Land Tax and trusts in Victoria

New rules from 1 January 2006

Legislation was passed in late November to change the way trusts are assessed for land tax in Victoria. A surcharge rate of 0.375% will apply to land held in a trust in Victoria, starting with the 31 December 2005 assessment.

The default position is that the trustee will be assessed, at the surcharge rate on the aggregate value of the land held in each trust. To avoid this surcharge, existing trust landowners will be able to nominate an individual beneficiary who will be assessed for the land tax.

The impact of the changes depends on the type of trust and when the land is acquired.

Land already owned by a discretionary trust at 31 December 2005

The trustee will be assessed for the land tax at the surcharge rate, unless
The trustee nominates a beneficiary of the trust to be assessed. If this happens, the trustee will be assessed at the ordinary rate, and
The beneficiary will be assessed at the ordinary rate on the land owned by the trust and any other land owned by the beneficiary, but will get a deduction for tax payable by the trustee. The deduction is intended to avoid double taxation, but will not give rise to refunds.
Nomination of a beneficiary is a once only opportunity and the nomination must be lodged by 30 June 2006.
If the beneficiary does not own other land, the beneficiary will not receive a separate assessment.
For example, the AB discretionary trust owns land with an assessed value of $500,000. The trustee nominates A as the beneficiary of the trust. A has no other land holdings. The trustee of the trust, AB Pty Ltd, will be assessed for land tax at the normal rate of $800 and as A has no other land, A will not receive an assessment.
If A had other land with a value of $500,000, A would get an assessment for $3,680, but would receive a credit of $800 for land tax paid by the trustee.
Note that hybrid trusts, where the property subject to the trust can be distributed using a discretionary power in the trust deed, will be a discretionary trust for land tax purposes.

Land already owned by a fixed trust at 31 December 2005

The trustee of the fixed trust will need to lodge with the SRO a notice showing the unit holders of the trust. The trustee will be assessed at the ordinary land tax rates on the land held in the unit trust.

Each unitholder will also be assessed on their proportion of the land held by the unit trust and this will be aggregated with any other land held by the unitholder. Similar to discretionary trusts, the unitholder will be able to get a credit for the unitholder’s share of land tax paid by the trustee.

Notification of the unitholdings must be made by 30 June 2006. Where the notification does not occur, the surcharge land tax rate will be applied to the trustee.

Note that discretionary trusts that own units in a unit trust that owns land will be required to make a beneficiary nomination as if it owned the land directly.

Principal place of residence held by a trust

Special rules will apply for land owned by a trust (not a discretionary trust) that is a principal place of residence of a fixed beneficiary of the trust. If only one residence is held within the trust, normal rates of land tax will apply, and only the trustee will be assessed. The specified PPR (principal place of residence) beneficiary can be changed under certain circumstances.

Land acquired by a discretionary trust after 1 January 2006

The trustee will be assessed at the surcharge rate on the land held. For land with a value of $500,000 this means the trustee would receive an assessment of $2,475, an additional land tax of $1,675. For land valued at $1m the additional land tax is $3,550.

Land acquired by a fixed trust after 1 January 2006

The trustee will be assessed at the ordinary rate on the land held. Each unitholder will also be assessed on their proportion of the land held by the unit trust and this will be aggregated with any other land held by the unitholder. Provided that a Unitholder’s notice is lodged, the surcharge rates will not apply.

The Unitholder’s Notice is required to be lodged in the year of acquisition before the end of the calendar year.

Exclusions

Superannuation funds, charitable trusts, public unit trusts and trusts for the benefit of the disabled are excluded from the land tax surcharge. Testamentary and will trusts are excluded from the surcharge for 3 years after the death of the testator; and if the only beneficiaries are minors, until the first minor reaches 18 years old.

The land tax surcharge phases out for land holdings in excess of $1.62 million. At $2.7million, normal land tax rates apply.

Planning

Land tax is rarely in the mind of a trustee when acquiring land. Trusts remain suitable vehicles to acquire land and can have significant benefits in asset protection, accessing capital gains tax concessions and streaming income.

For existing landholdings, the trustee should ascertain which beneficiary to nominate. The nomination of a beneficiary can be done independently of income tax considerations, and in most cases it will be possible to find a family member who owns no land in their own name. This is a major advantage for pre 2006 landowners and all trustees should ensure that a beneficiary nomination or unitholder’s notice is lodged before 30 June 2006.

For future acquisitions, a unit trust will continue to be appropriate in certain circumstances as no surcharge rates will apply.

Discretionary trusts may continue to be appropriate entities for land acquisition notwithstanding the increased land tax. Streaming of capital gains to low income beneficiaries and access to the capital gains tax concessions can allow for considerable savings in income tax that may exceed the land tax surcharge. The land tax surcharge cost needs to be weighed up against these benefits from trust ownership.

2006 land tax rates

Published : 21 December 2005