Changes ahead for property tax in Australia

In this update we discuss the tax changes impacting the real estate sector in Victoria and consider the ATO’s updated approach to dealings in intangible assets.

As announced in Victoria’s State Budget on May 21 2021, Victoria will be introducing a new 50% windfall gains tax’ for rezoned land and also increasing land tax and stamp duty rates. These tax changes will significantly impact the real estate sector in Victoria.

Windfall gains tax for rezoned properties

A new windfall gains tax will be introduced from July 1 2022. This new windfall gains tax will impose tax at 50% for increases in value above AU$500,000 (approximately $377,993) which result from a rezoning decision from the local council. Lower taxation rates will apply to value increases of between AU$100,000 to AU$500,000.

This new tax is targeted at developers and landholders who benefit from the increased value of land from a rezoning decision, but the scope of the tax will ultimately depend on the drafting of the legislation, which is yet to be issued.  This windfall gains is effectively a new capital gains tax that is being applied at a state level, which could have a material financial impact on property developments in Victoria. 

Increased stamp duty rates

A new top rate of duty will be introduced for properties valued at AU$2 million or more. The current top rate is a flat 5.5% for properties over AU$1 million. Thus, for contracts entered into from July 1 2021, the land transfer duty rate will increase to AU$110,000 plus 6.5% of the dutiable value exceeding AU$2 million.

Increased land tax rates

From January 1 2022, the land tax rate for taxpayers with property holdings will increase by:

• 0.25% for taxable landholding exceeding AU$1.8 million; and
• 0.3% for taxable landholdings exceeding AU$3 million.

Increased payroll tax

A new mental health and wellbeing levy will apply in the form of a payroll tax surcharge at a rate of 0.5% on wages paid in Victoria by businesses with national payrolls above AU$10 million a year. Businesses with national payrolls above AU$100 million will pay a further additional surcharge of 0.5% (total increase of 1%).

New draft ATO guidelines for dealings in intangibles

The Australian Taxation Office (ATO) has released draft Practical Compliance Guide PCG 2021/D4 (PCG). The PCG discusses what the ATO will review in order to assess the risk of transactions that involve dealings with intangibles.  

In particular, it focuses on cross-border arrangements connected with the development, enhancement, maintenance, protection and exploitation (DEMPE) of intangible assets and/or particularly involving a migration of intangible assets out of Australia.

The PCG sets out the key factors that the ATO will consider when assessing the compliance risks, and likelihood of ATO audit or review, associated with such dealings in intangible assets.

Key issues explored include the retrospective operation of the PCG, whether intangible assets are ‘properly identified’ for tax purposes, whether the transactions are appropriately priced for transfer pricing purposes and whether withholding obligations have been satisfied. The PCG also focuses on the types and content of documents and related evidence that multinationals should maintain.

There has been a significant increase in ATO activity in relation to the above issues in recent years and the PCG makes it clear that this will continue, with the potential to disturb past ATO positions that taxpayers’ thoughts were settled.  Thus, taxpayers involved with intangible asset transactions should carefully review the guidelines in the PCG to assess the ATO’s likely approach to their arrangements.  

Capital gains and discretionary trusts 

The Full Federal Court of Australia has dismissed the taxpayer’s appeal in the Peter Greensill Family Co Pty Ltd (trustee) v. FCT case (FCAFC 99 – June 10 2021). As such, the court affirmed that the Australian trustee of the Australian discretionary trust was subject to capital gains tax in relation to the disposal of shares, even though the relevant beneficiary of the trust was a foreign resident.

The case is an important warning to foreign investors that invest in Australian assets via a discretionary trust. 

Foreign investors who directly invest in Australian assets would normally expect to avoid paying Australian capital gains tax on any profit on disposal of ‘non-taxable Australian property’ assets. Broadly, these are assets that are not real estate or interests in real estate.

Taxpayers generally view trusts as a disregarded entity for Australian tax purposes.  However, in this case, the court upheld the decision of the lower court that the interaction of Australia’s capital gains tax rules and trust rules meant that the beneficiary did not obtain the benefit of the exemption that directly investing non-resident would have.

It is important to note that in Greensill, the trust was discretionary, with the trustee having the power to decide to whom the income of the trust was to be allocated. If the trust were a fixed trust (e.g. a unit trust), with the beneficiary’s entitlement fixed and known in advance, a different outcome is likely.

This article was originally published in the International Tax Review.