Land tax has always been controversial and the latest changes are contentious.
New Act with new lower rates
The Land Tax Act 2005 comes into effect on 1 January 2006 (New Act). The New Act is essentially a rewrite of the 1958 Act, but it also applies new tax rates to Victorian taxable land. The new rates are lower than those that apply under the 1958 Act, so that is very good news.
The New Act and land held in trusts
A surcharge has been introduced to apply to Victorian land held in trusts other than excluded trusts. Unless trustees of discretionary trusts nominate a beneficiary, or trustees of fixed and unit trusts notify the Commissioner of State Revenue as to the identity of beneficiaries/unitholders, from 1 January 2006 land tax will be imposed on the land held in the trust at surcharge rates.
The surcharge is 0.375% and applies to land with an unencumbered value of between $20,000 and $2.7 million.
Nominate/Notify and reduce your Land Tax? ... maybe!
To pay the ordinary rate (and not the higher surcharge rate) the trustee can:
- in the case of discretionary trusts holding land acquired prior to 1 January 2006, nominate an individual beneficiary (Nomination); or
- in the case of fixed and unit trusts, notify the Commissioner for State Revenue of all the beneficiaries or unit holders (Nomination).
Discretionary trusts holding land acquired on or after 1 January 2006 are unable to Nominate in respect of that land. Accordingly, the surcharge rate will always apply to post-31 Dec 05 land held in a discretionary trust.
Aggregation - the sting?
It would seem from the above that except in the case of land acquired by a discretionary trust on or after 1 January 2006, a trustee can simply Notify or Nominate and ordinary tax rates will apply to land held by a trust. This is true, but there is a catch.
The new regime will see an end to the ability of persons to disaggregate under the regime in the 1958 Act. That regime allowed the owner of several pieces of land to take advantage of marginal land tax rates on each piece of land by having a different trust with a different trustee own each property.
Under the new scheme, where the trustee Nominates or Notifies the Commissioner and the Nominated/Notified person owns other land either directly or though other trusts, each of those properties will be taxed on the basis of the aggregated value, not as separate parcels. Accordingly, notwithstanding that land tax is paid at ordinary rates, in certain circumstances aggregation can offset the benefit of the lower ordinary rates.
Should you Nominate/Notify?
The question of Nomination/Notification is not as simple as Treasury has otherwise claimed. Aggregation can offset the benefit of lower ordinary rates that will apply at the beneficiary level, particularly in respect of land with an unencumbered value close to $1.62 million. It is therefore paramount that trustees crunch the numbers in an effort to clarify the best course of action in their individual circumstances. It would be dangerous for a trustee to assume that Nomination/Notification will always lead to a lower total land tax cost.
Nomination/Notification is not appropriate for all trusts. The individual circumstances of a trust must be considered, together with the land holding profile of individual beneficiaries, to properly determine if Nomination/Notification is truly beneficial. In certain circumstances aggregation of land holdings at the individual beneficiary level will mean that Nomination/Notification at the trust level is not the best course of action.
Discretionary trusts that hold Victorian land acquired after 31 December 2005 are unable to Nominate. Accordingly, the surcharge rate will always apply to post-31 Dec 05 land held in a discretionary trust.