Hot property! Major NSW and Victorian tax measures to impact property funds
By Jim Koutsokostas and Bradley White
In the past few years, NSW and Victoria have seen a number of developments that significantly impact property funds. Property funds – and their investors – may now be exposed to state taxation in ways in which they would not previously have been exposed.
Below is a round-up of some of the more recent legislative developments.
The bottom line for property fund managers
- The state taxes landscape has become more complex in recent years. Stability no longer exists. Transactions previously not subject to state taxation may now be – and these costs will need to be factored into pricing and projected returns.
- Following on from substantial duties measures introduced by the NSW government in 2022, the latest measures demonstrate NSW is experiencing a significant shift in its duty regime.
- Likewise, Victoria has seen the introduction of new taxes and the broadening of its duties base. This is aside from recent litigation which has introduced uncertainty into the application of the Victorian landholder duty regime, particularly with respect to the capitalisation of property funds.
- Property fund managers need to be vigilant and carefully consider their obligations and exposures when establishing, operating and winding-up their funds.
- Now, more than ever, property fund managers need to get the right advice. Reach out to Jim Koutsokostas or a member of the HW Funds team.
New South Wales
Corporate reconstructions and consolidations no longer exempt
The existing NSW corporate reconstruction and consolidation rules exempt from duty, transfers of dutiable property (or interests in landholders) between entities of a relevant corporate group, provided certain conditions are met.
From 1 February 2024, the exemption will be replaced by a concession. Duty will be payable on these transactions at a rate of 10% of what would otherwise be payable.
Dutiable value of transfer: $10,000,000
Duty at current general rates: $533,055
Concessional duty: $53,305.50
Transactions arising from agreements or arrangements entered into prior to 19 September 2023, but effected on or after 1 February 2024, may continue to be eligible for the exemption – provided an application for the exemption is lodged before 1 April 2024.
‘Significant interest’ landholder acquisition threshold for private unit trust scheme reduced to 20%
Taking a leaf out of its southern neighbour’s duty rules, the NSW landholder duty ‘significant interest’ threshold for private unit trust schemes will be reduced from 50% to 20%. The 50% threshold will be retained for private companies, and for the new category of ‘wholesale unit trust schemes’.
The NSW wholesale unit trust registration rules broadly reflect those for Victorian wholesale unit trust registration – but for some differences, including for the minimum qualified investor threshold. So, what may qualify as a wholesale unit trust scheme in one state, may not qualify as a wholesale unit trust scheme in the other state.
Also changing are the landholder duty tracing provisions. Under the new rules, entities will be ‘linked entities’ if at each link between the two entities, one would receive at least 20% of the value of the others’ property if distributed – this is a reduction from the existing 50% condition.
The changes have the effect of broadening the landholder duty base, while increasing the instances in which landholder duty will be triggered.
These changes apply to acquisitions made after 1 February 2024 (unless the acquisition arises from an agreement or arrangement entered into prior to 19 September 2023).
Windfall gains tax now live
First announced on 15 May 2021 and then delayed 12 months, the Windfall Gains Tax (WGT) commenced on 1 July 2023.
The WGT is a new tax imposed when a WGT event occurs. A WGT event is any rezoning, other than an excluded rezoning (such as rezoning between schedules in the same zone, and rezoning into the growth area infrastructure contribution (GAIC) area).
When rezoning occurs, and provided no exemption applies, the taxpayer will be liable for WGT on the taxable value uplift of the land. This is calculated as the difference in the capital improved value of the land before and after the rezoning. For taxable value uplifts of:
- less than $100,000, the WGT rate is nil;
- between $100,000 and $500,000, the WGT rate is 62.5% of the gain that exceeds $100,000; and
- more than $500,000, the WGT rate is 50% of the whole gain.
The owner of the land at the time of the rezoning is liable for the WGT. However, landowners can elect to defer their liability (at interest) until 30 days from the first to occur of the following:
- when a dutiable transaction (other than certain excluded dutiable transactions) occurs in relation to the land (eg sale); or
- where a landholder duty relevant acquisition (other than certain excluded relevant acquisitions) occurs in respect of a landholder who is the owner of the land; or
- the day that is 30 years after the WGT event.
Exemptions may apply, including where a contract of sale was executed before 15 May 2021, and where a rezoning was ‘substantially underway’ before 15 May 2021.
Prohibition on land tax and WGT apportionment
Land tax apportionments are typical in land sale contracts as part of settlement adjustments. And with the recent introduction of WGT, the apportionment of WGT risk has also become common.
However, from 1 January 2024, it is proposed the apportionment of land tax or an existing WGT liability between a vendor and purchaser under a contract of sale will be prohibited. Any such purported apportionment will be an offence, and clauses purporting to make such an apportionment will be taken to have no effect. As at 15 November 2023, the relevant draft legislation was still being considered by the Victorian Parliament.
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