A fixed trust receives the benefit of the land tax threshold and minimises the land tax payable on the property held by the trust. However, not all trusts are fixed trusts.
So what is a fixed trust and how can it save you from paying land tax?
What is a fixed trust?
A fixed trust is a unit trust that satisfies the ‘fixed trust’ provisions of the Land Tax Management Act 1956 (NSW).
Generally, unit holders in a unit trust are not ‘owners’ of the land held by a unit trust as they only have an interest in the assets of the trust as a whole and do not have an ownership interest in any particular asset of the unit trust.
This differs to fixed unit trusts in which the unit holders fall within the definition of ‘owner’ under section 3 of the Land Tax Management Act 1956 (NSW) and have an equitable entitlement to the land held by the trust.
What is the benefit of having a fixed trust?
In New South Wales, the land tax threshold is not available to discretionary trusts and unit trusts that are not fixed unit trusts. These trusts are known as ‘special trusts’ which are taxed at a flat rate of 1.6% of the taxable value of the properties which they hold as they are not entitled to the land tax threshold.
However, the land tax threshold is available for units trusts which satisfy the ‘fixed trust’ provisions set out in the Land Tax Management Act 1956 (NSW).
What are the requirements of a fixed trust?
To qualify as a fixed trust, the trust deed must satisfy the following:
- the trust deed must specifically provide that the unit holders of the trust are presently entitled to the income and capital of the trust and such entitlements 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;
- every unit holder must be entitled to redeem units at a time of their choosing and such redemption cannot be subject to a discretion of the trustee and/or the approval of other unit holders;
- the trustee cannot have the right to compulsorily redeem units from a unit holder;
- the unit holders must have a right to require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property;
- the unit holders must have a right to require the trustee to wind up the trust prior to the vesting date;
- there can only be one class of units issued (typically ‘general’ or ‘ordinary’ units);
- there cannot be a power to issue other classes of units or reclassify existing units; and
- all units must have equal entitlements to the income and capital of the trust and give every unit holder a right to vote under the winding up clauses.
Can I restructure my unit trust into a fixed trust?
Quite often we are engaged by taxpayers who have received a land tax assessment notice for their unit trust as it does not meet the relevant criteria of a fixed trust.
If you operate a unit trust which owns real property and have received a land tax assessment notice, your unit trust has most likely been assessed by the Chief Commissioner as a ‘special trust’ which is not entitled to the land tax threshold.
We can ensure your trust receives the benefit of the land tax threshold for future tax years by restructuring your trust deed so that it satisfies the ‘fixed trust’ provisions set out in the Land Tax Management Act 1956 (NSW).
However, it is important to note that the land tax threshold will only apply from the next land tax year.
Are unit holders also liable for land tax?
If the trust is accepted as a fixed trust, the unit holders are taken to be equitable owners of the land under section 25 of the Land Tax Management Act 1956 (NSW). This means that the unit holder:
- are treated as secondary taxpayers;
- assessed for land tax as if they were legal owners of the land;
- will also be required to pay land tax; and
- may be entitled to a secondary deduction to prevent double taxation.
Moreover, if the unit holder holds an interest in other taxable land, it will be assessed on the combined value of their interest in the land held in the trust as well as any other taxable land they own.
It is for this reason that unit holders should also lodge a separate land tax return disclosing their interest in the unit trust as well as any other land which they have an interest in.
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