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Victorian Land Tax Jeopardises Property Ownership

June 2003

The May 2003 Victorian Budget has projected that land tax revenue will increase by 13.4% this year to just over One billion dollars, and thereafter minor increases. However, the figures do not seem to take account of the land tax revenue increases that would flow from the massive increases in municipal property values assessed over the past year. Meanwhile, the Victorian State Revenue Office is also now seeking to assess taxpayers on the basis of a new tougher interpretation of the Land Tax Act with higher assessments resulting.

Furthermore, the Victorian Government has introduced the Retail Tenancies Act 2003 which now restricts landlords from passing on any land tax for payment by the retail tenant where the Act applies. Section 50 of the new Retail Tenancies Act 2003 provides, in regard to recovery of land tax, that any ‘provision of a retail premises lease is void to the extent that it makes the tenant liable to pay an amount for tax for which the landlord is liable under the Land Tax Act 1958’. Also, the Government has regulated to define retail premises to include office space up to and including the 4th floor used for the provision of "retail services".

Even where the tenant is a public company and not able to avail itself of the tenancy protection of the new law, the overall negotiating position of all landlords has been weakened, since the new retail tenancy laws will strengthen most tenants’ bargaining power.

Recent cases highlight a more aggressive interpretation of land tax legislation by the State Revenue Office. In particular, a tough new approach appears to be aimed at trustees of discretionary trusts. This is reminiscent of the early 1980s when Premier John Cain (mentor of current Premier, Steve Bracks) sought to impose a special land tax penal rate on discretionary trusts.

Two recent cases, Arjon v Commissioner of State Revenue [2002] VCAT 249 (‘Arjon’) and Karingal (No 2) Pty Ltd v Commissioner of State Revenue [2002] VSC 431 (‘Karingal’), have dealt with the application of the Trustee provisions in sections 51 and 52 of the Land Tax Act as grouping provisions.

In Arjon, section 52 was deemed to apply. Section 52 states land tax is assessed to a trustee unless the trustee ‘is the owner of different lands in severalty in trust for different beneficial owners who are not, by reason of joint occupation or otherwise, liable to be jointly assessed’. In this case, different companies held the legal titles as bare trustees or nominees for different discretionary trusts, of which Arjon Pty Ltd was the sole trustee. The Commissioner grouped the trusts, even though they had previously been separately assessed under s 52. Because Victoria has a steeply progressive land tax rate scale, the result increased the land tax liability substantially.

The Tribunal upheld the Commissioner’s assessment and treated Arjon as the sole ‘owner’. We now await the outcome of an appeal.

In contrast, in the Karingal case, section 51 was the section under which the Commissioner sought to assess the unitholder company in a land-holding unit trust but the Court said that the unitholder was not a landowner. The Commissioner has lodged an appeal.

In an earlier case, Famajohn, a land tax grouping assessment was based on the fact that different land parcels shared the same registered proprietor albeit that he acted in different trustee capacities. The outcome in that case would have been different if each trust had a separate trustee.

Baldwins has a number of test cases in the pipeline on similar issues, and is able to advise on the complexities of land tax planning.

We are also aware of instances where a developer has made a conscious decision to disband future development plans in the state of Victoria because of projections for increased land tax liabilities. Land tax is a tax on property site values and must be paid irrespective of the level of income from the property.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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