How to access the land tax threshold in a trust

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If you operate a trust that holds real property, you may not receive the benefit of the land tax threshold. This is due to your trust being classified a ‘special trust’ instead of a ‘fixed trust’.

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. This is due to the fact that:

  • unit holders only have an interest in the assets of the trust as a whole;
  • unit holders do not have an ownership interest in any particular assets of the trust.

This differs to fixed trusts where the unit holders have an equitable entitlement to the land held by the trust.

What is the benefit of having a fixed trust?

The benefit of having a fixed trust is that it will be entitled to the land tax threshold.

In the alternative, where a trust does not satisfy the ‘fixed trust’ provisions, it will:

  • be deemed a ‘special trust’; and
  • not be entitled to the land tax threshold;
  • taxed at a flat rate of 1.6% of the taxable value of the properties held by the trust.

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?

We are often engaged by clients who are paying a high amount of land tax as their unit trust does not meet the relevant criteria of a fixed trust.

If your trust has been assessed as a ‘special trust’, it will not be 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.

Can I restructure my discretionary trust into a fixed trust?

Another common query we receive from clients is whether they can restructure their discretionary trust into a fixed trust.

If you operate a discretionary trust which owns real property, it will have been assessed as a ‘special trust’ which is not entitled to the land tax threshold.

While it is possible to amend the trust deed to convert it from a discretionary trust to a fixed trust, the Commissioner of Taxation considers such amendment as an act which constitutes resettlement of the trust (which is when a new trust is created out of an old trust).

Where a trust resettlement is triggered:

  • the original trust is taken to have ended;
  • the original trust’s assets are taken to be disposed to the new trust;
  • a number of taxation consequences occur (such as capital gains tax, transfer duty); and
  • the capital gains tax and transfer duty payable will outweigh the land tax.

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How we can help

  • Advise you on whether your trust is a fixed trust or special trust

  • Respond to a land tax assessment that’s classified your trust as a special trust

  • Convert your unit trust to a fixed trust so you get the land tax threshold

  • Help you calculate the accurate amount of land tax you need to pay

  • Establish a fixed unit trust for future property acquisitions