In his 2006 State Budget speech delivered on 6 June 2006, the NSW Treasurer announced the following changes to the application of the Land Tax Management Act 1956 ( NSW Act) with respect to the taxation of unit trusts:
Increases in tax rate
A unit trust will be taxed as a special trust if:
Special trusts will be assessed at the rate of 1.7% on the combined taxable value of the land and, importantly, disregarding the land tax threshold of $352,000.
Trust to be taxed at increased rate instead of unit holder
Individual unit holders will no longer be taxed as land owners under the NSW Act if the trust deed:
The High Court decision in CPT and Karingal is summarised below. The Treasurer acknowledged that the decision changed the taxation of commercial unit trusts so that almost all unit trusts would be 'special trusts' and subject to higher rates of land tax.
After the changes, if the trust deed does not confer on unit holders an equitable interest in each trust asset, then they will not be considered to be 'legal owners' for the purposes of NSW land tax legislation. The unit trust will then be assessed as a‚?? special trust'.
To avoid this, the trust deed will need to confer on unit holders something more than the usual equitable interest in all the trust's assets, and no interest in particular asset. To do this, the deed will need to:
'Special trusts' will be assessed at the rate of 1.7% on the combined taxable value of the land disregarding the land tax threshold. (The land tax threshold for the 2006 land tax year is $352,000; for the 2007 land tax year is $356,000.) Individual unit holders in special trusts will not be taxed as land owners under the NSW Land Tax Act.
The NSW 2006 State Budget contains the following statements with respect to concessions and transitional measures available for unit trusts:
Family unit trusts:
Other unit trusts:
The trust deeds in CPT Custodians v Karingal contained specific clauses which prevented the unit holders from being categorised as equitable owners of any specific trust asset. Most unit trust deeds contain a provision to this effect and for good reason - allocating a specific asset or part of a specific asset to each unit holder is problematic. For example, it may lead to a reduction of the trustee's autonomy in dealing with assets, and it affects the flexibility of arrangements by which the unitholding or investment structure changes.
Therefore, it is only possible to work out if it is necessary to alter the deed on a case by case basis and taking into account:
On 28 September 2005, the High Court of Australia handed down an important decision on the taxing of unit trusts under the Land Tax Act 1958 (Vic) ( Victorian Act).
Karingal and CPT were the registered proprietors of land in their capacity as trustees for separate unit trusts. The terms of the trust deeds allowed for:
The Victorian Revenue Commissioner issued assessments on the unit holders (not the trustees) on the basis that their ownership of units in the unit trusts was an interest sufficient to classify them as property owners for collection of land tax. When aggregated with the unit holder's other land holdings, issuing such an assessment leads to a greater overall land tax liability.
After a series of lower court decisions, the High Court had to decide whether the unit holders were either legal or equitable 'owners' of the land for the purposes of the Victorian Act.
The High Court held that, under the trust deeds, the rights of the beneficiaries were not of a kind that made the unit holders "owners" of the trust property within the meaning of the Victorian Act. Therefore, the Commissioner could not levy land tax on the relevant unit holders — only on the trustee.
The decision deemed that unit holders were not the owners of trust land for the purposes of the Victorian Act because:
The decision meant that the Commissioner could no longer aggregate a unit holder's equitable or legal interest in a unit trust with any other equitable or legal interest which the unit holder may have for land tax assessment purposes. Unless, that is, the trust deed confers on unit holders a fixed beneficial interest in the trust's land.
For more information, contact Maddocks on (03) 9288 0555 and ask for Michael Taylor-Sands or Julian Smith.
Julian Smith is a partner in the Maddocks Commercial team.
Julian advises extensively in the following areas:
Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.
Julian has been with Maddocks since undertaking articles in 2001.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.