How to manage Land Tax in Victoria

I am trying to get my head around a tricky land tax issue, so thought to throw it out there on PC ahead of getting some proper advice.

Buying properties in different entities is a common way to better manage land tax. So, property 1 is bought by Company 1, and property 2 in bought by Company 2.

Let’s assume Company 1 is 100% owned by a family trust, with husband as the sole trustee of the trust and sole director of Company 1. Company 2 is 100% owned by his wife, with wife as sole director. Husband has no interest in company 2 whatsoever.

Company 1 and Company 2 each get a land tax threshold, so land tax is minimized. But, Victorian legislation can deem corporations to be related, in which case they are treated as one for land tax purposes, negating this whole benefit.

So, in the above example, is Company 1 related to Company 2?

The first test is whether Company 1 controls Company 2. In above example, clearly not the case. Company 1 does not own or control Company 2. No shares in Company 1 are owned by Company 2. And Company 1 and Company 2 have completely different directors. On this test, not related at all.

The second test is trickier. Corporations can be deemed to be related if the same person has a controlling interest in each of the corporations. A controlling interest is defined in section 48, and provides that a person has a controlling interest if they can control the composition of the board of the corporation. Makes sense.

In the above example, wife clearly controls Company 2 (she is 100% owner and sole director). But does the wife control Company 1?

Well, she is not a director or owner of Company 1, so no direct control (it is owned by family trust). Occasionally, wife tells husband (owner and director of Company 1) to do this and do that (and husband always says, no problem wife), but I don’t think that would amount to control in law. But the wife is the appointor of the trust that owns Company 1. And appointors can replace the trustee, appoint another trustee (themselves), and then, as you own 100% of the shares in Company 1 (albeit beneficially as trustee), then you can control Company 1.

So, arguably problematic. Or maybe not (need legal advice).

Putting aside the legal question, how would you structure things to avoid any of this related Corporations provisions being triggered?

I am thinking that Company 1 and Company 2 should be as separate as you can possibly make them. So, you have separate directors, different shareholders, no cross shareholdings, and if either of them are owned by a trust, you have different trusts, with different trustees and different apponters, (and maybe even different beneficiaries if you wanted to be especially safe)

Anyone on PC looked at this?

 

There is only so much that can be done to avoid land tax in Vic, and nsw,. A smsf may be another option but you would want to decide on a ownership structure just to reduce land tax.

Might be worthwhile consider other jurisdictions and or to treat land tax as a cost of investing. At least it is tax deductible.

 

Yep, buying interstate easier and cleaner. I guess I cannot help myself, I just love all this legal stuff.