Australia: Land Tax For Trusts - Notification And Nomination Information

The forms required to notify details of land held on trust and to nominate beneficiaries have now been released by the State Revenue Office (SRO). These forms and related information can be downloaded from the SRO website at www.sro.vic.gov.au.

We have been advised by the SRO that it has accumulated a database of trusts holding land where trustees have previously disclosed their trust capacity to the SRO and that it has also obtained details from the Australian Taxation Office where trust-related Income Tax Returns have been lodged.

Using this information, the SRO has completed a mail-out to the entities holding land on trust in Victoria of which it is aware, explaining that the landowner must notify the SRO of land held on trust and that the landowner has a one-off opportunity to nominate a beneficiary in order to avoid the trust land tax surcharge.

However, the SRO mail-out may not reach all trusts with Victorian landholdings. Notification of land held on trust is not optional and must be completed for all trusts with Victorian landholdings, whether or not the trustee has received the SRO mail-out.

Any person or entity that holds land in Victoria on trust must lodge a notification of land held as at 31 December 2005 with the SRO.

Trustees holding land in Victoria are required to submit a Notification of Lands Held on Trust Form by 31 March 2006, which requires trustees to disclose details of the trustee, the name and nature of the trust and Victorian landholdings.

If a beneficiary is nominated:

• The trustee will pay the ordinary land tax rates on land held in the trust on 31 December 2005.
• The nominated beneficiary will be assessed at ordinary land tax rates on the aggregate unimproved value of the trust land acquired on or before 31 December 2005 and any other land they own, with a credit for any tax payable by the trustee.
• If the nominated beneficiary does not own any land, or only owns exempt land (eg a principal residence) the deduction will reduce their liability to nil and they will not receive a Land Tax Assessment.

The nominated beneficiary must be:

• A natural person;
• A potential beneficiary of the trust; and
• 18 or older on 31 December 2005 (if all potential beneficiaries of the trust are under the age of 18 on 31 December 2005, the trustee may nominate itself).

The nominated beneficiary must sign the nomination form to acknowledge acceptance of the nomination.

It is important for trustees to carefully consider the nominated beneficiary. Trustees of discretionary trusts will not have an automatic right to change a nominated beneficiary unless the nominated beneficiary dies. Changes will only be permitted where the SRO considers that it is ‘just and reasonable’. The SRO has stated that it is not intended that a nominated beneficiary can be changed simply because that nominated beneficiary acquires other taxable land, which is then aggregated with the trust’s land for land tax purposes.

For landholding unit trusts and fixed trusts the key differences are:

• The unitholders or beneficial interest holders will be taxed, at normal rates, on the land owned by the trust (in proportional to their interest), with a proportional credit for land tax paid by the trustee. The trust land will be aggregated with other land owned by such unitholders or beneficiaries in their Land Tax Assessments.
• If the ‘nominated’ unitholders and beneficial interest holders are also trusts they will be taxed on their interests at the trust land tax surcharge rates unless they in turn nominate their own beneficiaries or unitholders.

Nomination of a beneficiary will not necessarily result in a land tax saving. The choice of whether to nominate is principally a financial decision involving a comparison of the cost of paying the trust land tax surcharge on the one hand and the aggregate of the land tax liability of the trust without the surcharge and any increased land tax liability for the nominated beneficiary on the other. (Refer to our ‘Land Tax Calculator’ section below).

In addition to the financial impact, the following issues should be considered when deciding whether to nominate in relation to income producing property:

• It is unlikely that the additional land tax payable by a nominated beneficiary (if any) on trust land will be tax deductible.
• Where land tax is payable or reimbursed by a tenant, the Lease provisions may not be wide enough to enable the landlord to obtain payment or reimbursement of additional land tax payable by the nominated beneficiary (if any).

A trustee has until 30 June 2006 to nominate beneficiaries for discretionary trusts or notify their unitholders or beneficial interest holders for unit trusts and fixed trusts by lodging the appropriate form with the SRO.

The SRO intend issuing 2006 Land Tax Assessments at the trust surcharge rates to all trustees who have not nominated beneficiaries after the notification deadline expires on 31 March 2006, even though the deadline for nominations is not until 30 June 2006. Accordingly, if you intend to nominate we recommend that you lodge the nominations forms with the SRO as soon as possible and no later than 31 March 2006. This will avoid the inconvenience of being issued with a 2006 Land Tax Assessment at the trust surcharge rates, and then having to arrange for this incorrect assessment to be amended.

Entities which are nominees for landholding joint ventures are considered to be trustees of trusts for land tax purposes and will be subject to the trust land tax surcharge. Nominees must also notify the SRO of lands held on trust by the 31 March 2006 notification deadline and may nominate the joint venturers to avoid the trust land tax surcharge. If any joint venturer is the trustee of a trust, that joint venturer will be taxed on their joint venture interest at the trust land tax surcharge rates, unless they in turn nominate their own unitholders or beneficiaries.

Trustees will not pay the trust land tax surcharge on land held in a trust which is used as a principal place or residence (PPR) of a nominated beneficiary. Nomination of a PPR beneficiary must be lodged at the SRO on or before 30 June 2006. If you intend to nominate a PPR beneficiary we recommend that you lodge the nomination form with the SRO as soon as possible and no later than 31 March 2006 to avoid being issued with a 2006 Land Tax Assessment at the trust surcharge rates.

We are in the process of developing an online land tax calculator to assist trustees of discretionary trusts to determine the financial impact of nominating a beneficiary and whether it is cost effective from a land tax perspective to do so. The calculator will be available from the end of February 2006 on Arnold Bloch’s website.

The following key dates apply to the new land tax surcharge for trusts regime:

31 March 2006: Deadline for lodging notification with the SRO.
30 June 2006 Deadline for lodging nominations with the SRO.

If you intend to nominate a beneficiary or a PPR beneficiary then we recommend that you lodge the nomination forms with the SRO as soon as possible, and by 31 March 2006, to avoid being issued with a 2006 Land Tax Assessment at the trust surcharge rates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.