|Practice note number||CPN 003|
|Date issued||19 December 2017|
|Issued by||Cullen Smythe|
Commissioner of State Revenue
|Effective from||31 December 2017|
This Practice Note outlines the type of amendments to a trust deed that are generally accepted for a unit trust to comply with the relevant criteria as defined under section 3A(3B) of the Land Tax Management Act 1956 (LTMA) and receive the benefit of the threshold.
Land tax is an annual tax levied on all land, other than exempt land, owned in New South Wales as at midnight on 31 December of each year.
Land tax is calculated on the combined value of all the land owned above the threshold. However, if land is owned by a trustee of a special trust, the threshold does not apply.
A special trust exists where the Trustee of the trust is the owner of the legal estate in the land and is the only person that meets the definition of ‘owner’ for land tax purposes. The beneficiaries of the trust are not considered to be owners.
Unlike special trusts, fixed trusts get the benefit of the threshold. Generally a trust is a fixed trust if all the beneficiaries of that trust fall within the definition of owner under s.3 of the LTMA having an entitlement in equity to the land for any estate of freehold in possession.
The decision of CPT Custodian Pty Ltd v Commissioner of State Revenue  HCA 53 in September 2005, held that unit holders were not ‘owners’ of the land held by a unit trust where the unit holders only had an interest in the assets of the trust as a whole but are not granted any ownership interest in any particular asset of the unit trust. Where such circumstances apply, a unit trust will not satisfy the ‘fixed trust’ provisions of the LTMA. Section 3A(3A) and section 3A(3B) of the LTMA were introduced to treat unit trusts as fixed trusts provided that the ‘relevant criteria’ are satisfied.
The relevant criteria stipulate that a trust is a fixed trust if:
The Chief Commissioner requires that the trust deed contain a clause that expressly provides that the unit holders of the trust have a present entitlement to the income of the trust.
To avoid doubt, the words ‘presently entitled’ or ‘present entitlement’ should be inserted in reference to the income of the trust along with a further reference that the income is subject only to the payment of proper expenses by the trustee in relation to the administration of that trust. Trusts that contain clauses which allow a trustee to create a general reserve or accumulate undistributed income are still acceptable, provided that a present entitlement is still conferred over the income of the trust towards the unit holders.
The term ‘presently entitled to the capital of the trust’ refers to the right of every unit holder to redeem units at a time of their choosing. The redemption of units should not be subject to a discretion of the trustee and/or the approval of other unit holders (whether by special resolution or otherwise). A trustee cannot have the right to compulsorily redeem units from a unit holder.
To avoid doubt, it is preferable that the words ‘presently entitled’ or ‘present entitlement’ are inserted in reference to the capital of the trust along with a further reference that the unit holders may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property.
A winding up clause must provide the unit holders with the right to wind up the trust.
This right can be included with the ‘presently entitled to capital’ clause, or it can be included so as to form part of the standard winding up clause of the deed. The unit holders should have the option to require the trustee to distribute the trust property or the net proceeds of the trust property. Having a vesting date within the trust deed is acceptable provided that the unit holders still have the ability to wind up the trust prior to that date.
The entitlements listed above cannot be altered or changed or interfered with by any subsequent amendment.
Clauses permitting the trust deed to be amended should expressly exclude the clauses that relate to the entitlements. The entitlements must also not be subject to any discretion, or a failure to exercise any discretion, by the trustee or a unit holder. If the entitlements satisfy the relevant criteria it must continue to do so until such time as the trust is wound up or terminated.
Unit trusts must only have one class of units issued and all units must have equal entitlements to the trust capital and the income of the trust. The trust deed should also not have the power to issue other classes of units or have the power to reclassify existing units. If such clauses exist then the offending clauses should be deleted from the trust deed. Typically the class of units issued will be referred to as ‘general’ or ‘ordinary’ units and must give every unit holder a right to vote under the winding up clauses.
Beneficiaries are presently entitled to income and capital of the trust
These entitlements cannot be removed, restricted or otherwise affected by the exercise of any discretion, or by a failure to exercise and discretion, conferred on a person by the trust deed.
One class of units issued
Income and capital distribution fixed in the same proportion
Relevant criteria satisfied
Beneficiaries deemed to be owners
Trust deemed to be a fixed trust.
The effect of an overriding clause is that it removes the necessity to amend other clauses within the deed which would otherwise be inconsistent with the provisions of the ‘relevant criteria’. It prevails over any other provision of the deed.
In the decision of Sayden Pty Ltd v CCSR  NSWCA, it was held that the phrase ‘notwithstanding any other provisions of this Deed’ means, to the exclusion of any other provision of this Deed or in spite of any other provisions of this Deed.
Mirroring the provisions of the ‘relevant criteria’ prefaced with an overriding phrase is an acceptable approach in amending a unit trust deed that initially failed to satisfy the land tax fixed trust provisions.
If a unit trust is accepted as a fixed trust, the unit holders are equitable owners under s.25 of the LTMA. Unit holders that are special trusts or own other land will be separately assessed for land tax.
These unit holders should lodge a separate land tax return disclosing their interest in the unit trust, along with any other land holdings.