From 1 January 2006 a higher scale of land tax rates will apply to land held by trusts. Broadly, unless a nomination (see below) is made:
- there will generally be a 0.375% surcharge applying to land held by a trust (the surcharge tapers off above $1.62 million of unimproved land value and is eliminated above $2.7 million); and
- only a $20,000 tax-free threshold applies for trusts (compared to $200,000 for others).
Unless timely action is taken by trustees, the surcharge will be payable. The following table highlights the difference in tax payable by trustees as compared to individuals or other entities.
|Land value||Trust||Individual||Extra tax|
|$ 500,000||$ 2,475.00||$ 800.00||$1,675.00|
|$1,000,000||$ 7,230.00||$ 3,680.00||$3,550.00|
The new rules particularly target discretionary or ‘family’ trusts. However, discretionary trusts with pre-2006 land can avoid the surcharge by nominating an adult individual (who is a beneficiary of the trust) to be assessed for land tax on that land. Note, the trust’s land value will then be added to any other land that person owns for calculating land tax.
If a discretionary trust acquires land post-2005, that land will be subject to the surcharge unless a principal place of residence (‘PPR’) nomination is made in relation to the property. A PPR nomination will generally only be available to a beneficiary using the residence as their ‘family’ home. Where a PPR nomination is made by a discretionary trust, land tax at ordinary rates is payable on the principal residence.
Unit and fixed trusts
Unit and fixed trusts can utilise ongoing nomination relief; ie, a nomination can be used for existing (pre-2006) and future (post-2005) land acquisitions. Broadly, the proportionate interest held by each unit holder or beneficiary of the trust’s land is assessed to them when calculating the tax payable. Thus, each unit holder or beneficiary will be assessed at their ordinary rates. Unless a nomination is made, the surcharge applies. A PPR may apply to a principal residence owned by a unit or fixed trust.
Accordingly, each trustee will need to consider whether there will be land tax savings from making a nomination. In cases where each beneficiary already owns land, there may be no savings.
Certain trusts such as charities, complying superannuation funds, testamentary trusts for up to 3 years from date of death and trusts for disabled persons are, unless a specific exemption applies, subject to ordinary rates with the benefit of a $200,000 tax-free threshold. That is, they are excluded from the surcharge but not the ordinary land tax regime.
SMSF with land in a unit trust
An SMSF that owns 100% of the units in a unit trust can nominate the fund to be assessed as the owner of the land at ordinary rates. Unless a nomination is made, the surcharge applies. If the SMSF owns land in its own name, then ordinary rates apply as it is an excluded trust.
Deceased estates and testamentary trusts
There is a general exclusion from the surcharge for 3 years from date of the person’s death. However, if land will continue to be held by a testamentary trust beyond this time, then the surcharge will generally apply unless a fixed interest is created. To overcome the surcharge, people may now wish to make specific gifts of land to individuals rather than to a testamentary trust. However, tax and other issues (see below) still need to be carefully considered. Thus, each person with valuable land should review their Will and overall estate planning.
Issues apart from land tax
Land tax is but one of the many issues to consider when choosing how to hold land. The CGT, GST and stamp duty issues should also be addressed; especially if a trust that gives rise to greater land tax is proposed to be wound-up or the land is proposed to be transferred to individual beneficiaries.
While there may be a Victorian stamp duty concession on transferring a property out of a trust if certain conditions are satisfied, there is no specific CGT exemption. Moreover, family succession and asset protection are other important features of discretionary trusts that should not be overlooked.
As soon as practicable: Review all land holdings and determine what action needs to be taken by whom. Where land is held by a trust, determine whether a nomination or any restructuring is needed.
Action by 31 March 2006: All trusts must complete a notification of land holdings to the State Revenue Office (‘SRO’). However, a trustee that holds land which is wholly exempt from land tax need not notify the SRO unless the land ceases to be exempt.
Action by 30 June 2006: Trustees must generally lodge their nominations by 30 June 2006 in respect of their pre-2006 land. Note, the surcharge generally applies unless a nomination is made by this date. Where land is acquired by a unit or fixed trust post-2005, the nomination can take place in the year the land is acquired.
Ongoing: Trustees must notify the SRO of land acquired or disposed of by a trust within 30 days. Moreover, changes in unit holders of unit trusts and beneficial interests in fixed trusts must also be notified to the SRO within a 30 day period if a nomination has been made.
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