Part 2: Land held on Trust
Land tax and trusts
In this Part 2 in our series of articles on land tax we examine the special land tax rules that apply to land held in trusts under the Land Tax Act 2005 (Vic) (LTA).
Land tax trust surcharge
The fundamental difference for the purposes of land tax is the potential application of a land tax surcharge that is assessed to trustees of land held under trusts.
The trust surcharge rate is higher than the general rate of land tax and applies when the total value of taxable land held by the trust is more than $25,000 but less than $3,000,000.
When the total value of taxable land held by the trust is more than $3,000,000, there is no difference between the general and surcharge rates of land tax.
How the surcharge applies and whether exemptions or concessions apply vary depending on what type of trust holds the land and whether beneficiaries can and are nominated. These conditions are discussed in further detail.
Trustee notification requirements
A trustee must under section 46K of the LTA lodge with the Commissioner a written notice within one month after becoming trustee of the land.
Similarly, a trustee who disposes of any land that is subject to the trust must lodge a written notice with the Commissioner within one month after disposing of the land.
Failure to lodge a notice with the Commissioner under section 46K constitutes a notification default under the Taxation Administration Act 1997 (Vic), resulting in a liability to penalty tax and interest.
The State Revenue Office (SRO) has an ongoing compliance program in relation to the notification of trusts as acquirers of land. This program is bolstered by the data matching and data sharing with other authorities, such as the ATO. It is therefore important that trust landowners check their land tax notices to ensure they are correctly assessed in the name of the trust. If they are not, landowners should consider making a voluntary disclosure to the SRO as a voluntary disclosure is more likely to receive a waiver or reduction of penalties and interest.
Notification of beneficiaries and unit holders
In addition to the obligation to notify the SRO that a trust has acquired land, there are a number of options for voluntarily notifying the SRO of the beneficiaries or unit holders of the relevant trust. These are considered below.
Unit and Discretionary Trusts – Nomination of PPR beneficiary
While there are is a full principal place of residence (PPR) land tax exemption for certain trusts (as discussed in a later article), there is also a PPR land tax concession for certain unit trusts and discretionary trusts. Under section 46A of the LTA, the trust surcharge rate does not apply for unit and discretionary trusts where a unit holder/beneficiary uses the land as their PPR provided the following requirements are met:
A unitholder or beneficiary has been nominated to the SRO, in the approved form, as the nominated beneficiary PPR beneficiary;
The land in question must be used and occupied as the principal place of residence of the nominated PPR beneficiary; and
The land is not used to carry on a substantial business activity.
If the requirements under section 46A are satisfied, then land tax applies at the general rate (ie no trust surcharge applies). In addition, the land tax is assessed on a single holding basis (ie it is not aggregated with other land holdings of the unit trust or discretionary trust).
Fixed trusts – Notice of beneficial interests
Section 46B of the LTA provides that a trustee of a fixed trust may lodge a written notice of the beneficial interests in land held by the trust. The notification takes effect for the tax year following when the notice is lodged and remains in force until it is withdrawn by the trustee.
If such a notice is in force under section 46B, the trust does not trigger the trust surcharge. That is, the trust pays land tax on the land at general rates.
The nominated beneficiary will then be also be deemed to hold the land in the same proportion as the beneficiaries’ interest in the trust. What this means in practice for the beneficiary is that the beneficiary’s interest in the trust’s land will be aggregated with the beneficiary’s other land holdings if (any) and the beneficiary will pay land tax on the total aggregated interests. However, the beneficiary will receive a credit for the land tax paid by the trustee of the trust on the beneficiary’s interest.
Example
As an example of how this operates, let’s say in the 2021 year we have a fixed trust that holds $1 million of land and two beneficiaries Alice and Ben who each have a 50% interest in the trust. Alice also has land worth $600,000 while Ben has no personal landholdings.
If the trust notifies the SRO of the beneficiaries, then it will be assessed with land tax at general rates of $2,975. Alice and Ben will be deemed to hold 50% of the trust’s land. As Ben has no personal landholdings, he will not receive a personal land tax assessment.
