Land tax in Western Australia is imposed pursuant to the Land Tax Assessment Act 2002. All land owned by a tax payer may be aggregated to ascertain the rate of tax payable. The more property owned by the same owner, the higher land tax bracket the owner finds him or herself in. The only real exemption is for the family home or place of residence.
In recent years the State Government has whacked land owners with very large rate increases. There has also been an increase in the efficiency and ability of the State Revenue to aggregate land owned by the same owner.
Land owners are enduring double jeopardy – an increase in the rate of taxation and a vast improvement in the State Revenues’ ability to aggregate.
This firm has had a number of enquiries as to how to overcome the impost and effect of this tax. A typical example is that of Mrs K. who is in her eighties. She and her husband through their hard work acquired 7 properties. He died, she became the sole owner by succession. In previous years her properties, for whatever reason, were not aggregated. However because of the recent government clamp down all her properties were aggregated (as the State Revenue was entitled to do) and with the increase in the rate of land tax, the land tax bill she received was ruinous.
She and her family were looking at any way they could minimise the impact of that new rate of tax.
Essentially people like Mrs K. have three options none of which are without difficulty or complication:
- Sell the property and pay capital gains tax if that tax applies. The problem is the capital gains tax may make the exercise of marginal utility;
- Transfer the property to another entity and pay the stamp duty. The problem is the stamp duty on the transfer may make the exercise of marginal utility;
- Transfer to a company or trust of which Mrs K. is the sole beneficiary or owner (which avoids stamp duty). The problem with the third alternative is that the Land Tax Assessment Act 2002, by s.45, contains anti-avoidance provisions which provide that a contract, agreement or understanding that has the effect of removing, qualifying or altering the operation of an assessment for land tax is void and inoperative as against the Commissioner of State Revenue. Similar considerations apply to schemes which involve the transfer of a minor interest in property to another entity. Jointly owned land is assessed as if the joint owners are a separate tax payer to the individual owners. However the Land Tax Assessment Act 2002 in s.45(A) and 45(B) give the Commissioner a discretion to disregard the minor interest if he is of the view that it was created for the purpose of reducing (avoiding) land tax.
There is little or no case law on s.45, s.45(A) or s.45(B) or their predecessors. Section 45 has remained unchanged since it was enacted and this firm is unaware of any case in which the Commissioner has legally sought to exercise s.45 to strike down a transaction alleged to be for the avoidance of land tax. In practical terms this is a dangerous situation because if the Commissioner becomes aware of large scale movements of properties (or schemes to move properties between related land owners), he is likely to seek to establish the boundaries of s.45 and his powers. You do not want to be the first person he has a go at.
These considerations were all put to Mrs K. and her family who decided not to take the risk.
However some principles do emerge from this situation:
- Firstly, the anti-avoidance provisions will not apply to a contract, agreement or understanding that has or might have the effect of reducing the incidence of tax but which is capable of explanation by reference to ordinary dealings such as a business or family dealing. For instance if the real purpose of moving properties from one owner to another was a family business reorganisation or the transfer of the property was to avoid an elderly lady having to manage the property on her own, then the anti-avoidance provisions may not apply. In other words the transfer has another realistic purpose;
- Secondly, if there is a legitimate reason for the acquiring party to acquire the property (other than as a simple substitute owner to avoid land tax) then the avoidance provisions may not apply.
The key messages for land owners are:
- Once land is purchased in the name of a party, it is difficult and potentially expensive to change that ownership;
- The Commissioner has not to date sought to exercise his powers under s.45, 45(A) or 45(B) of the Land Tax Assessment Act 2002 but you do not want to be the person who is first in the rank for him to have a go at – so be very careful about moving properties around to related parties;
- Proper structuring at the time of entering a contract to acquire land so as to ensure that land is not aggregated is essential. The reach of the anti-avoidance provisions on fresh purchases or acquisitions of land is much more limited than on subsequent movements between related parties. Careful structuring and the taking of advice from your accounting and legal advisors is essential if land owners are to limit future problems.
For more information, contact Mark de Kerloy at mdekerloy@mdk.com.au
