Edited version of your written advice

Authorisation Number: 1051469255144

Date of advice: 21 December 2018

Ruling

Subject: Timing of a deduction for a land tax assessment

Question 1

Is ABC Pty Ltd’s, as trustee for ABC Unit Trust, (‘ABC)’s liability to land tax under the Land Tax Notice of Assessment issued during the financial year ended 30 June 20XX which gives effect to a determination made on behalf of the Commissioner of State Revenue earlier in that financial year under section 45A of the Land Tax Assessment Act 2002 (WA) (‘LTAA’) incurred for the purposes of section 8-1 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) in the income year ended 30 June 20XX?

Answer

Yes, to the extent that the assessment increases the amount of land tax that ABC is liable to pay as a result of the determination made by the Commissioner of State Revenue under section 45A of the LTAA.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background

1. ABC Pty Ltd as trustee for the ABC Unit Trust (‘ABC’) owns various parcels of land in State XYZ used to generate rental income.

2. ABC is the majority owner of the land in State XYZ. The State XYZ Properties are comprised of the different lots of land as detailed in the land tax notice of assessment issued by the Office of State Revenue for State XYZ to ABC during the dated financial year ended 30 June 20XX.

3. Each lot forming part of the State XYZ properties is over 90% owned by ABC and the remaining interest is owned by one or more minor interest holders (Minor Interests).

4. ABC received land tax assessments (the Assessments) in relation to the State XYZ Properties for the land tax years 20XX/20XX to 20XX/20XX inclusive (“the relevant years”). The lots were assessed for land tax on separate accounts due to the Minor Interests.

5. ABC has or will claim a deduction for the land tax payable under the Assessments in the respective income years to which the liability to the land tax relates. At the time of making these assessments, the Commissioner had not made a determination under section 45A of the LTAA.

6. By letter dated in 20XX, the Office of State Revenue for State XYZ (‘OSR’) enclosed a questionnaire in relation to section 45A of the LTAA to be completed by ABC (section 45A questionnaire).

7. ABC responded to and made submissions in relation to the section 45A questionnaire.

8. By letter dated in 2017, the OSR informed ABC that it had formed the preliminary view that pursuant to section 45A of the LTAA, one of the purposes of the creation of the Minor Interests in the State XYZ properties was to minimise the land tax payable.

9. ABC responded to the Preliminary Findings.

10. By letter dated in the financial year ended 30 June 20XX, the Commissioner of State Revenue made a determination pursuant to section 45A of the LTAA to disregard the minor interests in the State XYZ properties (section 45A determination).

11. As a result of the section 45A determination, the properties were amalgamated on ABC’s assessment for the relevant years. The letter states that payments that had been made to eight other Client IDs will be transferred to ABC’s assessment. It was estimated that it would result in a land tax reassessment of approximately $XXX,XXX.

12. ABC received a land tax notice of assessment from the OSR during the financial year ended 30 June 20XX for the reassessment of land tax on the properties described therein (including the State XYZ properties for which the Minor Interests were disregarded) for the relevant years which increased ABC’s land tax assessment for the relevant years by a total of $X,XXX,XXX (‘Reassessment’).

13. ABC lodged an objection to the Final Determination and Reassessment.

14. As at the date of this private ruling, the Objection has not yet been determined by the OSR.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

Summary

The increase in ABC’s liability to land tax under the Reassessment which gives effect to a determination made on behalf of the Commissioner of State Revenue under section 45A of the LTAA is incurred for the purposes of section 8-1 of the ITAA 1997 in the income year ended 30 June 20XX.

Detailed reasoning

The relevant provisions of the State XYZ legislation - land tax and taxation administration

The legislation that governs the assessment of land tax in State XYZ is contained in the Land Tax Assessment Act 2002 (‘LTAA’), the Land Tax Act 2002 (‘LTA’), and the Taxation Administration Act 2003 (‘TAA’). Those Acts are to be read together as if they formed a single Act.

Land Tax Assessment Act 2002 (‘LTAA’)

Section 5 of the LTAA provides that land tax is payable, in accordance with the Land Tax Act, for each financial year for all land in the State except land that is exempt under section 17 of the Act

Subsection 6(1) provides that land tax payable on an original assessment is due for payment on the 49^th day after the date of the assessment notice. Subsection 6(2) provides that land tax payable on a reassessment is due for payment on the date specified in the assessment notice in accordance with the TAA.

Section 7 provides for the liability to pay land tax and states:

(1) Land tax payable on land for an assessment year is payable by the person who is or was the owner of the land at midnight on 30 June in the previous financial year.

(2) However, if a person or a taxable authority is taken under section 8 to be the owner of the land at that time, the land tax is payable by the person or the taxable authority respectively.

[(3) deleted]

(4) Joint owners of land are jointly and severally liable for land tax payable on the land regardless of each of the joint owner’s respective interests in, or use of, the land.

(5) A person or taxable authority who is liable to pay land tax is also liable to pay any additional taxes, interest, penalties or charges payable under a land tax Act in relation to the land tax.

Owner is relevantly defined as a person who is entitled to the land for any estate of freehold in possession. Joint owners means persons who own land jointly or in common, whether as partners or otherwise.

