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VRLT — holiday home exemption extended to discretionary trusts and certain other structures

The holiday home exemption (HH Exemption) from the vacant residential land tax (VRLT) in Victoria has been extended to holiday homes owned by companies, unit trusts, fixed trusts and discretionary trusts (DT) provided certain criteria is met. This extension was in the State Taxation Amendment Act 2024 (Vic) (STA Act) that was finalised as law on 4 June 2024.

This article focuses on holiday homes in DTs with a brief comment on how it applies to other structures. For a more general overview of how VRLT operates see our article here.

The usual 6+ month use and occupation test

Residential land is subject to the VRLT where it has been vacant in the prior calendar year for more than 6 months unless the property qualifies under the HH Exemption. This means that unless an exemption applies (eg, the principal place of residence (PPR) exemption or the HH Exemption), residential land must generally be used and occupied for greater than 6 months in the prior calendar year before being exempt in the following calendar year.

Note that the VRLT will apply to all of Victoria from 1 January 2025. Prior to 2025, VRLT only applies to specific council areas around inner and middle Melbourne. The extension to all of Victoria from 1 January 2025 will naturally cover many more properties and holiday homes.

The 4 week test for a holiday home owned by an individual

For the HH Exemption to apply where an individual owns the land, the owner of the holiday home or their relative is required to use and occupy the holiday home for at least 4 weeks in the prior calendar year (4 Weeks Test). Further, the owner or their relative must have used and occupied other land in Australia as their PPR.

A ‘relative’ is defined in the Land Tax Act 2005 (Vic) (LTA) to include, among others, the spouse, sibling or child of the owner, as well as the sibling or child of the owner’s spouse.

The State Revenue Office (SRO) of Victoria also needs to be satisfied that the property is used as a holiday home after considering the location of the property, the distance between the owner’s PPR and their holiday home, as well as the nature and frequency of any use of the land.

If the owner or their relative satisfies these tests, VRLT will not apply.

STA Act

Prior to the STA Act extending the HH Exemption to companies and trusts from 1 January 2025, the exemption will only apply to holiday homes personally owned by an individual. This caused significant concern for those owning holiday homes via companies and trusts when substantial VRLT changes were introduced in December 2023 including the extension of the VRLT regime to all of Victoria. Fortunately , the STA Act has extended the HH Exemption to apply to holiday homes held by companies and trusts provided certain criteria are satisfied.

HH Exemption in a discretionary trust

The following criteria applies for land held in a DT to qualify for a HH Exemption from 1 January 2025:

  • it is owned by a trustee of a trust on and from 28 November 2023;
  • a ‘specified beneficiary’ (SB) of the DT who is a natural person or their relative used and occupied other land in Australia as a PPR;
  • a SB or their relative used and occupied the land as a holiday home for at least 4 weeks in the prior year; and
  • the SRO is satisfied that the land was used and occupied as a holiday home in the preceding year having regard to the location, distance from the owner’s PPR and the nature and frequency of any use of the land.

HH Exemption criteria explained

28 November 2023 date

Only land owned by a company or trust on and from 28 November 2023 is eligible for the HH Exemption provided the other criteria is satisfied. The HH Exemption cannot apply to property acquired by a company or trust after 28 November 2023.

Specified beneficiary

Broadly, a SB is a natural person beneficiary that is expressly named in the trust deed rather than being a member of a class of beneficiaries (eg, the children, grandchildren and lineal descendants).

The term ‘SB’ of a DT is defined to mean a beneficiary who is specifically named in the trust deed or specifically declared in writing pursuant to the trust deed as a beneficiary to or in whom income or property can be distributed or vested.

Thus, you should first carefully review your trust deed (including any deed of variation) to determine who the SBs, if any, are. This task may not be so straight forward given to each trust supplier uses different wording and many trust deeds are difficult to read and understand.

Furthermore, the definition of SB gives rise to, among other things, the following queries:

  • Not many deeds refer to the term ‘SB’. Some refer to the term ‘primary beneficiary’, ‘main beneficiary’, ‘principal beneficiary’ or some other title. (For simplicity we refer to the term ‘primary beneficiary’ to cover these various terms below).

