NSW businesses, property buyers and owners face some tax rises as the NSW Labor Government delivered its first Budget in 13 years.
Against a backdrop of a slowing economy, rising interest rates, a budget deficit expected to be $7.8 billion and a gross state debt reaching $150 billion, Treasurer Daniel Mookhey had almost no alternative but to increase taxes, reduce concessions and reduce spending.
The main tax changes to be aware of include:
Transfer duty on corporate reconstructions
The current 100% duty relief on corporate reconstructions will be reduced to 90%. The transfer of assets between the members of a single corporate group for the purpose of restructuring has been exempt from duty under certain circumstances. This exemption for corporate reconstructions will be replaced with concessional duty charged at 10% of the duty otherwise payable, applying to transactions occurring on or after 1 February 2024. The current corporate reconstructions exemption will be substituted with concession that works as follows:
- identify a qualifying corporate reconstruction taking place on or after 1 February, 2024;
- calculate the duty that would otherwise be payable at usual transfer duty rates; and
- 10% of that amount is the total duty that is payable when the application for the concession is approved by Revenue NSW.
ParentCo transfers land, with an unencumbered value of $5 million, to SubCo on 1 March 2024. Duty of $258,055 would have been payable without corporate reconstruction relief. The duty payable will be $25,806 if relief is applied for.
Acquisitions of interests in landholding private unit trust schemes are now more likely to be subject to landholder duty due to a budget change. Landholder duty is applied when someone acquires a “significant interest” in a company or unit trust that holds NSW land with an unencumbered value of $2 million or more. The threshold for the acquisition of a “significant interest” in a private unit trust scheme will be decreased from 50% to 20%. The threshold remains at 50% for a new category of trusts titled “wholesale unit trust schemes”. The definition of this type of scheme can be understood as schemes that are more widely held by qualified investors.
Examples how this could apply to a qualifying private unit trust scheme are:
- Mary is a new investor in a private unit trust scheme which holds land valued at $3 million. In March 2024, she acquired 25% of the units. She will be subject to landholder duty at land transfer duty rates on her $750,000 interest acquired.
- Rohit has owned 35% of the units in a private unit trust scheme for 10 years. In July 2024, he acquires a further 10% of the units at which time the land is valued at $6 million. He will be subject to landholder duty at land transfer duty rates on his further $600,000 interest acquired.
Landholder duty has a “grouping” regime whereby the land interests in linked entities are combined for application of thresholds and rates. The “linking” percentage will be reduced from 50% to 20% from 1 February 2024 for both trusts and companies. A principal entity will only be entitled to receive at least 20% of the value of the property of another entity in the event of a distribution of all the latter’s property, for the two to be linked.
MumCo, which owns $5 million of land, also holds a 30% interest in SonCo. SonCo owns $4 million of land. In the case where FriendCo acquires a 60% interest in MumCo. FriendCo may face a landholder duty liability on its 60% acquisition of interests. This amounts to $6.2 million of land (calculated as MumCo's $5 million landholding plus 30% of SonCo’s $4 million landholding).
Increases to fixed and nominal duty rates
A series of fixed and nominal duty rates will increase. One prominent example will be for declarations of trust that are not over dutiable property. The duty in this instance will rise from $500 to $750 from 1 February 2024.
A minimum ownership interest percentage is now required for the Principal Place of Residence (PPR) exemption. From the 2025 land tax year, the person who uses and occupies land as their PPR will be required to have at least a 25% interest or the joint owners will be subject to land tax. A consequence of failing to meet that requirement is that the joint owners will have the value of their ownership interest in the land in question added to any other of their taxable landholdings. Some may now face land tax rates of 1.6% to 2% on the unimproved value of their part interest.
Where the occupant’s land interest is currently below 25%, the PPR exemption should continue to apply in the 2024 and 2025 land tax years.
Stamp duty exemptions and rebates for the purchase of electric vehicles (EV) will cease from 1 January 2024. The existing concessions provide up to $3,000 for each new EV purchased. The concessions will still apply for new EV purchases contracted before 1 January 2024 but transferred after that date. Some of the savings from ceasing the current $527 million program will be redirected to boosting the number of charging stations in regional NSW.
Revenue NSW will be allocated a further $650 million for compliance activity regarding payroll tax, land tax and transfer duty, which is expected, among other things, to increase payroll tax collections by $337 million.
The tax increases are tightly targeted and should only affect a small number of NSW residents by taking away concessions. While it may substantially increase their tax payable, the overall tax take from the measures is modest. Yet the budget forecasts a return to a surplus of $844 million in 2024-25.That is expected to be driven largely by substantial increases in transfer duty revenues ($ 9.5 billion over four years) which are expected to result from land price rises. If the economy softens and the 4% of interest rate increases so far begin to bite harder, the reliance on such rising transfer duty flows is surely a risk. In retrospect, the Labor Government may look back at the 2023-24 Budget as a wasted opportunity to embark on some substantial tax reform when their political capital was high shortly after their return to government.
For further information please speak to your usual Mazars advisor about how these changes may affect you or your business, or alternatively contact our NSW indirect tax specialist, Stephen Baxter via phone or the form below:
Author: Stephen Baxter
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