Section 9 provides that a trustee (whether solely or with other trustees) is liable to pay land tax as if it were the beneficial owner.

Section 9A provides that a person identified as being liable to land tax by a land tax assessment notice must notify the Commissioner of any material error or omission before the due date for payment of the land tax (if a date was specified in the assessment notice) or within 21 days after the date of the assessment notice.

Section 10 provides that unless the LTAA provides otherwise, the amount of land tax payable for taxable land for an assessment year is the amount calculated by applying the rate fixed in relation to the land under the LTA to the amount equal to the taxable value of the land for the assessment year.

Section 11 explains how the land is taxed when one person owns two or more lots:

(1) If a person owns 2 or more lots or parcels of taxable land, land tax is payable on the aggregated taxable value of all the taxable land owned by the person.

(2) However, if a trustee owns 2 or more lots or parcels of taxable land held, in severalty, in trust for different persons, then the land tax payable for each lot or parcel is assessed separately unless another provision of this Act specifically requires the land tax to be assessed on the lots or parcels jointly.

(3) If a trustee owns taxable land held in trust for another person and is also the beneficial owner of other land, the land tax payable on the land held in trust is assessed separately from the land tax payable on the land held beneficially, unless for any reason the land tax payable on the trust land and the beneficially held land is liable to be jointly assessed independently of this subsection.

[Section 11 amended by No. 19 of 2009 s. 13.]

Clause 6 of the Glossary to the LTAA provides that the taxable value of land for a financial year is the lesser of the capped value of the land (if it can be used) or the unimproved value of the land determined under the Valuation of Land Act 1978 at midnight on 30 June immediately before that year.

Aggregated taxable value in relation to 2 or more lots or parcels of land means the amount equal to the sum of the taxable values of each taxable lot or parcel.

Section 12 explains how land that is owned jointly is taxed as follows:

(1) The land tax payable on land owned jointly by 2 or more persons is assessed as if the land were owned by one person.

(2) When determining the extent (if any) to which the land is exempt or subject to a concession, the following matters are to be taken into account —

(a) each joint owner’s use of the land by virtue of which the land is exempt or subject to a concession (whether or not the use is common to any of the other joint owners);

(b) each joint owner’s interest in the land by virtue of which the land is exempt or subject to a concession (whether or not the interest is common to any of the other joint owners).

(3) The assessment for the land is to be kept separate and distinct from an assessment for any land that is owned —

(a) by any one of the joint owners individually; or

(b) by any of them as a joint owner with any other person.

(4) The owners of non-strata home units whose liability is assessed under section 16 are taken not to be joint owners for the purposes of this section.

Section 45A and Section 45B provide as follows:

45A. Minor interests of joint owners, Commissioner may disregard

(1) The Commissioner may determine that an interest in a lot or parcel of land as a joint owner (whenever created) is to be disregarded for the purposes of this Act on and from the creation of the interest.

(2) The Commissioner can only make a determination under subsection (1) if —

(a) the interest is a minor interest in the lot or parcel of land; and

(b) the Commissioner is of the opinion that the purpose, or one of the purposes, of the creation of the interest was to reduce the amount of land tax payable for that, or any other, lot or parcel of land.

(3) For the purposes of subsection (2)(b), the Commissioner may have regard to —

(a) the nature of any relationship between the owners of the lot or parcel of land; and

(b) the form and substance of any transaction giving rise to the interest, including the legal and economic obligations of the parties and the economic and commercial substance of the transaction; and

(c) the lack of consideration, or the amount or value and source of the consideration, for the transaction giving rise to the interest; and

(d) whether any professional advice was received in relation to the transaction giving rise to the interest; and

(e) the way in which the transaction giving rise to the interest was entered into or carried out; and

(f) any other matter the Commissioner considers relevant.

(4) On making a determination under subsection (1) in respect of a lot or parcel of land, the Commissioner must give to the owner of the lot or parcel of land a notice setting out the determination, the reasons for the determination and the effect of the determination as described in section 45B.

(5) In any review proceedings that relate to a determination under subsection (1) in respect of an interest in 5% or less of a lot or parcel of land, the onus of establishing that none of the purposes of the creation of the interest was to reduce the amount of land tax payable for that, or any other, lot or parcel lies on the taxpayer.

[Section 45A inserted by No. 31 of 2006 s. 30; amended by No. 15 of 2015 s. 9.]

45B. Effect of determination under s. 45A

(1) If the Commissioner makes a determination under section 45A that an interest in a lot or parcel of land is an interest that is to be disregarded for the purposes of this Act on and from the creation of the interest, then, on and from the creation of the interest —

(a) the owner of the interest is to be taken not to be an owner of the lot or parcel of land for the purposes of this Act; and

(b) the land is to be taken to be wholly owned by the owner of the land who does not have an interest the subject of a determination.

(2) The Commissioner is to make any assessment, or reassessment, necessary to give effect to a determination.

(3) However, a reassessment cannot be made for an assessment year that is 5 or more years before the assessment year during which the determination was made.

(4) Subsection (3) —

(a) does not affect the operation of the Taxation Administration Act 2003 section 17(2); and

(b) applies despite the Taxation Administration Act 2003 section 17(4).

