In a recent Alert we provided information on changes to the imposition of Land Tax to Unit Trusts.
Following the recent High Court decision in CPT Custodians, the NSW Government will now be issuing Land Tax assessments for Unit Trusts on the basis that these trusts constitute ‘Special Trusts’ for Land Tax purposes. This change will come into affect from the 2006 Land Tax year (i.e. land held as at 31 December 2005).
Where a Trust is treated as a ‘Special Trust’ for Land Tax purposes, it will not be eligible to apply the threshold when calculating its Land Tax liability.
In brief, generally all Discretionary (or Family) Trusts have historically been treated as ‘Special Trusts’ as there is no ‘fixed entitlement’ held by any given beneficiary. In contrast, generally all Unit Trusts have not been treated as ‘Special Trusts’ as it was argued the defined unit holding in the trust amounted to a fixed interest.
The practical consequence of not applying the threshold is the trust will pay more Land Tax.
Previously Unit Trusts were taxed like companies for Land Tax purposes and benefited from the tax free threshold, which is $352,000 for land held at 31 December 2005. Any excess in land value above this threshold was taxed at 1.7% of the excess plus $100.
The percentage interest in the land held by each unit holder was then included in the Land Tax return for each unit holder in determining their liability for land tax (referred to as a secondary liability). A proportionate credit for land tax levied at the Unit Trust level was then allowed for each unit holder.
Following the High Court decision referred to earlier, the majority of Unit Trusts will now be taxed as ‘Special Trusts’ for Land Tax purposes. Under the new interpretation of the law, only ‘Fixed Trusts’ will be eligible to apply the threshold. This means that Unit Trusts that are not considered ‘Fixed Trusts’ will no longer receive the benefit of the $352,000 tax free threshold and will pay Land Tax at 1.7% of the value of all land held.
Further, the secondary liability for each unit holder outlined above will no longer apply.
In short, it is likely that your standard Unit Trust deed will no longer comply with the interpretation of a ‘Fixed Trust’. Where there are owners of ‘units’ in a Unit Trust which owns land, such owners are not considered to hold an equitable interest in the assets of the trust. Instead, the unit holders are taken to have an interest in the trust property in general. In essence, a fixed trust is likely to only exist in a ‘bare trust’ arrangement.
In order to avoid having your Unit Trust treated as a ‘Special Trust’ for Land Tax purposes, you may need to have your deed amended. Such amendments may give rise to a ‘resettlement’ of the Trust, which may produce a liability to Stamp Duty & CGT.
By default, the OSR will be issuing 2006 Land Tax Assessments to all Unit Trusts on the basis that they are not ‘Fixed Trusts’. If you consider your Trust deed may meet the definition of a Fixed Trust, you can forward a copy of your deed to the OSR for review.
In light of the High Court’s decision, the NSW Treasurer, Mr Michael Costa, announced as part of the NSW Government’s 2006/7 budget that certain measures would be introduced to allow certain Unit Trusts that have been previously assessed as ‘Fixed Trusts’ to retain their status as ‘Fixed Trusts’ notwithstanding the contents of their Trust deed.
The requirements to obtain the benefit of this concession are as follows:
- 95% of the units in the trust are held by family members;
- the total land value held by the trust is < $1 million; and
- the trust has previously been assessed as a ‘Fixed Trust’ for Land Tax purposes.
Where the above-mentioned conditions are met, the Unit Trust will continue to be taxed as a ‘Fixed Trust’ for Land Tax purposes. In addition, the Trust may be able to seek re-assessment for the 2006 Land Tax year if the Trust has already paid its tax.
In addition to the above-mentioned ‘grandfathering’ of the previous treatment, the NSW Government is also offering taxpayers an opportunity to restructure their affairs to continue to obtain the ‘Fixed Trust’ treatment. In brief, the OSR will allow taxpayers who have previously been treated as ‘Fixed Trusts’ to restructure their holdings without incurring Stamp Duty into a ‘Fixed Trust’ in order to retain access to the threshold.
Further, if the Trust restructures to become a Fixed Trust before 31 December 2007, it will be re-assessed as a Fixed Trust for the 2006 Land Tax year and will be provided with a refund for any Land Tax paid.
Before amending your Trust deed to become a ‘Fixed Trust’, it is important to consider any Federal Tax implications, such as Income Tax and/or CGT. Despite receiving a concession from the State Government on any State Taxes applicable to the restructure, such relief will not be provided for any Federal Taxes.
We have outlined below a ‘decision tree’ diagram below which illustrates the various issues to be considered.
For further information or to discuss your individual circumstances contact Darren Shone, Taxation Associate on 02 49 622 688.
