Business SA submission to State Government on Draft Land Tax Bill - October 2019 - Business SA submission to State Government's Draft Land Tax Bill
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Business SA submission
to State Government on
Draft Land Tax Bill
October 2019
1 Business SA submission to State Government’s Draft Land Tax BillExecutive Summary
There is no doubt the land tax aggregation changes have caused a significant amount of uncertainty within the South
Australian business community. This has been reflected in numerous business surveys, including Business SA’s
most recent Survey of Business Expectations which finds confidence at a two-year low. From a wide array of
feedback provided to Business SA, we also know many property owners are reluctant to transact at present due to a
lack of clarity surrounding future land tax arrangements. While this is worrying for Business SA, we are more
concerned about how political decisions now could send long-term signals that will be very hard to undo. Those long-
term signals relate to how either the current, or future South Australian State Governments operate to protect the
legislative arrangements of existing and new investments. Business people invest on confidence and once it’s lost,
it’s hard to regain.
A common theme among business owners most impacted by these changes has been their quest, often over many
decades, to build up a portfolio of properties to provide them with a retirement independent of any government
support. In fact, many of those people started long before superannuation was mainstream. The land tax aggregation
changes threaten to undermine many of those investments and while we now know this relates to a minority of
property investors, those investors are often people who also have businesses and are employers. The most
successful businesses in South Australia don’t come and go in a four year political cycle, they are built up over many
decades and are often multi-generational, and the State Government must be very careful in making decisions now
which jeopardise the incentive for astute investors to continue seeing South Australia as a sound location to generate
acceptable returns in the long run.
As Business SA has maintained throughout the land tax debate, if the primary driver of the proposed changes is a
revenue shortfall from vanishing GST revenue growth, then it must follow that the primary solution relates to how the
State Government can most effectively plug its budget shortfall. Considering the Valuer General’s Revaluation
Initiative still has nearly two years to run and could quite conservatively raise more than double the State
Government’s current estimate of an additional $19 million in recurrent land tax revenue, the option to delay this Bill
must remain on the table. While Business SA accepts this would disadvantage those set to gain from the State
Government’s proposal, the land tax policy taken to the election was never about fundamental land tax reform where
there might be winners and losers but ultimately everyone had an opportunity to cast their vote. Delaying this Bill
would also allow the State Government more time to consider a path forward that introduced aggregation changes
but with a higher degree of grandfathering to protect existing investments, where practicable.
Should the Bill proceed, which is not the option we support, the State Government should at least make some
amendments to improve the outcomes for property investors with small to medium sized portfolios. Albeit considering
the State Government’s revised policy reduces the top land tax rate substantially, the effective land tax outcomes at
various size portfolios between $1m to $10m remains on average 45% higher than comparable averages for other
mainland states. Business SA has prepared three alternative structures which primarily focus on improving outcomes
for small to medium size investors and would significantly reduce the average land tax premium paid in South
Australia to 20%, 9% and -1% respectively, depending on the extent the State Government can rework its existing
proposal. As is widely understood within the business community, many (but not all), of the most impacted parties
now have portfolios with values of $3m and less, aside from medium to large company groups above this value. A
focus at this level seems the most obvious place for the State Government to focus on lessening the impact of the
Draft Bill.
2 Business SA submission to State Government’s Draft Land Tax BillContents
Introduction ................................................................................................................................................. 4
The Revaluation Initiative: ......................................................................................................................... 5
Data matching: ............................................................................................................................................ 6
Legitimate Choice of Legal Structures: .................................................................................................... 6
Grandfathering and other Transitional Options: ...................................................................................... 7
The Revised Rates: ..................................................................................................................................... 8
The Policy Mandate and the Policy Proposal: ....................................................................................... 11
Impact on Tenants: .................................................................................................................................. 11
Technical clarifications required on the Draft Bill ................................................................................ 12
3 Business SA submission to State Government’s Draft Land Tax BillIntroduction
Business SA, South Australia’s Chamber of Commerce and Industry, was established in 1839 and has more than
3,000 members across every industry sector, from micro businesses through to listed companies. Business SA is a
not-for-profit membership organisation which works on behalf of members and the broader business community in
pursuit of economic prosperity for both South Australia and the nation. Funded by member subscriptions and our
products and services, we are independent of any government or political party.
