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Land Tax – Know the Traps & Exemptions

Posted on November 24, 2017
by Adam Birrer in BUSINESS Blogs, Structuring Blogs & Taxation Blogs
There can be misconceptions involving Land Tax which inevitably leads to individuals or companies falling into trouble depending on how they have bought the property and what the intended purpose is.
The good news is we have the primary information on hand you need to know to assist in your property purchases. We show you some of the Land Tax traps to avoid or amend, as well as some of the exemptions that you may fall under.

Traps

Leases of Crown Land

If you lease property from either the Crown (i.e. NSW State Government) or a local council, under certain circumstances you may be deemed to be the ‘owner’ of the leased land and liable to land tax. This can often be an extra ‘hidden’ cost associated with entering into such a lease.

The most notable exception to this rule applies where the term of the lease is less than 12 months, including any period under an option. There are other exceptions for grandfathered leases and public authorities.

As with property you own, the land values for land you lease are determined by the Valuer General as at 1 July in the year preceding each tax year. Where there are multiple lessees occupying a property the land value of the area you lease may be apportioned to you.

Discretionary Trusts with Non-Resident Beneficiaries

Foreign persons who own residential land in NSW must pay a 0.75 per cent surcharge for the 2017 land tax year, rising to two percent from the 2018 land tax year onwards.

For an individual, a foreign person is defined as someone who is not an Australian citizen or an ordinary resident.

A potential trap applies to trusts that own residential land in NSW as the rules also deem the trustee of a trust to be a foreign person if substantial interests are held by a beneficiary who is an individual and is not ordinarily a resident of Australia.

For a discretionary trust, every beneficiary is deemed to have a substantial interest and therefore any trust with a foreign resident as a potential beneficiary (whether or not they have received distributions) will potentially be liable for surcharge land tax.

The Office of State Revenue (OSR) have released Revenue Ruling G010 which states that the Commissioner has a discretion to exempt the trustee of a discretionary trust from surcharge purchaser duty and/or surcharge land tax if there is no scheme to avoid these taxes, and the trust deed is amended within 6 months of the exemption being granted to remove foreign persons from the list of beneficiaries.

Therefore it is crucial for all trustees owning land in NSW to review their discretionary trust deeds and consider if any foreign residents fall within the class of beneficiaries.

Exemptions

Main Residence

This exemption from land tax can apply where one of the owners uses and occupies the land as their principal place of residence. The exemption only applies to natural persons (i.e. not companies or trusts) and the exemption is not affected by the value or size of the land.

Concessions may also apply if you meet the eligibility criteria in the following instances:

  • land intended as your principal place of residence
  • changing your principal place of residence
  • land used for incidental business
  • absence from your former residence
  • deceased estates
  • permitted occupancies
  • mixed use properties.

Primary Production Land

This exemption may apply where the dominant use of the land is for primary production. The exemption can be applied whether or not it is you that is undertaking the primary production activity.

Where the land is not zoned rural, the property must also pass a business test.

Other

Other exemptions may apply to owners of land that is used for boarding houses, low cost accommodation, residential/caravan parks, non-profit organisations, aged care establishments and childcare centres.

It is important to understand your position with land tax, and BLG Business Advisers have a team to assist you through your individual situation. Get in touch with us online or by calling (02) 4229 2211 today.

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