The intricacies of the land tax legislation can trip up even the most savvy of owners, and with land tax liability being determined by the occupation of your property as at 31 December each year, now is a good time to start planning ahead to minimise unnecessary exposure.
Here are some of the areas of risk which we commonly see affecting our private clients and their family homes – if you spot anything of concern, we would be happy to help.
1. Moving house
The risk – a land tax bill for either your old home or your new home.
Most family homes are exempt from land tax under what’s known as the “principal place of residence” (PPR) exemption.
When a family moves house and there is a crossover period where both the old and new homes are in their names, in most circumstances the PPR exemption will extend to include both properties during the crossover period.
However, there are some circumstances where the usual exemptions will not be available:
– The owner derives income from either home while it is not occupied as their principal place of residence (eg. by leasing it out short term);
– The old home has not been sold by the end of the assessment year for which the PPR exemption is granted; or
– The owner does not move into the new home within 12 months of its purchase and use the new land as their principal place of residence for at least six continuous months.
We have seen multiple cases where these scenarios have led to an unwelcome and unexpected land tax assessment.
The take-away: Aim for a sale of your old home within the year, and don’t bring in tenants.
2. Contiguous land
The risk – a land tax bill for separately titled land adjoining your home.
Land contiguous to a person’s principal place of residence was historically considered part of the PPR and treated as exempt from land tax on that basis.
From 1 January 2020, that position changed – now, land contiguous to a PPR will only be exempt from land tax if it is:
– located in regional Victoria; or
– a car space or a storage cage associated with an apartment in metropolitan Melbourne.
This means that if your garden, tennis court or outbuildings are on a separate title, that land will be subject to land tax.
Consolidating the title to the contiguous land with the title to the adjoining PPR will get around the problem for future years, but should be considered carefully in each case to determine ensure that it doesn’t inhibit future plans for the property.
The take-away: Consider whether it is practical to consolidate contiguous titles.
3. Deceased estates
The risk – a land tax bill if administration of the estate takes more than 3 years.
The Land Tax Act generally allows a period of 3 years for administration of a deceased estate to be completed (known as the “concessionary period”), and the SRO must be notified of the commencement and completion of administration.
Any principal place of residence concession applicable to the deceased person’s home at the time of their death will continue to be available for a maximum of 3 years from their date of death (unless it’s transferred out to the estate beneficiaries before that).
Other land owned by the deceased receives slightly different treatment – such land is assessed at general land tax rates for a maximum of 3 years from commencement of the administration.
The Commissioner does have a discretion to extend the concessionary period, but only in exceptional circumstances.
Once time is up, any land remaining in the estate will be taxed at trust surcharge rates and subject to VRLT if applicable – this could mean a hefty bill for representatives to deal with.
The take-away: Executors and administrators should keep an eye on time as the 3 year anniversary of death approaches.
4. Nominated beneficiaries for pre-2006 trusts
The risk – a land tax bill if the nominated beneficiary of a pre-2006 trust property dies.
When higher rates of land tax were introduced in 2006 for properties held in trusts (known as “trust surcharge rates”), trustees of discretionary trusts had a one-off opportunity to notify the SRO of the name of a beneficiary of the trust. Such a nomination ensured the land would continue to be taxed at general rates, rather than the new surcharge rates.
If the nominated beneficiary dies, trust surcharge rates will begin to apply to the property unless a replacement beneficiary is nominated. Nomination takes effect from the year following, so if there is a delay in nominating (or if no nomination at all is made), the land tax consequences could be significant.
Unfortunately, many people are unaware of this and are therefore receiving unexpected land tax assessments following the beneficiary’s death.
The take-away: Ensure a replacement beneficiary is nominated promptly for pre-2006 trust property.
The risk – a VRLT bill if you own residential property which was vacant for more than 6 months in a year.
Vacant residential land tax (VRLT) was introduced from 1 January 2018, and is a separate annual tax applicable to homes in inner and middle Melbourne that were vacant for more than six months in a calendar year.
The tax is a significant one, equal to 1 per cent of the capital improved value (CIV) of the vacant property. For example, a property with a CIV of $1 million will attract an annual tax of $10,000.
VRLT applies to land that is able to be used solely or primarily for residential purposes (such as a home or an apartment), and can include land on which a residence is being renovated or where a former residence has been demolished and a new residence is being constructed, depending on how long the renovation/construction process takes.
An existing residence will generally be considered vacant if, for more than six months in the preceding calendar year, it has not been lived in by one of the following:
– The owner, or the owner’s permitted occupier, as their principal place of residence (PPR), or
– A person under a lease or short-term letting arrangement made in good faith.
It is important to note that it is not enough that the property is available for occupation, such as by listing on a short term rental website. It must actually have been used and occupied for more than six months.
Taxpayers have a positive obligation to notify the SRO by 15 January each year if a property they own was vacant for more than 6 months of the previous calendar year. Failure to notify could mean significant interest and penalties on top of a VRLT assessment.
There are some limited exemptions available for holiday homes, properties which changed ownership during the year, properties which became residential property during the year, and properties used and occupied by the owner for work purposes. The requirements of these exemptions are quite technical, and whether they are available will depend on the specific fact scenario affecting a particular property.
The take-away: Where possible, avoid leaving residential property vacant for more than 6 months.
6. Absentee owner surcharge
The risk – extra land tax if you live overseas and are not an Australian citizen or permanent resident.
A annual surcharge of 2% is applied on top of the usual land tax rates if land is owned by one of the following:
– an absentee individual
– an absentee corporation
– a trustee of an absentee trust
Each of these terms has a fairly technical meaning, but basically the surcharge has the potential to apply if an individual owner, a director of a corporate owner, or a beneficiary of an owning trust fits the following criteria:
– they are not an Australian citizen or permanent resident; and
– they do not ordinarily reside in Australia; and
– they were absent from Australia:
– on 31 December of the year prior to the relevant tax year, or
– for more than six months in total in the calendar year prior to the relevant tax year.
Landowners have a positive obligation to notify the SRO if they are an absentee owner – notification must be made by 15 January of the relevant tax year, using the Absentee Owner Notification Portal on the SRO website.
The take-away: Where owners, directors or beneficiaries are not Australian citizens or permanent residents, consider whether notification may be required under the absentee owner rules.
What can you do?
If you spot an issue of concern, please get in touch with us. Our expert team at Moores is experienced in helping our private clients understand their land tax liability and minimise exposure in this regard. We can help you to avoid any nasty surprises in your next land tax assessment. For more information, please do not hesitate to contact us.