Queensland’s land tax settings are inadvertently discouraging Australian superannuation funds from investing in agriculture, a leading tax specialist says.
Duncan Bedford, a Brisbane-based McCullough Robertson Lawyers partner, says Australian-based retirement funds are being caught by rules designed to target foreign investors.
Mr Bedford, a specialist in agricultural taxation and investment structures, said Queensland’s treatment of foreign investment in agriculture was a major talking point at the recent Global AgInvesting conference in Brisbane.
“Coming into this conference, it was the elephant in the room,” he said.
“One of the conference sessions focused on the apparent contradiction between the strong interest shown by overseas pension funds (in Queensland farms) and the relatively limited participation of Australian super funds.
“There was a discussion about why we have Canadian pension funds and UK municipal pension funds putting all this money into Queensland agriculture, and Australian super funds are not.”
According to Mr Bedford, the issue arises because large Australian super funds cannot realistically guarantee that every member satisfies Queensland’s definition of a non-foreign person.
Under current Queensland land tax rules, Australian-owned primary production land is generally exempt from land tax.
However, in Queensland, even a very small amount of foreign ownership can trigger different tax treatment and potentially remove access to the exemption.
Mr Bedford said Queensland was an outlier among Australian jurisdictions in that regard.
“Queensland is the only state that has this outcome,” he said. “Everywhere else, if it’s primary production land, it’s generally exempt (from land tax).”
In a recent example of a large super fund that was considering the viability of their existing farm-based investment in Queensland, as well as potential future investment decisions, Mr Bedford noted that this land tax anomaly was a material factor.
Even with millions of members, an Australian super fund would be disqualified from the primary production land tax exemption if just one member was an “absentee”. This is almost certain to be the case for most super funds (think backpackers on temporary work visas in Australia who then return “home”).
“It is hard to believe that the original policymakers had this outcome in mind. It may have just been a mistake, but more likely, it was a rule written at a time before the modern superannuation system was established, so simply failed to take into account the overwhelmingly Australian character of this form of investment structure.”
Mr Bedford said he had seen investors, both local super funds and overseas investors, either redirecting capital interstate or altering their acquisition strategies to minimise exposure to Queensland’s land tax settings relating to agricultural land.
He had seen clients divest investments in Queensland due to the state tax regime and the issue was being factored into new investments.
Mr Bedford stressed that governments have every right to decide whether foreign investors should face higher tax rates, but that the legislation should clearly reflect the intended policy objective.
“I believe the government could fix the legislation to make it really clear what they’re targeting, rather than catching investors, like Australian super funds, by mistake” he said.
Under Queensland’s land tax laws, if you are “100 percent Australian” and you use your land solely for a business of primary production (farm land), you don’t pay any land tax.
If there is some (but less than 50 percent) foreign ownership in a trust or super fund that owns farm land, there is a base rate of land tax of up to 2.75 percent. Unusually, the same rules do not apply to companies. For example if a Pty Ltd company that owns farm land is 100 percent owned by foreign individuals, it is still exempt from land tax.
“This inexplicable result seems to support a conclusion that these rules were not drafted with current investment structures in mind,” Mr Bedford said.
If an owner of farm land is an absentee individual or an entity with more than 50 percent foreign ownership (other than a Pty Ltd company with more than 50 percent foreign individual ownership), they pay surcharge land tax, which is another three percent in addition to the base rate. The total land tax rate can be up to 5.75 percent of the unimproved value of the land.
There is provision for ex-gratia relief from the surcharge component when a foreign investor can show that they are making a significant contribution to the Queensland economy and community, but there is no certainty for investors in how this is applied and no ability to object or appeal if it is not granted.
The ex-gratia provisions had been revised in December last year, but Mr Bedford said those changes failed to address the fundamental problems.
“The changes were very much at the margins,” he said. “It was not a material change and didn’t really move the dial.”