In its 2019/20 Budget, the State Government released preliminary detail on material changes to the way in which
properties would be aggregated for the purposes of collecting land tax. At the time, these changes were forecast to
raise $40mper annum as part of a broader effort to repair the Budget following substantive declines in presumed
GST revenue growth. The aggregation proposal was designed to replicate laws in New South Wales and Victoria
which aggregate land ownership of related companies and apply a surcharge to trusts in the absence of a named
beneficiary. The initial proposal was to introduce new aggregation laws from 1 July 2020, and gradually phase down
the top land tax rate from 3.7% to 2.9% over seven years.
Over the past three months, Business SA has been consulting with our broad membership on land tax changes. In
August we released a Land Tax Focus Paper outlining our preliminary position on the Government’s yet to be
amended aggregation proposal. We argued that any aggregation changes should be delayed until the Government
had a clear picture of recurrent land tax revenue, both from the data matching exercise to understand the revenue
impacts of aggregation, and the Valuer General’s state-wide Revaluation Initiative. We also conveyed widespread
feedback from businesses that a rate reduction from 3.7 to 2.9 percent over seven years was unacceptable,
particularly when the two precedent States for aggregation changes have top rates of 2 and 2.25 percent
respectively. Finally, we reported concerns about land tax imposts being passed back to tenants, either directly or
indirectly, and the potential for a broader property market decline from an increase in forced sales from adversely
impacted owners.
Following the Government’s Draft Bill release on 9 September, Business SA has continued to engage with our broad
membership to fully understand how the revised land tax package, particularly the top rate reduction to 2.4%
effective 1 July 2020, will now impact on their business and personal investments. As we repeatedly say, for many
people in business, property is often what helped get them the necessary collateral to start and is often used as a
diversification against the owner’s operating business. This is particularly relevant for mature business owners who
began building up in an era long before the advent of superannuation, when property was, and still is, seen as a
visible and reliable investment.
Businesses are forced to minimise all costs in competitive markets, particularly when trying to compete interstate and
overseas, as is often necessary in South Australia with its ingrained negligible population growth. For many property
owners in business, they have legitimately used tax effective legal structures to hold property, underscored by
professional advice from the accounting and legal professionals. The use of various legal structures within business
is also not just related to land tax, but often pertains to the protection of assets and to enable succession within
family businesses with multiple siblings. It is not employing a loophole to structure legal affairs to legitimately protect
assets, particularly when business relationships are entered into with non-family members. Furthermore, all levels of
Government in Australia openly encourage entrepreneurs and innovators, and we cannot dismiss the benefits of our
prevailing legal framework in facilitating businesses to grow and employ people, fundamentally the role of the private
sector, not Government.
4 Business SA submission to State Government’s Draft Land Tax BillThe Revaluation Initiative:
Each year, all properties in South Australia are reassessed by the Valuer General (an independent State
Government Statutory Officer), as part of a General Valuation that produces valuations used for rates, charges and
land tax assessments. Property valuations aim to reflect market value and there are approximately 935,000 records,
with site and capital values for each, resulting in over 1,850,000 assessments to be undertaken every year.
Understandably given the sheer volume, the primary methodology for the General Valuation is mass appraisal,
informed by a small percentage of individualised assessments.
In 2015, the former Valuer General identified a need to comprehensively review the data the annual General
Valuation was based upon. Funding was granted in the 2016-2017 State Budget for an in-depth data collection and
analysis program - the Revaluation Initiative - to be undertaken to improve the accuracy of the General Valuation. In
short, rather than a small number of individualised assessments informing the annual General Valuation, a much
larger number of individualised assessments will be undertaken to ensure the General Valuation approach is
accurate. This practice is common interstate but has not occurred in South Australia for twenty years.
