Kresevic v Chief Commissioner of State Revenue [2006] NSWADT 270

CITATION: Kresevic v Chief Commissioner of State Revenue [2006] NSWADT 270

DIVISION: Revenue Division

APPLICANTS PARTIES: Rudi and Teresa Kresevic RESPONDENT Chief Commissioner of State Revenue

FILE NUMBER: 066045

HEARING DATES: 12/09/2006

SUBMISSIONS CLOSED: 09/12/2006

DATE OF DECISION: 09/18/2006

BEFORE: Verick A - Judicial Member

CATCHWORDS: Land tax exemption - principal place of residence

MATTER FOR DECISION: Principal matter

LEGISLATION CITED : Land Tax Management Act 1956

APPLICANTS In person REPRESENTATION: RESPONDENT H El-Hage, solicitor

ORDERS: The decision of the Chief Commissioner is affirmed

REASONS FOR DECISION Factual Background 1 The decision under review relates to the disallowance by the Respondent of an objection by the Applicants against land tax imposed in respect of a property situated in Baulkham Hills ("Baulkham Hills property") for the 2004 land tax year. Essentially the matter at issue concerns a claim for a principal place of residence exemption by the Applicants in respect of the Baulkham Hills property. 2 The facts are not in dispute. The Applicants purchased a property situated at Killara ("Killara property") on 3 November 2003 and commenced to use it as their principal place of residence from 20 December 2003. Prior to purchasing the Killara property the Applicants had owned and occupied the Baulkham Hills property as their principal place of residence for a number of years. 3 When the Applicants purchased the Killara property they also sought to sell their Baulkham Hills property. The Applicants placed the Baulkham Hills property on the market for sale from December 2003 to March 2004. Due to a depressed real estate market, the applicants were not able to sell the Baullkham Hills property. The Baulkham Hills property was withdrawn from sale in March 2003. 4 Because of financial and income tax reasons Rudi Keresevic transferred his interest in the Baulkham Hills property to his wife, Teresa Kresevic, on 13 May 2004. The property has been let from 7 May 2003 and remains an investment. 5 A land tax assessment for the 2004 land tax year was issued on 12 October 2005 by the Respondent in respect of properties owned by the Applicants and included the Baulkham Hills property in the Applicants' assessment. The Baulkham Hills property was included on the basis that they were owners of the Baulkham Hills property on the 31 December 2003, which no longer was their principal place of residence on that date. This review is only in relation to the inclusion of the Baulkham Hills property as a taxable property. Relevant Legislation 6 By the combined effect of sections 7, 8, and 9 of the Land Tax Management Act 1956 (the "LTM Act"), land tax is levied each year on land value of all land in New South Wales owned at midnight on the thirty-first day of December immediately preceding the year for which the land tax is levied other than land which is exempt from taxation under the LTM Act. 7 In the relevant year, land used and occupied as the principal place of residence by the owner of the land was exempt under s 10(1)(r) of the LTM Act. Section 3(1) of the LTM Act defines a "principal place of residence" of a person as "the one place of residence that is, among the one or more places of residence of the person within and outside Australia, the principal place of residence of the person". 8 The exemption under s 10(1)(r) is in the following broad terms: "10 Land exempted from tax (1) Except where otherwise expressly provided in this Act the following lands shall, subject to sections 10B, 10D, 10E, 10G and 10P, be exempted from taxation under this Act: … (r) land that is exempt from taxation under the principal place of residence exemption, as provided for by Schedule 1A, …" 9 The exemption is fully expanded in Clause 2 of Schedule 1A as follows: "2 Principal place of residence exemption (1) Land used and occupied by the owner as the principal place of residence of the owner of the land, and for no other purpose, is exempt from taxation under this Act, in respect of the year commencing 1 January 2004 or any succeeding year, if: (a) the land has a land value in respect of the year of less than the premium tax threshold, and (b) the land is: (i) a parcel of residential land, or (ii) a lot under the Strata Schemes ( Freehold Developments) Act 1973 or a lot under the Strata Schemes (Leasehold Development) Act 1986. (2) Land is not used and occupied as the principal place of residence unless: (a) the land, and no other land, has been continuously used and occupied by the person for residential purposes and for no other purposes since 1 July in the year preceding the tax year in which land tax is levied, or (b) in any other case, the Chief Commissioner is satisfied that the land is used and occupied by the person as the person's principal place of residence. (3) If the owner of land is entitled to the exemption conferred by this clause, no other person is liable to be assessed for taxation under this Act in respect of the land during the period of the owner's entitlement to the exemption. (4) The exemption conferred by this clause is referred to as the principal place of residence exemption". 10 Generally speaking, there is only an exemption for one property for each family under the law. There is, however, an exception to this general rule. The legislature has recognised the fairly inequitable treatment by the law of cases falling in circumstances where owners of property are required to pay land taxes for a property that had been their principal place of residence for some years and was only unoccupied or not used as such for a short period prior to its sale. The State Revenue Legislation Further Amendment Act 2003 introduced amendments to the LTM Act that allow an owner to claim the principal place exemption concession for two residences in circumstances where the owner has bought a new residence and is in the process of selling the existing residence, but has not been able to complete the sale by the taxing date. The changes introduced are found in Clause 7 of Schedule 1A of the LTM Act. The concession is effective from 31 December 2003 and applies in this matter. 