We expect to see certainty return to the South Australian property market, which has struggled during the drawn out and hotly contested debate on the Bill. We also anticipate that the amended Bill in its final form will boost business confidence, which has recently been flagged as the lowest on record for the State.
The key changes introduced by the Bill, which commence from 1 July 2020, include a reduction in the marginal rates of Land Tax, increases to the thresholds at which each rate applies, and new aggregation rules.
We will see the top Land Tax rate drop from 3.7% down to 2.4% with effect from 1 July 2020. Additionally, the top threshold at which this rate kicks in will increase to $1.35m in 2020 and to $2m from 1 July 2022. These changes will bring us closer to the other States, where the average top rate is below 2%.
New aggregation rules will also come into place. The law will assess each owner on the total value of land held in their name, regardless of whether the land is held jointly with others.
Land held by related corporations will also be aggregated and assessed on the total value of the land held by all related corporations. Each company that is a related corporation will be jointly and severally liable for the Land Tax assessed.
Land Tax will be imposed at a surcharge rate for land held in trusts, but trustees may nominate a beneficial owner of the land to access a lower rate of Land Tax.
Changes between the draft and final Bill
Initially, the Government had expected to raise over $100 million during the next 4 years from the initial proposal.
However, with the numerous amendments, tweaks to rates and thresholds and additional sweeteners thrown into get the Bill across the line, it is likely that the State Government will be out of pocket by $189 million as a result of these changes.
Despite the cost to the Government, not all taxpayers will benefit from the changes, as certain groups will end up paying more Land Tax. However, the impact on those groups is significantly less than it would have been under the initial draft Bill released in October.
For example, under the terms of the initial draft Bill, some property portfolios would have faced increases in their total Land Tax assessment in the range of 360%. With the final Bill as passed, the same portfolio will now have an increase of 18%.
To push the Bill through Parliament, the Government committed to fund last minute projects including solar panels and batteries for a further $7.5 million to upgrade and maintain Housing Trust homes.
The Government also committed $2 million per year to go towards emergency accommodation for the homeless and victims of family violence, and a trial 5-year Land Tax exemption for private homes that are rented at affordable rates through a community housing provider.
These sweeteners are in addition to the previously agreed package of reforms which included:
- A transition fund of $25 million over 3 years to compensate investors negatively impacted by the aggregation measures,
- Land Tax concessions for developers holding greenfield and brownfield land for developing 10 or more residential allotments, and
- Concessions for land held by eligible developers of affordable housing, where the land intended to be developed will not be aggregated with other land held by the developer.
For discretionary trusts that held South Australian land at 16 October 2019, it will be imperative to obtain professional advice to consider whether it is advantageous to nominate a beneficiary as the notional “owner” for Land Tax purposes and access the lower rates of tax. There is a fixed deadline of 30 June 2021 to make a nomination under these provisions. Depending on the group structure and asset portfolio, this nomination can create some significant differences in the total Land Tax cost for the group.
For unlisted unit trusts, the trustee will need to make a decision as to whether they will pay the higher surcharge rates of Land Tax, or choose to notify RevenueSA of the underlying owners of the trust. For unit trusts with a wide ownership structure, gathering the necessary information from unit holders to make an informed decision may prove to be difficult. Accordingly, we suspect that many widely held unit trusts will pay the higher surcharge rate of Land Tax.
For companies that own South Australian land, the new “related corporation” provisions are likely to result in many groups being assessed on a higher land value. The new regime will cause all SA land held by commonly controlled companies (broadly based on a 50% control test) to be aggregated and assessed accordingly, with each company in the group being jointly and severally liable for the Land Tax assessment. However, for those groups that are already taxed at the top rate, the changes are likely to result in a lower total Land Tax assessment.
Given the broad scope of the changes, all land owners, from “mum and dad” investors through to large property developers, should seek professional advice on how they will be impacted and if any action needs to be taken before the changes commence on 1 July 2020.
Since the Budget announcement in June, South Australia has seen a significant reduction in activity in the property sector which is largely due to the uncertainty around the terms of this Bill.
Now that the Bill has finally passed, we are expecting the market to lift, as confidence in the property sector is restored.
We believe the final Land Tax package is a step in the right direction for South Australia and should improve our competitiveness as a place to invest in real estate.