Proposed NSW State Taxes Reforms

On 16 October 2024, the NSW Government proposed a suite of amendments to existing taxation acts as part of the Revenue Legislation Further Amendment Bill 2024. The Bill and explanatory notes can be viewed here.

Key changes proposed include:

• Changes to the definition of ‘qualified investor’ under the Duties Act 1997 (NSW), which will extend the benefit of the higher 50% threshold for the imposition landholder duty on acquisitions in a wholesale unit trust scheme, by enabling more unit trusts to register as wholesale unit trust schemes. ‘Qualified investors’ will now include wholly owned subsidiaries or trusts of qualified investors (including foreign equivalents of domestic qualified investors), and statutory bodies which are deemed to be qualified investors by regulation.

• Clarifications to how duties and land tax will apply to Corporate Collective Investment Vehicles (CCIVs). Each CCIV sub-fund will be deemed a separate unit trust under the Duties Act 1997 (NSW) and under the Land Tax Management Act 1956 (NSW). As a consequence, for the purposes of assessing duties and land tax payable in relation to a CCIV:

1. CCIVs will be deemed trustees, with the assets of each sub-fund deemed trust property and the sub-fund members deemed beneficiaries.
2. Concessional duty arrangements currently in place for managed investment schemes will apply to CCIVs with transfers of property between the CCIV and custodians or sub-custodians of the CCIV to be subject to a concessional rate of duty.
3. As a deemed unit trust, each CCIV sub-fund will also be a special trust for land tax purposes.

• A new penalty for entering into a tax avoidance scheme under the Tax Administration Act 1996. The Chief Commissioner will have a discretion to determine the amount of the penalty, which may be up to 100% of the amount of tax avoided, having regard to factors, including the seriousness of the tax avoidance, the period over which it took place and the deterrent effect of any penalty.

The reforms concerning qualified investors and CCIVs follow similar reforms introduced in Victoria last year.

In addition to these changes, other amendments to the family farm transfer duty exemption, native title land tax exemption, and principal place of residence land tax exemption have been proposed. These are summarised in further detail below.

The Bill is expected to pass later this year.

Expanded definition of ‘qualified investor’

Acquisitions of interests in registered wholesale unit trust schemes do not give rise to a dutiable acquisition for landholder duty purposes unless an interest of 50% or more is acquired in the registered wholesale unit trust scheme (including when aggregated with pre-existing interests and interests acquired under substantially one arrangement / by associated persons). This increases the threshold from the 20% which applies to private trusts.

One of the requirements for a scheme to be eligible to register as a wholesale unit trust scheme is that 80% or more of its units must be held by ‘qualified investors’.

The Revenue Legislation Further Amendment Bill 2024 proposes to expand the definition of ‘qualified investors’ to two new categories.

• First, certain statutory bodies representing the Crown may be deemed ‘qualified investors’ by regulation. No draft regulation identifying such bodies has been released yet, but it is expected that this change will provide further clarity to investors by eliminating uncertainty over whether certain statutory bodies satisfy the ‘qualified investor’ test.
• Second, wholly owned subsidiaries and trusts of existing qualified investors will now also qualify. This amendment has been proposed in response to industry feedback that the current definition of ‘qualified investor’ is overly restrictive and not in line with modern business practices where investments are often held by wholly owned subsidiaries and trusts. This will ensure that wholly owned subsidiaries and trusts of public companies and trusts, life insurers, bodies who represent the Crown and other categories of qualified investor are in turn treated as qualified investors in their own right. This change is particularly significant as it also extends to wholly owned subsidiaries and trusts of foreign investors who have satisfied the Chief Commissioner that they invest in a way which corresponds with a category of qualified investor that applies to domestic investors (e.g. foreign pension funds which are equivalents of complying superannuation funds). It is common for foreign entities to invest in Australia through wholly owned subsidiaries or trusts, which are incorporated in Australia.

Corporate Collective Investment Vehicles (CCIVs)

CCIVs are a new type of Australian company, made up of sub-funds and limited by shares. In 2022, new Federal legislation was passed to regulate CCIVs and to tax CCIV sub-funds as separate unit trusts.

The amendments proposed by the NSW Government bring state legislation in line with the Federal treatment of CCIVs. If passed, each CCIV sub-fund will be treated as a separate unit trust scheme of which:

• the CCIV is the trustee;
• the business, assets and liabilities of the sub-fund are the trust property; and
• the members of the sub-fund are the beneficiaries.

Under the Duties Act 1997 (NSW), a $500 flat rate of duty will apply to certain transfers involving CCIVs:

• a transfer of dutiable property between a CCIV and a custodian or agent of the CCIV;
• a transfer of dutiable property from a sub-custodian of a CCIV to the custodian of the CCIV; and
• a declaration of trust over dutiable property by a custodian or sub-custodian of a CCIV.

Under the Land Tax Management Act 1956 (NSW), a sub-fund of a CCIV will be deemed a ‘special trust’ and existing provisions which apply to special trusts will be extended to CCIV sub-funds.

Reforms will also be made to ensure that the corporate reconstruction relief provisions apply to CCIVs.

New penalty for tax avoidance schemes

Proposed amendments to the Tax Administration Act 1996 (NSW) allow the Chief Commissioner, at their discretion, to impose an additional penalty on a taxpayer if a tax notice has already been issued to that taxpayer on the basis that a scheme is a tax avoidance scheme under the Act.

The new penalty would be imposed in addition to existing liabilities to pay interest and penalty in relation to the amount of tax avoided.

The penalty may be at an amount determined by the Chief Commissioner up to the amount of tax avoided by the taxpayer. In deciding whether to impose a penalty and the amount of the penalty, the Chief Commissioner must consider:

• the amount of tax avoided;
• the length of the period during which the person was involved in the tax avoidance scheme;
• the deterrent effect the penalty may have; and
• any other matter they consider relevant.

Other amendments

Other proposed amendments to the Duties Act 1997 (NSW) include:

• An expansion of the family farm transfer exemption to cover situations where a bare trust is created over dutiable property, and where after the breakdown of a domestic relationship, the intended recipient of the farm property dies before a transfer can be completed and as a consequence the property is transferred to their legal representative.
• Express clarification that dutiable transactions can be effected by electronic and digital means.

Other proposed amendments to the Land Tax Management Act 1956 (NSW) include:

• The extension of a land tax exemption to land owned by registered native title bodies corporate, which represent native title holders once native title has been determined. A land tax exemption already applies to the NSW Aboriginal Land Council and local Aboriginal land councils.
• An amendment to address an inconsistency between the principal place of residence exemption and the mixed-use land concession for land used as a principal place of residence. The principal place of residence exemption currently does not apply where the landowner is a company or trustee, including a trustee of a special trust. The mixed-use land concession similarly excludes companies or trusts but does not exclude a trustee of a special trust. The amendment corrects this oversight and excludes a trustee of a special trust.