Huge Land Tax Increase proposed for South Australia

Jul 22, 2019

The South Australian budget contained a nasty surprise for property investors who hold multiple properties under different ownerships or family trusts with a change to how land tax is calculated.

Currently properties owned under individual or joint names are treated as different owners for land tax purposes meaning that both the individual and the joint owner have the benefit of their own tax free threshold and lower tax rates. This produces a significant saving for owners of multiple properties who structure their holdings under different names.

Under the proposed changes, for which the exact details are yet to be announced, the value of a persons property holdings will be calculated based on aggregating their ownership across all entities. For many multiple property owners this will result in a significant tax increase. The other proposed change is likely to mean that family trusts will not have access to a tax free threshold. These changes will make South Australia's calculation method similar to Victoria and New South Wales.

A land tax cut was also announced to the top land tax rate which will reduce the rate on properties valued between $1,302,000 and $5,000,000 from 3.7% to 2.9% from 2021 and to reduce the rate applicable to land valued above $5 million by 0.1 percent per year over the next eight years from 3.7% to 2.9%. The tax free threshold will also be increased to $450,000. These decreases will not come close to offsetting the impact of aggregation for many multiple landowners.

Below is an example of what the changes might mean:

Scenario

Mr Investor

Mr & Mrs Investor Jointly

Investor Family Trust

Investor Unit Trust (100% of units owned by Mr Investor)

Property A - Land Value $500,000

Property B -Land Value $500,000

Property C - Land Value $500,000

Property D - Land Value $500,000

Current Tax Position

Under the current land tax rules, The Investor family above, is treated as having property under four separate ownerships, each having their own tax free threshold and low tax rates. Each pays no tax on land under $391,000 (The tax free threshold for 2020) and then 0.5% on values between $391,000 and $716,000. The Land Tax payable in this scenario is:

Mr Investor

Mr & Mrs Investor

Investor Family Trust

Investor Unit Trust

Total

$545

$545

$545

$545

$2,180

Proposed Tax Position

Under the proposed changes, Mr Investor's land interests would be 100% of Property A, 50% of Property B and 100% of Property D. Mrs Investor would own 50% of Property B and the Family Trust is treated as owning 100% of Property C. The Unit Trust is not treated as an owner because it's beneficial owners have fixed entitlements. This would result in the following estimated tax position based on proposed 2021 rates and considering what rules may be applicable:

Mr Investor

Mrs Investor

Investor Family Trust

Investor Unit Trust

Total

$11,701

$0

$2,500

$0

$14,201

The Investor family's annual land tax bill would increase by $12,021 under the proposed new rules.