At present, the State Government expects that once the Revaluation is complete and the revised site assessments
flow through to land tax assessments from the 2021/22 financial year, an additional $19m of recurrent land tax
revenue will be received. This figure was last updated ahead of the release of the 2018/19 State Budget but has yet
to be updated to reflect the more substantive findings from the Revaluation Initiative to date, including any provisional
results from the Revaluation of Adelaide’s CBD.
The Revaluation Initiative program has commenced in two inner metropolitan areas, Unley and Walkerville, and one
regional area, Adelaide Plains primary production, for the first cycle. Outlier properties are being identified (due to
zoning changes, improved structures, occupancy information or changes to a specific market segment), reviewed
and where appropriate, corrections applied. Of the subset of affected properties to date, most changes have been
within a zero to 10 per cent positive movement. However, a small percentage have moved by up to 40 per cent and
in some parts of Unley, values have increased by up to 125 per cent. Extensive feedback to Business SA suggests
the most substantial uplift in site values is likely to occur as the Revaluation Initiative proceeds through the Adelaide
CBD during the course of the 2019/20 and 2020/21 financial years. This is a function of the significant uplift in
property development over the past decade, assisted by zoning changes to accommodate higher living densities, the
previous Government’s pursuit of a new health precinct anchored by the Royal Adelaide Hospital and South
Australian Health and Medical Research Institute (SAMRI), as well as various Hotel and University related
developments.
Business SA is concerned that despite indexing of land tax thresholds under the Land Tax Act 1936, that the
significant uplift in property valuations through the Revaluation Initiative has the potential to substantially exceed the
outdated prediction of an additional $19m per annum in recurrent land tax revenue. For a start, $19m in 2023
represents only 4.4% of forecast private land tax revenues at the time. In other words, there is significantly more
potential for the Revaluation Initiative to raise additional recurrent land tax revenue. As Deloitte’s recent report
pointed out1, the indexing of land tax thresholds does not mitigate against asymmetric growth of site values in
different bands. In other words, if there is a significant increase in valuations for CBD sites which are already above
the highest land tax threshold, the Government stands to gain substantially more land tax revenue than the average
1 Deloitte Access Economics, ‘Land Tax implications from an upwards revaluation of official land values in South Australia’, December 2018
5 Business SA submission to State Government’s Draft Land Tax Billgrowth in site values. Even adopting Deloitte’s conservative 6.2% average (low-high asymmetric growth) increase
scenario, the Government gains an additional $46m in land tax revenues per annum as a result of the Revaluation
Initiative. This equates to an additional $81m over three years, which goes a long way towards meeting the State
Government’s initial target to raise $40m per annum from aggregation rule changes.
Considering the material upside in land tax revenues from the Revaluation Initiative, Business SA maintains that the
most reasonable approach ahead of making wholesale changes to the land tax system, which have potential to
significantly impact some property owners who have operated within the law in good faith, is to wait until June 2021
when complete information from the Revaluation Initiative has been collected. It may well be the case that at that
stage, the Government does not need to proceed with its aggregation changes based on having enough additional
land tax revenue to fill its budget hole. This is on the basis that the primary driver of the aggregation changes was a
budget measure to offset against the decline in forecast GST revenue growth. If the Government has now adopted a
fundamental position of supporting aggregation rule changes other than just for immediate budgetary reasons,
Business SA would be quite surprised given this would mark a material shift in the policy position taken to the 2018
election after sixteen years in opposition with ample opportunity to consider land tax aggregation rule changes.
Data matching:
In our recent land tax paper, Business SA raised concerns with a fundamental change to land tax assessment
structures proceeding without appropriate data matching having been undertaken to verify how much revenue
aggregation changes would actually raise. This is due to the potentially complicated nature of company and trust
structures and the fact that the Government had not previously had cause to need to understand ownership behind
all separate legal entities.
We conservatively forecast the Government may raise up to $100m per annum based on broad feedback from our
membership, much higher than the Government’s initial estimate of $40m per annum. While Business SA never
argued the Government made out its estimate to be anything other than an estimate, we were always under the
impression that full data matching of property ownership to understand the realistic impact of aggregation was still to
occur.
