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Legislative Council - Fifty-Second Parliament, First Session (52-1)
2010-06-24 Daily Xml
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LAND TAX (MISCELLANEOUS) AMENDMENT BILL

Committee Stage

In committee.

Clause 1.

The Hon. P. HOLLOWAY: Something I omitted to do yesterday was to read on the record the statement in relation to how the average movement in land values would be determined, so I will do that first. The Land Tax (Miscellaneous) Amendment Bill 2010 provides that from 2011 to 2012 all land tax thresholds will be indexed by the average movement in land values. The average percentage change in land values for a particular financial year will be determined by the Valuer-General having regard to the Valuation of Land Act 1971 and the Land Tax Act 1936.

Honourable members have expressed an interest in understanding the methodology that the Valuer-General will apply to determine the average percentage change in land values. The government has previously provided a working formula to members of parliament that summarised the Valuer-General's proposed approach. Following further examination of various approaches to determine the average change in land values, including having regard to feedback provided by honourable members particularly the Hon. John Darley during briefing meetings on the bill, the Valuer-General has now advised that he intends adopting the following methodology to determine the average percentage change in land values.

The Valuer-General will undertake the analysis of land value changes for the taxable properties following gazettal of completion of the general valuation in late May. The average percentage change in land values in 2011-12 will be determined as follows: taxable properties for the 2010-11 financial year from Revenue SA's database will be used as the taxable properties data set; the Valuer-General will determine the change in total taxable site values for those properties between the values in force for the 2010-11 year and those determined for the 2011-12 year and use those values to calculate the average percentage change in site values.

So the average percentage change in site value will be equal to the total land value in year 2 for properties in the taxable properties data set divided by the total land value in year 1 for properties in the taxable properties data set minus one multiplied by 100 (to give the percentage). While the underlying principles in this approach and the previously circulated working formula are consistent, the Valuer-General considers that this approach will ensure that the average percentage change in land value reflects as accurately as possible movements in the land values of properties subject to land tax. I needed to put that on record because I think the Hon. Mr Lucas had referred to it.

As the Hon. Mr Darley has put some amendments on file, I also take this opportunity to indicate in advance what the government's position would be on those, given that we would obviously like this bill passed as soon as possible next week before the end of the financial year. It might help members in coming to their positions if I put on record the government's views in relation to those amendments.

I advise the council that the government strongly opposes the amendments moved by the Hon. John Darley. While there are six amendments, the first five essentially relate to one issue—that is, removing the predominantly residential character tests from the act in relation to gaining a principal place of residence exemption.

The second amendment relates to minority interest provisions, which are anti-avoidance provisions. I note that the Hon. Rob Lucas has asked for an indication of the likely revenue impacts of these amendments. I am advised that the revenue impacts of amendments Nos 1 to 5 are difficult to quantify, but they will be significant, as it opens up the principal place of residence exemption for avoidance.

In relation to amendment No. 6, I am advised that this amendment will put all the revenue raised from these provisions in jeopardy, which was $20.8 million in 2008-09 and in 2009-10 is estimated to be $21.75 million. I now deal with each amendment in turn.

In relation to amendment No. 1, the Hon. Mr Darley's amendment removes the requirement under the act for buildings on the land to be of a 'predominately residential character' for a full principal place of residence exemption to apply. The government cannot support this amendment because, if adopted, there would be no requirement in the act for buildings on the land to be residential property. Under these amendments, any land owned by a natural person that is occupied as a principal place of residence would be exempt. This could potentially include small commercial premises, for example.

The predominately residential character test is essential for the effective operation of the provision, which currently works well. If removed, the provision would be ineffective and the exemption opened up to avoidance. It should be noted that the residential character test was inserted in 2005. However, prior to that, the regulations required all buildings on the land to be designed, constructed or adapted for use as a private dwelling and all buildings on the land had to be solely or principally used for residential purposes. This test was in place for many years and also operated effectively. It is unclear to the government why this amendment is necessary as these provisions have operated effectively in both of their forms for many years, whilst these amendments will open up the exemption to avoidance opportunities.

