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Purchasing property with Fixed Unit Trust - Land Tax Issues

Many investors hold property via a trust for asset protection purposes. One such trust is a fixed unit trust. A fixed unit trust has many other advantages including a land tax threshold.

Land Tax on Trusts

A trust is an arrangement where a trustee manage or hold a property for the benefit of one or more individuals or organisations (known as a beneficiary). The trustees have a duty to the beneficiaries, who are the ‘beneficial’ owners of the trust property.

• - You are considered to be the owner of the interest in the trust if you are a beneficiary or a unit holder in a fixed or family unit trust.
• - When calculating your land tax liability, you need to take into consideration the value of your interest in the account.

A trust may be liable for land tax. You may be able to reduce the amount you pay by claiming the land tax threshold, depending on the type of trust.

How is Land Tax Calculated

Land tax is calculated on the total value of all your taxable land above the land tax threshold.

The threshold for the land value changes each year and is applied as follows.

• - General threshold: $100 plus 1.6% of land value above the threshold, up to the premium threshold.
• - Premium threshold: 2% of land value above the threshold.
• - The threshold is published by the valuer general in October each year and applied to land holdings on 31 December each year.
• - Land tax is applied for the full year following the taxing date of 31 December and no pro-rata calculation applies.

Special Trusts Vs Fixed Trusts

Special trusts do not receive the land tax threshold. They are taxed at a flat rate of 1.6 per cent for amounts up to the premium land tax threshold and then at 2 per cent.

A special trust is when a trustee is the only person who meets the definition of an owner for land tax purposes and beneficiaries are not. A special trust must meet one of the following trust definitions as per Section 3A of the Land Tax Management Act , 1956.

• - most family trusts
• - discretionary trusts
• - most unit trusts and
• - some trusts created by a will.

Fixed trusts are eligible for the land tax threshold

A fixed trust is where the beneficiaries or unit holders are considered owners of the land as at the taxing date. This is because they are presently entitled to the income and capital of the trust and these entitlements cannot be varied by the trustee in any way. Fixed trusts include some unit trusts and bare trusts (Fixed trust has the meanings given by Section 3A (2) and Sections (3A) and (3B) of the Land Tax Management Act, 1956.

To qualify as a fixed trust, the trust deed must satisfy the following ‘relevant criteria’:

• - the unit holders are presently entitled to all the income of the trust, after payment of the proper expenses incurred by the trustee in authorised administration of the trust
• - the unit holders are presently entitled to the capital of the trust and may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust
• - these entitlements cannot be removed, restricted or otherwise affected by the exercise of any discretion or by a failure to exercise any discretion, conferred on a person by the trust deed
• - for unit trusts only one class of units can be issued, and the proportion of trust capital a unit holder is entitled to on winding up or surrender of units must be fixed and must be the same as the proportion of income of the trust to which the unit holder is entitled.

Restructuring a unit trust

Unit trusts that do not meet the relevant criteria and are special trusts are able to restructure their trust deed to be considered a fixed trust for future tax years.

Before purchasing any property via a trust or to make sure your fixed unit trust deed meet the requirements of a fixed unit trust, we recommend that you get your trust deed vetted by your solicitor who will be able to determine that your deed needs an amendment or not.

Since legislation change frequently, it is highly recommended that you send a copy of the Fixed Unit trust deed of the office of state revenue for assessment before embarking any purchase of property, especially if the deed has been purchased from an online portal without the letter of compliance from the portal

Before you amend a trust deed, we always recommend seeking professional financial and legal advice.

Liability of unit holders in a fixed trust

If a trust satisfies the relevant criteria the persons who are beneficiaries of the trust under the trust deed are taken to be owners of an equitable estate in the land.

Under section 25 of the Land Tax Management Act 1956, owners of an equitable estate or interest in land are liable in respect of land tax as if they were legal owners of the land. Owners of an equitable estate in land are treated as secondary taxpayers.

Therefore a unit holder’s interest in the unit trust, who owns other taxable land, or is a special trust, are assessed on the combined value of their interest of the land held in the trust and any other taxable land owned. They may be entitled to a secondary deduction to prevent double taxation. All fixed unit trusts must provide details of the unit holders.

How the land tax threshold affects the beneficiaries or unit holders as secondary taxpayers

If a beneficiary or a unit holder owns other taxable land, or is a special trust, they are assessed on the combined value of their interest of the land held in the trust and any other taxable land owned. They may be entitled to a secondary deduction to prevent double taxation.

Lodging Returns by Unit Holders

If a unit trust is accepted as a fixed trust, the unit holders are equitable owners under s.25 of the LTMA. Unit holders that are special trusts or own other land will be separately assessed for land tax.

These unit holders should lodge a separate land tax return disclosing their interest in the unit trust, along with any other land holdings.

Amendment Service for $660

If you have purchased a Fixed Unit trust deed from us before 1st December 2009 and purchased a property via the trust or If you own land via a Fixed Unit Trust and you are not sure if your trust deed will comply to the LTMA requirements, for a fee of $660 we will get our solicitors to vet your Fixed Unit Trust Deed and our solicitors will amend your trust deed to ensure that the trust deed has the clauses to be considered as a Fixed Unit Trust deed by office of state revenue.