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Land Tax Latest Changes

© July 2005 by Joe Lederman, BALDWINS Australian Lawyers and Consultants

On 27 June 2005, the Victorian Government Cabinet released details of the
Government's proposed new legislation that will impose a special Land Tax regime
on trusts. Meetings have been held since then with representatives of the State
Revenue Office to clarify and make submissions on this draft legislative proposal. The
feedback process will have ended by 8 July 2005.

The effect of the proposal is to apply a separate tax scale to trusts. Set out below are 3
tables showing, respectively, the proposed new rate scale for trusts (Table A),
compared with the current (2005 Land Tax year) ordinary Land Tax rate scale for
non-trust taxpayers (Table B), and the proposed 2006 Land Tax year ordinary Land
Tax rate scale for non-trust taxpayers (Table C):

Table A:

The top special trusts rate of 3.5% will be progressively reduced in line with prospective reductions in the top rate of tax applying to non-trust taxpayers.

Table B:

Table C:

There are several comments that ought to be made concerning the proposal in relation to the special trust Land Tax regime:

· The proposal is not to aggregate trusts. However, this could result in several anomalies such as people being double assessed, and trust groups and corporate groups being treated differently, i.e., corporate groups can be aggregated whilst trusts cannot. Clearly this is a policy decision that has been taken.

· Transitional period: The State Revenue Office (SRO) is still considering the question of a transitional period and how best to phase-in the new laws.

· Baldwins has received advice from the SRO that the new laws will not override the existing exemption for genuine primary production land. In other words, even though a farm property might be owned by a trust, the new special Land Tax regime for trusts will not apply to the farm property, with the exception of metropolitan land used for farming.

· There are some anomalies in the proposal as regards bare trusts which appear to be caught in most instances even though the policy intent would appear to be aimed at express trusts such as discretionary trusts and fixed trusts. Currently the proposal allows a narrow exclusion for property held on a bare trust by a guardian under a "guardianship or administration order", but fails to make any equivalent exclusion for the situation of a natural parent holding on a bare trust for their own child who is a minor. Another bare trust situation not dealt with in the exclusions would be the case of a purchaser under a contract in the period between contract date and settlement date; by law, the vendor in that situation holds on a bare trust for the purchaser.

· The rates appear to be skewed against the bottom end of the market and therefore affect the "mums and dads" trust more severely than the corporate end. Undoubtedly, further submissions will be made to the SRO on this issue.

· The penalties for non-payment are yet to be finalised by the SRO with the Department of Justice.

· Filing of returns: The proposal is for each taxpayer with a trust owning taxable property to lodge a return but it is possibly likely the SRO will require further information whenever there is a material change in the trust or a new trust is established with property. At this stage, annual returns are not being suggested.

· Although there is an exclusion in relation to trusts established under a Will, the exclusion is only for one year following the date of the testator's death. A case could be mounted to lengthen the period of this exclusion, and, undoubtedly further submissions ought to be made by financial planning groups and trustee companies that act for testamentary trusts and estates.

· In the proposal, several other exclusions are contemplated apart from those mentioned above, including, for example, charitable trusts, complying superannuation funds, trusts for members of clubs. All the exclusions do not mean exemptions but mean that Land Tax would be applied at ordinary rates instead of at the special Land Tax trusts rate.

The Government has indicated that they expect to recover $20 million in extra Land Tax as a result of the new regime, yet claim that the new laws will be revenue neutral! One big concern is that Governments have an awful habit of winning agreement on the introduction of new taxes by offering what appear to be reasonable tax rates, but
once the legislation has been in for a while, the tax rates are increased. This is the big danger here, especially given the track record of the current Bracks Government. The
remainder of this article highlights some examples of tax perfidy by the Government.

Years before Land Tax attracted the attention of Melbourne newspapers, we were raising the prospect of horrendous Land Tax assessments for our Baldwins Bulletin
readers. See, for example, our article in June 2003 `Victorian Land Tax Jeopardises Property Ownership' archived at http://www.baldwins.com.au/a_jeop.php.

