Tax developments for private groups to watch in 2024

Beneficiaries brought to tax

Echoing our thoughts from this time last year, we have continued to notice an increase in audit activity concerning the application of section 99B of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). The increased activity is consistent with the Australian Taxation Office’s (ATO) shift from a supportive posture during the pandemic, to one which has begun applying a more sophisticated and data driven approach to its compliance assurance programs.

Section 99B remains a priority for the ATO and is an integrity measure that applies where trust property is paid to, or applied for the benefit of, an Australian resident beneficiary (unless an exception applies). Traditionally, section 99B is a provision that often goes unnoticed, but it has been on the ATO’s radar in recent years. Like section 100A, there are very few cases on section 99B, very little guidance, and many concerns regarding the scope of its potential application. The ATO is due to issue guidance on this issue in 2024.

Simplifying CGT Rollovers

As we noted in our ‘Tax developments for private groups to watch in 2023’, the Board of Taxation’s (Board) final report on the capital gains tax (CGT) roll-over rules was due to be submitted in April 2022. That report remains outstanding, and no update has been published on the expected timing of the final report. The Board provided its interim written advice to the government in March 2021.

The final report is expected to identify and evaluate opportunities to simplify the existing CGT rollovers into a set of rules that have substantially the same practical effect but are easier to interpret and apply. While there has been no update on the status of the Board’s final report, it is expected that the final report will offer the Federal Government clear recommendations that will hopefully simplify the process of giving advice on rollovers and reduce the regulatory burden on affected businesses.

The contents of the Board’s report and the Government’s appetite to adopt any of the recommendations will be something to track given the ATO’s focus on transactions that utilise rollovers, especially back-to-back rollovers.

Changes to Thin Capitalisation Rules

As mentioned in our review of private group tax developments in 2023, we are expecting legislative amendments to be made to the Australian thin capitalisation rules. Refer to our comments regarding these proposed changes here.

Potential changes to the individual tax residency rules

In July 2023, the Government issued a Consultation Paper for a new, modernised individual tax residency framework based on recommendations made by the Board of Taxation in its 2019 report Individual Tax Residency Rules – a model for modernisation. This Consultation Paper followed the Government’s announcement in the 2021-2022 Budget that it would legislate new individual tax residency rules based on the Board of Taxation’s 2019 report.

Under the Board’s 2019 report, the primary test for individual tax residency will be a simple “bright line” test - a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria.

The Government consultation process has now been completed, however we have not received any subsequent updates from the Government. Perhaps we will receive further updates in 2024. This is a case of “watch this space”.

State Tax Developments

Expansion of Victorian Vacant residential Land Tax to all land in Victoria

On 4 October 2023, the Victorian Government introduced the State Taxation Acts and other Acts Amendment Bill 2023 (Bill) announcing a suite of legislative changes. The Bill was passed by the Upper House on 30 November 2023.

The Bill includes a substantial expansion of the vacant residential land tax (VRLT) to apply to all residential land in Victoria from 1 January 2025. The VRLT is not new, but what was once an obscure tax will now become an impost on many landowners.

Previously, VRLT only applied to residential land that was situated in specific council areas around inner and middle Melbourne. The expanded geographic range will now capture all land in Victoria, including the state’s favourite holiday destinations.

VRLT applies to taxable residential land that is ‘vacant’, meaning land that has not been used and occupied for more than 6 months of the year (continuous or aggregate), by either the owner of the land or a permitted occupant as their principal place of residence, or a tenant under a bona fide lease. The Bill further provides that from 1 January 2026, VRLT will also apply to undeveloped land in metropolitan Melbourne that has been unimproved for more than 5 years.

VRLT is levied at 1% of the capital improved value of the land, including the value of any buildings and capital improvements on the land. This is different to, and can be significantly higher than, the unimproved value of land used for general land tax. The Bill amends the rate of VRLT so that rate will increase by 1% for each year that the property remains subject to VRLT, up to at 3% after three years.

In practice, this means that owners of a property worth $2,000,000 will face an annual tax liability of $20,000 in the first year, up to $60,000 for the third year that the property qualifies for the surcharge, in addition to their existing land tax bill.

For those with holiday homes, there is an exemption from VRLT if the property is used for four weeks in the year (continuous or aggregate), but owners must be aware it only applies to properties owned by a natural person. Properties held by a company or by a trustee, which is common for asset protection, do not qualify for the exemption. Some relief for companies and trustees who own holiday homes has been announced but was not included in amendments made to the Bill as it progressed through Parliament. It is understood this relief will be restricted to those who already own holiday homes in those structures.

New Victorian prohibition on land tax and windfall gains tax adjustments at settlement

In addition to changes to VRLT, the Bill introduces a prohibition on:

• the apportionment of land tax under a contract of sale below $10 million; and
• the apportionment of any existing windfall gains tax (WGT) liability,

between a vendor and a purchaser under a contract of sale of land from 1 January 2024.

Previously, sale of land contracts would typically provide that land tax is paid by the vendor until the date of settlement, with an adjustment made at settlement for a purchaser to pay land tax attributable to the balance of the year.

The Bill amends the Property Law Act 1958 and the Sale of Land Act 1962 to prohibit adjustments for any land tax (including VLRT and the absentee owner surcharge) or existing WGT liability. Penalties also apply for entering into such an agreement.

As a result, the vendors remain solely responsible for any land tax or existing WGT liability and cannot require the purchaser to pay any amount for or towards that liability. In practice, these changes will result in land tax burden falling on vendors and may make the time of settlement a more important factor.

Importantly, the Bill was amended so that the prohibition on recovery of land tax will not apply to contracts where the sale price is above the ‘threshold amount’, being $10 million for contracts entered into in 2024. The threshold will be adjusted annually by CPI. There is no threshold amount in respect of the WGT rules.