South Australian landowners are stung with the highest rate of Land Tax in Australia. The proposed changes to the Land Tax Bill will have little or some impact on Mum and Dad investors but the changes will impact investors with larger property portfolios.
Under existing arrangements, some landowners set up complex ownership structures. This creates a tax loophole designed to minimise or avoid land tax payable.
For example, a taxpayer who controls 10 taxable pieces of land across 10 trusts – with each trust having a slightly different composition of beneficiaries - could be subject to the land tax on the individual value of each parcel (disaggregated), rather than on the combined or aggregated value of all, despite the fact they are all controlled by the same owner.
The new proposed changes to the Bill will see this tax loophole being closed to minimise the disaggregation of land ownership and create a more level playing field.
Where a taxpayer owns two or more pieces of land, the land value is aggregated for the purposes of Land Tax. The owner doesn’t pay tax on land valued below $323,000. The tax rates will increase up to a maximum of 3.7% above $1.078M.
Take a look at the examples below:
- Three properties with land value of $330,000 which are disaggregated would incur land tax of $210 total
- If those same three properties are aggregated (total value $990,000) would incur land tax of $9,206
- Purchasing another 3 pieces of land (total value $1,980,000) that are aggregated would incur land tax of $45,030
Disaggregating properties for the purposes of Land Tax is therefore very beneficial.
Up until 2007, it was common for taxpayers to use minor holdings (below 5%) to create different combinations of ownerships. A different ownership combination constitutes a different taxpayer. Therefore, each property would be disaggregated. However, minor interest are now ignored.
Since then there has been an increase in the use of different trusts to create different ownerships. Often the same trustee is used to reduce costs. Because each trust is considered a different taxpayer, the properties will be disaggregated.
The new arrangement will include:
- A shift to aggregating based on an owner’s interest in every piece of land, rather than only aggregating properties held in the same ownership structure;
- Introducing provisions to allow two or more related companies to be grouped for land tax purposes, and
- Introducing a surcharge on land owned in trusts in cases where the interests in land of trust beneficiaries are not disclosed or cannot be identified. This is designed to minimise the incentive to own properties in trusts to avoid aggregation by increasing the tax payable. There will be exceptions from the surcharge for certain trusts such as special disability trusts, guardianship trusts, complying superannuation funds. Consultation will be undertaken prior to implementation.
Treasurer Rob Lucas says, “This measure is aimed squarely at closing a loophole that may encourage some landowners to form complex ownership structures designed purely to avoid paying land tax. We don’t think that’s fair and we will be introducing a model that works well interstate in Victoria and New South Wales. We will consult before introducing the new arrangements on July 1, 2020.’’