[Section 45B inserted by No. 15 of 2015 s. 10.]

Land Tax Act 2002 (‘LTA’)

Section 5 of the LTA provides that land tax is imposed at the rates shown in the tables for the relevant financial year according to the value of the land referred to in the table. For example, the table for the 2015/2016 and subsequent years:

Table 11: Land tax rates for 2015/16 and subsequent financial years

Taxable value of the land		Rate of land tax
Exceeding ($)	Not exceeding ($)
0	300 000	Nil
300 000	420 000	A flat rate of $300
420 000	1 000 000	$300 + 0.25 cent for each $1 in excess of $420 000
1 000 000	1 800 000	$1 750 + 0.90 cent for each $1 in excess of $1 000 000
1 800 000	5 000 000	$8 950 + 1.80 cents for each $1 in excess of $1 800 000
5 000 000	11 000 000	$66 550 + 2.00 cents for each $1 in excess of $5 000 000
11 000 000		$186 550 + 2.67 cents for each $1 in excess of $11 000 000

Tax Administration Act 2003 (‘TAA’)

The TAA provides for the administration and enforcement of legislation dealing with State taxation including land tax. The LTA and LTAA are taxation Acts for the purposes of that Act.

Section 13 of the TAA provides that an assessment is a determination of the amount of tax payable under a taxation Act or a portion of such an amount; or that no tax is payable; or that a person is liable or exempt from tax; or that an instrument or transaction is liable to or exempt from tax. Subsection 13(3) provides that receipt by the Commissioner of an amount as payment of tax does not constitute an assessment of tax liability.

Section 14 provides that self-assessment is an assessment made by the taxpayer in a return under a taxation Act.

Section 15 provides for official assessments as follows:

(1) An official assessment is an assessment made by the Commissioner.

(2) The Commissioner must make an official assessment of the tax payable by a person —

(a) if the person is or is likely to be liable to pay tax, but is not required to make a self-assessment; or

(b) when a taxation Act specifically requires the Commissioner to do so.

(3) The Commissioner may make an official assessment on his or her own initiative, and may do so even if the taxpayer is required to make, or has made, a self-assessment.

(4) The Commissioner may make an official assessment in any other circumstances at the taxpayer’s request.

Section 16 provides for reassessments as follows:

(1) The Commissioner must make a reassessment —

(a) if specifically required to do so under a taxation Act; or

(b) if specifically required to do so under a direction given in the course of review proceedings; or

(c) if a taxation Act provides for a rebate or refund of tax in particular circumstances, and the circumstances were not taken into account when the previous assessment was made.

(2) Subject to subsection (5), the Commissioner may also make a reassessment —

(a) on his or her own initiative, if it appears that a previous assessment is or may be incorrect for any reason; or

(b) on the application of the taxpayer.

….

(3) A reassessment may be made whether or not any amount of tax has been paid on the previous assessment.

(4) A reassessment may consolidate 2 or more separate assessments into a single assessment.

(5) If an assessment is based on a particular interpretation of the applicable law or a particular practice of the Commissioner that was generally applied to assessments of that kind when the assessment was made, then the Commissioner cannot make a reassessment based on the ground that the interpretation or practice is or was erroneous.

Section 18 provides that:

(1) A reassessment of an interim assessment or an original assessment supersedes the assessment and any earlier reassessment.

(2) A reassessment may increase or decrease the amount originally assessed.

…

(4) A reassessment does not invalidate proceedings for the recovery of tax, but the amount to be recovered is to be amended to take account of the reassessment.

(5) If an objection to an assessment is lodged but a reassessment is made before the objection is determined, the objection may be continued against the reassessment to the extent that it is liable to the same objection or to an objection that is the same, or similar, in substance.

Section 23 provides that when the Commissioner makes an assessment he or she must issue an assessment notice (unless no tax is payable or refundable) and must serve it on the taxpayer. Subsection 24(4) provides that liability is not dependent on service of the notice of assessment.

Part 4 of the TAA provides for the procedure for challenging assessments under a taxation Act. Section 33 of the TAA provides that an obligation to pay tax is not suspended or deferred by an objection or case stated or by review proceedings. Section 34 provides for the rights of a taxpayer to object to an assessment or another decision under a taxation Act that affects the taxpayer’s liability to taxation.

Section 45 of the TAA provides that the tax is due for payment on the date fixed by or worked out in accordance with the relevant taxation Act. Unpaid tax is a debt due to the State. As from the time it becomes payable under subsection 7(1) of the LTAA, land tax is a charge on the land for which the tax is payable whether or not an assessment notice has issued for the tax and whether or not the tax is due for payment but ceases to be a charge when paid.

Clause 1 of the Glossary to the TAA provides the following relevant definitions:

original assessment, in relation to a reassessment of tax payable under a taxation Act, means —

(a) a complete self-assessment made in relation to the tax; or

(b) if no self-assessment is made — the first complete official assessment made in relation to the tax, other than an interim assessment,

but does not include a reassessment;

reassessment does not include an interim assessment or an original assessment;

Extrinsic materials

Section 45A and 45B of the LTAA were inserted by Part 4 Division 4 of the Revenue Laws Amendment Act 2006 and came into operation from 1 July 2006. The Explanatory Memorandum to the Revenue Laws Amendment Bill 2006 explained the purpose and operation of the provisions as follows:

Anti-avoidance provision

This land tax measure seeks to address a practice whereby minor interests in property are held by, or transferred to, different owners in order to defeat the aggregation provisions.

