Trusts that hold real property often miss out on the land tax threshold because they are classified as ‘special trusts’ rather than ‘fixed trusts’ under NSW land tax law.
What is a fixed trust?
A fixed trust is a unit trust that satisfies the fixed trust provisions in section 3A(3B) of the Land Tax Management Act 1956 (NSW) (the Act).
Generally, unit holders in a typical unit trust are not considered the ‘owners’ of land held by the trust because:
- they only hold an interest in the assets of the trust as a whole; and
- they do not have ownership of any specific asset within the trust.
By contrast, in a fixed trust, unit holders have a vested and indefeasible entitlement to income and capital. This distinction allows fixed trusts to be treated differently for land tax purposes.
TD;LR: Only fixed trusts qualify for the land tax threshold in New South Wales.
What are the benefits of having a fixed trust?
The main benefit of a fixed trust is that it is entitled to the land tax threshold.
In comparison, if your trust is not a fixed trust, it will:
- be deemed a special trust;
- not receive the land tax threshold; and
- be taxed at a flat rate of 1.6% of the taxable value of all land owned by the trust, plus $100.
Example
Suppose your trust owns land with a taxable value of $1.2 million.
- If it is a special trust, land tax is $19,300 (1.6% × $1.2m plus $100).
- If it is a fixed trust, only land value above the threshold ($125,000) is taxed, saving you over $17,000 per year.
What are the requirements of a fixed trust?
To qualify as a fixed trust under the Act, the trust deed must satisfy all of the following:
Presently Entitled to Income and Capital
Unit holders must be presently entitled to the income and capital of the trust. These rights cannot be changed or affected by any discretion of the trustee.
Further, each unit holder must be able to redeem units at a time of their choosing, without requiring trustee or other unit holder approval.
In turn, the trustee cannot compulsorily redeem units from a unit holder.
Winding Up Clauses
Unit holders must have the right to require the trustee to wind up the trust and distribute property or proceeds prior to the vesting date.
Classes of Units Issued
There can be only one class of units (usually ordinary or general units).
Further, the deed must not allow new classes of units to be issued or existing ones reclassified.
Finally, all units must carry equal entitlements to income, capital, and give every unit holder a right to vote under the winding up clauses.
Can I restructure my unit trust into a fixed trust?
Yes – many clients contact us after being assessed as a special trust and facing higher land tax bills.
If your unit trust does not meet the fixed trust requirements, we can amend your trust deed so that it complies with section 3A(3B) of the Act and qualifies as a fixed trust for future tax years.
This allows you to access the land tax threshold and reduce your annual land tax liability.
Can I restructure my discretionary trust into a fixed trust?
If you operate a discretionary trust that owns real property, it will automatically be assessed as a special trust, meaning it does not qualify for the land tax threshold.
While it is technically possible to amend the trust deed to convert a discretionary trust into a fixed trust, the Commissioner of Taxation treats such a change as a resettlement of trust – effectively creating a new trust.
When a resettlement occurs:
- The original trust is taken to have ended;
- The assets are taken to be disposed of to the new trust; and
- Capital gains tax and transfer duty are triggered, often outweighing the benefit of any land tax savings.
In practice, converting a discretionary trust to a fixed trust is rarely viable due to these tax consequences.
For asset protection and succession planning, you can instead establish a new fixed unit trust for future property acquisitions.
Our land tax lawyers can explain how trust structures are assessed under land tax law and help you amend or restructure your existing trust deed or prepare a new fixed unit trust deed so you can access the land tax threshold and minimise unnecessary tax liability.
If you’d like to explore related structures, see our page on Business Structures.
You can also visit Revenue NSW – Land Tax and Trusts for official guidance.