Australian companies that are partly or wholly owned by foreign persons / corporations / trusts can apply for an exemption to effectively remove the 1.5 per cent land tax surcharge (provided an appropriate application is made and the relevant requirements are satisfied). Until now, there has been no equivalent discretionary exemption available for trusts. It only takes one `absentee beneficiary' for a whole trust to be treated as an `absentee trust' (and, therefore, subject to the surcharge) and if the trust holds its Victorian land through sub-trusts, the surcharge applies to the entire taxable value of the land.
This makes no sense from a policy perspective and, thankfully, looks like it is about to change. The State Taxation Acts Further Amendment Bill 2017 proposes to make the land tax absentee owner surcharge more `trust friendly' (or at least less `unfriendly' to trusts), as well as making some other State tax amendments.
The State Taxation Acts Further Amendment Bill 2017 (the Bill) has passed through the Legislative Assembly and is currently before the Legislative Council. We understand it is likely to be considered by the Legislative Council before Parliament rises for its Summer break. Land Tax Absentee owner surcharge exemptions for trusts For the purposes of the land tax `absentee owner' surcharge, a trust can be an `absentee trust' (and, therefore, subject to the surcharge) when only a minority unitholder or beneficiary (`specified beneficiary' for discretionary trusts) is an absentee. In other words, it only takes one `absentee beneficiary' for the trust to be treated as an `absentee trust'. Currently, there is a discretionary exemption available for `absentee corporations' which, in effect, means they can be exempt from the land tax absentee owner surcharge. The amendments proposed in the Bill will extend this exemption to `absentee trusts' that hold Victorian land, by introducing a discretionary exemption under which a beneficiary of an absentee trust is taken to not hold its interest as an absentee beneficiary, such that the absentee owner surcharge would not be payable (or would be payable to a lesser extent) by the landholding trust. The exemption requirements broadly mirror the equivalent requirements for corporations.
The Victorian Treasurer has previously issued guidelines outlining the factors to be considered in making exemption decisions under these provisions. In very broad terms, the exemption may be available where an absentee company or (once the Bill is enacted) the trustee of an absentee trust conducts commercial operations in Australia, makes a strong and positive contribution to the Victorian economy, and has local day-to-day management and operations.
This is obviously very good news for trusts!
Absentee owner surcharge for land held through a chain of trusts / sub-trust structure
Broadly, where Victorian land is held in a `sub-trust' structure and one or more of the unitholders / beneficiaries `up the chain' are foreign, the land tax absentee owner surcharge applies to the whole of the value of the land held in the sub-trust, even if only a small proportion of the trust is (indirectly) held by foreign unitholders / beneficiaries. This is out of sync with the absentee owner surcharge treatment of absentee trusts that hold Victorian land directly.
For example, if the ABC Unit Trust (an absentee trust) holds Victorian land and only 5 per cent of the ABC Unit Trust is held by `absentee beneficiaries', the 1.5 per cent surcharge only applies to 5 per cent of the taxable value of the land. This is in stark contrast to a scenario where the ABC Unit Trust instead holds Victorian land through the XYZ Trust (a wholly-owned sub-trust). Although only 5 per cent of the ABC Unit Trust is held by `absentee beneficiaries', the 1.5 per cent surcharge would apply to the entire taxable value of the land of the XYZ Trust. This is clearly an anomalous outcome from a policy perspective and these amendments seek to redress this issue.
The amendments will provide the ability to `look through' the trusts, such that the absentee owner surcharge will only apply to the proportionate interest that is ultimately held by absentee beneficiaries. For example, using the same facts as above, if the ABC Trust is 5 per cent held by an absentee beneficiary and 95 per cent by non-absentee beneficiaries, the surcharge should only apply in respect of the 5 per cent interest that is ultimately held by an absentee person.
Whilst this will provide a fairer basis for the application of the surcharge, a similar `apportionment' provision has not been proposed for land held by a corporation (either directly or through a chain of corporations).
Valuation of Land
The proposed amendments will allow for valuations to be made (for land tax and other purposes, such as municipal / local council rates) each year rather than every two years. This amendment was previously proposed but withdrawn before the relevant bill was passed. Assuming the amendments will be passed this time, taxpayers will be likely to see an increase in their land tax bills annually rather than every two years.
Amendments to exemptions and concessions
A land tax exemption is currently available for land that is leased for specified activities where the proceeds from the activities on the leased land are used for a charitable purpose. This exemption is available regardless of the character of the landowner. The amendments seek to limit the exemption to only apply to land that is owned by a charitable institution and is used for relevant purposes. Therefore, commercial landowners that lease such land to charities may no longer qualify for this land tax exemption.
Foreign Purchaser Duty Surcharge
The Bill proposes amendments to correct possible anomalies in the operation of the foreign purchaser duty surcharge under the Duties Act 2000 (VIC). The main amendment will be to align the application of the surcharge with current administrative practice to clarify that it will apply where general duty is chargeable. An example of circumstances where there has been some doubt as to whether the surcharge applies is where the principal place of residence duty concession is available (and the amendment will clarify that the surcharge does apply in these circumstances). This amendment will be taken to have come into operation on 1 July 2015 (when the foreign purchaser surcharge initially came into effect).
Other Minor Changes
The Bill also proposes amendments:
- to permit certain disclosures of information under the Taxation Administration Act 1997;
- regarding the service of documents between the Commissioner of State Revenue and taxpayer. In particular, this is to reflect changes to the postal system in Australia (as some mail now takes longer to be delivered) and also to make provision for certain types of electronic communication. For example, a document may be taken to be served when a communication is received or when the document is available to be access or retrieved, which may be relevant in scenarios where a `data room' is used or a document is to be accessed via an internet site; and
- to extend a payroll tax exemption currently available under the Payroll Tax Act 2007 to approved non-profit group training organisations so that it will also apply to approved `for profit' group training organisations.
These amendments provide some welcome news for landholding trusts that have (one or more) foreign beneficiaries / unitholders. Trustees of such trusts should consider whether they will qualify for the exemption and, if so, lodge a detailed request for the exemption, addressing all of the relevant factors / criteria.
Taxpayers will be likely to see increases in their land tax bills annually rather than every two years (in line with increases to the taxable value of the land, assuming the amendments are passed this time).
Some charities may be stung if their landlords seek to pass on additional land tax liabilities as outgoings under their leases.