Treasurer, Rob Lucas, announced on Monday night changes to the State Government’s proposed land tax reform package, which was first announced as part of the 2019-20 State Budget handed down on 18 June 2019.
Since the announcement in June, there has been a lot of talk about the impact of the proposed changes, particularly given that South Australia already has the highest land tax rates in Australia. The proposed changes appeared to result in South Australian property owners with multiple ownership structures incurring massive increases in their land tax bills from 1 July 2020.
The current law
Before considering the proposed reforms it is important to understand the law as it currently stands in South Australia.
The Land Tax Act 1936 (SA) (“Act”) currently imposes land tax on the basis of legal ownership of land and provides for the aggregation of the taxable value of all land in South Australia owned by the same taxpayer, regardless of how that land is held. Land tax is imposed at a progressive rate and so as land is aggregated a higher tax liability for the taxpayer arises when compared to when a parcel of land is assessed on its own.
The application of the aggregation principles under the Act are subject to certain qualifications concerning trusts. For example, if two parcels of land are held by a taxpayer in their capacity as trustee in different trusts, but the beneficiaries of each trust are different, the aggregation rules do not apply.
This means that by using holding structures that split landholdings among different corporate trustees (i.e. different taxpayers) or trusts with different beneficiaries, some individuals have, until now, been able to avoid the effects of aggregation.
Primary production land and land that is valued below the minimum threshold of $391,000 is exempt from the operation of the Act.
The proposed changes
When the State Budget was handed down, the proposed reform focused on three significant changes to the existing system:
- The introduction of new aggregation provisions that will “look through” the legal structures that have in the past avoided the effect of aggregation. Individuals will be taxed as the ultimate owner on the entire value of their property portfolio, and surcharges will be imposed on certain trusts where the interests in land of trust beneficiaries cannot be determined.
- A progressive reduction in the top marginal land tax rate (where the value of ownerships is above $5 million) from 3.7% to 2.9% by 1 July 2027.
- An increase in the tax-free threshold for land tax to $450,000.
The changes are based on similar models used interstate to deter people from creating complex legal ownership structures in order to minimise land tax.
The Government announced on Monday night that instead of a progressive reduction in the top marginal rate over seven years as previously indicated, it would immediately slash the top rate to 2.4%. The Treasurer, Mr Rob Lucas, said the reduction was made possible by the land tax revenue gain from the new aggregation provisions being larger than predicted.
Treasury estimates that at a top tax rate of 2.4%, the aggregation changes will raise an extra $86 million per annum. The Government predicts that 4,300 individuals and 2,600 company groups will have to pay more land tax under the proposed reform. Overall however, Mr Lucas has estimated that $70 million less land tax revenue will be collected by the Government over the next three financial years.
At the time of writing, these changes were yet to pass through parliament. We will keep you up to date with any further developments.