% ownership of Whiteacre, are automatically disregarded. Trumpco is deemed to be the sole owner of both Blackacre and Whiteacre. Blackacre and Whiteacre are aggregated for land tax (together with any other land of which Trumpco is the sole owner, or deemed to be the sole owner as a result of disregarding other minority interests). 2. Minority interest of more than 5% but less than 50% may be disregarded If a person’s interest in land exceeds 5% but is less than 50%, the interest will be disregarded only if the Commissioner forms the opinion “that the purpose, or 1 of the purposes, for the creation of the interest was to reduce the amount of land tax payable in respect of the land, or any other piece of land”. 5 A minority interest may be created for many purposes. The fact that one purpose is to reduce land tax is sufficient to disregard the interest, even if it was the least influential purpose. INFERENCES AND PURPOSE FOR CREATION OF INTERESTS In the ACN 068 691 092 Pty Ltd case, the Commissioner had disregarded minority interests of 10% created in six properties in June 2010. This resulted in the properties being aggregated, because one entity (the taxpayer) was thereby taken to be the owner of all six properties. The Commissioner’s case was a circumstantial one. It was necessary to consider whether an inference could be drawn that reduction of land tax was a purpose for creation of the 10% interests based on the objective facts and circumstances. This required consideration of each item of relevant evidence, whether pointing in favour of or against the inference, and weighing of all of the evidence together. 6 The Court drew a number of inferences that reduction of land tax was a purpose for the creation of the 10% interests. These included: the taxpayer’s awareness

TAX FILES of s.13A in June 2010 and the advantages of minority interests above 5%; the timing of the transfers (they were lodged for registration on 30 June 2010); the variety of minority interest holders; a lack of commonality of ownership; the size of minority interests transferred (10% - rather than a higher percentage such as 25% or 40% which might suggest other reasons); and the similarity/pattern of transactions since 1998 for land tax purposes. 7 The Court concluded that the overwhelming inference and substantial purpose of the transfers was to reduce the amount of land tax payable on land owned by the taxpayer company. 8 In Kyren, the Court had referred to similar grounds for forming an opinion that the predominant purpose of the relevant transactions was to reduce land tax: namely, timing of the conveyances; the size of the interests conveyed; the selection of land in which the interests were conveyed; and conveyances of similarly small interests in other land held by related entities. 9 TAKE HOME MESSAGES • RevenueSA gathers data from the Lands Titles Office about transfers of freehold interests in land. It is clear that RevenueSA’s practice is to investigate transfers wherever a transferee acquires a minority interest. Taxpayers should expect that transferring a minority interest in land will attract a “please explain” letter from RevenueSA. • It appears that RevenueSA is also reviewing minority interests created prior to 1 July 2008, even if there has been no transfer of any interest in the land since that time. A minority interest may be disregarded regardless of when it was created, including an interest created before the commencement of section 13A. 10 • If the Commissioner disregards a prescribed interest under section 13A(3) (a prescribed interest that exceeds 5% but is less than 50%), then the interest is taken to have been disregarded from the date on which the interest was created (which may be before the date of the Commissioner’s decision, and before the commencement of section 13A). 11 This is subject to the general five year limitation on reassessments. 12 My own experience is that RevenueSA’s usual practice is not to “backdate” the disregarding of a minority interest, but only to assess onwards from the financial year in which the interest is disregarded. • One (perhaps) unexpected consequence of section 13A is that the disregarding of a minority interest may cause a residential property, which is otherwise exempt from land tax as a principal place of residence, to lose that exemption. The principal residence exemption requires that the land is owned by a natural person (whether or not he or she is the sole owner of the land). 13 If a natural person owns a minority interest in his or her principal residence, and the remainder is owned by a company, the disregarding of the minority interest under section 13A will cause the exemption to fail (because the natural person is no longer taken to be an “owner”). • The ACN 068 691 092 Pty Ltd case makes clear that challenging a section 13A decision comes down to inferences drawn from the facts and circumstances. The burden of proof is upon the owner. The evidence must be capable of satisfying the Commissioner or a Court that a minority interest was created for purposes other than reduction of land tax. An obvious example is a syndicate where several investors pool their funds to buy an investment property. Their proportionate interests may be different. At least some will have minority interests. My view is that the Commissioner is unlikely to apply s.13A in such cases, assuming evidence is adduced that the purpose for creating minority interests was to reflect their respective contributions. • Section 13A applies to a “prescribed interest” (i.e. a minority interest). By definition, section 13A cannot apply in two scenarios: ο first, if each land parcel is wholly owned by a different entity (Blackco Pty Ltd owns Blackacre, Whiteco Pty Ltd owns Whiteacre, Brownco Pty Ltd owns Brownacre); or ο second, if two taxpayers own exactly 50% each. Section 13A applies only if an interest is less than 50%. The Commissioner has no power to disregard an interest of 50% or more. Ownership of land in any other proportions will almost certainly invite enquiry. Tax Files is contributed by members of the Taxation Committee of the Business Law Section of the Law Council of Australia. B Endnotes 1 Land Tax Act 1936 (S.A.), ss.4 and 14. 2 ss.2 and 8B. 3 At [12] - [13]. The Court noted the “widespread” practice of landlords to create minor interests in their multiple holdings to avoid the aggregation provisions. 4 ss.13A(2) and (5). 5 ss.13A(3) and (5). 6 At [94] – [96]. 7 At [97] – [109]. 8 At [130]. 9 Kyren, at [90]. 10 s.13A(9)(b). 11 s.13A(3a). 12 s.10(4) of the Taxation Administration Act 1996 (S.A.). 13 s.5(10) of the Land Tax Act. April 2018 THE BULLETIN 33