LSB September 2019_Web

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PROPERTY LAW EXAMINING THE PROPOSED LAND TAX AGGREGATION LAWS FOR SA ELIAS FARAH, PRINCIPAL PARTNER, COMMERCIAL & LEGAL The South Australian State Government announced on 18 June 2019 that measures would be taken to help close and prevent “loopholes” that exist which enable owners of multiple properties to pay less land tax. Put simply, the intention of the State Government is to aggregate (i.e. group) land held by common owners and beneficiaries regardless of who actually owns the land (i.e. the legal entity). This article is intended to assist readers to better understand the proposed measures, will consider what the pending draft legislation may look like, and how such a change may affect the South Australian real estate market. WHY THE HYPE? For the past two months, there has been much discussion, speculation and, in some cases, resentment in our local real estate market in relation to the State Government’s proposal. At the present point, land tax is assessed for the most part based on the concept that each legal entity is assessed separately from other land that may be owned by the same or related entities or persons. So for example, that means land wholly owned in your name is assessed separately to land owned in the joint names of you and your partner (or another person), and again is assessed separately to land owned in a company that you may control or be a shareholder in, and again is assessed separately to a family trust or unit trust that you may hold a beneficial or fixed interest in. The reason why separate assessment is important, as opposed to grouped assessments (better known as “multiple holdings”), is because the rate of land tax 26 THE BULLETIN September 2019 applied varies and increases substantially the higher the value of total land holdings you have in an assessment. This is illustrated later within the article. It should be noted that utilising these separate assessments, disregarding antiavoidance laws for the time being, is not illegal and is in fact clearly outlined by RevenueSA on their website. Naturally this creates incentive for landowners to utilise different entities (and mixes of entities) when deciding to buy new properties, and this has developed as a common practice for some time now, to reduce one’s land tax assessments and increase net cashflows from property ownership. This is essentially the “loophole” that the State Government now wish to close, and concern of stakeholders revolves around a real estate market which fears it will be stung by an uncommercial rise in land tax costs. WHY THE CHANGE? The State Government says that it wants to facilitate competitiveness within the tax system, ensuring equity amongst taxpayers, intending to supplement, correct, and control the law by being fair and impartial. They consider that closing these “loopholes” in land tax does just that. Importantly, the State Government’s land tax reform proposal is part of a wider State Budget proposal responding to an estimated loss of $2.1 billion in GST revenues. They estimate that the aggregation measures will raise approximately $120 million over the first three years, with some $40 million of additional revenue expected to go directly into the State Government coffers in the first year. In considering these figures, it has been widely speculated that the State Government has significantly underestimated the additional land tax revenue, some saying it could actually be in excess of $100 million per year. FURTHER DETAIL ON THE PROPOSAL The proposed changes are detailed in the 2019-20 South Australian Budget that was recently released on 18 June 2019. The State Budget papers are available at https://statebudget.sa.gov. au/#Budget_Papers For those who wish to obtain greater insight and detail on the proposed measures, we direct you to pages 8-9 of the Budget Speech, pages 42-43 and page 168 of the Budget Statement, and pages 4-6 of the Budget Measures Statement. WHAT ARE THE PROPOSED CHANGES? Outside of the State Budget papers, there has not been a great deal of information provided regarding how exactly the aggregation and surcharge measures will be implemented. At the time of writing this article, the draft legislation had not yet been distributed for comment by industry stakeholders. On the current available information, the changes are likely to cover the following: • Legal changes that allow various related entities to be grouped together for land tax purposes; • Properties will be aggregated based on a land owner’s interest in every piece of land they hold rather than only aggregating properties held in the same ownership structure; • RevenueSA will receive further authority and standards to determine the “true owner” of every parcel of land regardless of whether they are
PROPERTY LAW acting together or have a controlling interest; and • An additional surcharge rate will be charged on land owned in trusts where the trust beneficiaries are not disclosed or identified. Aggregation standards will identify the “true” multiple holdings for each individual owner, be it land held in sole name, joint names, in companies or in fixed interest trusts. In those cases where individual owners cannot be effectively identified, such as a discretionary family trust, it is proposed that they would have to pay a “surcharge”, being an additional rate of land tax, effectively dissuading anyone from trying to avoid grouping. These reforms will effectively group properties to the extent a common ownership can be identified, and will diminish incentives to own properties in other entities (such as trusts) if there is no other substantive benefit other than the minimisation of land tax. Although the draft legislation remains a work-in-progress, the proposed measures COMPANIES VICTORIA NEW SOUTH WALES SOUTH AUSTRALIA HOW WILL RELATED COMPANIES BE GROUPED? • The Commissioner of State Revenue, at its own discretion, may treat two or more related corporations as a single corporation and group corporations. • Each claim is on a case-by-case basis and will apply the following factors: ÆÆ ÆÆ ÆÆ ÆÆ ÆÆ Intention to avoid land tax; Degree of relatedness within the company; The degree of control by the Directors of the day-to-day operations of each related corporation; Use of the land; and Other relevant factors that will support the determination to group in any given case. • The Chief Commissioner may assess: ÆÆ ÆÆ ÆÆ All companies separately; Companies jointly; and Any 2 or more companies jointly and the remainder separately. • There is no guiding criteria or factors for the Chief Commissioner to consider. • It is likely that RevenueSA will be given similar discretion as both VIC and NSW have, but with guiding standards similar toVIC. HOW ARE ‘RELATED COMPANIES’ IDENTIFIED? DOES A ‘CONTROLLING INTEREST’ EXIST IF A PERSON OR TWO OR MORE PERSONS ‘ACTING TOGETHER’ CAN CONTROL THE COMPOSITION OF A BOARD OF DIRECTORS OF THE COMPANY? • Controls the composition of the Board of Directors. • Holds or controls 50% or more of issued share capital. • Does not limit the circumstances in which the composition of a company’s board is taken to be controlled by a person or persons. • As per Victoria. • Likely to be same as VIC and NSW. • As per Victoria. • Likely that a similar broad authority will be provided to RevenueSA. UNIT TRUSTS VICTORIA NEW SOUTH WALES SOUTH AUSTRALIA HOW WILL TRUSTEES OF UNIT TRUSTS BE SUBJECT TO LAND TAX? WHAT OCCURS WHEN A COMMISSIONER HAS BEEN NOTIFIED OF THE UNIT HOLDERS? IS THE UNIT HOLDER ENTITLED TO A REDUCTION? • Trustees of unit trusts are subject to higher rates of land tax. This is distinguished as surcharge rates. • However, a trustee will be assessed at general rates if the Commissioner is notified of the unit holders. • The unit holders will be assessed on their interests in the land, which is held in the unit trust. • The unit holder’s interests are aggregated with all other interests on other taxable land they hold. • The trustee of the unit trust remains assessed for land tax. • To avoid double taxation, the unit holder may qualify for a reduction of their land tax liability to the extent land tax is paid by the trustee of the relevant unit trust. • However, if the unit holder’s land tax assessment is greater than the portion paid by the trustee (i.e. due to the individual’s multiple holdings being in a higher band of land tax), the unit holder will remain liable to pay the balance. • As per Victoria. • Likely to be same as VIC and NSW. • As per Victoria. • Likely to be same as VIC and NSW. • As per Victoria. September 2019 THE BULLETIN 27
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