Land Tax is a state-based tax. In Victoria, it is administered and collected by the State Revenue Office (“SRO”). Land Tax liability is related to the ownership of real estate.
Like income tax, it is a progressive tax. That is, the more real estate a particular entity owns, the higher the rate of Land Tax that is paid on each property. Land Tax is calculated based on an entity’s land holdings as at midnight on December 31 and the liability calculated is the Land Tax liability for that property for the coming calendar year.
Certain categories are exempt from Land Tax including:
land that is actively farmed;
properties occupied as a principal place of residence; and
certain properties having a value lower than a specified threshold.
Any money owing to SRO for Land Tax is secured by a charge over that land in favour of the SRO. So, even if the money is owed by a vendor, it is essential for the purchaser to ensure that all Land Tax is cleared at settlement as the SRO will retain a charge over the actual property. It is normal practice to ensure all outstanding Land Tax is paid at settlement.
The liability to the SRO for Land Tax for that year remains even if the property is sold during the course of that year and even if the purchaser is an entity that would normally be exempt from land tax. The Land Tax status of the property does not change until 31 December of that rating year.
SRO issue two major figures for each property:
The proportional sum, being the amount of Land Tax payable on that property for a particular year have regard to the overall status of that entity (and taking into account all of the properties held by that entity or its related entitles. See the later discussion on related entities).
A single holding amount being the amount which would be payable if that property were a rateable property and it was the only property owned by that entity.
Vendors, typically, attempt to recoup from the purchaser some of their Land Tax Liability in the year of sale and this is done by adjusting the Land Tax Liability for the property in question based upon the settlement date. If Settlement takes place on 31 March (being ¼ of the way through the year), the purchaser pays an adjustment for Land Tax equivalent to ¾ of the liability. If settlement is on 1 January, the adjustment is 364/365ths of the annual liability.
A major (perhaps, ethical) problem with such a system is that a purchaser (such as a young first home owner) who buys a property that settles early in a calendar year from a major property developer (who pays Land Tax at the highest marginal level) may have a massive Land Tax adjustment made against them at settlement. In short, they may have to pay many thousands of dollars on top of the agreed purchase price.
The standard general conditions acknowledge this injustice and provide that Land Tax, where it is adjustable, is to be adjusted with regard to the single holding assessment for that property. In a majority of cases, this is a lower sum than the proportional sum. However, many vendors (and, especially, property developers who are hit hardest by Land Tax) do not want to be limited by that general condition and will insert a special condition in their (often pro forma) contract that states that the general condition limiting adjustments to the single holding calculations is to be deleted. The special condition will prevail.
The situation is compounded in “off the plan” contracts where the settlement date is unknown (and may be years into the future) and the potential liability for Land Tax cannot, reasonably, be estimated by a vendor. In such off the plan contracts, we suggest that purchaser clients, prior to signing a contract, seek agreement to amend the contract by having a special condition inserted along the following lines:
“Notwithstanding any other provision in this contract, the adjustment for Land Tax against the Purchaser at settlement will not exceed $x” (x being an amount the purchaser can reasonably live with).
Given that the more property that is held by an entity, the higher the rate of Land Tax land owners started arranging their affairs such that their properties were held in related but separate entities. The SRO then moved to ensure that properties held by related entities would be grouped and, therefore, assessed at the higher marginal level.
An exception to this is where property is held in a trust structure. These properties are not grouped. However, to offset these losses, the SRO applies a surcharge to all properties held by a trust. It needs to be noted that, in Victoria as opposed to some other jurisdictions, the existence of the trust is not noted on title. As such, it is imperative that we be instructed by purchasers as to the existence of the trust so that we may notify the SRO about the trust. It is not uncommon for the SRO to cross reference with other government entitles and, several years after settlement, issue an amended assessment that includes the surcharge and substantial penalties.
As regards settlement where Land Tax applies to a property, the following will occur:
All outstanding Land Tax will be paid to the SRO from the Vendor’s settlement funds (and will, therefore, be treated as having been paid by the Vendor).
The necessary adjustment will be made to the purchase price against the Purchaser and the amount of that adjustment will be determined by the settlement date (unless the special conditions provide an alternate adjustment date such as plan registration date or contract date) and by the conditions in the contract (applying either the single holding or proportional basis).
At ASAP Lawyers we understand that stress and anxiety can sometimes be related to the settlement process in conveyancing transactions. We try to make your journey easy! Our firm endeavours to provide guidance and comprehensive communication with our clients during the entire settlement process.
If you have a conveyancing matter you’d like us to assist you with, please contact us on PH: 03 9450 9400