Where to begin with a summary of the SA Government’s ‘historic’ land tax reform?
There is certainly plenty to be said about the ‘story behind the story’ – take, for example:
- The complex labyrinth of lobbying and political vote trading which saw several revamps, compromises, and shifting loyalties over the last six months;
- How a measure morphed from the promise of swelling the Government’s coffers to ending up giving back to many taxpayers in the form of various tax breaks, transition packages and other subsidies; and
- The cloud of confusion that remains as to who the true winners and losers are. The measures simultaneously promise to close loopholes and make SA more competitive.
The legislation has now passed State Parliament, and while the Government highlights headlines that the reform “massively slashes” the top land tax rate (from 3.7% to 2.4%) a lot of South Australians are still struggling to decipher what exactly the legislated changes included now that the dust has settled on negotiations.
While some wealthy landowners appear happy with a reduced top rate, it is fair to assume that many property owners will rightly fear that taking no action is going to result in more tax being paid, not less overall. While at the same time, many are confused as to where to begin implementing changes.
What you need to know
The key amendment proposed by these reforms – that high-wealth investors will no longer be able to use separate trust and company structures to avoid paying land tax – remains a central feature of the bill passed into law. The measures will group 'related corporations' based on whether the same persons control (i) the overall share capital of the Companies, (ii) the composition of the Board, and (iii) voting power.
For land owned by trusts, the rules will differ for discretionary and unit trusts. It is here where decisions will need to be made:
- The directors of trustees of unit trusts will need to consult with unitholders to agree whether unitholders’ proportional interests are to be notified to the Commissioner, or instead whether the trustee will be subject to surcharge rates
- Land held by trustees of discretionary trusts* will be subject to land tax at surcharge rates, subject to the ability of the trustee to nominate a beneficiary as the ‘owner’ of the land held in the trust (this must be accompanied by a statutory declaration by the nominee).
*Exceptions from the operation of the abovementioned Trust Surcharge will still be provided for certain trusts such as Complying Superannuation Funds and deceased estates (the latter subject to time limitations).
Thankfully, an extension to the beneficiary nomination period for discretionary trusts has been granted to 30 June 2021, allowing more time for decision-making.
There will be a tax-optimal strategy for every South Australian landholder group. The key will be to model alternative scenarios to identify the optimal pattern of notional ‘land ownership’, to ensure wealth can be sheltered from higher tax.
As with any tax consideration, it will be essential to start this process early, applying the rules to the specifics of your own group profile, and making realistic forecasts to ensure that a short-term decision to mitigate the immediate tax risks does not come at a long term cost.
What else is new?
The land tax overhaul has been through five separate changes since first being announced in the June state budget; some made to appease independent and minor parties in state parliament, others to regain lost loyalties from industry allies.
The changes include a $25 million transition fund for individual taxpayers and companies hit by higher land tax bills under the new aggregation changes. This transition fund will operate for three years and gives taxpayers the opportunity to restructure their affairs over that time. There will also be concessions for developers of affordable housing and new residential estates. Taxpayers will benefit from considering whether these measures will apply to them.
While the changes leave SA’s top land tax rate higher than that of NSW, at 2 per cent, and Victoria, at 2.25 per cent, it is lower than Western Australia's 2.67 per cent, and Queensland's commercial property land tax, at 2.75 per cent. The jury is out on whether this will have the desired outcome of making SA more competitive. It would seem, however, that while the Government was able to ultimately close a tax loophole, the confusion caused in the process of doing so makes it hard to clearly call ‘winners and losers’, and this makes the reform anything but an unqualified political victory.
After receiving Royal Assent, the measures will take effect from July 1, 2020.