To the Government’s credit, PWC were engaged to validate the Treasury’s initial estimate and a revised estimate of
$118m was confirmed in a comprehensive report reviewing the land tax methodology employed. While neither the
report, nor the Government, has confirmed that a full data matching exercise has been completed, we are more
satisfied that at least from a revenue forecast of aggregation changes perspective, the Government is in a
significantly more robust position than at the time of its Budget. This is reassuring, particularly if the Draft Bill is not
delayed and enters Parliament as is currently scheduled.
Legitimate Choice of Legal Structures:
Business SA has received a material amount of feedback over the past few months on the impacts of aggregation on
businesses and individuals who have in good faith, operated within the existing land tax framework and followed
accounting and legal advice to establish legal entities to accommodate long-term investments in property and
associated businesses. While it is true that not all individuals who would have benefited from disaggregation through
separate legal structures took that path, establishing unique legal structures is often more beneficial for businesses
that use such structures for a range of reasons including asset protection, enabling succession, tax effective
6 Business SA submission to State Government’s Draft Land Tax Billmanagement of business profits and so on. For example, companies provide for a more formalised management and
governance structure, which is often desirable where there are a number of arm’s length investors. That is to say that
shareholders have defined rights to dividends, voting and capital and the companies have a formal board structure
accountable to shareholders. By contrast, this is not always achievable with trust structures.
Typically, the need for separate legal entities is not always as relevant for individual property investors, and for
instance, some just may not wish to pay the costs of establishing and maintaining a trust. Many families also have
very genuine reasons for establishing a family trust to hold property, particularly related to the protection of assets,
which for other families, may have no relevance.
However, there are also disadvantages to holding assets in trusts, including the inability to pass on net losses to
beneficiaries to offset against other income. Seeking finance can also be more complicated when assets are tied up
in trusts. Therefore, choosing to hold assets in a trust is a choice of preferable legal structure for individual reasons,
and is not just related to how land tax is calculated for separate legal entities and individuals over multiple property
holdings. Subsequently to put all individuals, who for a host of legitimate reasons decided to establish trusts or
companies, into a basket of people exploiting a loophole is an unfair categorisation.
Business SA has also received feedback from a range of businesses that for historical reasons, had sought to hold
property assets in companies rather than trusts, and while those initial drivers may not always be as relevant as they
are today, there are also costs (particularly with residential property) in transferring assets and sometimes an existing
legal structure is maintained purely to avoid transactional costs. Foreign groups are also more likely to hold property
in companies, often being less familiar with Australian trust structures.
Grandfathering and other Transitional Options:
Business SA accepts the Government may seek to enact a policy change with respect to how aggregation rules
operate, but they should grandfather existing arrangements for those individuals negatively impacted by the
proposed changes. We accept this may mean having those individuals remaining subject to the existing rates and
thresholds (aside from changes already legislated) for the grandfathered property, but it at least protects them
against having to absorb significant land tax increases on existing property holdings purely as a result of legislative
change. Policy decisions by Governments should not cause existing investors to have to restructure or sell property
purchased with alternative rules in place, no differently to Capital Gains Tax changes being grandfathered and the
Federal Labor Party’s recent acknowledgment of the need to grandfather any changes to negative gearing.
Unfortunately, what is proposed by the State Government, while it may now only make a minority of investors worse
off following the recent revisions, does not respect that the retirement outcomes for those people will be materially
impacted. By contrast, the grandfathering arrangements in the Federal Government’s superannuation schemes are
well known and despite the significant cost to the country, no Government of either political persuasion has opted to
end the entitlements of those public servants who began on superannuation schemes that turned out to be entirely
unsustainable. These proposed changes would simply be unfathomable if we were talking about a cohort of public
servants, and there is no justification for businesses or any other individuals for that matter receiving alternative
treatment.
Business SA recognises that grandfathering may be complex and could be costly to implement but in effect what is
already proposed has some form of grandfathering for trusts, having six months to nominate a beneficiary, which
aligns with what occurred when Victoria introduced similar legislation. If the Government delayed its aggregation
7 Business SA submission to State Government’s Draft Land Tax Billpolicy until the completion of the Revaluation in 2021, it would have more time to work through various iterations of
grandfathering and the associated costs and benefits.
