In a nutshell
The changes seek to target what the Queensland Government describes as a loophole, that currently results in landholders with landholdings across more than one jurisdiction, paying less land tax than landholders who hold the same value of land, but where all of the land is located in Queensland.
How does it currently work?
The land tax system in Queensland is one of the most generous in the nation, including principal places of residence being exempt from land tax, a tax-free threshold that is higher than the median-valued parcel of residential land, and a rate structure that ensures that smaller landholders are subject to lower marginal rates of tax. The framework recognises that individuals and entities with more substantial taxable landholdings of commercial or investment properties have a greater capacity to pay.
Land tax is imposed in Queensland on the unimproved value of a taxpayer’s Queensland landholdings as at 30 June each year. The rate at which land tax is calculated increases as the value of the taxpayer’s total Queensland landholdings increases (i.e. the top rate for individuals is 2.25% which applies to the value of Queensland landholdings in excess of $10 million). For this purpose, the total value of a taxpayer’s landholdings does not include exempt landholdings such as a principal place of residence (PPR) and primary production land.[1]
For example, an Australian resident individual who owns:
- A PPR in Queensland with a taxable land value of $700,000;
- An investment property in Queensland with a taxable land value of $700,000; and
- An investment property in New South Wales with a taxable land value of $700,000,
will pay land tax in Queensland of $1,500 each year which amounts to an effective land tax rate of 0.214%. This is calculated on the value of the Queensland investment property, being $700,000 (because the PPR is exempt, and the NSW property is currently disregarded for Queensland land tax purposes). Land tax may separately be payable in NSW on the NSW land (subject to any specific exemptions or concessions under the NSW rules) but as at 2022, the threshold for land tax in NSW is $822,000, so in the example above, no land tax would be payable in NSW.
What would the position be under the proposed new rules?
Under the proposed changes, Queensland land tax would still only be payable on the taxable land value of the taxpayer’s Queensland landholdings. A total national taxable land value will be established for each Queensland landholder, which will continue to exclude exempt land such as principal place of residence. The national taxable value will determine the appropriate tax rate that will then be applied to the Queensland proportion of the value of the individual or entity’s landholdings. Therefore the rate at which that land tax will be calculated will depend on the value of the taxpayer’s landholdings Australia wide.
Using the facts from the example above, land tax would be calculated as follows:
- The land tax that would be payable on $1.4 million of land in Queensland (i.e. the PPR would still be excluded) would be $11,100. That amounts to an effective land tax rate of 0.792%;
- That effective tax rate is then applied to the actual value of the Queensland landholdings (excluding the PPR) of $700,00. That results in a land tax liability of $5,550.
This means that the taxpayer will be paying an additional $4,050 in land tax in Queensland each year because they own land in NSW, even though their landholdings in NSW fall below the NSW land tax free threshold and are therefore not subject to land tax in NSW.
Landholders who only own land in Queensland will not be affected by this change.
Additional land tax will only apply to the taxable Queensland landholdings of individuals who own land in multiple jurisdictions.
Queensland is the first jurisdiction in Australia to seek to introduce land tax rules of this type.
Practical difficulties
Although very little detail has been released by the Queensland Government about these proposed amendments,[2] there will presumably need to be some significant changes to the existing rules to make this work. An added difficulty is that there is no uniformity between the land tax rules in each State and Territory. Not only do the rates and thresholds differ, but the exemptions and concessions differ too. The Northern Territory does not impose land tax at all!
The Queensland Government has used payroll tax as an example of where the national payroll of an employer is used to calculate the rate of payroll tax in each State and Territory, claiming that these proposed changes to the land tax rules will achieve a similar outcome. However, this method only works in the payroll tax context because the payroll tax rules across Australia have largely been harmonised since 2012.
It will be interesting to see how Queensland manages to implement these rules in practice. Drawing from recent experience, with Queensland’s introduction of a foreign surcharge land tax, we expect the introduction of the changes will not be a smooth process. That said, the other jurisdictions are no doubt looking on with interest and we may soon see this approach adopted more broadly.
What can you do?
One obvious step is to ensure that you acquire land in each different jurisdiction in a separate entity. As they currently stand, Queensland’s aggregation rules as between different entities are relatively basic, so it is often possible to obtain the benefit of numerous land tax free thresholds through the use of different investment entities. There may even be scope to transfer land from one entity to another to ensure that they are not aggregated for land tax purposes (although the transfer duty and CGT implications should always be considered before undertaking such a step). However, it should not come as a surprise if the Queensland Government takes this opportunity to broaden the aggregation and tracing rules for land tax purposes (following the example of NSW and South Australia) to make it more difficult for taxpayers to structure their land ownership to manage their land tax liabilities.
In summary
While this has been touted as a measure to close a loophole in the land tax rules, it is effectively a tax hike for all taxpayers that hold land in Queensland as well as another Australian jurisdiction. While the details have not yet been released, these new rules promise to add a significant level of complexity to the Queensland land tax regime.
[1] This is subject to certain exceptions. For example, primary production land owned by a foreign individual (or an entity in which a foreign person or entity holds an interest) will not qualify for the primary production land tax exemption.
[2] The date for the introduction of the changes has not been announced, as they will be subject to the Government passing the appropriate legislative changes. However, we understand that the Government is hoping to have the new rules in place by the next land tax liability date of 30 June 2022.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.
Taken from the 2021-2022 Queensland Budget Update Report – chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://s3.treasury.qld.gov.au/files/2021-22_Budget-Update_web.pdf and McCullough Robertson Lawyers – https://www.mccullough.com.au/2022/02/17/changes-to-queensland-land-tax-rules/
