How will the South Australian Land Tax Changes affect you?

Dec 3, 2019

After several amendments, the contentious changes to Land Tax in South Australia have passed through parliament and will apply from the 1st of July 2020. The amendments have introduced further cuts to land tax rates but the changes to aggregation of properties remain. The changes to aggregation mean that land owners can no longer avoid paying higher rates of tax by structuring multiple property holdings in different entities.Previously you could have, as an example, one property held by an individual, one held jointly with their spouse and one held by their spouse treated as three different owners. Under the new rules the value of the joint holding will be added to the two individuals holdings to potentially require a higher rate of tax to be paid. Where you hold land in a Trust it will be vital to obtain advice prior to 30 June 2021 regarding elections that can be made to potentially save thousands in tax. Each individual circumstance is unique so please contact us for assistance.

In summary the changes:

  • Reduce the top land tax rate from 3.7% to 2.4%
  • Reduce the second highest land tax rate from 2.4% to 2%
  • Reduce the third highest land tax rate from 1.65% to 1.25% for 2020/21 and 2021/22 and down to 1% from 2022/23
  • Increase the tax free threshold from $391,000 to $450,000
  • Increase the threshold at which the top rate applies from $1,302,000 to $2,000,000
  • Introduce a surcharge rate of tax for certain trusts of 0.5% from $0 up to the second top threshold of approximately $1,100,000, decreasing to 0.4% from $1,100,000 up to the top tax rate threshold ($1,350,000 for 2020/21 and 2021/22 rising to $2,000,000 from 2022/23). The surcharge does not apply beyond the top tax rate threshold (maximum surcharge approximately $6,500 for 2020/21 and 2021/22, rising to approximately $9,165 from 2022/23)
  • The new trust surcharge wont apply to certain trusts including:
    • Unit trusts where unit holdings are notified to the Commissioner
    • Discretionary Trusts where land was held prior to 16/10/2019 and a single individual is nominated as the sole beneficiary by 30 June 2021
    • Charitable Trusts
    • Self Managed Super Funds
    • Bare Trusts established solely for a limited recourse borrowing arrangement for a Self Managed Super Fund
  • Group related Companies and tax them as a single entity

The effect of the land tax cuts on property held by a single entity for the 2021 Financial year are approximately:

Total Value of Land

Approximate Value of Tax Cuts (Individual)

Approximate Value of Tax Cuts (Trust with surcharge)

$450,000

$188

$2,062 net loss

$755,000

$188

$3,587 net loss

$1,098,000

$1,559

$3,930 net loss

$1,350,000

$2,567

$3,930 net loss

$2,000,000

$11,017

$4,520 net gain

The effect of the land tax cuts on property held by a single entity for the 2023 Financial year are approximately:

Total Value of Land

Approximate Value of Tax Cuts (Individual)

Approximate Value of Tax Cuts (Trust with surcharge)

$477,000 (Estimate of indexed bracket amount)

$188

$2,197 net loss

$801,000

$188

$3,815 net loss

$1,165,000

$2,554

$5,637 net loss

$2,000,000

$14,344

$4,991 net gain

From the above tables it can be seen that for an individual who owns all of their property in their own name, there is a minimal saving from the changes up to a land value of around $750,000 which then increases the higher the value of the total property held is. For property held in a Trust, the Trust is worse off up to a land value of around $1,600,000 and then starts to be better off from the changes as a result of the tax cuts becoming higher than the trust tax surcharge. If the Trust is a unit trust, the Commissioner can be notified of the unit holdings to avoid the surcharge. If the Trust is a discretionary Trust, land held prior to 16/10/19 can be nominated to be held by a single beneficiary prior to 30/6/21 to avoid the surcharge. Once an election is made, it can be revoked but you wont be able to make a new election in future. In both of these cases, Land tax is assessed at the Trust level first and then the nominated beneficiary is taxed on their share of the land value, less a non-refundable credit for their proportion of tax paid by the Trust. The credit can be used to reduce tax payable by the beneficiary for all land held by the individual. Different rules apply to land held by a trust that qualifies as a principal place of residence.

The biggest impact of the changes, along with the above mentioned trust surcharge, is going to be the grouping of property. One example is that where property is held jointly, previously the joint ownership was treated as a different owner from the individual but jointly held property will now be split between the relevant owners and added to the value of other properties held by the individual. Another example is where two Companies are related, their land holdings will be grouped together and taxed at higher rates. There is an exception to the Company grouping rules in certain circumstances for large residential developments. The changes can increase land tax significantly as can be seen in the following example:

Scenario:

Mr Investor

Mr & Mrs Investor

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

New Tax Position

In the 2021 Financial Year, Mr Investor's land interests would be 100% of Property A, 50% of Property B and 100% of Property D (assuming a notice has been lodged with the Commissioner to advise the unit holdings). Mrs Investor would own 50% of Property B and and the Family Trust is treated as owning 100% of Property C assuming no beneficiary nomination has been made. This would result in the following estimated tax position based on estimated 2021 thresholds:

Mr Investor

Mrs Investor

Investor Family Trust

Investor Unit Trust

Total

$8,853 less $250 credit from the Unit Trust

$0

$2,750

$250

$11,603

If alternatively no notice was lodged notifying the Commissioner of the unit trust holdings and a notice was lodged to nominate Mrs Investor as the sole beneficiary of the Family Trust the estimated tax position would be:

Mr Investor

Mrs Investor

Investor Family Trust

Investor Unit Trust

Total

$1,500

$1,500 less $250 credit from the Family Trust

$250

$2,750

$5,750

From the above tables you can see that the family's Land Tax bill could increase under the new rules by as much as $9,423 per year. What the above also highlights is the importance of the choices made regarding elections to the Commissioner. By altering elections for the two trusts in the above example the family could save $5,853 per year. Therefore it is vital to get appropriate advice before 30 June 2021 to make appropriate elections that result in paying the minimum amount of tax. In some cases you'll need to make an election and in others you wont. Each individual circumstance is unique so please contact us for advice.