The ‘Tennis Court Tax’: Will you be paying tax on land next to your home from 2020?

Deuce

Land that a person owns and occupies as their home, or ‘principal place of residence’ (PPR), is generally exempt from land tax.  In Victoria, the exemption has also historically extended to separately titled land that was ‘contiguous’ with the PPR land, did not contain another residence and was used for domestic purposes together with the home.

‘Contiguous land’ means adjoining land or land separated only by a road or other similar area across which movement is reasonably possible.

The most common examples of ‘contiguous land’ used by homeowners include a separately titled tennis court, swimming pool or extended garden beside the title on which their house is located.

Advantage: State Revenue Office

From 1 January 2020, separately titled contiguous land in metropolitan Melbourne will no longer be included in the exemption that applies for a PPR.  This change will not be ‘grandfathered’, so you will not continue to qualify for the exemption just because you were previously entitled to it.  Only the title that has your residence located on it will remain exempt from land tax.

As a result, some taxpayers are facing the prospect of being charged thousands of dollars on separately titled contiguous land every year by the State Revenue Office.  Exceptions apply for:

• adjacent land on a single title together with your home (for example, if you consolidate your PPR title and the ‘contiguous land’ title by 31 December 2019, being the relevant date for the 2020 Land Tax year);
• your PPR and the contiguous land are wholly in ‘regional Victoria’ (specified municipal districts and alpine resorts );
• the contiguous land is a separately titled car park or storage cage connected to a unit or apartment in metropolitan Melbourne; or
• the taxable land held by the taxpayer, including the contiguous land, is valued under the ‘tax-free threshold’ (currently $250,000).

The policy intent behind this change seems to be to prompt economic activity by making ‘vacant’ land more costly to hold.

Land tax in Victoria is imposed at progressive rates with a top general rate of 2.25% applied to land holdings with a total taxable value of $3 million or more.

Example

Novak owns a house in Malvern and a separately titled block next to it with a tennis court and small shed with his equipment and trophies.  The site value of the tennis court block, as shown on Novak’s rates notice, is $2 million.

Novak also owns an investment property in Richmond with a current site value of $2 million.

As Novak’s contiguous land is used for private purposes and does not have another dwelling on it, it has until now, been exempt from land tax together with his home.  He has only paid land tax on his investment property, which would incur $11,975 of land tax for the 2020 tax year in isolation.

If Novak continues to hold the tennis court block on a separate title, it will be aggregated with the investment property in his 2020 Land Tax Assessment Notice and his total liability for the year will be $47,475.

Back to Deuce?

In light of the above change, taxpayers with contiguous land should consider the following options:

Option 1: if the situation allows for it, consolidate the residence and contiguous titles by 31 December 2019 to retain the full PPR exemption.

To achieve this option, a surveyor (and possibly also a planner) will need to be engaged to assist before your property lawyers can register the plan of subdivision on title, all of which can take some time. If there is a mortgage over the land, approval must also be obtained from the mortgagee.

If this is the preferred option, taxpayers should act now as the consolidation process can take many weeks to finalise, especially if there are encumbrances, such as a mortgage, on the relevant lots or council restrictions.

However, taxpayers should first consider the potential impact consolidation could have on the value of the property or their plans with respect to the property.  In particular, subdividing at a subsequent date to create a separate title for the block without a residence (for example, for sale purposes) may require a permit from the council and, depending on the location of the property and its zoning, may not be permitted at all.  A town planner may need to be engaged to consider these issues.

The impact of other taxes, such as capital gains tax implications, should also be confirmed to ensure no unintended consequences are triggered.

Option 2:  Alternatively, taxpayers may decide it is the right time to sell their adjoining land on its own.  If settlement is completed prior to 31 December 2019, the vendor will not be liable for land tax for the adjoining land for the 2020 Land Tax year.  However, if the adjoining land was acquired after 20 September 1985, there may be capital gains tax implications on the sale.

If you would like any assistance with the above options, please contact our Tax team below.