The Act provides that the assessment of land is to be kept separate and distinct from an assessment of any land that is owned by any one of the joint owners individually, or by any of them as joint owner with any other person.

By structuring property holdings so that each land item is assessed separately, aggregation of property holdings can be avoided, which results in significant land tax savings, due to the progressive nature of the land tax scale.

It has been identified that some owners with multiple land holdings are avoiding paying a higher aggregated land tax rate by structuring their holdings so that another person or entity, usually related to the owner of the majority interest, holds a minor interest in the land.

..….

The proposed legislation does not define a minor interest, as this is likely to encourage the creation of minor interests which fall just outside of the defined amount.

However, the legislation does provide a series of factors that the Commissioner is to consider when making a determination to disregard a minor interest.

Once a determination has been made, the legislation requires the Commissioner to notify the owner and to provide the reasons for the decision.

…

Section 45A sets out the provisions that allow a minor interest to be disregarded.

Subsection (1) allows the Commissioner to determine that an interest in a lot or parcel of land of a joint owner is to be disregarded for the purposes of the Act.

Subsection (1) is to apply regardless of when the interest was created, however, a Commissioner’s determination will apply from the commencement date of these provisions. This means that these provisions will only apply to allow tax to be reassessed from the 2006-07 year of assessment onwards, despite the fact that the interest may have been created prior to that year of assessment.

Subsection (2) sets out the conditions under which the Commissioner can make a determination under subsection (1).

Paragraph (a) provides that the interest must be a minor interest in the lot or parcel of land.

A minor interest is not defined for the purposes of these provisions. Generally, a minor interest is a part or share of property that is less than 50%. However, the mere presence of a minor interest will not in itself be the trigger for the Commissioner to determine to disregard that interest. Other factors are to be considered in addition to the minor interest. Rather, the concept of a minor interest is used in this section to clarify that no interest of 50% or greater will be the subject of a determination by the Commissioner.

Paragraph (b) provides for the minor interest to be disregarded if the Commissioner’s opinion is that the purpose, or one of the purposes, for the creation of the minor interest was to reduce the amount of land tax payable on the lot or parcel of land or any other lot or parcel of land.

…

Subsection (3) provides a list of the factors that the Commissioner may have regard to when forming his opinion for the purposes of subsection (2)(b).

…

Section 45B sets out the effect of making a determination under section 45A.

Section 45B provides that if the Commissioner makes a determination under section 45A that a minor interest in a lot or parcel of land is to be disregarded, the owner of the minor interest is taken not to be the owner of the lot or parcel of land for the purposes of the Act. Furthermore, the land tax payable is to be assessed and payable by the other owner or owners of the lot or parcel of land, who are not the owners of the minor interest.

Accordingly, the owner of the minor interest is deemed not to be an owner and the definition of “owner” included in the Glossary, does not apply to the owner of the minor interest. As the owner of the minor interest is not an owner of the lot or parcel of land for the purposes of the Act, the owner of the minor interest is no longer jointly or severally liable for payment of land tax assessed in respect of the lot or parcel of land. The remaining joint owners will be considered to be the sole owners and the joint ownership provisions in section 12 of the Act, which provide that the assessment of land is to be aggregated on land owned by the same persons, will be applied according to the ownership of the major interest. The effect of the determination that the owner of the minor interest is not an owner for the purposes of the Act is illustrated in the following example.

Example:

A Pty Ltd and B Pty Ltd, as joint owners, own five commercial properties in the centre of Perth, each valued at $750,000. The aggregated value of the property holding is $3,750,000 with land tax payable under 2004-05 rates of $67,323.

To reduce the land tax liability on the assessment of these lots and parcels of land for the 2005-06 assessment year, A Pty Ltd and B Pty Ltd have transferred a 1/1000th share in each of the properties on 30 August 2004 to different related entities, including individuals, trusts and other companies which have the same shareholders of A Pty Ltd and B Pty Ltd. In the past, this resulted in five separate assessment notices being issued, with land tax payable on each of $2,310. The total land tax bill was $11,550 in 2005-06.

The stamp duty paid on the transactions was $225. However, by the creation and transfer of a minor interest in each property, the ownership of each lot or parcel of land has been amended and the various lots and parcels of land are assessed on 1 July 2005 according to different ownership. This resulted in a reduction in the 2005-06 land tax of $51,260.

A Pty Ltd and B Pty Ltd had no apparent commercial reason for creating and transferring a minor interest in each lot or parcel of land to different related entities.

As a result of the passage of this legislation, the Commissioner determined that he is of the opinion that each minor interest created and transferred in each lot or parcel of land should be disregarded for the purposes of assessing the 2006-07 land tax. The owner of each minor interest is taken not to be an owner and the owner of the properties is A Pty Ltd and B Pty Ltd. Land tax payable will be assessed as if all the land was owned by A Pty Ltd and B Pty Ltd. Based on 2006-07 rates, with values remaining static, this would be $61,017.50.

