Land Tax – Top 5 Mistakes

Unlike many taxes which are generally passive in nature, the New Land Tax provisions allow you to make a number of active choices including nominating a designated beneficiary of a Discretionary Trust, Notifying the Commissioner (or not) of Unit Holders of a unit trust, or choosing who will be the director of a land owning company. All these choices, and there are many, will effect how much land tax you pay. Making the wrong choices can result in thousands more in tax each year… every year… forever – there are no do overs! Once these choices are made, they can’t be remade or altered. You have until 30 June 2022 to correct any mistakes.

Here are a few of the common mistakes I’ve seen so far:

1 – Nominating/Notifying all Trusts:

There are two rates for SA Land Tax – the General Rate and the Trust Rate. The Trust Rate is much higher than the General Rate. When you nominate/notify a trust the rate of tax switches from the trust rate to the general rate. Most people think this is a good thing because the general rate is lower, however this can be a huge mistake in many cases. Lets say Sally owns two properties each with a site value of $450,000 held in a trust and she nominates herself as the designated beneficiary. Each of the Trusts will be taxed at the general rate and pay $0 because they are under the threshold, however Sally is going to be assessed on a total site value of $900,000 and pay $3,577.49 in land tax each year. If Sally only nominated 1 of the trusts then one property would be taxed at the trust rate paying $2,250 and one at the general rate paying $0. Sally will be better off by $1,327.49 per year if she only nominates one of the trusts. Conversely if the site value of each of the properties was 225,000 then sally should nominate both of them and pay $0. There is no optimum strategy, its all a balancing act.

2 – PPR Exemptions

Not getting the Principal Place of Residence exemption can have a huge impact on your land tax. It is really easy to stuff up, but also really easy to fix. Let’s just say you own your home in a Trust, the trustee is a company. If you nominate/notify a person who lives there then you will get the PPR exemption**. However, you might not want to nominate/notify that trust because you might intend to keep it as an investment at a later date and because of the example 1 its better not to nominate/notify. Having a corporate Trustee is great for asset protection BUT you will now lose the PPR exemption under section 5(10) because the trustee doesn’t live in the property. All you need to do is change the trustee to someone who lives in the property… however if you don’t this before 30 June each year you will lose your PPR exemption and get hit with land tax.

**Be careful you don’t nominate an older child who might move out though, once they move out you will lose your PPR exemption! Potentially you can still gain the exemption under 5(10) though… the legislation is not clear on this point.

3 – Not making use of Credits

Credits for Land Tax paid is another important aspect to consider when making the decision to nominate/notify. Credits expire and do not carry over, so use them or lose them. Where two people jointly own a property, they will first be taxed jointly on the site value. Secondly they will be then they will be taxed individually on 50% of the site value; and receive a credit of 50% of the tax paid.

For example, lets say Jack and Jill jointly own a property worth $900,000. There are two properties owned by separate discretionary trusts each with a site value of $300,000. Firstly, they will be taxed on the full value of the $900,000 property needing to pay $3,577.49. Secondly Jack and Jill will each be attributed $450,000 of site value to their personal names paying tax of $0 (as it will be under the threshold), and also receive $1,788.75 of credits each.

If we don’t nominate either trust then the total tax payable will be $6,577.49.

If we nominate Jack and Jill as a beneficiary of the trust, then they will each be taxed on the value of their land owning being $750,000 and be required to pay $1,702.49 but also receive a credit of $1,788.75, the total tax payable by Jack and Jill will therefore be reduced to 0. That makes the total tax payable $3,577.49.

It’s a complicated process to calculate the best ways to use credits, but it can save you a significant amount of money each year if done correctly.

4 – Company Aggregation

How companies will be aggregated is anyone’s guess at this stage. The legislation is not clear and the Commissioner has inferred that common directors can cause the aggregation of companies despite the legislation having no mention of directors. The legislation also states that where two or more people together can control the composition of the board then they will be aggregated. Now this could mean that every company in Australia is aggregated. Imagine A and B (who have never met each other) are each the sole shareholder of a company; well together A and B can control both companies so will they be aggregated? Surly not…. Surely…

More likely I think it means if A,B,C are 1/3^rd shareholders of a company and A,B,D are 1/3^rd of a company, then the two companies will be aggregated as A and B together will have more than 50% control of both companies. If A and B were a married couple, it could simply be a case of transferring their interests such that A has a 66% interest in company 1, and B has a 66% interest in company B, and they would no longer be aggregated.

Likewise for directors, if John and Johanna (husband and wife) own two commercial properties each worth $450,000 and they are each 50% shareholders, John has been made the director of both companies in the past for ease of administration. If aggregation was to occur by virtue of John’s control of each company, then we could simply make John the director of one company and Johanna the director of the other.

5 – Unit Trusts owned by Discretionary Trusts

It seems that Commissioner is going to assess land held subject to a unit trust which notifies that a discretionary trust is the Unit Holder as not being pre-existing land (yes that’s quite a mouthful but it makes sense to me).  This is disastrous as a discretionary trust owning units in a unit trust that owns land is not an uncommon joint investment structure. Pre-existing land being held by the same trust as post-existing land results in a poor outcome for the taxpayer. You would think that if the Unit Trust and Discretionary Trust both notify/nominate then the beneficiary will get the credits and be liable for tax at the general rate. The Commissioner seems to want to go the other way, I think the Commissioner’s view is liable to be challenged in court. But… this issue is that you wait for the court outcome, your chance to nominate the discretionary trust will be lost. It is perhaps better in this case to nominate the discretionary trust which must be done before 30 June 2021 and then hold off on the Unit Trust Nomination until the Commissioner’s position becomes clear or it is challenged in court. This won’t trouble most people but if a land owning Unit Trust whose units are owned by a discretionary trust means something to you, then you have some serious thinking to do.