By Russell Cocks, Solicitor
Published in 2011, First published in the Law Institute Journal
Land tax is imposed by the state government as a source of revenue. In this respect it is similar to stamp duty or taxes on gambling, and it is undoubtedly an important revenue stream for government. Essentially it is a wealth tax designed to raise revenue from taxpayers who own valuable, commercial land. Thus land tax:
- has a threshold, so that ‘cheap’ land is not taxable;
- is calculated on the unimproved value, so that the value of improvements to the land, such as buildings, is not taxable;
- is calculated on the aggregate of all land owned by the vendor;
- is calculated on a sliding scale, so that more valuable land attracts tax at an increasing rate, known as an ad valorem rate; and
- has a number of exemptions, so that the principal place of residence (PPR) and farming land, amongst others, are not taxable.
These aspects may be contrasted with other outgoings, such as municipal rates, that are generally based on the improved value, apply universally and are at a fixed rate. Thus land tax provides a special challenge in respect of adjustment of outgoings at settlement of a conveyancing transaction.
Adjustments
Adjustments are meant to result in the vendor and purchaser each paying a fair share of the outgoings relating to a property in the year of sale/purchase. Thus rates and charges need to be apportioned between the vendor and purchaser at settlement, so as to result in the vendor paying those outgoings up to and including the day of settlement and the purchaser being responsible for outgoings after settlement. The process is therefore governed by the agreement between the parties – generally general condition (GC) 15 of the 2008 contract – and the provisions of legislation establishing those outgoings, the Land Tax Act 2005.
Conceptually the adjustment process is simple and, in the case of most outgoings, remains so in practice. The current rate or charge is apportioned over the year between vendor and purchaser. If the charge is paid as at the date of settlement, the apportionment will result in an increase in the amount paid to the vendor at settlement. If the rate or charge is unpaid, the usual way to adjust is to treat the outgoing as paid, resulting in the same increase in the amount due at settlement to the vendor as if the rate or charge had have been paid, and then draw a cheque from the amount due to the vendor for the full amount of the outgoing and forward that cheque to the rating authority after settlement in payment of those rates, thus complying with s 175 Local Government Act 1989. In this way the parties have contributed to payment of the outgoings in proportion to their length of time of ownership in the year of acquisition.
Adjustment of land tax
The fact that land tax has a threshold – currently $250,000 – means that land tax will not be a factor in the sale of ‘cheap’ land. The fact that it is calculated on the unimproved value of the land, ignoring the value of improvements, effectively extends this threshold so that, whilst a property may have a capital improved value of $1 million because of the improvements erected on the land, it will not be subject to land tax if the land itself has a value below $250,000.
The distinguishing feature about land tax when compared with other outgoings is its ad valorem nature. Thus a vendor of land that exceeds the threshold will pay land tax at a higher rate as the value of the land increases (0.2% above $250,000, increasing to 2.25% over $3 million). Further, land tax is calculated on this increasing scale on the aggregated value of the vendor’s land and then apportioned across the vendor’s total land holdings. Thus a vendor whose total land holdings are valued at $3 million will pay much more tax on one lot valued at $250,000 than a person who only owns one lot worth $250,000.
A purchaser is therefore exposed to being obliged to adjust land tax at an ‘inflated’ rate simply because the vendor owns other land. GC 15.2(b) of the contract recognises this possibility and requires adjustment of land tax to be on the basis that ‘the land is treated as the only land of which the vendor is owner’ – the so-called ‘single holding’ basis. The property sold is isolated from the vendor’s other land holdings; and a calculation of whether, and how much, the purchaser must contribute to the vendor’s land tax is made on that basis. This additional information is included on the back of the Land Tax Certificate.
Next month’s column will consider the impact of the PPR exemption, the imposition of special land tax on trusts and the effect of special conditions in contracts.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.