If the decision to grandfather, or not, is also primarily linked to revenue, having fulsome information about the
outcome of the Revaluation would enable the Government to make a decision on grandfathering which didn’t
unnecessarily prejudice the outcome.
There could be a range of methods for grandfathering/transitioning including:
- A transitional impact approach whereby investors who are negatively impacted only face a percentage of that
impact each year, which progressively grows over five or ten years. Conversely, investors who gain from the
tax reform would similarly only benefit from a percentage at first which progressively increases. Say 20% in
year one, 40% in year two and so on.
By way of illustration, the Local Government Act 1999 provides for a ‘Special Discretionary Rate Rebate’ to all
land uses to ensure any increase in general rates payable for comparable properties is no more than 10%.
This effectively acts to smooth any substantive impact on rate payers following an unusually high spike in their
rates due to a revaluation, change of land use etc.
- A grandfathering of trusts and company arrangements, or a grandfathering of only trusts or company
arrangements. Considering the majority of small to medium size investors communicating with Business SA
are impacted by the trust changes, this could be an alternative way to consider grandfathering.
- Having grandfathered property subject to existing, or new, rates and thresholds,
- Restricting the level at which grandfathering becomes null and void on the basis of changing ownership or
beneficiaries,
- A stamp duty break for individuals negatively impacted to enable them to transact residential property within
available legal structures, including to/from personal ownership, noting commercial property is no longer
subject to stamp duty so the Government’s existing proposal advantages owners of commercial property over
owners of residential property, which tends to be more the domain of smaller investors.
The Revised Rates:
There is no doubt that the Government’s revised rate structure has improved the position for many businesses and
property owners, however, we are still unclear and await the outcome of a data request specifically related to:
- Of the 8% of individuals (4,157) paying more land tax as a result of the most recent iteration of rates, what is
the collective value of their land ownership and how many individual properties does that represent?
- Of the 25% of company groups (2,633) paying more land tax as a result of the most recent iteration of rates,
what is the collective value of their land ownership and how many individual properties does that represent?
In any case, we are mindful that simply because we are referring to a smaller group of individuals being worse off,
that that somehow doesn’t matter.
One aspect of the revised rating structure that has received less attention is the fact that while South Australia is now
much more competitive at the top end, although not as competitive as Victoria and New South Wales, we are still
8 Business SA submission to State Government’s Draft Land Tax Billwell behind at lower levels of property portfolio values. This is a very important point given how the Government has
chosen to structure its revised policy and the fact that many, but not all, owners of trust property over approximately
$3m will be better off, although related company owners will not be so fortunate.
Business SA has calculated land tax for a range of small to medium sized property portfolios in relation to the
average of the other combined mainland states. We have based our assessments on individual property owners
given the Government’s aim to ensure all property owners regardless of legal structures pay an equivalent amount of
land tax.
Land Tax comparison (for individuals)
State $1m $3m $5m $10m
portfolio portfolio portfolio portfolio
SA Revised (20/21) 5,568 52,832 100,832 220,832
Vic (19/20) 2,975 24,975 69,975 182,475
NSW (19/20) 5,028 37,028 72,014 172,104
QLD (19/20) 4,500 37,500 62,500 150,000
WA (19/20) 2,730 34,330 73,130 180,130
Mainland State Average (excluding SA) 3,808 33,458 69,405 171,177 AVERAGE
SA Revised above Mainland State Average 46% 58% 45% 29% 45%
Figure A
As can be seen in Figure A, while the Government’s reduction in the top rate from 3.7% to 2.4% is welcome, it does
not actually mean South Australia is competitive for small to medium sized property portfolios when actual land tax
bills are compared; and these property portfolios are most synonymous with small to medium sized business owners.
