In South Australia, the Retail and Commercial Leases Act 1995 provides that a retail shop lease cannot require a tenant to pay land tax but a landlord’s liability for land tax can be taken into account in assessing the amount of rent. The Act does not always apply and in certain circumstances land tax can be charged to a tenant. One of those circumstances was recently tested in the Supreme Court of South Australia.
As we all know, land tax in South Australia is not insignificant (see our article: ‘Land Tax Anti Avoidance‘). To calculate liability for land tax use the table below.
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The Act only applies to a lease of a “retail shop” (business premises at which goods or services are sold or provided to the public) and will not apply to a retail shop lease if:
- the annual rent exceeds $250,000 or an amount prescribed by regulation;
- the lease is for a term of 1 month or less;
- the right of occupation arises under a contract of sale or a mortgage;
- the lessee is a public company or a subsidiary of a public company;
- the lessee is an Authorised Deposit-taking Institution (banks and credit unions); or
- the lessee is a Local Council, State or Federal instrumentality.
Of course, just because the Act does not apply does not of itself mean that a landlord can charge a tenant land tax. There must be a contractual basis for such a charge. It is always open to the parties to decide whether or not land tax will be payable by a tenant when the commercial lease is first negotiated.
Landlords take note: Our experience is that leasing agents sometimes miss opportunities to negotiate the payment of land tax by tenants to which the Act does not apply. We surmise that this is because the vast majority of retail, commercial and industrial leases are caught by the Act and the agent therefore proceeds all negotiations on that basis and assumes that land tax will not be covered.
For several years, the “threshold” annual rent for application of the Act was $250,000. In other words, any lease requiring payment of more than $250,000 rent in any year was exempt from the Act and the lease could legally require the tenant to pay land tax.
Regulations made under the Act recently increased the threshold to $400,000. The regulations left unclear what effect that had on existing retail shop leases. The Full Supreme Court recently answered this question in WST Pty Ltd v GRE Pty Ltd  SASFC 146. In that case the Court held that during any period of any retail lease, existing at the time of the threshold increase or not, if the rent payable exceeded the threshold, land tax would be payable. In other words, the Act’s application flows with the threshold.
A difficulty arises where rent is agreed in a lease, especially a long lease, where the old threshold was exceeded but which is now caught by the new regulation and hence under the threshold. Under the recent decision, the landlord can’t charge for land tax nor unilaterally alter the rental.
Tenants under substantial leases should check that they are not being charged land tax illegally. Landlords should draw their lease terms to provide for a recalculation of rental mechanism to take account of threshold fluctuations.
The Supreme Court case may be further challenged but until a new Full Supreme Court or the High Court reverse the principle, it can be regarded as settled.