The effect of the Commissioner’s determination that the owner of the minor interest in the landholding of each property is not an owner will result in that person not being liable for the payment of land tax assessed on the lot or parcel of land. Accordingly, only A Pty Ltd and B Pty Ltd will be jointly and severally liable for the land tax payable on the land."

The Government of State XYZ states on its website:

What is Land Tax?

Land tax is an annual tax on land. It is based on land owned on 30 June and is calculated on the unimproved value of the land which is determined by the Valuer-General.

…..

The amount of land tax payable is calculated by applying the appropriate rate of tax to the aggregated taxable value of land in the same ownership.

…..

For example, if you owned two taxable properties in State XYZ with taxable values of $200,000 and $300,000 respectively, the tax is assessed on $500,000 at the rate shown in the table above.

Generally, only land owned by the same owners is aggregated. For example, land that is owned solely by you is not usually aggregated with land you own jointly with another person or with land that you have an interest in through a company or trust. In such circumstances, a separate assessment notice is issued.

Who pays land tax?

You are required to pay land tax for the 20XX-XX assessment year if, at midnight on 30 June 20XX, you are the owner of land (excluding exempt land) with an aggregated taxable value in excess of $300,000.

…..

Land tax assessment notices are generally issued between October and January…

Sections 45A and 45B of the Land Tax LTAA 2002 enable the Commissioner to make a determination that a minor (ownership) interest in a lot or parcel of land can be disregarded for the purposes of assessing land tax…

The Government of State XYZ Landgate website states:

UVs are determined each year for all land within the state and come into effect on 1 August the previous year, so in 2017, the Date of Valuation is 1 August 2016.

Income Tax Law

Section 8-1 of the ITAA 1997 relevantly states:

You can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a ^* business for the purpose of gaining or producing your assessable income.

Land tax incurred in respect of land used for business or income-producing purposes is deductible under section 8-1 of the ITAA 1997: Moffatt v Webb (1913) 16 CLR 120.

To qualify for a deduction under section 8-1 in a particular income year, a loss or outgoing must have been incurred in that year.

Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out some general rules, settled by case law, that assist in defining whether and when a loss or outgoing has been incurred:

(a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum;

(b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others;

(c) a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities);

(d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise;

(e) in the case of a payment made in the absence of a presently existing liability(where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid. [emphasis added]

Paragraph 18 of TR 1997/7 states:

The liability must be 'more than impending, threatened or expected' - refer New Zealand Flax (CLR at 207). '[W]hat is clearly necessary is that there should be a presently existing liability' - Nilsen Development Laboratories (CLR at 624). It is not a presently existing liability if it is contingent - refer James Flood (CLR at 506); Nilsen Development Laboratories (CLR at 207); Marbren Pty Ltd v. FC of T 84 ATC 4783 at 4788-4789; (1984) 15 ATR 1145 at 1152.

It is also clear that a taxpayer can be completely subjected to a liability even though it may be defeasible: paragraph 19 of TR 1997/7 referencing Commonwealth Aluminium Corporation Ltd (77 ATC 4151 at 4161; (1977) 7 ATR 376 at 386).

Application of the principles to tax related liabilities

The determination of when a tax related liability is incurred turns on a proper construction of the relevant statutory provisions: FC of T v Nash [2013] FCA 336; 2013 ATC 20-384 (Nash) per Griffiths J at 33. After considering the relevant income tax provisions and case law, Griffiths J determined that a taxpayer becomes liable to pay GIC when the tax the taxpayer is liable to pay remains unpaid after the time when it was due to be paid. Until such time as a notice of assessment of income tax is given there is no liability to pay the tax even though the date for payment may precede the giving of the notice of assessment.

Griffith J distinguished previous cases that the respondent relied upon to support the proposition that the entitlement to claim a deduction for the GIC flows directly from the legislation and does not depend upon the issue of an assessment including: Layala Enterprises Pty Ltd (In liq) v Federal Commissioner of Taxation (1998) 86 FCR 348; 98 ATC 4858 (Layala Enterprises) and Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation (1977) 77 ATC 4151 (Commonwealth Aluminium).

Layala Enterprises involved the question of whether pay-roll tax imposed under two enactments in Western Australia was deductible in the year in which the wages were paid or in the year in which an assessment was issued. The pay-roll tax legislation imposed an obligation to pay pay-roll tax when wages were paid in respect of services performed in Western Australia. The obligation was imposed on the employer that paid the taxable wages. The legislation fixed the rate at which payroll tax was imposed. An employer was liable to lodge the return of the wages in respect of which the wages were payable seven days after the close of a month in which taxable wages were paid and was liable to pay the pay-roll tax within the time which they were required to lodge the return. The legislation then provided for the ability of the Commissioner to assess the amount of taxable wages and the pay-roll tax payable where an employer failed to furnish a return or the Commissioner was not satisfied with the return made.