Business SA has suggested three alternative rating structures to demonstrate that, with respect to interstate
competitiveness only, the State Government can quite substantially improve its current proposal:
Land Tax comparison (for individuals)
$1m $3m $5m $10m
State
portfolio portfolio portfolio portfolio
Current SA Revised (20/21) 5,568 52,832 100,832 220,832
SA (same as revised 20/21 except 1.25%
above $755k, 1.95% from $1.098m up
to $5m, 2.2% above $5m) 4,588 42,902 81,902 191,902
Vic (19/20) 2,975 24,975 69,975 182,475
NSW (19/20) 5,028 37,028 72,014 172,104
QLD (19/20) 4,500 37,500 62,500 150,000
WA (19/20) 2,730 34,330 73,130 180,130
Mainland State Average (excluding SA) 3,808 33,458 69,405 171,177 AVERAGE
SA Revised above Mainland State
Average 20% 28% 18% 12% 20%
Proposal 1
9 Business SA submission to State Government’s Draft Land Tax BillProposal 1 shows that by a small adjustment to the rates for small to medium sized property portfolios, and further
reducing the top rate to be more competitive with Victoria and New South Wales, the State Government could more
than halve the average land tax bill payable in South Australia. While South Australia would still not be as competitive
as we should be, it would be a vast improvement on the present proposal.
Land Tax comparison (for individuals)
$1m $3m $5m $10m
State
portfolio portfolio portfolio portfolio
Current SA Revised (20/21) 5,568 52,832 100,832 220,832
SA (same as revised 20/21 except 1% above
$755k, 1.75% from $1.098m up to $5m,
2.4% above $5m) 3,975 38,240 73,240 193,240
Vic (19/20) 2,975 24,975 69,975 182,475
NSW (19/20) 5,028 37,028 72,014 172,104
QLD (19/20) 4,500 37,500 62,500 150,000
WA (19/20) 2,730 34,330 73,130 180,130
Mainland State Average (excluding SA) 3,808 33,458 69,405 171,177 AVERAGE
SA Revised above Mainland State average 4% 14% 6% 13% 9%
Proposal 2
Proposal 2 demonstrates with some further adjustments, and leaving the top rate at 2.4%, the Government can make
a material impact to the land tax payable for small to medium sized property portfolios. Considering that the vast
majority of property owners with land held in trust will be worse off with under $3m in ownership, this scenario should
be given serious consideration.
Land Tax comparison (for individuals)
$1m $3m $5m $10m
State
portfolio portfolio portfolio portfolio
Current SA Revised (20/21) 5,568 52,832 100,832 220,832
SA (same as revised 20/21 except 0.9%
above $755k, 1.5% from $1.098m up to
$5m, 2.1% above $5m) 3,730 33,142 64,142 169,142
Vic (19/20) 2,975 24,975 69,975 182,475
NSW (19/20) 5,028 37,028 72,014 172,104
QLD (19/20) 4,500 37,500 62,500 150,000
WA (19/20) 2,730 34,330 73,130 180,130
Mainland State Average (excluding SA) 3,808 33,458 69,405 171,177 AVERAGE
SA Revised above Mainland State average ‐2% ‐1% ‐8% ‐1% ‐3%
Proposal 3
Finally, Proposal 3 represents the type of competitive land tax structure the State Government should ultimately aim
for. Business SA acknowledges there may be existing budgetary constraints, but nonetheless we should not lose
sight of what is required to provide South Australians a genuine land tax advantage.
10 Business SA submission to State Government’s Draft Land Tax BillThe Policy Mandate and the Policy Proposal:
Businesses SA has appreciated the opportunity to discuss the land tax proposals with the Government over the past
few months. While we acknowledge our differences of opinion, we also recognise that is part and parcel of a
discussion and that a much worse outcome would have been no opportunity to meet and discuss the impacts of the
proposed changes. We also respect the Government is in a challenging budgetary position and that it must make
difficult decisions to overcome that.
One of the most testing aspects for impacted parties to contend with during the consultation process though has
been the combination of policies related to land tax which are legislated and unlegislated. The Government’s
welcome increase in the land tax threshold from $369,000 to $450,000, and reduction in top rate from 3.7% to 2.9%
between $1.2m and $5m, was a pre-election policy and to the Government’s credit was implemented as a measure
in its 2018/19 Budget to become effective from 1 July 2020. Accordingly, this policy is already legislated so any future
land tax proposals are unrelated and have no bearing on a past decision. In business, we would say a sunk cost, an
investment already made which we cannot undo.