We understand the SRO is likely to accept a beneficiary as a SB where that person’s name is specifically referred to in the deed even if they have since changed their name due to marriage or some other reason. This is because the definition of SB refers to a beneficiary who is specifically named or specifically declared in writing pursuant to the deed.

  • In many cases, the SBs are dead and may have been the former grandparents or great grandparents of the children or grandchildren or great grandchildren who currently use the holiday home.

We would hope the SRO will accept that a relative of a SB who currently use and occupy the holiday home owned by a DT as being eligible for the HH Exemption provided the other criteria is satisfied.

  • What if the trust refers to Steven John James as the primary beneficiary and Steven divorces from his former wife Mary Pixie James (or separates from Mary, if they were in a de facto relationship) and Mary now controls of the trust after a family law property settlement? It appears the DT would not be eligible for the HH Exemption as Mary is not specifically named in the deed; nor is she a relative of her former domestic partner and may not even be a beneficiary under the trust. However, a more detailed examination of the deed and Mary’s circumstances would be required to see if there was any opportunity for the DT to satisfy the HH Exemption criteria.

Unfortunately, there is limited and scant guidance on the term ‘SB’ and the SRO website merely provides:

A SB is not the same as a taker in default. However, it could be the same person. A taker in default is usually identified in the trust deed in the taker in default clause. A taker in default will take any trust capital that has not been allocated to a beneficiary when the trust is terminated.

Can a trust deed be easily varied?

While there appears to be some flexibility to specifically declare the names of beneficiaries in writing pursuant to the a deed as SBs, we would recommend that a lawyer with expertise in duty be requested to provide an opinion before doing so. This is because there is complexity in declaring or appointing a beneficiary under a trust deed or varying a deed to add a primary beneficiary (eg, SB?) including the risk of ‘resettling’ the trust and having to pay duty on the value of all dutiable property owned by the trust.

The SRO is currently working on a ruling to formalise its view what will resettle a trust. Broadly, a change of a primary beneficiary or taker in default in relation to a DT is typically considered sufficient to invoke a resettlement. Until the SRO ruling issues, this topic remains unclear.

Given the nature of the term SB and that many DTs rely on a term like primary beneficiary in determining the classes of other beneficiaries (eg, children and lineal descendants and other relatives like parents and grandparents, siblings and their respective spouses, etc), any change to an SB or a declaration to add or remove a beneficiary for land tax or VRLT purposes may give rise to a resettlement risk. Thus, we generally recommend that expert advice be obtained before making any changes to a deed in this regard.

Company, unit trust and fixed trust

While there may not be many holiday homes owned by companies, unit trusts or fixed trusts we briefly cover the criteria for the HH Exemption that will apply to these structures from 1 January 2025. The key points include:

  • At least 50% of the shares/units/beneficial interests in the land must be owned by one or more natural persons who, in the year preceding the relevant land tax year, used and occupied other land in Australia as their PPR. Note that this PPR test (in the case where a company, unit trust or fixed trust owns the holiday home) cannot be satisfied by a relative using other land in Australia as their PPR.
  • A natural person referred to in the paragraph immediately above or their relative must use and occupy the property as a holiday home for at least 4 weeks in the preceding year.
  • The SRO is satisfied that the land was used and occupied as a holiday home in the preceding year having regard to the location, distance from the owner’s PPR and the nature and frequency of any use of the land.

Conclusions

The above changes were a welcome and important positive development. However, before assuming you are covered by a HH Exemption if your holiday home is owned by a DT, company, unit trust or fixed trust, you should carefully check the rules governing the structure and the STA Act to determine whether all the relevant criteria is satisfied.

Also, before making any changes to trust deeds, we recommend that appropriate advice be obtained.

Naturally, DBA Lawyers would be pleased to assist.

Related articles:

 

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Daniel Butler, Director ([email protected]) and Nick Walker, Lawyer ([email protected]).

DBA LAWYERS

10 June 2024

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