A trust is not a separate legal entity in the same way as an individual or a company, rather it is a relationship which exists whereby a person (Trustee) is compelled to hold property (Trust Property) for the benefit of others (Beneficiaries).
The nature of the relationship and the terms upon which the Trustee holds the Trust Property for the Beneficiaries are usually set out in a deed (Trust Deed) and the terms of the Trust Deed will determine whether the trust is a so called discretionary trust or unit trust. In a unit trust, the initial unitholders will agree to pay an amount for initial units to the Trustee which the Trustee holds as the Trust Property. Those unitholders will then share in the assets of the unit trust in proportion to the number of units held.
A distinction needs to be made between units trusts generally and a special NSW land tax fixed trust. In NSW, land tax is a tax levied on the owners of non-exempted land in NSW as at midnight on 31 December of each year. Trusts that are not special trusts in NSW get the benefit if a land tax threshold currently which for the 2018 land tax year is $629,000. The premium land tax threshold for the 2018 land tax year is $3,846,000.
Land tax is calculated on the combined value of all the taxable land you own above the land tax threshold. The rate of tax is $100 plus 1.6% of the land value between the threshold and the premium rate threshold and 2% thereafter. If land is owned by a trustee of a special trust the land tax threshold does not apply and land tax will be charged at a flat rate of 1.6% of the taxable land value up to the premium threshold and then 2% thereafter.
The benefit of the land tax threshold can result in a land tax saving of up to approximately $10,064 per annum.
A standard unit trust is a special trust and is not entitled to the NSW land tax threshold. A fixed trust is not a special trust. To be a fixed trust it is necessary for the unit trust to satisfy the “relevant criteria”. The term, ‘relevant criteria’ is satisfied if:
(a) the trust deed specifically provides that the beneficiaries of the trust:
(i) are presently entitled to the income of the trust, subject only to payment of proper expenses by and of the trustee relating to the administration of the trust; and
(ii) 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 property.
(b) there must be only one class of units issued; and
(c) the proportion of trust capital to which a unit holder is entitled on a 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.
In addition, the relevant criteria 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.
The consequence of satisfying the relevant criteria however is that all unitholders will become secondary land tax payers and as such will receive assessments for land tax in respect of the land owned by the Trust.
The nature of the unitholders and their respective landholdings will determine whether they will be liable to pay any land tax. For instance, where the land value of the Trust is less than the land tax threshold, all of the unitholders are companies, superannuation funds or individuals who own no taxable land directly then no land tax would be payable by the unitholders. However, where the unitholder is a discretionary trust then the discretionary trust will be liable to land tax without the benefit of the land tax threshold.
Satisfaction of the relevant criteria also results in the unitholders having specific rights which entitle them at any time to demand a redemption of their units at market value. This may be an unwanted consequence if the trust is being used for a purpose other than holding NSW land.
The administrative practice of the NSW Office of State Revenue (OSR) has changed a number of times since the provisions were introduced. If you are seeking a NSW land tax threshold you should regularly review the administrative practice and the terms of your unit trust deed.