Cooper J (with whom Wilcox J and Nicholson J agreed) stated:

The Tax Act and Assessment Act are together constructed and operate in such a way that liability does not depend on assessment. The liability of the employer does not depend upon any act of the Commissioner: The Australian Council of Social Services Inc & Anor v Commr of Pay-roll Tax (NSW) 82 ATC 4385 at 4388; (1982) 13 ATR 290 at 293-294; Commr of State Taxation (WA) v Pollock at ATC 5225-5226; WAR 72 …

It is only when no tax, or less tax than is payable by law, is paid within the period ending seven days after the month in which taxable wages are paid, that any assessment and calculation under s 18(1) of the LTAA may become necessary or appropriate.

…

For reasons given earlier, I do not accept that the appellant… had no liability to pay pay-roll tax until and unless assessed to pay pay-roll tax by the Commissioner. The appellant … became liable to pay pay-roll tax when each paid or became liable to pay taxable wages in any month in the 1989 and 1990 financial years. The pay-roll tax only became owing by them when the pay-roll tax was capable of calculation at the expiry of the month in which the pay-roll tax liability was incurred. The contingent liability thus incurred by the conduct of the appellant … paying taxable wages matured into a debt which was owing when it was ascertainable: Commr of State Taxation v Pollock at ATC 5230-5231; WAR 78-79. The debt becomes due and recoverable seven days after the end of the month in which the taxable wages are paid: s 17 and s 23 of the LTAA.

The liability incurred by the appellant … to pay pay-roll tax after it became due and owing as a recoverable debt was not a contingent liability; it was a liability ``presently incurred and due though not yet discharged'': The Emu Bay Railway Co Ltd v FC of T (1944) 7 ATD 455 at 461; (1944) 71 CLR 596 at 606 and is to be contrasted with a liability ``which is no more than pending threatened or expected'': New Zealand Flax Investments Ltd v FC of T (1938) 5 ATD 36 at 49; (1938) 61 CLR 179 at 207. A liability falling within the former type is a liability incurred for the purpose of s 51(1) of the ITAA whereas a liability of the latter type is not:

Nilsen Development Laboratories Pty Ltd & Ors v FC of T 81 ATC 4031 at 4034-4035; (1981) 144 CLR 616 at 623-624.

So understood, the liability of the appellant … was not a liability to make a future payment. Nor was it one that was contingent or subject to defeasance.

…

… the liability of the appellant … was imposed by the operation of the Tax Act and the Assessment Act. The liability was not merely impending, threatened or expected. It had been imposed by statute. The liability did not require any voluntary acceptance by the appellant … to fix it or fix the amount; nor did it require any third party or arbitral or curial process to fix either liability or the amount of the tax.

…

… For reasons given earlier, the assessment by the Commissioner under s 18 of the LTAA is wholly facilitative to effect recovery of the pay-roll tax due. The pay-roll tax liability of the appellant … was recoverable irrespective of whether the default assessment was made under s 18 of the LTAA or not.

[emphasis added]

The case of Commonwealth Aluminium is conveniently summarised by Griffiths J in Nash as follows:

93. The facts in Commonwealth Aluminium were complicated. The central question was whether a taxpayer carrying on bauxite mining operations in Queensland and paying royalties to the Queensland Government in respect of bauxite mining during the year of income was entitled to claim the royalty payments as deductions under s 51(1) of the 1936 Act in the relevant year of income which ended 31 December 1974. The royalties paid by the company in respect of the period 1 August to 31 December 1974 were imposed by the Mining Royalties Act 1974 (QLD) and by regulations made under that Act. The Commissioner argued that the royalty payments were not an allowable deduction during the year ended 31 December 1974 because, relying on James Flood, the taxpayer's liability as at 31 December 1974 "was at best an inchoate liability in process of accrual but subject to a variety of contingencies" (at 4,159-4,160).

94. Newton J held that the payments were allowable deductions in the relevant taxation year even though no payments had been made but the amount was capable of reasonable estimation.

95. As to the meaning of the word "incurred" in s 51(1) of the 1936 Act, Newton J made the following observations at 4,160-4,161:

For the purposes of the present case it is sufficient to say that in my opinion the authorities establish that a liability will be a loss outgoing which has been "incurred" within the meaning of sec. 51, even though it remains unpaid, provided that the taxpayer has completely subjected itself to the liability: see Flood's case (supra) at p 506. In my opinion the authorities also establish that for this purpose a taxpayer can completely subject itself to a liability, notwithstanding that the quantum of the liability cannot be precisely ascertained, provided that it is capable of reasonable estimation... In this context I think that the quantum of a liability is "capable of reasonable estimation", if it is capable of approximate calculation based on probabilities... The authorities also show, in my opinion, that a taxpayer may completely subject itself to a liability, notwithstanding that the liability is defeasible...

In relation to the point regarding defeasibility, Newton J went on to say at 4161:

… it may incidentally be remarked that all, or almost all, unpaid liabilities are in a sense defeasible, because they could in the future be forgiven by the creditor, or cancelled by Act of Parliament, or barred by any applicable statute of limitations…

The variety of contingencies referred to by Newton J in paragraph 93 (which the Commissioner argued made the liability inchoate) included: the fact that the Minister had not determined certain components of the formula that were used to determine the rate or rates at which the royalties would be paid; and the regulations permitted variations to the rate or basis of calculation to be made having regard to certain prescribed matters.

