Very Taxing Times for Property Investors
On 9 September 2019, following the delivery of the State Budget on 18 June 2019, the SA Government released the much-anticipated draft of the Land Tax (Miscellaneous) Amendment Bill, 2019.
The draft Bill proposes to lower substantially the top rate for land tax from 3.7% to 2.4%. However, the new provisions will impose special higher rates on land held by trusts and also aggregate land held by related companies. Those measures will increase significantly the land tax payable by many property owners.
For example, a family that owns four  properties worth $500,000 each, in four  separate family trusts, currently pays land tax of $2,180 per annum. Under the proposed changes, the land tax on the same holding will potentially increase to $34,322 per annum.
The Bill will provide a mechanism by which the effect of the new trust rules can be avoided or reduced—by allowing the trustee to designate a specific beneficiary under the trust as the owner, solely for land tax purposes. That specified beneficiary must be a natural person. Once that choice has been made, another beneficiary cannot replace the specified beneficiary as the owner. Landowners will therefore need the foresight of Nostradamus before committing to such an election!
5 Key Issues
In addition to the trust and aggregation measures, a number other key issues that require further discussion and analysis include:
1. Is the rate reduction sufficient?
Although the top rate of land tax would reduce from the current 3.7% (the highest in Australia) to 2.4%, is that reduction enough to keep South Australia competitive?
2. Should there be different thresholds for properties held by trusts?
Where property is not held by a trust, no land tax is payable if the property has a site value of less than $450,000—but trusts in some cases will start paying tax once the value exceeds $25,000. Given the importance and prevalence of trusts in commercial and family dealings, is favouring one form of ownership over another (i.e. trusts) something the Legislature should be dictating?
3. Should there be transitional relief?
Given that investors have in many cases entered into long-term property holding arrangements on the basis of the current law, should there be some transitional relief, or relief from stamp duty, to allow investors to restructure their affairs?
Although the proposals will reduce the top rate, and increase the tax thresholds, the new trust and aggregation rules will adversely affect a significant number of individual investors, who are certainly not “big end of town”.
4. What are the implications for asset protection & structuring?
The higher rates applicable to property held by trusts, and the aggregation rules for related companies, will have significant implications for legal structures used to protect assets and ensure orderly family and business succession. Considerable thought needs to be given—at the earliest opportunity—to the implications of the new rules on existing and proposed structures.
5. Is the reform process all over (bar the shouting)?
Although the Bill involves concessions on the Government’s part, a number of Industry Groups are clearly unhappy with the trust and aggregation proposals and have made clear they will continue to lobby against the changes. The State Opposition has also indicated it is yet to decide whether to support the Bill—and until the Bill is passed by Parliament and receives Royal Assent, it will not be law.
The Government has invited submissions on the draft Bill by 5.00pm, 2 October 2019. The changes will come into effect on 1 July 2020 if the draft Bill becomes law. If you want to have an opportunity to assist the Government identify any unintended consequences of the draft Bill, Finlaysons can assist you in preparing and submitting a submission.
This article is not intended to be a complete and definitive statement of the law and the information and views contained in it should not be regarded as a substitute for specific advice in individual situations. Further professional advice should be sought before applying the content of this article to particular circumstances.