How to ensure landowning clients do not have shortfalls and exposure to penalties
Landowners in Queensland should expect increased scrutiny of their affairs for land tax purposes.
It is expected the Queensland Office of State Revenue (Queensland OSR) will increase its land tax audit activity in 2015 so landholders and their advisors should be ready. Advisors should take proactive steps to review the land tax positions of their clients to ensure land tax has been properly assessed and paid, particularly where exemptions have been claimed (or assumed to be claimed).
In late December 2014 the Queensland Treasury issued its mid year fiscal and economic review (Treasury Mid Year Review) noting that it expected payroll tax revenue to fall due to moderate wage growth and increasing unemployment. To offset this expected fall, the Treasury Mid Year Review forecasts land tax revenue to increase by in excess of $40 million each year for the next three years. This budgeted increase in revenue is despite the Treasury stating in its 2014 Annual Report (issued in September 2014) that it expected only a modest recovery in land values.
With only modest increases in land values expected it seems any significant increase in land tax revenue will be due to increased audit activity. Consistent with this expectation, the Queensland OSR issued a public statement in January 2015 that it intended to write to all landholders claiming a home exemption.
Increased scrutiny of taxpayers’ land tax affairs is consistent with the position in other states such as New South Wales, where as part of the 2014 budget papers it was announced that due to the success of compliance activity measures regarding land tax collection, that the New South Wales government would extend its land tax compliance program. In New South Wales, where there has been an active land tax compliance team, land tax revenue has almost doubled from $1.3 billion in 2004 to $2.3 billion in the 2013 year.
With this background, the Queensland forecast of increased land tax revenue is not unrealistic and landholders in Queensland should take steps to ensure they are ready for an audit.
An overview of land tax
Land tax is an annual tax, assessed each year for the coming 12 month period on the taxable value of an owner’s total land-holdings. In Queensland the assessment date is midnight 30 June each year, whereas in New South Wales the tax is assessed at midnight, 31 December each year.
The taxable value is the aggregate of the relevant unimproved value of all land owned less any deductions or exemptions (including the home exemption).
Potential penalties arising from land tax shortfalls
Whilst the amount of land tax payable by landholders may be lesser compared to other taxes, the fact it is an annual tax and potentially of a non-deductible nature means landholders and their advisors should consider their affairs carefully to ensure there is no potential exposure to land tax (particularly where such exposure could be cumulative).
Potential penalties for any land tax shortfalls (penalties potentially being up to 75% of any shortfall amount for each year in question) could be reduced by making a voluntary disclosure – prior to the commencement of any audit.
Which landholders are at risk of audit?
Unlike New South Wales, lessees of Crown land are not deemed to be owners for land tax. In Queensland only owners of freehold land are subject to land tax, which means 70% of Queensland’s land mass is not subject to land tax.
Owners of freehold property, including interests in body corporates, should review their affairs – particularly if they hold multiple properties, the combined unimproved value of which could be above the tax free thresholds. The tax free threshold for Queensland resident individuals is $600,000, whereas absentees, companies and trusts with Queensland landholdings have a lesser threshold of $350,000. Broadly, any individual who is not resident in Australia would potentially be an absentee.
Any landholder who holds land above the tax free thresholds is potentially exposed to land tax – particularly those who may be claiming exemptions such as the home exemption or the primary production exemption for some or all of their holdings.
Most home owners assume that they will not pay land tax on the property they regard as their main residence. Care should be taken to ensure continuing eligibility for the ‘home exemption’ and that changes in personal circumstances do not inadvertently trigger land tax being assessed.
Landholders at risk of not validly claiming the home exemption include:
- landholders who have changed their principal place of residence in recent years, including people who have relocated overseas for work purposes and those who have moved inter-State or elsewhere to rented accommodation but who now use their former home to generate rental income
- landholders who have or are conducting major renovations, including demolitions
- landholders who move between multiple properties – for instance holiday homes, homes kept as bases in home towns and retirement homes
- landholders who use part of their home for business purposes, irrespective of whether they actually have clients/customers visit the premises and particularly if gross income from business activities conducted at the home is in excess of $30,000. For example: internet based businesses, professionals and para-professionals (architects, surveyors, engineers, occupational therapists, psychologists etc.)
- landholders who require aged or disabled care and move in with their children or other family members, not fully transitioning to a hospital or aged care home can be exposed, and
- trustees who own a property which is used as the home of beneficiaries of the relevant trust.
Owners of primary production land
Landholders claiming the primary production exemption from land tax should also consider whether the exemption is validly being claimed. Broadly for the exemption to apply, the land has to be used predominantly for primary production purposes.
For the purposes of the New South Wales provisions it is now accepted that in considering whether the dominant use is primary production, the relevant test requires a consideration of both physical and non-physical uses of the land.
In Queensland there are additional ownership requirements, which must also be satisfied.
We recommend that specific advice should be sought in instances such as where:
- there is potentially multiple uses of the land – for instance in addition to primary production the land is held as a buffer zone or for access to mining sites or if the land is being held as trading stock for development purposes, or
- in Queensland ownership of land is held either directly or indirectly by non-residents or public companies.
There are various other land tax exemptions which landholders may be able to benefit, including for instance; land used for aged care facilities, moveable dwelling parks or charitable purposes. In each case, the particular requirements of each exemption must be considered and professional advice sought if there is any uncertainty as to their availability so as to avoid potential land tax shortfalls and associated penalties.
Where land values have increased, valuation notices are issued in Queensland in March. Even if notices are not received in the mail, land valuations can be checked online for free from March to June on the Queensland Department of Natural Resources and Mines website.
Accessing the free online database in the months prior to the financial year end is an excellent opportunity for landowners and their advisors to review the total unimproved values of landholdings and to discuss land tax (and whether there are potential shortfalls) as part of year end tax planning.