Revenue from Land Tax in Victoria rose from $378 million in 1999 to $926 million in 2004, an average increase of over 28% per annum. Most of this increase in revenue
was attributable to higher tax brackets catching taxpayers as bracket creep imposed itself on increased land values. Although Victorian Treasurer Mr Brumby has recently
promised Land Tax relief of $823 million over 5 years, his statement needs to be viewed against the backdrop trend of average annual increases of 28% which would otherwise see Land Tax exceed $3,100 million by 2009. "Relief of $823 million over 5 years" is an average reduction of only $170 million per annum.

Victoria still has the highest top rate of Land Tax at 5.5% compared to Queensland's and New South Wales top rates of 1.8% and 1.4%, respectively.

The Victorian Government has foreshadowed the top Land Tax will be decreased to 4% in 2005; to 3.5% in 2006; to 3.25% in 2007; and 3.0% in 2008.

Trusts are a preferred property holding structure largely because they offer the multiple benefits of: Asset protection, ability to share family income and capital without being penalised by double-layered taxation applicable to company structures, ability to separate ownership from control, and the availability of the 50% Capital
Gains Tax concession. The bulk of trusts have not been created with a view to avoiding Land Tax. Furthermore, those who have set up structures that purported to
minimise Land Tax by de-aggregation arrangements have not been successful in all the main Court cases that have been heard. In fact, most of the recent Land Tax cases
have gone in favour of the Commissioner on appeal. In Arjon v Commissioner of State Revenue [2003] VSCA 213, the full Victorian Supreme Court upheld the
Commissioner's adverse assessment grouping the bare trustees or nominees for different discretionary trusts as one group belonging beneficially to the controlling
unit trust. In Karingal (No 2) Pty Ltd v Commissioner of State Revenue [2003] VSCA 214, the Commissioner was also successful on appeal in having the full Supreme
Court agree with the assessment grouping the landholdings of the unit holder with the landholdings of the trustee of the unit trust.

The lack of empathy by the Victorian Government with taxpayers and its impatience against any suggestion of relief for taxpayers is highlighted by legislation that it passed after Justice Balmford held in Port of Melbourne Corporation v Melbourne City Council & Anor (No 2) [2004] VSC 217 that a land owner assessed for Land Tax
could object against the land valuation during the 60 day period from the date of receiving the Land Tax assessment notwithstanding that the valuation was simply the
restated municipal rate value determined many months or even in a previous year. The Victorian Government moved at the end of 2004 to amend the Valuation of Land Act to legislate against Balmford J's decision and thereby deprived taxpayers of a further ground for appeal against the valuation which caused the huge increase in the
assessment over the amounts in previous assessments. Ironically, Balmford J's decision was recently overturned on appeal by the full court, but the Victorian
Government was not taking any risk that would have threatened its Land Tax revenue base!

Yet, it would be fairer if payers of Land Tax were given an opportunity to object to a valuation of land when the valuation is one that was issued for municipal rates which in themselves are of an amount hardly worth objecting to. Most taxpayers do not realise at the time of a municipal valuation that they have a limited time in which to object to the municipal valuation, bearing in mind the horrendous consequences that might flow from that valuation in later years when the valuation is picked up and used by the SRO for the purposes of a subsequent Land Tax assessment. At that point, the taxpayer is prevented from objecting to the Land Tax assessment on the basis of the valuation which was meant to have been objected to years earlier.

One contentious issue that ought to be still tested in the Courts is the method by which valuations are set for Land Tax purposes. In the High Court case of Maurici, the High Court agreed that a property site value does not necessarily equate with the valuation of nearby vacant land because vacant land is a different commodity from property which has building improvements on it. Most municipal valuers do not appear to have gained an appreciation of the High Court decision and too many properties are being overvalued on the basis of incorrect valuation principles.

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

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