We have seen many examples of taxpayers incorrectly claiming exemptions or unaware that their innocuous discretionary trust or testamentary trust is a “foreign person”.

Land tax exemptions are based on self-assessment and many people and companies will believe they have self-assessed appropriately, but the exemptions can be complex and confusing, and they may not technically qualify.

The NSW Government has just announced a new crackdown on land tax.

Considering the Government has said they expect to recoup approximately $100m in unpaid land tax in the first year of this crack down – clearly there is an anticipation that there are many instances of errors in self-reporting or taxpayers being unaware of their position.

In anticipation of a ramp up of audit activity in 2020, the Government has offered a once off amnesty period up until 31 January 2020.

We expect that the amnesty offered by the Government will be crucial for tax payers to avoid hefty penalties for incorrectly accessing exemptions. While there will be a cost in terms of paying the appropriate land tax (potentially for the last 5 years) – penalty interest has been imposed at rates between 9% and 10%pa over the last few years, with an additional exposure to penalties if a voluntary disclosure is not made.  If anything, we expect such penalties it to increase after the amnesty.

Are you impacted?

This has implications beyond non-Australian citizens and hobby farmers.

For instance, there can be specific criteria for primary production to be able to claim an exemption for land tax – the business and profitability tests can be difficult to meet. While there are some safeguards around this during times of drought, it still can onerous burden to prove – and importantly requires contemporaneous documentation (for instance how many livestock were on each lot over time).

Property developers will also be impacted if they have not subdivided land appropriately before commencing development. Take for example, if you have a 5ha former primary production site (say in the popular Southern Highlands or Hunter Valley) and you commence development too early in the subdivision process, you may lose the exemption on the entire site.

Ordinary families may also be impacted – and it should be noted that discretionary trusts and testamentary trusts, unless worded otherwise, are generally considered to fall under the definition of a foreign person. This may be a surprise to families, as well as individuals from other jurisdictions who have a different definition of foreign person for the purposes of land tax surcharges.

What should you do?

The amnesty to 31 January 2020 cuts through the Christmas and summer holiday period and we recognise that this may impede the collection and documentation to back up any exemptions claimed.

  • Check your documentation – with an emphasis on consistency and continuity of documentation – to meet the criteria for your particular exemption.
  • Check the ownership of the land – is it owned by individuals living there, trusts or family companies, or a combination?
  • Check the wording of your trust to ensure it is worded to exclude distributions to foreign persons.
  • We can assist in determining the eligibility for exemptions or potential requirements to pay a surcharge to give you peace of mind.
  • If an error or oversight has occurred, we can manage the necessary reporting requirements on your behalf.

It’s important to act now

While all jurisdictions have a focus on land tax, the NSW Government is particularly active and has a rigorous audit program for land tax. The majority of cases that have been litigated have been decided in favour of the government. The reason they win so often is that the burden of proof falls on the taxpayer – and without consistent documentation, this can be a difficult burden to meet.

Once the amnesty ends we expect the NSW Government to show less leniency than in the past. This could include heavier fines in addition to the interest owed on unpaid land tax.