On 27 January 2010 the Queensland Land Court delivered a judgement regarding the land tax position of residential property owners who vacate their main residence for renovation purposes: a process not without risk.

Land tax

Most home owners never concern themselves with land tax. Whilst qualifying as a ‘principal place of residence’ (PPR) a property’s unimproved value will not be taken into account when assessing liability to land tax.

However land tax is assessable on the taxable value of an owner’s total land-holdings. The taxable value is the aggregate of the relevant unimproved value of all land owned less any exemptions or deductions (including the PPR deduction). The relevant unimproved value of land will be the lesser of the:

• unimproved value for the financial year
• average of the unimproved value over the current and previous two financial years, and
• capped value of the land for the relevant year.

Land tax is assessed at 30 June each year for the coming 12 month period.

Although the PPR deduction is generally claimed without dispute, sometimes the Commissioner denies the availability of the deduction, as a Gold Coast couple recently discovered during a particularly difficult renovation.

Jackman v Commissioner of Land Tax

The Jackmans lived on Hedges Avenue on the Gold Coast.

They decided to renovate the Hedges Avenue property, which they had owned for many years. Unfortunately, and for reasons beyond the Jackmans’ control, the works took nearly a year longer to complete than originally scheduled. Whilst they tried to hold out and live in the Hedges Avenue property during the renovation ordeal, they found it too difficult and began to more frequently utilise another nearby property they owned, which was set up as a holiday home. Ultimately the Jackmans leased a unit in an apartment building given they had genuine need of a properly set up home office. The Jackmans then resided in the unit until the renovation works were complete, at which time the Jackmans returned to the Hedges Avenue property.

The Jackmans were not residing at the Hedges Avenue property at 30 June (when land tax is assessed for the coming 12 months) and the Commissioner took the view that the PPR deduction should not apply - meaning that land tax was payable on the Hedges Avenue property. Given the location of the land the assessment was significant. The Jackmans appealed to the Land Court.

What makes a PPR for land tax purposes?

To qualify as a PPR for land tax purposes, Section 3E Land Tax Act requires one of two requirements to be satisfied:

• the land was used ‘continuously’ as a residence for the six months prior to the 30 June on which the assessment was raised, or
• the Commissioner is ‘satisfied’ that the land is being ‘used’ as the taxpayer’s PPR.

The Jackmans carried the onus of proof in the appeal which was vigorously argued and (in the words of the Court) a ‘difficult’ case. The six month test (which is generally satisfied regarding most home owners) was not satisfied. Regarding whether the Commissioner was satisfied the Jackman’s used the Hedges Avenue property as their PPR the Commissioner pointed to the residency situation of the Jackmans and argued that they had used the residence less and less, and then stopped altogether.

The Court noted the significance of the wording of section 3E not requiring ‘occupation’, but merely referring to the ‘use’ of the land. Whilst acknowledging that the Hedges Avenue property was not physically occupied, the Court found that to prevent the PPR deduction being claimed in circumstances beyond the control of the owner would frustrate the purpose of the law. Here, the occupancy of other places was on the evidence, temporary and forced on the owners by circumstance. The Jackmans had always regarded the Hedges Avenue property as being their home. Apart from the extent necessary to allow a builder on site they had not handed over possession, and the Hedges Avenue property was used for other usual purposes associated with a home (e.g. for the receipt of mail and being listed on electoral roll details).

The Court considered that on the evidence, the only other possible use of the land was as a building site, however this potential use was dismissed given the long history of residential use prior to the building works and the fact that the Jackmans returned to the Hedges Avenue property soon after the renovations were completed. The Court ruled that the Commissioner should have been satisfied that the Hedges Avenue property remained the Jackmans’ PPR, meaning the value of the Hedges Avenue property was excluded for land tax purposes.

The renovation game and land tax

The Jackman decision demonstrates the difficulties that can be faced from a land tax perspective that are not normally in the minds of renovators. In addition to capital gains tax (CGT) implications, several things should be kept in mind following this case from a land tax perspective:

• the length of time a property has been used as a PPR prior to the commencement of any substantial renovations
• the Court was very careful to find that the renovation timetable was out of the Jackmans’ control, not planned
• careful emphasis was placed on the fact that there was a substantial renovation, not demolition or construction, of the house in question
• the Court drew an important distinction between the land tax legislation in New South Wales and Queensland in that the owner is only required in Queensland to ‘use’ the land as the taxpayer’s PPR as opposed to the owner being required to ‘use’ and ‘occupy’ the land in New South Wales in order to obtain the exemption, and
• it is possible, without satisfying the Commissioner, to retain the residence status so long as continuous use of the property occurs prior to the relevant 30 June on which annual land tax is assessed.

Further advice

Specific legal advice should be sought in situations where the PPR deduction for land tax purposes may be in jeopardy, as the situation may require the consideration of a number of factors. Advice should also be sought on any potential CGT ramifications.

For further assistance or enquiries regarding the ability of trustees to claim the PPR deduction for land tax purposes please contact:

Tax

Mark West on 07 3233 8871
Lyndon Garbutt on 07 3233 8921

Property

Rodney Bell on 07 3233 8936
Michael Smith on 07 3233 8810.