By Russell Cocks, Solicitor
First published in the Law Institute Journal
Last month’s column considered the imposition of land tax and its adjustment at settlement of a conveyancing transaction.
Land tax is distinguished from other outgoings by four attributes:
- thresholds, below which tax is not imposed;
- aggregation of ownership;
- an increasing rate of tax based on value; and
- exemptions.
The combination of aggregation and the increasing rate of tax expose a purchaser to a liability to contribute to ‘excessive’ land tax in some circumstances, and last month’s column explained how the ‘single holding’ basis of adjusting protects purchasers in this regard.
Principal place of residence exemption
Land may be exempt from land tax on the basis of the principal place of residence (PPR) exemption. A property owned and occupied by a ‘natural person’ is exempt from land tax. This is irrespective of the land value of that property and means that land tax is rarely a factor in residential conveyancing. But ‘unusual’ transactions present from time to time, and it is probably the unfamiliarity with land tax in the residential environment that creates problems.
The key to understanding this exemption is that it is based on the current use of the property, not an intended use. If the current use is as the vendor’s PPR, then the property is exempt for the current year. The upside of this for a purchaser is that, if the vendor has established the PPR exemption, it will not be taken away in the current year and no adjustment is necessary, even if the purchaser does not intend to use the property as a PPR. The purchaser will be liable for land tax in the subsequent year, but not in the year of acquisition.
The downside is that, if the vendor has not established the PPR in the year of sale, the purchaser will still be obliged to adjust land tax (on a single holding basis) even if the purchaser intends to occupy the property as the purchaser’s PPR. The exemption will not be available until the subsequent year.
This scenario can also arise if the vendor has purchased before selling. The vendor settles their purchase and advises the State Revenue Office that their new property is their PPR. If they retain ownership of their ‘old’ property beyond 31 December in that year, the old property is likely to be assessed for land tax as it is no longer exempt as a PPR. Disputes may arise at settlement of that property in the new year as the vendor’s statement, prepared at the time of sale, will very likely not reveal a potential land tax liability as it was prepared in anticipation of the sale of the PPR in the previous taxing year.
Special land tax
Land tax at a premium rate is imposed on some properties owned by trustees, and the land tax threshold in respect of such properties is $25,000 rather than $250,000. This means that a purchaser of such a property would, perhaps unexpectedly, face an obligation to adjust land tax in the year of acquisition, notwithstanding that the purchaser is a natural person and would not ordinarily be liable for land tax. This situation is covered by GC 15.2(c) of the 2008 prescribed contract of sale, which provides that adjustments are to be effected on the basis that ‘the vendor is taken to own the land as a resident Australian beneficial owner’. On that basis the premium rate does not apply and the threshold is $250,000. Adjustments would therefore be effected on a single holding basis, with the normal threshold and standard rates. In this manner, the burden of special land tax falls on the vendor, not the purchaser.
Special conditions
The 2008 contract of sale is an industry standard, but its use is not compulsory. It is permissible for a vendor to change the method of adjustment of land tax by special condition, and purchasers must be careful to check whether this has been done in any particular contract. Property developers in particular may seek to transfer responsibility for land tax to a purchaser from the date of contract rather than from the conventional date of settlement. This can have the effect of requiring the purchaser to bear an unexpected land tax burden and, if coupled with removal of the ‘single holding’ basis of assessment, can have a significant downside for a purchaser, particularly in the case of a long settlement period that may extend beyond 31 December. This exposes the purchaser to a share of land tax in the year of contract and the whole of the land tax, at the vendor’s rate, in the year of settlement – often a nasty surprise.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.