In relation to those points, Newton J stated:

Paragraphs (1), (2) and (3) of the Commissioner's points raise more difficult problems. But in the end I have reached the conclusion that they do not justify the Commissioner's contention.

It is, I think, clear that the overall effect of the new sec. 70 of the Mining Act (as enacted by sec. 3 of the 1974 Act) and of reg. 78(1) and (2)(c)(ii) and (d) was that Commonwealth Aluminium became liable to pay a royalty in respect of each tonne of bauxite which it mined during the 1974 five months' period, so soon as that tonne was mined. For those provisions imposed a royalty liability upon Commonwealth Aluminium in respect of all bauxite which it ``won''. Thus once each tonne of bauxite was mined during the 1974 five months' period, Commonwealth Aluminium thereby subjected itself to a liability to pay a royalty in respect thereof…

In respect of the fact that the regulations permitted variations to rate or basis of calculation of the royalties to be made, Newton J regarded this as a provision in defeasance of the primary liability, for pursuant to that provision the primary liability could be cancelled and another rate or basis of royalty liability could be substituted. It was noted that as of midnight on 31 December 1974 no variation of the rate of royalty had been made under that provision.

Regarding the argument that the Minister had not determined certain components of the formula that were used to determine the rate or rates at which the royalties would be paid as at 31 December 1974, Newton J said:

It is true that as at midnight on 31st December, 1974, the primary royalty liability of Commonwealth Aluminium in respect of the 1974 five months' period at the rate prescribed by para. 2 of the Table to para. (c)(ii) of reg. 78(2) could not have been calculated with complete precision. As at that time the Minister had made no determination of ``the average Alcan World value per tonne of the metal aluminium on the basis of 99.5% ingot C.I.F. Main World Ports'' during the 1974 five months' period, or during the year commencing on 1st July, 1973, and there was also the possibility that, pursuant to the provisos set out in para. 2(a) of the Table, the Minister might determine the World value of the metal aluminium upon some other basis. But nevertheless I consider that a reasonable estimation could have been made as at midnight on 31st December, 1974 of the amount of the liability. If this conclusion be correct, then para. (1) and (2) of the Commissioner's points have no substance.

In Case B5 70 ATC 24 (Case B5), the issue before the Taxation Board of Review was the correct timing for the deduction of land tax for which the taxpayer became liable as an owner and lessee of land. The Board of Review considered the relevant provisions of the NSW Land Tax Management Act and found that land tax for the period commencing on 1 November is levied on an owner of land in respect of all land owned by him on 31 October. The actual assessment issues to the land owner sometime after 31 October each year. In that case, the Board determined that the taxpayer came under a present obligation to make a future payment for land tax on 1 November in each year of income. It held that the amount of land tax was quantifiable in the year of income.

In ATO ID 2010/192 Income Tax Deductions: land tax arrears (withdrawn) the Commissioner concluded that arrears of land tax are not deductible in the income year in which the arrears are paid but in the respective income years in which the liability for land tax was incurred. The facts in that ATO ID include that the taxpayer had for a number of years failed to lodge land tax returns and had been assessed for unpaid arrears of earlier years.

In our reasons for decision, we stated:

In the present circumstances, the taxpayer incurred a liability to pay land tax under the provisions of the state legislation at the start of each calendar year for which the land tax was payable. The taxpayer was 'definitively committed' or 'completely subjected' to the debt at that time, even though unaware of it. As the liability to pay land tax was ascertainable in the year to which the assessment giving rise to the liability relates, land tax payable was incurred in that year (15 CTBR (NS) Case 67 Case B5 70 ATC 24;). The Federal Court confirmed this principle, in the context of payroll tax, in Layala Enterprises Pty Ltd (in liq) v. Federal Commissioner of Taxation (1998) 86 FCR 348; 98 ATC 4858; (1998) 39 ATR 502.

The ATO view is now contained in the Rental Properties Guide as follows:

Land tax liabilities may be deductible, depending on when the land tax liability arises. The timing of when you incur a liability to pay land tax will depend on the relevant state legislation. Your liability to pay land tax does not rely on the lodgement of a land tax return or on the taxing authority issuing a land tax assessment. In many states, the year in which the property is used for the relevant purposes determines when you are liable, even if an assessment does not issue until a later date.

When you receive land tax assessments in arrears, the amount of land tax is not deductible in the income year in which you pay the arrears. The land tax amounts are deductible in the respective income years to which the liability for the land tax relates.

If a land owner receives a land tax assessment for a year, then later in the same financial year either sells the property or starts to use it as their residence, there is no requirement to apportion the land tax deduction. We consider that the land tax liability was incurred for an income producing purpose because the liability for it was founded in the property's use for income-producing purposes.

In the event of the property being sold and there being an adjustment of the land tax, the recovered amount should be declared as rental income by the vendor.

ATO ID 2010/192 and the Rental Properties Guide do not address the timing of a deduction for a reassessment of liability to land tax due to the application of section 45A and 45B of the LTAA.

