2020 Land Tax Changes - Managing the Risks

Here’s the Summary

As you may be aware, the changes to the Land Tax Act 1936 (SA) announced in last year’s Budget are due to commence on 1 July 2020 – and this is still slated to take effect notwithstanding the relative uncertainty we face from Covid19.

While the detail is below, in short, individuals, trusts and companies that own multiple land parcels are potentially facing a significant increase in their land tax bill.

If you or the entities you control hold multiple parcels of land, we strongly encourage you to calculate your likely land tax liability for 2020/21, as any preventative restructuring must occur prior to 30 June 2020. We can guide you through this process including by identifying interests in land that are likely to be aggregated.

If you are facing a significant increase in your land tax bill there may be cost effective options available to you to minimise the impact of the new measures. Likewise you should carefully consider if your current structure is still the best structure for new land acquisitions.

To understand how we can help you, read on.

Here’s the Detail

RevenueSA has released a legislative guide which, while not entirely accurate, provides a good summary of the changes and examples of how land tax will be calculated under the new rules (a copy of the guide can be downloaded here: Overview of the Land Tax (Miscellaneous) Amendment Act 2019).

Some of the key changes you need to be aware of include:

• For individuals, the value of all interests in land will now be aggregated, including part interests held in common with other land owners. Jointly owning land with other individuals or entities will no longer prevent the value of that land being attributed to an individual. While the rate of land tax has been reduced, the increase in scope of aggregation will mean that the value of grouped land holdings will quickly reach the top marginal tax rate.
• Most trusts will now be assessed for land tax as a separate owner, albeit with a higher land tax rate (incorporating a 0.5% surcharge).
• For discretionary trusts, there is an option to avoid the trust surcharge by nominating a beneficiary to be the relevant taxpayer for that land – however this only applies to land assets held by the trust before 16 October 2019. Whether a trustee should take up this option, and choosing a suitable beneficiary, requires consideration of a number of factors. Importantly, the trustee should identify:
  • whether the trust’s beneficiaries own any other land or land interests;
  • whether, as a consequence of nomination, the designated beneficiary will be deemed by the legislation to be the owner of other land interests;
  • the ability of the beneficiary to acquire property in the future; and
  • the tax outcome of any resulting aggregation.

• For land held in a unit trust, the trustee and unitholders will need to consider whether to accept the trust surcharge, or instead elect to treat the unitholders as the ultimate owners for calculation purposes. Whether this option should be taken includes a consideration of the factors set out for discretionary trusts. Trustees will also need to consider the differing circumstances of unitholders and how they may be reconciled from a commercial perspective.
• For closely held companies, all land held within the group will be aggregated. The aggregation carve-out for land developers assists large scale development but is of no benefit to developments involving smaller (10 or less) subdivisions.

If you are facing a significant increase in your land tax bill, as a consequence of aggregation, the trust surcharge rate or both, there may be cost effective options available to you to minimise the impact of the new measures.

One option will be to take advantage of the $25 million transition fund - however, while this may provide short term limited relief, it should only form part of a longer term solution to mitigate the increases in land tax, as the fund is only available on a first come first serve basis (and we expect it will be exhausted quickly).

In addition to the main changes above, we have also identified several uncertainties, ambiguities and risks under the new regime which are not adequately addressed or explained, and these uncertainties could lead to unintended or unexpected aggregation.

For example:

• How are corporate trustees going to be assessed? The Commissioner has indicated that she does not intend to group related companies that are trustees of different trusts – however, the new rules enable this to happen.
• Notwithstanding the repeal of the “same beneficiary” rules, is there still scope to aggregate trusts based on the identity of the beneficiaries?
• How far down can the aggregation rules trace, and how do the rules interact with multiple layers of trusts?

Despite the current uncertainty about how the Commissioner will implement the new rules, the risks can be managed. This is best done by undertaking a careful and detail analysis of your personal circumstances.

In creating a customised solution, it will be important to undertake a detailed review of your current land holding structure and to advise on other tax concessions which may be available to reduce the transactional costs of implementing a disaggregation strategy.

You may also be concerned about whether your current structure is still the best structure for new land acquisitions. We can also assist you in understanding the benefits of various land holding entities and help you create an ownership structure that meets your personal investment needs both now and into the future.

What to do next

For more specific information on any of the material contained in this article please contact Kale Rigano or Christina von Muenster on +61 8 8210 1246 or krigano@normans.com.au / cvonmuenster@normans.com.au.