Land tax criteria for unit trusts in NSW

I recently spoke with a customer on the Cleardocs helpdesk on the topic of the Cleardocs fixed Unit Trust and liability of the trustee to pay land tax in NSW.

Their query centred on whether the deed took into account the additional criteria introduced in 2014, but concerned other areas too.

Does the deed take into account all relevant criteria?

Yes. Your Cleardocs Unit Trust can be a fixed trust for NSW land tax purposes.

Cleardocs customers who have set up a unit trust and selected that it should be a 'fixed trust' for the purposes of NSW land tax receive a deed which takes into account all the relevant criteria to attract the tax free threshold under the law ^[1].

...Including the 2014 criteria?

Yes. The Cleardocs unit trust deed satisfies the criteria as it does not allow the trustee to issue more than one class of units and the proportional entitlements of unit holders to capital and income are fixed according to the units held.

Can an existing deed be amended to satisfy the criteria for later years of land tax assessment?

Yes. Unit trusts which were not established to satisfy the criteria of a fixed trust and wish to hold land in NSW should have their trust deeds reviewed and amended if necessary in order to benefit from the tax free threshold.

Trustees need to think carefully about the other consequences of amending a deed which already owns assets (including the risk of resettlement, and any negative stamp duty and GCT consequences).

What about the references to seeking a private ruling?

In all cases you should consider applying for a private ruling from the Commissioner concerning a unit trust, for the following reasons:

• if you do not obtain a ruling that the trust is a fixed unit trust, it is possible that the Commissioner, at some time in the future, may consider that a unit trust is not a fixed trust and levy land tax at the higher surcharged rate that applies to non-fixed trusts; and
• the Commissioner's policy in relation to fixed unit trusts is based on a number of factors, including on cases that are decided from time to time. The Commissioner can change the policy at any time and trusts that were previously considered to be fixed trusts can be assessed as being non-fixed trusts and ineligible for the lower threshold land tax rate.

To assist you the Cleardocs fixed unit trust document package includes a pre-forma letter applying for such a private ruling.

So, remind me, what is the issue relating to unit trusts and NSW land tax?

The unitholders of a unit trust which holds property in NSW will be entitled to a tax free threshold if the trust is defined under the Land Tax Management Act 1956 (NSW) (Act) as a fixed trust. Trusts which do not meet the definition of a fixed trust will be considered a special trust and will not be entitled to the tax free threshold.

If a trust can satisfy the tax free threshold, then $482,000 of the value of the trust's property is disregarded for the assessment of land tax. The amount of tax then paid is $100 and 1.6 per cent of the land value between the threshold and the premium rate threshold ($2,947,000) and 2 per cent thereafter.

Prior to 2014, to be considered a fixed trust the criteria required that the unit trust's beneficiaries be presently entitled to:

• the income of the trust, subject only to the trustee paying proper expenses; and
• the capital of the trust, and be entitled to require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property.

What were the additional criteria introduced by the 2014 amendments?

On 20 May 2014 amendments to the Act introduced additional criteria a unit trust must satisfy before it will be considered a fixed trust and attract the tax free threshold.

The additional unit trust criteria are:

• there must be only one class of units issued; and
• 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.

Why should you be careful about establishing a unit trust as a fixed trust for land tax purposes? What does the criteria mean for the trust deed and administration of the trust?

In practice, the Commissioner considers that for the trustee of a unit trust to comply with the criteria, the trustee must not be able to:

• refuse a unit holder's request to redeem the unit holder's units;
• refuse to register a transfer of a unit holder's units; and
• accumulate any income of the trust without the unit holders' prior consent or agreement.

The criteria removes a number of the usual discretions provided to trustees under a typical fixed unit trust. These restrictions can have important ramifications for trustees, for instance:

• removing the trustee's discretion to refuse to redeem a unit holder's units can increase the risk that the trustee will have to raise funds by borrowing or liquidating trust assets;
• removing the trustee's discretion to refuse a transfer means the interests of non-transferring unit holders, who may not want to associate with the person to whom the transferring unit holder is selling their units, are no longer protected; and
• the requirement to obtain the consent of all unit holders increases the administrative burden upon trustees.

More information from Maddocks

For more information, contact Maddocks on (03) 6258 3555 and ask to speak to a member of the Tax and Revenue or General Commercial teams.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of trust matters.

Order Cleardocs trust packages

• Unit Trust - fixed
• Unit Trust - non-fixed
• Discretionary (Family) Trust
• Hybrid Trust
• Service Agreement
• Change of Trustee Discretionary Trust
• Change of Trustee Unit Trust