Application to your circumstances

ABC incurred the additional amount of land tax that has been assessed in the Reassessment in the income year ended 30 June 20XX.

The LTAA and the LTA impose a liability for land tax for an assessment year (the financial year for which the land tax is, or is to be assessed) on the owner of the land at midnight on 30 June in the previous financial year. Section 10 of the LTAA provides that the amount of land tax payable for taxable land is the amount calculated by applying the rate fixed under the LTA to the taxable value of the land. If a person owns two or more lots or parcels of land, land tax is payable on the aggregated taxable value of land owned by the person. However, pursuant to section 12 of the LTAA, the land tax payable on land owned jointly by two or more persons is assessed as if the land were owned by one person and the assessment for the land is kept separate and distinct from an assessment for any land owned by the joint owners individually or with another person.

In accordance with Case B5 and having regard to the matters discussed in Layala Enterprises and Commonwealth Aluminium, as at 1 July of the relevant income year, the taxpayers liability to land tax based on those core provisions was a presently existing liability that was capable of precise ascertainment (or reasonable estimation). That is, the taxpayer would know what land it owned as at midnight on 30 June for the previous financial year and could aggregate the taxable values (which it can determine) and apply the rates set out in section 5 of the LTA. Pursuant to section 12 of the LTAA, the taxpayer’s land tax liability in respect of land it owned with another or others would be determined as if the land were owned by one person and subject to a separate assessment, and thus, liability. These provisions are considered self executing.

However, ABC did not during the relevant assessment years have a liability to pay an amount of land tax that would be assessed if the Commissioner later made a determination to disregard minor interests held in property that it jointly owned with others under section 45A and section 45B of the LTAA. Any additional liability for land tax that the applicant may have is contingent on the Commissioner making a determination under section 45A of the LTAA to disregard some or all of those minor interests.

The determination under section 45A of the LTAA is a substantive component in the determination of the liability to additional land tax imposed in the Reassessment. So much is clear from the provision itself for the following reasons:

● the provision confers a discretion on the Commissioner of State Revenue;

● the Commissioner of State Revenue may make a determination that alters the basis upon which land tax is assessed (by disregarding minor interests in land);

● the Commissioner may only make a determination if the interest is a minor interest and the Commissioner is of the opinion that the purpose or one of the purposes of the creation of the interest was to reduce the amount of land tax payable for the land (i.e. the Commissioner has to form an opinion);

● the Commissioner may have regard to a number of matters set out in the section for the purposes of forming that opinion;

● on making a determination, the Commissioner must give the owner a notice setting out the determination, the reasons for the determination and the effect of the determination.

Further, pursuant to subsection 45B(2) of the LTAA, the Commissioner is then required to make any assessment or reassessment necessary to give effect to the determination.

Having regard to the principles discussed in the case authorities above and a consideration of the legislative regime, in particular sections 45A and 45B, it is clear that ABC’s liability to pay an additional amount of land tax due to the disregarding of the minor interests, did depend upon an act of the Commissioner and the circumstances can be contrasted with Layala Enterprises and Commonwealth Aluminium.

In Layala Enterprises, it was decided that the liability to payroll tax arose when the taxpayer paid taxable wages in a month. It was imposed by the operation of the taxation Acts and became owing when the tax was capable of being calculated at the end of the month. The assessment was wholly facilitative to effect recovery of the pay-roll tax due and the default assessment was not required to fix the liability or the amount.

In Commonwealth Aluminium, the relevant provisions of the law that allowed a change of rate or manner or basis of calculation, and the pending appeal, were considered by the Judge to be matters capable of defeating the liability (or part thereof) but did not affect the conclusion that the liability was ‘presently existing’. Further, although the precise components of the formula had not been determined as at the relevant date they were capable of reasonable estimation.

In this case, until the determination was made by the Commissioner of State Revenue, an increased liability to land tax was not presently existing although it may at various points during the review process conducted by the Commissioner of State Revenue be considered pending, threatened or expected.

The determination of the Commissioner under section 45A of the LTAA crystallised the additional liability of ABC to land tax as it altered the usual and self-executing basis on which the provisions operate such that the determination operated to treat ABC as if it solely owned land as at 30 June that it actually held jointly. In addition to increasing the amount of land tax, the determination made the liability for the land tax in respect of those properties in which the Minor Interests were disregarded fall solely on ABC (the deemed sole owner).

These circumstances are distinguishable from the issue considered in ATO ID 2010/192 which referred to the situation where the taxpayer had not lodged returns as required by the state legislation but had owned land at 31 December. Under the State legislation, a liability for land tax arose at the start of the calendar year for land owned by the taxpayer at midnight on 31 December in the preceding year. The state revenue authority assessed the taxpayer to land tax for the current year and unpaid arrears for prior years. The taxpayer incurred the liability under the provisions of the state legislation at the start of each calendar year. The ATO ID dealt with the usual self executing way in which the land tax provisions operated. It does not deal with the situation considered in this private ruling where the Commissioner of State Revenue may act to alter the basis upon which land tax is otherwise assessed to joint owners.

On the authority of Commonwealth Aluminium and applying TR 97/7, the pending objection is of no consequence. A taxpayer can be completely subjected to a liability even though it is defeasible.

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