Despite strong opposition from the property and business sectors, the South Australian Government is pressing ahead with its land tax aggregation changes having released draft legislation this week.
Below is a link to our comprehensive article on the new measures published in the November edition of Taxation in Australia.
SA Land Tax Developments: Aggregation Avalanche
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Aggregation to Proceed
Although the acceleration of the reduction in the highest marginal rate from 3.7% to 2.4% from 1 July 2020 is to be welcomed, if the aggregation changes are adopted, this will be “small beer”, with many property owners still expected to bear a significant and immediate increase in their annual land tax liability. This issue is only compounded by the Valuer-General’s ongoing statewide revaluation program.
In light of the developments, it is imperative that property owners and their advisers are fully prepared so that they are best equipped to navigate the proposed changes.
Commencing from 1 July 2020, the proposed measures will dramatically change the landscape for the assessment of land tax for South Australian land held in company and trust structures.
For land owned by companies, the measures will seek to group “related corporations”. Whether companies are related will turn on whether the same person or group of persons has a controlling interest in terms of:
- holding more than 50% of the issued share capital of each company;
- being able to cast or control the casting of more than 50% of the votes at a general meeting of each company; or
- being able to control the composition of the board of each company.
For land owned in unit trusts, it is proposed that:
- Trustees are subject to surcharge rates of land tax unless the Commissioner is notified of the unitholders, in which case the trustee will be assessed at general rates on the whole of the taxable land subject to the trust.
- Where the Commissioner has been notified of the unitholders, each unitholder will be assessed (in addition to the trustee) on their proportionate interest in the land held by the unit trust. This interest is then aggregated with all interests of the unitholder in other taxable land.
- In this latter case, the unitholder will be subject to a reduction in its land tax liability on account of the land tax paid by the trustee (so as to avoid double taxation). If this deduction would result in a negative amount payable, the unitholder does not receive any credit for that amount.
While discretionary trusts will not be subject to aggregation, land held by trustees of discretionary trusts will be subject to land tax at surcharge rates. This is subject to the ability of a trustee of a discretionary trust to nominate a beneficiary as the “owner” of existing land held in the trust for land tax purposes (which must be accompanied by a statutory declaration by the nominee).
Significantly, the nomination must be made by no later than 30 June 2020 and can only be made in respect of “pre-existing trust land”, being land already held by the trust on the day the draft legislation is introduced to the House of Assembly. Where such a nomination is made, surcharge rates will not apply to the land owned by the trust and the land will instead be taken to be owned by the nominated beneficiary. All subsequent land acquired in discretionary trusts will be subject to the surcharge rates.
A number of specific types of trusts, including complying superannuation funds and deceased estates, are excluded from the new measures.
Given the above proposed changes, there are significant planning issues that should be considered by taxpayers. For example:
- For trustees of existing land owning discretionary trusts, thought should be given to whether a nomination is made and, if so, who is nominated. Regard must be had to any interests in other land owned by the nominated beneficiary as well as the existing “disregarded minor interest” provisions.
- For trustees of unit trusts (including widely held unit trusts), the directors of the trustee will need to consult with the unitholders to come to a satisfactory position on whether all of the unitholders interests are to be notified to the Commissioner, or whether the trustee will instead be subject to the surcharge rates.
- For corporate groups, there will be a need to carefully consider the director and shareholding structure of the various companies in the group. The controlling interest provisions will be important here, and in particular, determining whether a controlling interest might arise other than by way of the shareholding of the company (for example, by an ability to indirectly influence voting power).
- Larger groups may consider any available restructuring opportunities as some structures are bound to have less palatable taxation outcomes than others. Of course, potential exposure to the State general anti-avoidance measures should not be overlooked in any restructuring exercise.
Keep Your Eye on the Detail
As the current Bill remains in draft form and subject to a consultation period, there are a number of issues that will need to be carefully monitored. These include, for example, the following matters:
- It will be imperative to form a view on whether a trust is in fact a discretionary trust, a unit trust or a fixed trust. Such action will be crucial for the purposes of determining whether a nomination in respect of pre-existing trust land can be made and, further, how the trust will be subject to land tax on an ongoing basis. This will require careful consideration of the trust deed in each case. Significantly, the legislative definition of a “discretionary trust” appears to turn only on the interests of beneficiaries as to trust capital (and not income).
- Issues arise as to how companies might be grouped in circumstances where they are owned by discretionary trusts with different trustees, but which are controlled within a family group. Often these involve overlapping (but not necessarily the same) interests. A careful assessment of how the new controlling interest provisions will apply to each group therefore becomes imperative.
- The draft legislation imposes significant notification requirements on taxpayers, which include notifying the Commissioner whenever a trustee acquires or disposes of land in South Australia. This extends to existing land owning trustees who are required to notify the Commissioner of their South Australian landholdings within one month after the commencement of the new measures. The precise details required to be disclosed to the Commissioner are not clear on the face of the draft legislation. These additional disclosure requirements are likely to significantly change the face of land tax compliance and assessment going forward.
- Where the trustee of a fixed trust or a unit trust notifies the Commissioner of the beneficial land owners, but subsequently withdraws that notification, the draft legislation precludes that trustee from subsequently lodging another notice with the Commissioner in respect of that trust. It is therefore critical that decisions to make and/or withdraw notifications are not made lightly, but are instead the product of careful consideration of the likely outcomes.
While it is pleasing that the Government has made some concessions in relation to its land tax package and proposes to consult on the draft legislation, there are clearly some unresolved issues.
It is disappointing that there is only limited grandfathering under the draft legislation (in terms of discretionary trust nominations for pre-existing trust land). In the authors’ view, given the impact of the changes on existing land owners who have legitimately structured their affairs under the current law, a more comprehensive grandfathering arrangement should be provided if the measures are to be implemented.
Cowell Clarke is maintaining an active brief on the proposed measures, including during the upcoming consultation period, and is able to assist in advising on the impact of the proposed measures as they may relate to your circumstances.