What we are interested in are the impacts of the land tax aggregation changes alone, forgetting any previous
decisions which related to land tax. If not, then we may as well also consider decisions related to payroll tax as many
business owners holding property are also employers, and either paid or still pay payroll tax. The State Government’s
pre-election policy to improve South Australia’s land tax competitiveness was simply that, a policy to ensure all land
taxpayers benefited from more competitive rates. It was not a quid pro quo based on accepting a wholesale change
in the rules for assessing multiple property holdings in calculating land tax. If it were, many voters would have
considered the Government’s pre-election policy in a vastly different light. While we accept that circumstances have
changed since the election, particularly in respect to GST revenue forecasts, this does not obviate the fact that
previous land tax policy and ultimate legislative change is untied to any future land tax reforms. Subsequently, we
have requested the Government provide specific detail on the cost breakdown of its previous policy, between the lift
in threshold and reduction in top rate, and communicate the revenue related outcomes of aggregation changes alone
without discounting any impacts by bundling in benefits which have previously been legislated for.
Impact on Tenants:
Businesses SA has consistently raised the potential for land tax increases to be passed on either directly or indirectly
to tenants. While the extent of this is unknown, as we have not yet seen the aggregate property portfolio statistics of
the most impacted landlords, we know from a significant number of discussions we’ve had with property owners and
lessees that it is a very real threat. Subsequently, we are very mindful of what increased rents would already do to
quite fragile business confidence.
The uncertainty for tenants is compounded by the fact that the Retail and Commercial Leases Act 1995 does not
expressly protect tenants from rent related increases due to multiple holding land tax. Impacted landlords have been
advising Business SA that they may have no other choice but to pass on land tax increases to tenants, and we know
of instances where those conversations have already been held. In one recent example provided, a southern
suburbs business owner with property investments has had to advise his commercial property tenant of a pending
rent increase if the Draft Bill becomes legislation. Consequently, this has had the effect of putting on hold a
redevelopment of the subject property already underway as part of an expansion of the tenant’s business.
11 Business SA submission to State Government’s Draft Land Tax BillWhile the landlord is devastated about this outcome, he could not have allowed the development to proceed without
certainty regarding his own costs related to the property.
Business SA accepts that landlords may not be able to directly pass on land tax increases, but they can be factored
into rent reviews or lease renewals and ultimately someone must pay the cost of a land tax increase. If landlords are
unable to pass on land tax increases, we understand from a significant number of business owners that this will force
the sale of properties and have the likely impact of reducing values, particularly in the lower ranges of property
values. Ultimately, property owners take a number of risks and that has to be justified by an adequate return. The
overwhelming sentiment from our conversations with landlords on this issue is their interest in comparable interstate
opportunities, particularly with vastly more competitive land tax bills for like properties.
Technical clarifications required on the Draft Bill
Companies Owned by Discretionary Trusts
Proposed section 13H(3) provides that corporations will be related corporations if the same person has, or the same
persons have together, a “controlling interest” in each of the corporations.
Section 13I defines when a person has, or when persons have together, a controlling interest in a corporation. This
broadly relies on those persons being able to control the composition of the board of the corporation, being able to
cast or control the casting of more than 50% of the maximum number of votes at a general meeting of the
corporation or those persons holding more than 50% of the issued share capital of the corporation.
Section 13J(1)(c)(ii) then provides that where any shares are held or any power is exercisable by a person or
corporation as a trustee or nominee for another person or corporation, those shares or that power are to be treated
as not held or exercisable by the trustee or nominee. In the case of trusts other than fixed trusts or unit trusts (for
example, discretionary trusts), the Draft Bill does not expressly deem any other person or corporation to hold the
shares or exercise the power.
