The new Victorian Land Tax legislation for trusts

Legislation imposing surcharge land tax on trusts (other than excluded trusts – see below) that hold property situated in Victoria was passed in November 2005 and came into effect from 1 January 2006. This legislation does not relate to trusts that hold Exempt Land in Victoria (land which is exempt from Land Tax under the existing land Tax provisions).

At Nexia ASR we have made a detailed study of the new land tax legislation relating to trusts and have also developed our unique Land Tax Simplifier calculator to help you with your decision whether to nominate or not as well as how to structure your new property purchase.

Please find below the following matters to assist you:

• Summary of the current situation relating to Victorian property held in trusts
• Excluded Trusts
• Principal Places of Residence
• The Land Tax Rates for 2006
• Notification of Land Held on Trust
• Nomination/notification of beneficiaries
  - Discretionary trusts
  - Unit Trusts
  - Fixed Trusts
• Will every trust that owns property in Victoria nominate a beneficiary / notify a beneficiary?
• What needs to be done whenever a new property is being acquired now or in the future?
• Our Land Tax Simplifier calculator

Summary of the current situation relating to Victorian property held in trusts

1. From 1 January 2006, a higher rate of land tax exists for properties situated in Victoria and held by trusts ( other than Excluded Trusts )

2. All Victorian land holdings acquired by trusts after 1 January 2006 will pay the trust land tax surcharge other than Principal Places of Residence - refer below

3. All trusts that hold land in Victoria at 31 December 2005 must notify the State Revenue Office of all land holdings in Victoria by 31 March 2006

4. All trusts that owned Victorian property holdings property acquired on or before 31 December 2005 have a once only opportunity not to pay the trust land tax surcharge by making a valid nomination of a beneficiary on or before 30 June 2006.

5. All trusts that acquire Victorian property after 1 January 2006 as well as those trusts that owned Victorian property as at 31 December 2006 that do not make a valid nomination of a beneficiary on or before 30 June 2006 will pay the trust surcharge of 0.375% on aggregate holdings of property above $20,000. The surcharge of 0.375% tapers away for trusts with landholdings valued between $1.62m and $2.7m and does not apply to trusts with landholdings above $2.7m.

6. All property situated in Victoria and owned in an entity other than a trust – say in individual names or in a company – will continue to pay land tax at the existing land tax rates without the trust land tax surcharge on aggregate holdings of property above $200,000.

The bottom line is that:

1. it will now be more costly to own land owned by trust as at 31 December 2006 unless a nomination is made by 30 June 2006, and

2. the land tax for a property acquired after 1 January 2006 will be higher if the property is acquired in a trust

Excluded Trusts

The following trusts will qualify as an excluded trust and will not be subject to the trust land tax surcharge and will be assessed at the normal land tax rates:

• A superannuation fund as long as the fund is a qualifying fund
• A trust established by a will
• A trust the sole beneficiary of which is a club or the members of a club
• A charitable trust
• A concessional unit trust
• A wholesale unit trust
• A public unit trust

A trustee of an excluded trust will be assessed on the trust property at the ordinary Land Tax rates.

Principal Places of Residence

If land owned by a discretionary trust or unit trust is used as the Principal Place of Residence by a beneficiary or a unit holder, the trustee may nominate the relevant person as the "Nominated Principal Place of Residence Beneficiary". This is done on the prescribed Nomination of PBR Beneficiary form. If this is done, the trustee will be assessed on the principal place of residence on a single holding basis at normal land tax rates.

Please note that the PBR Beneficiary does not have to be the same person as the Nominated Beneficiary in a Discretionary Trust or the Notified beneficiary in the case of a Unit trust or fixed Trust.

Note that all principal places of residence beneficially owned by individuals are still exempt of land tax.

The Land Tax Rates for 2006

Note 1. Normal land tax rates. These rates will apply to all owners of property situated in Victoria other than discretionary, unit trusts and fixed trusts for the 2006 calendar year. They will also apply to properties acquired on or before 31 December 2005 by discretionary trusts, unit trusts and fixed trusts as long as the trust nominates/notifies a beneficiary on or before 30 June 2006.

Note 2. Special trust land tax rates. These rates will apply to owners of all properties situated in Victoria and acquired on or before 31 December 2005 by discretionary, unit and fixed trusts if they do not nominate a beneficiary on or before 30 June 2006. They will also apply to all land acquired by discretionary trusts on or after 1 January 2006 - no nomination of beneficiaries will be permitted for these properties acquired by a discretionary trust.

Notification of Land Held on Trust

The legislation as passed in November 2005 provided that all trusts, including Excluded Trusts, had to notify the State Revenue Office ( SRO ) of all property situated in Victoria that it owned no later than 31 March 2006 on the prescribed Notification of land held on trust form.

