Proposed land tax reform in South Australia: impacts for office owners

This article has been updated, review updated article here.

In the 2019/20 South Australian Budget, the State Government proposed changes to the way Land Tax is assessed. Owners are currently able to establish a separate legal entity per property owned and claim single holding land tax for each of these entities/properties. It is now proposed to amend legislation to provide government with the ability to assess land tax based on the beneficiary.  

Exact details of these changes are yet to be announced with the matter still undergoing the legislative process. However, a proposed effective date of 1 July 2020 has been identified. Here’s what we know so far:

The State government is looking to end existing arrangements and adopt a model similar to those introduced in New South Wales and Victoria.

Following these changes, land tax will be assessed on a multiple holding basis when beneficiaries own more than one property irrespective of which legal entity holds those properties. Further, the Government will look to introduce a surcharge on land owned in trusts where the interests of beneficiaries cannot be identified.

The changes are proposed to come into effect as at 1 July 2020 which will coincide with a progressive reduction on the existing top land tax rate from 3.7% down to 2.9% in 2027.

There has been much discussion in South Australia since the budget on what this means for property owners from Mum and Dad investors to private corporations to institutional investors. Whilst there is genuine concern about the impact on property values, the liquidity of the market and how South Australian property compares against our eastern seaboard neighbours, another piece of this puzzle, which has the potential for significant increases on Site and Capital Values, seems to have been almost forgotten.

In the 2016/17 State Government Budget, funding was provided for the Office of the Valuer General to undertake a project known as the Revaluation Initiative which was established to improve the accuracy of the General Valuation through a staged review of all site values throughout South Australia. 

Early reports from the first stage, which came into effect 1 July 2019 and included the LGA’s of Unley, Walkerville and Adelaide Plains, indicates Site Values have increased by up to 40%.

The Adelaide CBD, which has some of the highest land values in the State is scheduled for the next round of reviews with newly assessed Site and Capital Values to be released in time for the 2020/21 financial year.  

Major office buildings and development sites within the CBD occupy on some of the largest, high profile sites.  Colliers International has recently reviewed 10 development site sales within the Adelaide CBD and analysed the sale price compared to the subsequent Site Value assessment determined by the Office of the Valuer General. From this sample, assessed Site Values were within the range of 24% to 50% of the sale price paid following market transaction.

If, for a moment, we ignore the proposed changes to how Land Tax is assessed and just consider the impact of the Revaluation Initiative on a hypothetical development site in the Adelaide CBD with a Market Value of $10,000,000. It is our understanding that the Revaluation Initiative aims at having Site and Capital Values that reflect Market Value. However, even if we take a conservative view point of an assessed site value of 80% of market value, the result is a Land Tax bill in 2020/21 that is 156% more the 2019/20 assessment. At 90% of market value (where a formal objection to the assessment is hard to justify) the Land Tax bill increases by 192%.

Table 1 tax reform

As we mentioned earlier, the land tax reform will progressively reduce the top tax rate from 3.7% to 2.9% in 2027, however, for the purpose of comparison and to determine the potential impact of the Revaluation Initiative, we have assessed the likely land tax payable should the reduction be effective from 2020/21.  Under this scenario, the Land Tax bill in 2020/21 would still be 103% more than the 2019/20 assessment. 

Table 2 tax reform

As we can see, if we overlay the cumulative impact of site values increasing from historically conservative levels and an aggregation based on an owner’s interest across a portfolio we will see significant increases in the Land Tax liabilities.

Land Tax is only recoverable from a tenant in certain circumstances and therefore any increases have a very real potential to impact debt/equity positions, debt serviceability and short-term market liquidity, particularly for those assets that are lower yielding/land rich.

Whilst the above proposed changes and the CBD revaluation have not yet been implemented and the full effects are currently unknown, building owners and potential purchasers should start preparing for increases.

For more information on how these proposed changes may affect your property portfolio please contact one of our Valuation & Advisory Experts today.