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Aggregation Avalanche - The Commissioner Speaks...

The South Australian Commissioner of State Taxation has recently issued detailed guidance on the State’s sweeping land tax reform measures. The new publication from RevenueSA, titled “Land Tax Guide to Legislation: Changes for Joint Owners, Land Held on Trust & Related Corporations” (“Guide”), comprises some 27 pages of statutory interpretation, analysis and worked examples.

This article will summarise some of the topical issues now clarified by the Guide, as well as commenting on major unresolved issues. For an overview of the measures generally, see our previous article titled “Land Tax Reform is Here - Buckle in!”. Readers should refer to this previous article to understand the broad concepts associated with the new land tax regime.

All statutory references in this article are to the Land Tax Act 1936 (SA) (“LTA”).[1]

For consistency of expression, the following terms are adopted in this article:

  • “pre-existing trust land” is land subject to a discretionary trust on or before midnight on 16 October 2019;
  • “designated beneficiary nomination” is a nomination made by the trustee of a discretionary trust in favour of a natural person potential beneficiary of the trust in respect of pre-existing trust land;
  • “trust notification” is a notice given by the trustee of a unit trust or fixed trust to the Commissioner disclosing the identity and proportionate interests of unitholders or fixed beneficial interest holders in the trust; and
  • “surcharge rates” means the surcharge rates of land tax imposed on trust landowners in the absence of a designated beneficiary nomination or trust notification having been made.[2]

Finally, the use of the terms “discretionary trust”, “unit trust”, “fixed trust” and “excluded trust” are used here as they are specifically defined in the LTA.[3]

Trust Issues

The Guide clarifies the Commissioner’s view on a number of significant issues involving land held on trust, namely:

  • The Guide makes it clear that land held upon trust, whether a discretionary trust, unit trust or fixed trust, cannot be aggregated with land held upon separate trusts.[4] The Commissioner has also removed any remaining doubt that land held upon separate trusts can be aggregated by virtue of their corporate trustees being related corporations.
  • Suggestions have been made in some quarters that where a unit trust or fixed trust makes a trust notification and the unitholder/beneficiary is itself a trustee of a further trust, the general rates (rather than surcharge rates) apply to the unitholder/beneficiary. The Commissioner makes it clear, however, that where a trust notification is in force, the surcharge rates apply on the land imputed to the unitholder/beneficiary, subject to the exception below.[5]
  • The Guide makes it clear that where a unitholder/beneficiary is itself a trustee for a further trust that has been imputed with land by virtue of a trust notification, that further trustee can in turn make a trust notification to the Commissioner of its unitholders/beneficiaries so that surcharge rates do not apply.[6] In this sense, the trust notification can have a “cascading” effect where there are multiple fixed trusts and unit trusts involved.
  • Where a discretionary trust holds units in a unit trust and the unit trust holds land that was acquired on or before midnight on 16 October 2019, a trust notification made by the trustee of the unit trust will not allow the discretionary trust to treat the land imputed to it as pre-existing trust land.[7] In other words, a discretionary trust unitholder cannot make a designated beneficiary nomination in respect of its imputed land. This is rationalised - correctly in the authors’ view - on the basis that the land was not, as a matter of fact, subject to the discretionary trust on or before midnight on 16 October 2019.
  • The Guide confirms the Commissioner’s view that where an excluded trust (such as a self-managed superannuation fund (“SMSF”)) either jointly holds land with another entity, or is imputed with land by virtue of a trust notification, such land will not be aggregated with other land owned or imputed to the excluded trust.[8] This raises pertinent planning issues in the context of landholding SMSFs that also hold units in unit trusts that own land. In particular, a trust notification by the unit trust will have the benefit of allowing the unit trust to be assessed at general (rather than surcharge) rates without the downside of aggregation occurring at the SMSF level. Moreover, as a security trust established under a limited recourse borrowing arrangement is a discrete form of excluded trust, the land held on such a trust is not aggregated with the land held by the SMSF trustee.
  • The Commissioner also confirms, correctly in the authors’ view, that a testamentary trust is not a deceased estate (and therefore cannot qualify as an excluded trust). The rationale is that a testamentary trust only commences to exist once the administration of a deceased estate ends.[9] A testamentary trust will normally fall within the definition of either a discretionary trust or a fixed trust depending on the terms of the deceased’s Will with the consequences that arise from its characterisation.

Related Corporations

The Guide also clarifies a range of topical issues with respect to related corporations, namely:

  • The Commissioner provides much needed clarity on the circumstances in which land held by a corporate trustee might be aggregated with land held by corporations that are related to the trustee. The Commissioner confirms that there is only one exception to the rule that land owned by a trust is not subject to aggregation with land held by other entities (in the absence of a designated beneficiary nomination or trust notification being made). This is where section 13G(5) of the LTA applies.[10]
  • Section 13G(5) provides that corporations will be related corporations if one of the corporations is the trustee of a unit trust (or fixed trust) and the other corporation (or other related corporations between them) owns more than 50% of the units or beneficial interests (respectively) in that trust. Importantly, the Commissioner’s view is that section 13G(5) would only apply to aggregate the land held by the unit trust (or fixed trust) with land held by a company unitholder/beneficial interest holder where the company holds the land in its own right and not as trustee of a trust.[11]
  • For the purposes of applying the controlling interest test for related corporations, there has been some ambiguity as to whether the directors of a shareholding company might be seen as persons who are in a position to control the casting of votes in relation to the subsidiary corporation.
  • The Commissioner’s view is that the directors of a corporation that owns shares in another corporation are persons who are able to control the casting of the votes in the second corporation.[12] While the relevant example in the Guide deals only with a company that holds shares in a further company in its own right, the authors expect this would extend to a situation where shares in a company are held by a company as trustee for a trust.
  • The Commissioner confirms that where shares in a corporation are held by an excluded trust, and are therefore to be disregarded for the purposes of the related corporation provisions, the remaining interests of the shareholders in the company other than the excluded trust remains the same.[13] For example, if Company 1 owns 49% of the shares in both Company 2 and Company 3, and SMSF 1 owns the remaining 51% of the shares in Companies 2 and 3, Companies 2 and 3 would not be related based solely on the shareholding. This is because the disregarding of SMSF 1’s shareholding does not cause Company 1’s interest to increase to 100% in each of Companies 2 and 3.

Other Issues Clarified by the Guide

Other issues clarified by the Guide include the following:

  • In order to make an application for exclusion from being aggregated as a related corporation under the residential developers’ concession, the legislation requires that the land is held for the purpose of being developed as a residential development of more than 10 allotments or lots. The Commissioner appears to adopt the view in the Guide that the requirement for the development to comprise more than 10 allotments or lots applies on a company by company basis.[14] That is to say that while the development of the 11 or more allotments can be across more than one parcel of land owned by the same company, the Commissioner seems to require that the land upon which the 11 or more allotments is being created is held by a single corporation (as opposed to being held by multiple related corporations). This interpretation may restrict the application of the developers’ concession to existing development structures and also necessitates that care is taken when structuring residential developments in landowning companies going forward if the developers’ concession is being sought.
  • The Guide appears to suggest that it is mandatory to make disclosure of land held in trust to RevenueSA where the land is merely deemed to be held by a trust because of a trust notification.[15]
  • The Commissioner confirms that, where land qualifies for an exemption from land tax, the land is exempt for all land tax purposes. For instance, where land is jointly owned and only one owner uses the property as a principal residence, the other owner still receives the benefit of the exemption. Moreover, where a discretionary trust with exempt land has made a designated beneficiary nomination, that designated beneficiary will also receive the benefit of the exemption.
  • The Commissioner makes it clear that, where a beneficiary of a trust is imputed with land as a result of a designated beneficiary nomination or trust notification, the intention of the legislation is not to give rise to any consequences outside of the LTA.[16] This includes, for instance, any person being deemed an owner of land for stamp duty purposes, Federal income tax purposes or for First Home Owner Grant or social security eligibility purposes.

Unresolved Issues of Significance

Regrettably, the Guide fails to address some of the pertinent issues that require urgent clarification given the commencement date of the new regime from 30 June 2020. For instance, the Guide does not provide any clear guidance on circumstances in which corporations that are owned by the same trustee of different trusts can be aggregated.

Unfortunately, there also remains ambiguity in relation to the application of section 13I(1)(g) of the LTA. This provides that where a trustee holds controlling interests in two or more corporations on behalf of different trusts, those corporations are not related to each other only because of that control.

While the Commissioner acknowledges that the legislation provides for this outcome,[17] the Guide does not provide any clarity as to whether the Commissioner might consider a basis for grouping two companies owned by the same trustee for different trusts on a basis other than the controlling interest test. For example, it may be possible to group the two companies in this scenario because the directors of the corporate trustee are necessarily the same (it is the same company) and therefore the same persons have a controlling interest in each corporation (as opposed to the trustee itself having that controlling interest).

The scope and operation of section 13I(1)(g) remains, in the authors’ view, a somewhat vexed issue.

Looking Ahead

With the 30 June 2020 implementation date now imminent, it will be critical for landowning groups to seek appropriate specialist advice to ensure they are best placed to negotiate the new regime and optimise outcomes.

Cowell Clarke has dedicated significant resources to this area and is well placed to assist in advising on the impact of the land tax measures as they may relate to your circumstances - Contact Us. This article was recently featured in CCH Tax Week on CCH iKnow.

[1] Amended most recently to accommodate the new land tax regime by the Land Tax (Miscellaneous) Amendment Act 2019 (SA).

[2] This is broadly an increase in the land tax liability of an amount equal to 0.4% to 0.5% of site values up to the highest threshold.

[3] Section 2(1).

[4] In the absence of a designated beneficiary nomination or trust notification being made.

[5] Page 16 of the Guide.

[6] Page 16-17.

[7] Page 16.

[8] Page 17.

[9] Page 19.

[10] Page 19.

[11] Pages 19 and 23.

[12] See Example 4 on page 22.

[13] Example 11 on pages 25 and 26.

[14] Page 27.

[15] Example 3 on pages 16-17.

[16] Page 20.

[17] Pages 24 and 25.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.

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