In March 2006 the Commissioner of State Revenue ( CSR ) stated that whilst trustees are required to comply with the 31 March 2006 deadline, there may be exceptional or unforeseen circumstances where it is impossible for notification to be made by 31 March 2006. In those cases, the taxpayers will not lose their right to nominate / notify beneficiaries or unitholders by 30 June 2006.

In addition the CSR has now exempted Excluded Trusts and Trusts that only hold Exempt Land from having to lodge the one-off Notification form. The only obligation these trustees have is to inform the SRO of a change in circumstances which could lead to the exemption ceasing. If this occurs the trustee has until 1 April in the year after the exemption ceases to notify or nominate beneficiaries.

Nomination/notification of beneficiaries

Discretionary trusts
These are the family trusts that are commonly used for business and investment purposes, usually having a corporate trustee.

Discretionary trusts that hold land acquired on or before 31 December 2005 can nominate an individual beneficiary in respect of the land held. If such a nomination is made, the trustee will be taxed at the normal land tax rates and will not be subject to the Trust Land Tax Surcharge applicable to trusts. The nomination must be lodged on or before 30 June 2006 and it is preferable to lodge the nomination by 31 March 2006 to avoid being issued with a 2006 Land Tax Assessment at the trust surcharge rates and having to have the assessment amended.

The nomination is made on the Nomination of Nominated Beneficiary form.

The nominated beneficiary will be taxed at normal land tax rates on the aggregate value of other land owned by the beneficiary in his/her own right as well as the aggregate value of land owned by the trust for which he/she was nominated, but the nominated beneficiary will receive a credit for the land tax payable by the trust. If a nominated beneficiary does not own any other land in Victoria or it only owns exempt land, then the credit will reduce the land tax payable to Nil and the nominated beneficiary will not receive a land tax assessment.

The nominated beneficiary must be:

• a natural person
• an individual 18 years or older on the 31st December 2005
• a potential beneficiary of the trust
  and must evidence their acceptance of the nominations in writing.

It is important to note that care must be made when choosing the person to be the nominated beneficiary as:

• there is no automatic right to change the nominated beneficiary
• the nominated beneficiary can only be changed when the existing nominated beneficiary dies
• in all other cases, the nominate beneficiary can only be changed with the CSR’s discretion

But the nominated beneficiary has the right to revoke their nomination and if this occurs, the trustee will become liable for land tax at the trust surcharge rate in future years.

A discretionary trust cannot nominate a beneficiary for land acquired on or after 1 January 2006 - all land acquired by a discretionary trust on or after 1 January 2006 will be taxed at trust land tax surcharge rates in the hands of the trustee.

Unit Trusts

A unit trust is one in which a beneficiary’s entitlement is determined by their respective unit holding.

The trustee of a Unit Trust which holds land in Victoria on or before 31 December 2005 can elect to notify the SRO of its unit holders and the number of units which each unit holder holds. This notification must be made on or before 30 June 2006.

If a unit trust acquires property in Victoria for the first time after 31 December 2006 it can make the notification no later than 31 December of the year in which the land was acquired.

The notification is made on the prescribed Unit Trust – Notice of Beneficial Interests in Land form.

If such a notification is made, the trustee of the unit trust will be taxed at the normal land tax rates and will not be subject to the Trust Land Tax Surcharge applicable to trusts.

The unit holders who were notified will then aggregate their respective proportion of the land held by the unit trust together with any land held by the unitholder himself / itself, and these will be taxed at normal land tax rates and a credit will be received for the land tax payable by the unit trust in proportion to the unit holder's interest. If a notified unit holder does not own any other land in Victoria or it only owns exempt land, then the credit will reduce the land tax payable to Nil and it will not receive a land tax assessment.

If there is a change in the unitholdings in the unit trust, the trustee must inform the SRO of the new unit holders and the number of units which each unit holder holds within one month of the change.

Also the trustee can withdraw the notification of unit holders at any time after which the trustee will pay the trust land tax surcharge rates. Once a notification has been withdrawn it cannot be reversed.

Fixed Trusts

A fixed trust is one which is not either a discretionary trust or a unit trust but one where the beneficiary’s entitlement is fixed.

The trustee of a Fixed Trust which holds land in Victoria on or before 31 December 2005 can elect to notify the SRO of its beneficiaries and their respective interests in the Victorian landholdings of the trust. This notification must be made on or before 30 June 2006.

If a Fixed Trust acquires property in Victoria for the first time after 31 December 2006 it can make the notification no later than 31 December of the year in which the land was acquired.

The notification is made on the prescribed Fixed Trust - Notice of Beneficial Interests in Land form.