In relation to amendments Nos 2, 3 and 4, these are related to amendment No. 1 and, if amendment No. 1 is not passed, amendments Nos 2 to 4 should also be rejected as the residential character test was inserted in these provisions to be consistent with the wording of the standard principal place of residence exemption. The amendments remove the predominately residential character test from the new exemption that applies where buildings on the land become uninhabitable due to their being destroyed or rendered uninhabitable by an occurrence for which the owner was not responsible. Again, this would allow a person to construct any type of building on the land and still qualify for exemption. There would be no requirement that the buildings on the land be a residential property. The government can therefore similarly not support these amendments.

In relation to amendment No. 5, this amendment removes the requirement under the act for buildings on the land to be of a predominately residential character for a partial principal place of residence exemption to apply. This provision directly applies to the small country motel referred to by the Hon. Mr Darley in the second reading debate. Currently, a partial exemption will apply to home business activities that occupy between 25 per cent and 75 per cent of the area of all buildings on the land where those buildings have a 'predominantly residential character'.

The predominately residential character test operates to prevent commercial and industrial buildings being given a land tax benefit because the owner chooses to live there, rather than a residential owner choosing to conduct a commercial or industrial operation from buildings that are genuinely a residence. In this way, equity is maintained between light commercial or industrial activities because such a property is considered to be essentially used for commercial or industrial purposes and, consistent with the land tax status of other commercial or industrial activities, should be liable for land tax. The government can therefore not support the proposed amendment.

In addition, it is worth noting that the current provisions were introduced in 2005 to primarily provide land tax relief to bed and breakfast operators, in addition to those persons who were already exempt. The previous land tax exemption in cases where a principal place of residence was used for business purposes applied only where no assistance was offered to the owner other than by another person resident in the dwelling, the floor area used did not exceed 28 square metres, and no goods were displayed on the premises. The current provisions are therefore a significant expansion of what formerly applied.

Amendment No. 6 relates to anti-avoidance provisions concerning minor interests, which were introduced in the 2007-08 budget, effective from the 2008-09 financial year. The changes address the practice where owners of more than one piece of land avoid paying a higher marginal rate of land tax by structuring their ownership so that another party, or parties, holds a similar minority interest in an individual piece of land, thereby creating different legal ownerships. The provisions enable the Commissioner of State Taxation to ignore any minority interests in land that are 5 per cent or less unless the commissioner is satisfied that there is no doubt that the interest was created solely for the purpose or entirely for purposes unrelated to reducing the land tax payable in respect of that or any other piece of land.

I am advised that the provisions are anti-avoidance provisions and are intentionally drafted in a robust manner so that, where a minor interest of 5 per cent or less exists, a very high burden of proof is on the taxpayer to show that the interest was created for a legitimate purpose. Although it is difficult for a taxpayer to discharge that burden, it is possible to overcome, and the discretion has been exercised by the commissioner in a number of situations. It is considered that this approach has ensured that the provisions are effective in achieving their purpose.

To remove the words 'there is no doubt that' would mean that the commissioner would merely have to be satisfied that the relevant minor interest was created for a purpose unrelated to reducing land tax. I am advised that this test would be far too simple for the taxpayer to overcome and that the provisions would become ineffective and result in a significant revenue loss. Matters raised during ongoing administration of these provisions have made it clear that the current robust test that requires the commissioner to have no doubt is essential for the effective operation of the provisions. The government therefore cannot support this amendment.

I trust those comments will help facilitate debate. If there are any other issues members wish to raise now, we can perhaps deal with those and then report progress.

The Hon. R.I. LUCAS: I would prefer that we report progress at clause 1 as I would like to consult further on what the minister has said. I think the substantive debate on the Hon. Mr Darley's amendments will be on clause 4 and the remaining clauses but, unless there is an argument to the contrary, if the minister is prepared to report progress at clause 1 that would seem to make most sense.

The Hon. P. HOLLOWAY: I am happy to do that. I just thought that if there were any other issues that members wished to raise now on clause 1, I would be happy to do that; however, if there are not, we can report progress.

Progress reported; committee to sit again.

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