Until now, all owners of the family home were exempt from land tax so long as one was an owner occupier. The NSW State Budget 2023/24 has restricted the exemption.
This is an outline and analysis.
The family home exemption from land tax
The Land Tax Management Act 1956 (NSW) exempts all owners of land that is used as the Principal Place of Residence (PPR) by an owner from taxation (see sections 10(1)(r) & 11(2)).
Schedule 1A outlines the exemption:
2 Principal place of residence exemption
(1) Land used and occupied by the owner as the principal place of residence of the owner of the land, and for no other purpose, is exempt from taxation under this Act … if the land is –
-
- a parcel of residential land, or
- a strata lot.
NSW Revenue Ruling LT 082v5 describes the exemption (prior to the new restriction) in these terms:
- Where the PPR exemption applies, it applies for the benefit of all owners. Accordingly, if the PPR exemption applies to land because one of its joint owners is eligible for the exemption, other joint owners will also receive the exemption for that land – see section 11(2) and Schedule 1A clause 2(3). However, generally the exemption cannot apply if a joint owner is a company or a trustee, even if another joint owner satisfies the eligibility requirements – see Schedule 1A clause 11 and the discussion below.
NSW Revenue considered the exemption needed to be restricted because it was too broad:
- Land may currently be exempt from land tax where only one of multiple owners occupies the property as a principal place of residence even in cases where they own only a tiny proportion of the property. [author’s emphasis]
The new ownership / occupancy requirement for the family home exemption
The Treasury and Revenue Legislation Amendment Act 2023 (NSW) No 26, restricts the exemption by introducing a minimum ownership / occupancy requirement:
15 Minimum interest to be held by person to claim exemption
(1) A person is not entitled to a principal place of residence exemption in relation to land unless all the persons who use and occupy the land as a principal place of residence together own at least a 25% interest in the land
According to the Explanatory Note which accompanied the Bill when it was introduced into Parliament, this was the purpose:
- [the amendment] removes the ability to claim a principal place of residence exemption in relation to land unless the persons who use and occupy the land as a principal place of residence together own at least a 25% interest in the land.
NSW Revenue provides this commentary:
Principal place of residence exemption
Changes to the Land Tax Management Act (LTMA) 1956 will require individuals who use and occupy land as a principal place of residence (PPR) together to have a minimum 25% stake in a property to claim the exemption.
Landowners who are eligible to claim the PPR exemption prior to 31 January 2024, but own less than a 25% interest in the land may continue to claim the exemption for the 2024 and 2025 land tax years. The minimum 25% ownership requirement will then apply to those owners from the 2026 land tax year.
Owners who purchase property on or after 1 February 2024 and do not meet the minimum ownership requirement will become liable from the 2025 land tax year.
Source: NSW Revenue Media Release Preparing for 202and tax year (1 November 2023)
Analysis
The way the land tax exemptions work under Land Tax Management Act 1956 (NSW) is that land tax is payable on the land unless a land tax exemption applies. Exemptions include use as a principal place of residence, or use for primary production, or use as a boarding house, or use for low cost accommodation, and so forth.
It is the use of the land as a principal place of residence that makes it exempt from land tax. Unlike other exemptions, this exemption has an owner-occupier requirement. That is, at least one or more owners must occupy the land as their principal place of residence. If so, this exemption is available to all owners, including those who do not occupy the land.
The exemption has now been restricted in that at least one person who uses the home as their principal place of residence (the owner occupier/s) must own at least a 25% interest in the land.
To paraphrase the Explanatory Note:
[the amendment] removes the ability of land owners to claim a principal place of residence exemption from land tax in relation to land unless the person, or persons who use and occupy the land as a principal place of residence together, own at least a 25% interest in the land.
Who will this new restriction affect?
NSW Revenue does not provide any examples.
The two examples are drawn from the author’s experience.
Example 1
Almost one in two parents contribute funds for their children to purchase their first home. For this reason, they are known as Bank of Mum and Dad (BOMAD or BMD).
Usually, they contribute funds as a gift or a loan. But some parents prefer to take an ownership interest to better safeguard their funds if their children are in, or enter into, a relationship which breaks down.
For the parents to claim the PPR land tax exemption, the child who is to occupy the property as an owner occupier must have at least a 25% ownership interest in the land.
Example 2
Parents and children can combine their funds and borrowing capacity to purchase a property large enough for all the family to occupy. This ‘family compound’ often takes the form of two or more dwellings, such as a main residence and a granny flat.
For the land tax exemption for principal place of residence to continue to be available if one or more of the family no longer occupy the property, all should have an ownership share of at least 25%. If no owner occupier has a 25% share, the property will be liable for land tax on the value of the land as an investment property.
How do the NSW Land Tax exemption and the Capital Gains Tax (CGT) exemption for the family home compare?
The CGT exemption for the family home, which the Australian Taxation Office (ATO) describes as the ‘main residence exemption’, is as follows:
INCOME TAX ASSESSMENT ACT 1997 - SECT 118.110
(1) A capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:
(a) you are an individual; and
(b) the dwelling was your main residence throughout your ownership period; …
CGT is an entirely different tax from land tax. CGT is a tax payable on the profit made on disposal of a property. Land tax is payable on the value of the land annually (provided the value is above the land tax threshold).
This is a broad-brush comparison of the family home exemptions:
- No NSW Land Tax is payable if owners with an ownership interest of at least 25% are in occupation of the land as their principal place of residence. All owners may claim the exemption, although they are not owner occupiers.
- No CGT is payable on the profit made by an owner occupier on the disposal of their ownership interest in their main residence. The exemption applies only to owner occupiers. CGT is payable by owners who are not occupiers on the profit made on the disposal of their ownership interest.
