Australia: Land Tax – Surcharge On Trusts

The Victorian land tax treatment of properties held by trustees of trusts has changed.

Subject to specified exclusions, properties held in all types of trusts will be subject to a surcharge of 0.375%. There are a number of specific requirements trustees must comply with and measures for reducing the impact of the surcharge.

Land held in a trust and with an aggregate unimproved value of more than $20,000 will be subject to a surcharge from the 2006 tax year. Land tax for the 2006 tax year is calculated on land holdings of a trustee as at midnight 31 December 2005. The basic surcharge is 0.375%. It is scaled back for unimproved land valued between $1.62M and $2.7M so that there is no surcharge for the proportion of unimproved land valued above $2.7M. A comparison between the land tax rates applicable to land not held in trust and land held in trust is set out in the table attached to this update. The following examples illustrate the impact of the surcharge.

As outlined below, certain trusts can avoid the surcharge by using the nomination process. Under this process the beneficiary is assessed. The trustee is also assessed, but at the standard land tax rates, and any land tax payable by the beneficiary will be reduced by the amount of land tax payable by the trustee. The nomination must be made by 30 June 2006. An alternative person may be nominated only if the nominated beneficiary dies or the Commissioner of State Revenue is satisfied that it is just and reasonable. The nomination is for the purpose of assessing land tax only. No other interest will arise and there are no stamp duty implications.

Discretionary trusts which either held land at 31 December 2005 or entered a contract on or before 31 December 2005 to buy land, can avoid the surcharge by using the nomination process. On a ‘once-off’ basis, these trusts may nominate a single adult beneficiary of that trust for an assessment of land tax.

The nominated beneficiary of a discretionary trust is deemed to be the owner of all land held in the trust as at 1 January 2006 and will be assessed, at ordinary rates, on the 1 January 2006 land held in the trust aggregated with any other land owned by that beneficiary and which is assessable for land tax (for example, a family home owned by the beneficiary would not be assessable for land tax). Any land tax payable will be reduced by the amount of land tax payable by the trustee.

Any land acquired by a discretionary trust from 1 January 2006 will be taxed solely in the hands of the trustee at the surcharge rate unless it is the principal place of residence of a beneficiary (see below).

A fixed trust may provide to the Commissioner of State Revenue details of the beneficial interests in land held in the trust and, similarly, a unit trust may provide details of the unitholders in the trust. This approach applies to land held or acquired on or after 31 December 2005. The effect of this is that each nominated beneficiary or unitholder will be deemed to be the owner of a proportion of the land held in the trust (calculated by reference to their proportionate beneficial interest or unitholding) and will be assessed, at ordinary rates, on that land aggregated with any other land they own which is assessable for land tax. Any land tax payable will be reduced by the amount of land tax payable by the trustee.

Land held in a unit trust or discretionary trust which is used as a principal place of residence by a unit holder or beneficiary of the trust, and which is not otherwise exempt from land tax, will not be subject to the trust surcharge provided the trustee nominates a beneficiary occupying the property. Such land is taxed at ordinary land tax rates while the beneficiary occupies the property. A principal place of residence held in a fixed trust is generally exempt from land tax if all the beneficiaries reside at the property.

Certain types of trusts are completely excluded from the surcharge. Land held in an excluded trust will be assessed at ordinary rates, unless exempt under an existing exemption. Excluded trusts include:

• charitable trusts and certain trusts for clubs or their members;
• certain testamentary trusts;
• complying superannuation funds;
• public unit trust schemes; and
• trusts for disabled persons.

If another exemption from land tax would apply to the land (eg primary production), then land held in a trust will not be affected by the new provisions.

A trustee holding Victoria land on trust:

• must submit a once-off return to the Commissioner of State Revenue prior to 31 March 2006; and
• if the trust is a discretionary trust and the trust was established before 1 January 2006, consider whether or not to nominate a beneficiary for land tax purposes;
• if the trust is a fixed or unit trust, consider whether or not to notify the Commissioner of State Revenue of the beneficiaries or unit holders of the trust; and
• if any such land is a principal place of residence of a beneficiary of the trust, consider whether or not to notify the Commissioner of State Revenue of that fact.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.