In our view, the above provisions give rise to some uncertainty as to whether two companies would be grouped
where their shares are held by the trustee for one or more discretionary trusts. Take the following alternative
examples:
1. 100% of the share capital in Company A and 100% of the share capital in Company B is held by
Corporate Trustee Pty Ltd as trustee for a single discretionary trust.
2. 100% of the shares in Company A are held by Corporate Trustee Pty Ltd as trustee for Discretionary Trust
1. 100% of the shares in Company B are also held by Corporate Trustee Pty Ltd, however, in its capacity
as trustee for Discretionary Trust 2.
It occurs to us that in both of the above situations, no persons have a controlling interest in both Company A and
Company B and therefore Company A and Company B are not grouped. We say this as:
section 13J(1)(c)(ii) provides that Corporate Trustee Pty Ltd is deemed not to own any shares or exercise
any powers;
in terms of whether any other persons can have a controlling interest in Company A and/or Company B,
the directors and shareholders of Corporate Trustee Pty Ltd can only control the composition of the board
12 Business SA submission to State Government’s Draft Land Tax Billor the casting of votes in Company A and Company B by influencing Corporate Trustee Pty Ltd to exercise
its rights as a shareholder; and
as stated, Corporate Trustee Pty Ltd is deemed not to own any shares or exercise any power as a
shareholder.
We note that the above interpretation (as least insofar as it applies to Example 2) appears to be consistent with the
interpretation adopted in NSW which has an identical deeming provision to 13J(1)(c)(ii) (we refer to paragraph 15 of
NSW Revenue Ruling LT003v2 in this regard).
Business SA seeks confirmation as to whether the related corporation grouping rules as expressed in the draft Bill
are intended to operate in the above manner. If not, can you please advise of the intended operation in the above
circumstances.
Aggregation for Excluded Trusts
In our view, it is clear from the Bill that excluded trusts will not be subject to the surcharge. What appears to be less
clear, however, is whether interests in land held by an excluded trust will be aggregated in calculating the land tax
liability of the excluded trust.
For example, assume a unit trust has 50% of its units owned by a self-managed superannuation fund (SMSF), which
SMSF directly owns other land. The unit trust has made notification of its unitholders to the Commissioner under
section 13. The effect of this is that the SMSF will be taken to own a proportionate interest in the unit trust land of
50% (section 13B(1)(b)).
In calculating the land tax liability of the SMSF, is the SMSF required to aggregate its 50% interest in the unit trust
land with its other land? It appears that this would be one possible application of sections 13 and 13B(1)(b).
However, if this is the case, we query the intended operation of section 13C(1). Section 13C(1) imposes land tax on
land “subject to” an excluded trust “as if the land were the only land owned by them as a trustee”. It is not clear
whether land that is notionally owned by the SMSF by virtue of the trustee of the unit trust having made a section 13
notification to the Commissioner is land that is “subject to” the trust within the meaning of section 13C(1).
Business SA therefore requests the Government to confirm whether:
land owned by an excluded trust is aggregated with any land that is notionally assessed to the excluded trust
by the above process; and
if not, what is meant by the words “as if the land were the only land owned by them as a trustee”?
Section 13E(2) Notification
Broadly, section 13E(2) provides that a person who, at the commencement of section 13E, holds land on trust must
lodge a written notice with the Commissioner within one month after the commencement of section 13E.
In accordance with section 2(2) of the Bill, section 13E (being in Part 2 of the Bill) should commence on 30 June
2020. As such, Business SA understands that the notification in section 13E(2) will need to be made within one
month after 30 June 2020.
13 Business SA submission to State Government’s Draft Land Tax BillHowever, the Land Tax Consultation Summary document states on page 5 that “once the legislation has been
passed, trustees will have one month to notify of the existence of land held in that trust (if they have not already done
so).” This would appear to suggest that the notification needs to be made within one month of the Bill passing
through Parliament, which is of course unlikely to be the same as one month after 30 June 2020.
Business SA requests the Government to confirm this is the case. If so, the Government may wish to give some
thought as to whether the Land Tax Consultation Summary should be amended accordingly.
Please advise if you require any clarification or wish to discuss this matter.
14 Business SA submission to State Government’s Draft Land Tax BillYou can also read
