Tax Q&A: How to avoid paying land tax?

06/12/2018

Question: My wife and I purchased my grandparents’ deceased estate a few years ago. Under instruction from a solicitor, we purchased it under a company title (as we planned to subdivide the property), as required by Randwick Council.

Then along came land tax. After three years of payments, this is a heavy burden as the site is our primary place of residence and the ‘company’ is not trading to make money, nor will it do so unless bricksand-mortar appreciation is considered.

We don’t have regular large sums of money to pay for tax, which seems to be opportunistic and indiscriminate. I’ve spoken with the Office of State Revenue and they simply say we are a company – so regardless of being a company title and regardless of this being our only place of residence, we must pay.

We are due to complete the construction of our home this year and wish to sell one share (side B or half of the property) and continue to live in side A. Under a company title, do we pay the full company tax rate of 30% when we sell side B?

Once sold, we would like to close the company title and be able to avoid paying land tax moving forward. Is this possible?

Thanks and regards, Daniel

Answer: If the company constitution allows its shareholder(s) exclusive right to occupy a property, and all the shareholders have been living in that property as their principal place of residence, then Section 21A of the Land Tax Management Act 1956 will enable the company to not be regarded as the owner of the land.

"Section 21A of the Land Tax Management Act 1956 will enable the company to not be regarded as the owner of the land"

Instead, the shareholders would be treated as the deemed owners for the purpose of assessing exemption from land tax on the principal place of residence. In your case, the key criteria for applying this section of the law are as follows:

• the company shareholders are natural persons
• the shareholders have an exclusive right to occupy the property as the deemed owners/residents, as per the company’s constitution
• the shareholders have been living in the property as their principal place of residence

If all three conditions above are satisfied, you may consider discussing and clarifying these facts with the Revenue Office if you wish to object to their land tax assessment.

The above principal also applies to side A after construction, for the purpose of exemption of your principal place of residence in the future.

With regard to the tax implications when selling side B, if there is no transfer to a strata/torrens title prior to selling side B, then the buyer(s) will have to purchase 50% of the shares in the company. That is, the current shareholders will be selling 50% shares, and there will be capital gains tax implications for the current shareholders, not the company.

To wind up the company, the duplex needs to first be transferred from the company title to a strata/ torrens/stratum title.

You may need to consult with an experienced conveyancer to get this done through the correct steps.

Need to know

- There are legal provisions allowing challenges of a land tax assessment.

- A property should be transferred from a company to a strata title prior to folding.

- Shareholders (not the company) bear the tax burden if there is no title transfer.

Cindy Su

is managing partner

at Chan & Naylor Pymble