When considering tax and property investing, many people will tend to consider negative gearing and capital gains tax. These are major tax considerations. However, you should also be considering land tax, which is a tax levied by each state. In Queensland, land tax applies when as a company or trust you own property with an unimproved value over $350,000 or as an individual, property with an unimproved value over $600,000.
If you are a foreign investor it is even more complex. You need to be aware of specific legislation and tax that affects your purchase, ownership or rental.
In June this year, the Queensland government released several amendments to land tax legislation that affects both foreign and local owners. These amendments came into effect on 30th June 2019.
Amendments affecting all landowners
The Queensland land tax rates for all companies and trusts with aggregate landholdings of $5 million or more were increased by:
- 0.25 cents to 2.25 cents for each dollar above $5 million; and
- 0.25 cents to 2.75 cents for each dollar above $10 million.
Amendments affecting foreign landowners
Causing even more of an impact, the Queensland government introduced a new 2% land tax surcharge on foreign companies and trusts.
When structures are considered foreign
Foreign company or unit trust – A company or unit trust will be considered ‘foreign’ if foreign persons hold an interest (together with associates) of 50% or more.
Foreign discretionary trust – A discretionary trust will be “foreign” if the default beneficiaries that are entitled to a distribution of 50% or more of the income or capital of the trust are foreign persons. As such, careful consideration needs to be given when drafting Trust Deeds.
Absentee individual – A person is considered an absentee if they are not ordinarily resident in Australia. However, the recent changes to the rules now ensure that Australian citizens and permanent resident visa holders are not absentees for land tax purposes. An absentee individual is also subject to the land tax surcharge (although this is not a new rule – the surcharge for absentee individuals has increased from 1.5% to 2%).
In light of these changes, it is crucial to consider the ownership structure for any property purchaser to ensure that land tax has been considered.
If you are a buyer or a tenant, please note that all contracts or leases for property in Queensland should appropriately address liability for land tax, particularly where the landholder is foreign. Contracts for sale, in most cases, requires an adjustment at settlement for land tax, except in residential sales.
In relation to leased properties, particularly commercial and industrial property, it is common for lease agreements to allow landlords to recover land tax costs from their tenants. Accordingly, with the potential increases in land tax costs, tenants and landlords may need to negotiate how these additional costs will be allocated. Some methods for allocation include:
- No adjustment in land tax liability – common in residential sales and retail leases;
- On the amount assessed, including any surcharge; or
- On some hypothetical or presumed assessment, which could be decided based on:
If the seller or landlord was born locally
If the seller or landlord was resident in Queensland
If the land was the seller or landlord’s only land (avoiding aggregation).
Notifying the Office of State Revenue
After the changes were published, the Queensland Office of State Revenue (OSR) started to assess and contact all landholders to certify their status, foreign or not. It is crucial to ensure that this information is given correctly, as it could result in serious consequences.
What to do next
If you are currently negotiating purchase or sale contracts or commercial property leases you should pay special attention to the recent land tax amendments and how these may affect you.
If you already are already a landowner or a tenant of commercial property, you should consider how these amendments will affect you and potentially re-evaluate the relevant clauses and adjustments to ensure that they are compliant and operating correctly.
At William Buck we have a team of property specialists that can help you navigate the changes in land tax.