Land Tax Reform – What Does it All Mean?

April 10, 2020 / Summer Report 2020

The Land Tax (Miscellaneous) Amendment Act 2019 (SA) (the Amending Act) has now been enacted and introduces progressive changes to the Land Tax Act 1936 (SA) (the Land Tax Act) between 30 June 2020 and 1 July 2022. The changes will affect, among other things, the rates of land tax, the relevant site value thresholds, the introduction of trust land tax rates and wider aggregation provisions, and the expansion of certain land tax exemptions.

From 1 July 2020, there are to be new land tax rates and increased thresholds. For non-trust held land, those changes are as follows:

• the top standard land tax rate, previously set at 3.7%, will be reduced to 2.4% as of 1 July 2020;
• the reduced top land tax rate will apply to sites valued at $1.35M and above from 2020/21 and will subsequently apply to sites valued at $2M and above in 2022/23;
• the land tax rate applicable to sites valued between $1.098M and $1.35M will be 2.0% as of 1 July 2020 and will subsequently apply to sites valued between $1.098M (indexed) to $2M as of 1 July 2022;
• the land tax rate applicable to sites valued between $755,000 and $1.098M will be 1.25% as of 1 July 2020 and will subsequently decrease from 1 July 2022 onwards to 1.0%; and
• in the 2020/21 financial year, the tax-free threshold will increase from $391,000 to $450,000.

Trustees that hold land on trust may be subject to higher surcharge rates of land tax. In some circumstances, the trustee of a trust may be able to nominate a beneficiary or unitholders of the trust, thereby resulting in the lower, standard, land tax rates applying to the trustee. The nominated beneficiary/unitholders will also be taxed in respect of the land, with a rebate available for tax paid by the trustee. Importantly, if the nominated beneficiary or unitholders are the owner of any other land, land tax will be calculated on the aggregated site value of all land legally owned by that individual. Importantly, nominations can generally only be made once, therefore careful consideration should be had to whether they make a nomination and, in the case of a discretionary trust, who to nominate.

If no beneficiary or unitholders are nominated, the trustee may be subject to higher trust rates of land tax as follows:

• the top land tax rate of 2.4% will apply to sites valued at $1.098M and above from 1 July 2020;
• the land tax rate applicable to sites valued between $755,000 and $1.098M will be 1.75% as of 1 July 2020 and will subsequently decrease from 1 July 2022 onwards to 1.5%; and
• the land tax rate applicable to sites valued between $450,000 and $755,000 will be 1% as of 1 July 2020 and will not change in subsequent years;
• the tax-free threshold for trust land will be $25,000; and
• if the site value of the land exceeds $25,000, the tax-free threshold will be lost, and land tax at a rate of 0.5% is imposed on value up to $450,000.

The effect of the increased rates is to impose a surcharge on land held in trusts. In the 2020/21 financial year, the maximum surcharge for trust land is $6,498. From the 2022-23 financial year, the maximum surcharge for trust land will increase to $9,165.

The Amending Act also amends the aggregation provisions contained in the Land Tax Act to function similar to the aggregation laws in the Victorian land tax legislation. The amended aggregation provisions are intended to collate all land (including interests in land) that is owned by the same taxpayer and combine their site value to calculate a combined total land tax liability for that taxpayer.

Where land is held jointly, land tax is assessed to the owners jointly in the first instance, with each owner then being taxed again on their proportionate interest in that land in addition to any other land or interest in land owned by that taxpayer, subject to a rebate for the taxpayer’s proportionate liability for land tax assessed to the owners jointly.

The existing trust aggregation provisions have been removed, and land held in a trust will only be aggregated with other land held in the same trust, i.e. land held in 2 or more separate trusts will not be aggregated. As noted above, however, where the trust nominates a beneficiary or unitholders, the beneficiary or unitholder’s resulting interest in the trust land will be aggregated with any other land, or interest in land, held by that beneficiary or unitholder.

Much broader aggregation provisions apply for companies with land held in different companies now subject to aggregation if the companies are related or otherwise controlled or deemed to be controlled by the same person or group of persons. As a result, land that is owned by corporations deemed related will be jointly assessed for land tax as if the land were owned by a single corporation and all of the related corporations are jointly and severally liable for the tax so assessed.

The changes to the aggregation provisions are likely to catch out many taxpayers, and therefore careful consideration is required when determining whether these provisions apply.

Land that was previously exempt from land tax, e.g. under the principal place of residence and primary production exemption, will remain exempt, with the Amending Act actually expanding the principal place of residence exemption to allow it in circumstances where the land is held in a trust and is the principal place of residence of the nominated beneficiary or unitholders. To get the benefit of this exemption, the trustee must make a nomination of beneficiary or unitholders.

Procedurally, one of the major impositions of the Amending Act is the notification requirements set out in the Land Tax Act. All existing trusts that have not previously done so must give the Commissioner a notice that land is held on trust by 31 July 2020. In addition, as mentioned above, the trustee of a trust may be able to nominate a beneficiary or unitholders, thereby deeming that beneficiary or those unitholders to be an owner of the land in addition to the trustee. The timing of this nomination is different depending on the type of trust involved.

Going forward, notifications must be given to the Commissioner in various circumstances, including where:

• a person becomes a trustee of land in South Australia;
• a trustee of a deceased estate has been granted probate or letters of administration;
• the administration of a deceased estate is complete;
• a person’s circumstances change, and they no longer have proper grounds for an exception or exemption;
• a trustee stops holding land on trust but otherwise remains the legal owner of the land;
• a trust that holds land changes from being one type of trust to another;
• the beneficial interests in a fixed trust change;
• there are changes to a unit holding of a unit trust; and
• a corporation or related corporation becomes the owner of more than 50% of:
  • the total beneficial interest in a fixed trust that holds land; or
  • the total number of units in a unit trust that holds land.

In summary, the Amending Act effects a number of important changes to the way land tax is imposed and administered. Of particular note are:

• land held in trust will be assessed at higher rates unless the trust makes a nomination of a beneficiary or unitholders, effectively resulting in a surcharge of up to $6,498 per trust in the 2020/21 financial year, and increasing to $9,165 per trust in the 2022/23 financial year;
• nominations can only be made once, and therefore careful consideration should be had as to whether to make a nomination and, in the case of a discretionary trust, who to nominate;
• company structures that previously were not aggregated may now be aggregated under the new provisions, resulting in potentially significant increases in land tax; and
• It is essential that you receive properly considered advice and do calculations in respect of alternative options to determine the most tax-effective outcome for your land holdings.

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This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.