Landholder Duty: Tax base expands

Posted on September 3rd, 2009

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Published by Law Society of New South Wales

New state revenue laws create a new model for imposing duty on land.

Since 1987, NSW has had a tax system which imposes duty on the acquisition of interests in private companies and unit trusts that hold land in NSW.

Prior to 1 July, the rules applied where a “relevant acquisition” was made of a “land-rich” landholder. A private company or trust was considered land-rich if 60 per cent or more of its total assets comprised land or interests in land in all places, and $2 million worth of it or more, needed to be in NSW.

Under the new system, provided the entity holds land worth $2 million or more in NSW, it is irrelevant what proportion of its value is in land.

This expands the tax base to acquisitions of many non landfocused entities, such as in the manufacturing and service sectors. Duty at a top rate of 5.5 per cent must now be calculated not only on the unencumbered value of NSW land, but goods in NSW held by the entity as well.

This represents an important and largely unheralded policy shift. Note that the definition of “goods” for these purposes does not include stock in trade, materials for use in manufacture or goods under manufacture, among other things.

As an example, Matwell, a listed company, wants to buy Bear Hunt, a children’s toy manufacturer, for $2 million. Bear Hunt directly holds assets of $12 million, comprising land, buildings, stock, intellectual property, moveable plant and equipment and goodwill. Of this, plant and equipment is valued at $2 million and land, buildings and other fixtures at $2.2 million.

It has liabilities of $10 million. Under the new system, Matwell will pay duty of $216,490, approximately 5.5 per cent of the value of the land and plant and equipment (which are goods) of $4.2 million. The duty payable represents nearly 11 per cent of the purchase price or net value of the company. Unlike GST, this is an unrecoverable, hard cost.

Duty would not have been payable on this transaction prior to 1 July this year.

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