Alice will be deemed to hold trust land worth $500,000 on top of her personal landholdings of $600,000. She will therefore be assessed on $1.1 million of land with land tax of $3,775 but will receive a credit of $1,487.50 for half of the trust’s land tax assessment.
Therefore, under the notification option, a total amount of land tax paid across the group is $5,262.50.
Alternatively, if a trust notification was not made, then the trust would trigger the trust surcharge and the land tax assessment to the trust would be $6,438. Ben would not receive an assessment and Alice will receive an assessment only relating to her $600,000 land (ie $975).
Under the non-notification option, the total land tax paid across the group is $7,413.
If the trustee of the fixed trust does not notify the SRO of its beneficiaries, then the trust surcharge will apply (if applicable) to the fixed trust’s landholdings.
Unit trusts – Notice of beneficial interests
Similarly, under section 46C of the LTA, a trustee of a unit trust scheme may lodge a written notice of the unit holdings held in the scheme. The notification takes effect for the tax year following when the notice is lodged and remains in force until it is withdrawn by the trustee.
If such a notice is in force under section 46C, a unitholder is deemed to be the owner of the land subject to the trust and is assessed at the general rate for land tax on the land, including any other taxable land owned by the unitholder.
The deeming rules that apply to fixed trusts that nominate apply in a similar way for unit trusts.
Again, if the trustee of the unit trust does not notify the SRO of its unit holders, then the trust surcharge will apply (if applicable) to the unit trust’s landholdings.
Withdrawing and changing notifications of beneficial interests
A trustee of a fixed trust or a unit trust may withdraw a notice of beneficial interests or unitholdings and if they do so the fixed trust or unit trust will trigger the trust surcharge (if applicable) and the beneficiaries/unitholders will cease to be deemed to hold the land of the fixed/unit trust. Once withdrawn, a notice of beneficial interest or unitholdings cannot not be remade.
A trustee of a fixed trust or a unit trust in respect of which a notice is in force respectively under section 46B or 46C of the LTA, must lodge a written notice with the Commissioner within one month after any change to the beneficial interests or unitholdings in the trust (section 46K). Similarly, if a nomination lodged under section 46H of the LTA is in force and the nominated PPR beneficiary for the land ceases to use and occupy his or her PPR, the trustee of the land must lodge a written notice with the Commissioner within one month of the beneficiary ceasing to use or occupy the land as a PPR (section 46K).
Failure to lodge a notice with the Commissioner in respect of a change in beneficial interests and unitholdings, or a beneficiary ceasing to occupy land as a PPR constitutes a notification default under section 46K of the Act, resulting in a potential liability to penalty tax and interest.
Pre-2006 discretionary trust – Nomination of beneficiary
Unlike fixed trusts and unit trusts, the trustees of discretionary trusts cannot nominate a beneficiary for trust surcharge purposes.
However, there are grandfathered provisions for nominations made in relation to land held by a discretionary trust if the trust property includes any pre-2006 land to which a nomination was made under the 2006 transitional rules. Once made, the nomination has the effect that the trustee will not trigger the trust surcharge and the beneficiary (in addition to the trustee) will be deemed to hold the land for land tax purposes.
While nominations must have originally been made pre 30 June 2006, they can still be made under any of the following three select circumstances:
Liability to land tax first arises on land subject to the trust (eg. previously exempt agricultural land becomes re-zoned, or where the total value of land held by the trust exceeds the trust threshold of $25,000); or
The nominated beneficiary revokes the nomination; or
The nominated beneficiary dies.
A post 30 June 2006 nomination may only be made, if the Commissioner considers it to be just and reasonable, to either:
A beneficiary who is aged 18+ who accepts the nomination in writing; or
The trustee of the discretionary trust if all of the beneficiaries are aged less than 18 at the date of the nomination.
Questions
If you have any questions about how land tax should apply in your circumstance, please contact our specialist team:
Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163
E: pbroderick@sladen.com.au