The land tax reforms have finally passed both houses of parliament with some significant changes from the initial draft. The one area which has remained fairly constant is the new aggregation rules which have attracted significant attention and a deep level of community and business angst, apprehension and anxiety.
After analysing the changes, it seems to me the State Government has left in a partial grandfathering option for discretionary trusts owning property on or before midnight on the day the bill was introduced to the House of Assembly – Wednesday, October 16, 2019.
How does this work?
For each discretionary trust holding land, the trustee can nominate a sole designated beneficiary under section 13A(1). The commissioner will treat that designated beneficiary as the final land tax assessee for land held by the trustee before October 16, 2019.
The beneficiary has to be designated by June 30, 2021, or the opportunity is lost forever.
The trustee cannot change the designated beneficiary unless the person dies, loses capacity or is subject to a domestic relationship breakdown.
If that designated beneficiary withdraws their consent to be named, the Trustee is considered to withdraw the notice and must then pay trust surcharge rates of land tax with a threshold of only $25,000 before the land is assessible as opposed to the $450,000 threshold available for individuals and companies.
Landholdings in discretionary trusts cannot be split between multiple designated beneficiaries.
Consider a practical scenario
A family with two adult children owns five properties in five trusts, with $300,000 of land value each.
Each of the children and the husband is assigned as the designated beneficiary of one of the trusts. As all three are under the $450,000 threshold the net land tax payable on those properties will be nil.
The wife is the designated beneficiary of the remaining two trusts meaning she will have $600,000 of total land holdings assessed to her and thus be above the $450,000 threshold and be liable for land tax.
So in practice, for many families, there will be a way to structure the land holdings to minimise land tax being aggregated for existing properties.
Keep in mind, these rules don’t allow for further properties as these provisions will not apply to land held, or beneficiaries added to a trust after October 16 this year.
So, for future investments we would recommend investors consider interstate land holdings (there is currently no aggregation between states), or, where possible, holding land through self-managed superannuation funds (which are exempted from the aggregation rules) if they want to increase their land holdings.
Only an adult over the age of 18 years can be a designated beneficiary.
There does not seem to be any risk to the parent in making an adult child a designated beneficiary but as the child gets older and buys his or her own properties this may cause issues as there is no means of amending a designation once made except in circumstances of death, disability or divorce.
What about a foreign beneficiary?
Although the proposed legislation does not prevent a foreign beneficiary being designated, it is not necessarily a ‘get out of jail free’ card for those of us who are migrants.
The upside of picking an overseas land tax nominee is:
- As the assessee for land tax has no effect on revenue/capital distributions the overseas relative will not be affected or have to receive any funds from the trust.
- As the proposed legislation gives an open free choice it should not be affected by the general anti-avoidance provisions.
- The foreign ownership surcharge in SA is on acquisition and currently only creates an additional duty liability if the overseas relative is named in the deed – so, yes, if a specified beneficiary but not if just a general beneficiary.
- Thus, a deed which includes a local as a specified beneficiary but their relatives as general beneficiaries may have several foreign beneficiaries but as their names do not appear on the deed will not make the trust a foreign trust and thus no additional duty need be paid based on today’s laws.
However, the downside risk is if our tax-hungry State Government – that just passed a land tax amendment which will cost the budget funds rather than raise them – follows the interstate examples and imposes an ongoing land tax surcharge on foreign land holders. If they do this, it may well apply to your designated person.
And, in that case, trusts with designated beneficiaries who are foreign will have the choice to either pay the trust land tax rates with no designated individual or pay the new foreign land holder surcharge.
So, although using a foreign beneficiary may seem like the perfect loophole at the moment it may be another example of timeo danaos et dona ferentes: beware of anything that looks too good to be true, especially involving tax.
Christopher Overton is a business and tax adviser with legal and accounting qualifications. He is a founding partner of Bartley Partners Accounting.
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