If such a notification is made, the trustee of the unit trust will be taxed at the normal land tax rates and will not be subject to the Trust Land Tax Surcharge applicable to trusts.

The beneficiaries who were notified will then aggregate their respective proportion of the land held by the fixed trust together with any land held by the beneficiary himself / itself, and these will be taxed at normal land tax rates and a credit will be received for the land tax payable by the fixed trust in proportion to the beneficiary’s interest. If a notified beneficiary does not own any other land in Victoria or it only owns exempt land, then the credit will reduce the land tax payable to Nil and it will not receive a land tax assessment.

If there is a change in the beneficial interests in the fixed trust’s property, the trustee must inform the SRO of the change within one month of it occurring.

Also the trustee can withdraw the notification of beneficiaries at any time after which the trustee will pay the trust land tax surcharge rates. Once a notification has been withdrawn it cannot be reversed.

What happens with partnerships of discretionary trusts with non-excluded property?

The land tax treatment for land owned by a partnership of trusts is as follows:

1. Each partner discretionary trust will need to notify the SRO of its proportional interest in the land by 31 March 2006.

2. Each partner discretionary trust will have the opportunity to nominate a beneficiary by 30 June 2006.

3. The partnership will receive a land tax assessment notice on the total value of the land at normal land tax rates. The notice will be addressed to either the nominee company or one of the partner trusts selected by the SRO computer and will state "This notice is issued to you on behalf of ( insert partnership name ) " followed by the names of the partner trusts.

4. Each partner trust will be entitled to a credit in proportion to its ownership interest.

5. If the partner trust does not have any other land, and has made the appropriate beneficiary nomination, no land tax assessment will be issued to the trust as the land tax payable will be Nil.

6. If the partner trust does not have any other land, but does not nominate a beneficiary, it will be assessed on its proportion of the land at surcharge rates and receive a credit for its proportion of the land tax paid by the partnership.

7. If the partner trust has other land and has made the appropriate nomination, it will receive an assessment of its aggregate value of land held as well as a credit for its proportion of the land tax paid by the partnership.

8. If the partner trust has other land and has not made the appropriate nomination, it will receive an assessment of its aggregate value of land held at surcharge rates and receive a credit for its proportion of the land tax paid by the partnership.

Will every trust that holds property in Victoria nominate a beneficiary / notify a beneficiary?

Whilst at first glance it appears that the trust land tax surcharge rates are so onerous that all trusts will nominate / notify a beneficiary, when the numbers are actually calculated, surprisingly it doesn’t always work out to be the most economical solution. Care should therefore be given to “do the numbers” before you nominate / notify using the Prescribed forms.

In this regard, at Nexia ASR we have developed our Land Tax Simplifier calculator which can be used to very quickly determine whether to nominate / notify and who to nominate or notify.

The process is simple and quick – all we need are the details of the properties owned by each trust and beneficiary which are available from the latest Victorian Land Tax Assessment as well as details of any other possible beneficiaries who can be nominated.

But this raises a very important point – whilst a nomination as a beneficiary does not create any entitlement to the property or confer any interest in the property, there may be sound reasons why you may desist from nominating to a seemingly good beneficiary candidate e.g. the beneficiary may someday acquire his/her own property and the nomination may be a hindrance, there may be emotional issues attached. These matters must be raised and considered at the time the nomination / notification is made as it may cause problems at some time in the future.

What needs to be done whenever a new property is being acquired now or in the future?

Victorian Land Tax is a significant impost that attaches to a property for the life of the property holding, in the absence of a change in the legislation to lessen the impact.

Accordingly, whenever you are acquiring a property, we recommend that you speak to your accountant and ask his advice as to the best structure in which to acquire the property taking into account all the relevant issues including estate planning, tax planning – income tax and capital gains tax, asset protection and land tax.

Our new Land Tax Simplifier calculator can assist you in giving you the answer from the land tax perspective – what is the structure that minimizes the land tax.

Our Land Tax Simplifier calculator

At Nexia ASR we have developed our Land Tax Simplifier calculator which can be used to very quickly determine whether to nominate / notify and who to nominate or notify.

The process is simple and quick – all we need are the details of the properties owned by each trust and beneficiary which are available from the latest Victorian Land Tax Assessment as well as details of any other possible beneficiaries who can be nominated.

We believe that this is one of its kind – a unique tool to assist you in giving you the land tax numbers that you will need as part of your consideration as to whether to nominate / notify or in what structure to acquire your new property.

If you want to run your numbers through the Land Tax Simplifier calculator, or have any land tax query whatsoever, please call either Mr Harry Rosenberg on 03 9608 0103 or contact him on hrosenberg@nexiaasr.com.au or Mr John La Rocca on 03 0608 0171 or contact him on jlarocca@nexiaasr.com.au

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