11 The concession that allows exemption of two properties is set out in Clause 7 of the Schedule 1A of the LTM Act in the following terms: "7 Concession for sale of former principal place of residence (1) If the Commissioner is satisfied that, on a taxing date (the relevant taxing date): (a) a person is the owner of land ( the former residence ) that was the principal place of residence of the person on the relevant taxing date or was the principal place of residence of the person on the preceding taxing date, and (b) the person is the owner of the other land (the new residence) that is being or is intended to be used and occupied by the person as his or her principal place of residence, both the former residence and the new residence are taken, for the purpose of the principal place of residence exemption, to be used and occupied by the person as the person's principal place of residence on the relevant taxing date. (2) This clause applies in respect of land owned by a person only if the Chief Commissioner is satisfied that: (a) the former residence has not been used or occupied except as the person's principal place of residence, and no income has been derived from the use or occupation of the residence, since the preceding 1 July, except: (i) income derived from an excluded residential occupancy (within the meaning of clause 4), or (ii) income derived under a lease or licence entered into by the purchaser under a contract for the sale of the former residence for a period pending completion of the sale, and (b) since the person became owner of the new residence the new residence has not been used or occupied except: (i) as the person's principal place of residence, or (ii) by a tenant under a lease entered into by the previous owner, and (d) the person intends to dispose of the former residence within 6 months after the relevant taxing date. (3) If the principal place of residence exemption applies by operation of this clause to land not actually used and occupied by a person at the relevant taxing date, the exemption is revoked if: (a) the person fails to dispose of the former residence within 6 month after the relevant taxing date, or such further period as may be approved by the Chief Commissioner, or (b) the person is not actually using and occupying the new residence as his or her principal place of residence by the next taxing date immediately following the relevant taxing date. (4) The effect of the revocation is that the principal place of residence exemption is taken not to have applied in respect of any tax year to which, but for the revocation, it would have applied. Land tax liability is to be assessed or reassessed accordingly. (5) For the purposes of this clause, a person disposes of a former residence if: (a) the person ceases to be an owner of the former residence, or (b) the person enters into an agreement for the sale of the former residence." 12 The Applicants were joint owners of both the properties at the relevant time and are treated by the provisions of s 27 of the LTM Act in respect of the relevant properties as if the properties were owned by one person. Submissions 13 The Applicants have submitted that their case "ought to be considered for a double exemption". In particular, they have argued that the Baulkham Hills property had been their principal place of residence for a number of years and was only "caught" by the taxing provisions because it was their property for a few weeks in December of 2003. In addition, the applicants rely on Clause 7 generally and on Clause 7 (5) in particular as Rudi Keresvic had effectively ceased to be an owner of the Baulkham Hills property on 13 May 2004. 14 The Respondent's position is fairly simple. The Respondent has submitted that the "applicants are not entitled to a principal place of residence exemption for the Baulkham Hills property because their principal place of residence as at 31 December 2003 was the Killara property". In relation to Clause 7, the Respondent's submission is that the Applicants have not satisfied the requirements as the property was not sold within 6 months and remains an investment property. Reasons and Decision 15 The law provides that each family is only entitled to one exemption for a principal place of residence unless it can be established that the special circumstances required by Clause 7 exist in a particular land tax year. 16 The facts, which are not in dispute, clearly establish that the Applicants had, on the 31 December 2003, occupied and were using the Killara property as their principal place of residence. The Applicants owned the Baulkham Hills property on the 31 December 2003, which was no longer used as their principal place of residence. It was the subject of a sale for a period, but not sold by the applicants. The property was let and remains an investment property. 17 The Applicants were only entitled to an exemption for both properties under Clause 7 if the requirements of Clause 7 were satisfied. The Applicants had to jointly in terms of s 27 of the LTM Act cease to be owners of the Baulkham Hills property. The mere transfer of the interest in the Baulkham Hills property by one joint owner to the other joint owner did not satisfy the requirement set out in Clause 7(3(a). As the property was deemed by s 27 to be owned by one person, for the transfer of ownership to be effective for purposes of Clause 7, the disposal had to be by both joint owners. 18 Clause 7 allows an owner to claim the principal place exemption concession for two properties in limited circumstances where the owner has bought a new residence and is in the process of selling the existing residence. The provisions of Clause 7 only apply in circumstances where there is a disposal of the existing property by the owner within the period of six months or a longer period allowed by the Respondent. 19 In this matter, although an attempt was made to sell the property, the property has not been disposed as required by Clause 7 and accordingly the double exemption provisions found in Clause 7 do not apply. 20 The decision under review is accordingly affirmed.