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Client Update: Tax – 18 November 2008

NSW mini-budget 2008-09

In brief: On 11 November 2008, the New South Wales Government released a mini-budget announcing a number of changes to taxes and duties in NSW. Partner Adrian Chek (view CV)and Senior Associate Katrina Parkyn look at the new measures which will affect a wide range of taxpayers.

Background

The NSW mini-budget was released in response to changing economic conditions and local issues affecting the NSW Government's expected revenue and expenditure position and credit rating.

The following is a brief discussion of the revenue measures adopted in the mini-budget and their implications for certain taxpayers.

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Deferred abolition of various duties

The previously announced dates for the abolition of various duties have been deferred until 1 July 2012.

The affected duties are:

Duty Previous date for abolition New date for abolition
Duty on non-quoted shares or units1 1 January 2009 1 July 2012
Mortgage duty2 1 July 2009 1 July 2012
Duty on non-land business assets (eg goodwill) 1 January 2011 1 July 2012

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Introduction of landholder regime

NSW is proposing to convert its existing 'land-rich' provisions to a 'landholder' model.

The existing 'land-rich' provisions operate to impose duty on certain dealings in unlisted companies and unit trusts that own land in NSW and whose total landholdings (worldwide) account for at least 60 per cent of the unencumbered value of all of the entity's property. Where duty applies, the dealing in the company or unit trust is subject to duty as if there were a transfer of the underlying NSW land.

Under the proposed landholder model, the 60 per cent land-rich ratio test will be removed. This follows the move to landholder regimes in Western Australia, the Northern Territory, the Australian Capital Territory and (with respect to trusts) Queensland.

Under the proposed landholder model, dealings in unlisted companies and unit trusts will potentially attract duty where the company or unit trust owns (directly or indirectly) any NSW land that exceeds a minimum prescribed threshold value. This threshold now stands at $2 million under the current NSW land-rich provisions, and there is no suggestion this will change.

The removal of the 60 per cent land-rich ratio test represents a substantial extension to the tax base, as it will increase the number of entities that are subject to these provisions. This is particularly the case for unlisted companies, which are less likely to have been land-rich under the existing provisions. In the property trust sector, many unlisted unit trusts would have already been land-rich under the existing provisions, and are, therefore, less likely to be affected by the removal of the 60 per cent land-rich ratio test.

It remains to be seen, however, what other consequential changes may be made to the land-rich provisions that may affect unit trusts. When WA introduced its landholder model, the acquisition threshold for triggering a dutiable acquisition in an unlisted unit trust went from nil to 50 per cent (regardless of whether the trust was private or wholesale). As a result, WA was able to dispense with the need for a separate regime for wholesale unit trusts. It remains to be seen whether NSW will adopt a similar approach and increase its acquisition threshold for unit trusts from the current 20 per cent to 50 per cent.

Once the 60 per cent land-rich ratio test is removed, it will no longer be necessary to value non-land property for the purposes of determining whether a particular entity is subject to these rules. However, this is likely to be of little comfort to taxpayers, given the substantial extension to the overall tax base.

The changes are proposed to come into operation from 1 July 2009, following consultation with industry. Parties who are considering acquiring interests in unlisted companies or unit trusts that own or have indirect interests in NSW land, but are not currently 'land-rich', might wish to consider the timing of their transactions.

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Increase in land tax rate

As from the 2009 land-tax year, the marginal land-tax rate on landholdings over $2.25 million will rise to 2 per cent. The new higher rate will only apply to landholdings over $2.5 million, with the current 1.6 per cent rate continuing to apply to landholdings below that amount (and above the tax-free threshold of $359,000).

The exemptions for principal places of residence and rural properties will not be affected.

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Increase in parking space levy

From 1 July 2009, the rates of the parking space levy will rise.

The parking space levy is currently $950 per parking space, per year, in category 1 areas (ie the Sydney, North Sydney and Milsons Point CBDs) and $470 per parking space, per year, in category 2 areas (ie Bondi Junction, Chatswood, Parramatta and Bondi Junction).

From 1 July 2009, the parking space levy in category 1 will increase to $2,000 per year and the levy in category 2 will increase to $710 per year.

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Coal royalties

The mini-budget also notes that coal royalties account for approximately 95 per cent of the NSW Government's royalty revenue. Due to the recent movements in the Australian dollar relative to the US dollar, the NSW Government has forecast that coal prices will 'remain above historical levels for the foreseeable future' and export volumes will increase.

Therefore, the Government will seek to capture a greater share of this increased profitability by:

  • increasing coal royalty rates by 1.2 per cent from 1 January 2009; and
  • removing transport costs as an allowable deduction when calculating those royalties.

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Nominal stamp duties

From 1 January 2009, the nominal duty imposed on documents such as duplicates of contracts will increase. The duty on trust deeds relating to unidentified and non-dutiable property will rise from $200 to $500.

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Reduction in payroll tax and increased threshold to remain

The reduction in the rate of payroll tax from 6 per cent to 5.75 per cent and the increase in the annual tax-free threshold from $600,000 to $623,000 for the period from 1 January 2009 to 30 June 2009 are not affected by the mini-budget.

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What next?

These changes will have consequences for a wide range of taxpayers.

For example:

  • Parties who had planned to defer entering into transactions affected by share transfer duty, mortgage duty and duty on the transfer of non-land business assets on the basis of the previous timetable for the abolition of these duties will need to reconsider their position.
  • Purchasers of companies and unit trusts that own land in NSW will also need to monitor the introduction of the new landholder regime. If the affected company or unit trust is not presently 'land-rich', parties may wish to consider bringing forward the timing of their transaction.
  • Other taxpayers will see a general increase in the amount of tax they are liable to pay in NSW.

If you have any question about these, or any other tax matters, please contact us.

Footnotes
  1. Duty on quoted shares and units was abolished on 1 July 2001.
  2. Mortgage duty on owner-occupied housing and investment housing was abolished in 2007 and 2008 respectively.

For further information, please contact:

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