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Understand the different types of trusts, their eligibility for the NSW land tax threshold and their potential liability for surcharge land tax.
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What is a trust?
A trust is an arrangement where a trustee manages or holds a property for the benefit of one or more individuals or organisations (known as a beneficiary).
The trustee has a duty to the beneficiaries, who are the beneficial owners of the trust property.
You are considered to be the owner of the interest in the trust if you are a beneficiary or unit holder in a fixed or family unit trust.
A trust may be liable for land tax. When calculating your land tax liability, you must consider the value of your interest in the account.
You may be able to reduce the amount you pay by claiming the land tax threshold, depending on the type of trust.
However, some trust types are not eligible to receive the land tax threshold. This means some owners may pay land tax even if their land value is below the threshold, such as special trusts.
Find out if your trust type is eligible for the land tax threshold below.
The trustee of a discretionary trust is considered a foreign person if:
any beneficiary is an individual not ordinarily resident in Australia, or
it is a foreign corporation or a foreign government.
A trustee will be liable to pay surcharge land tax unless the trust satisfies the following criteria:
No beneficiary or potential beneficiary of the trust is a foreign person, and
The terms of the trust must not be capable of amendment that would result in a foreign person being a potential beneficiary.
If the above criteria are not satisfied, surcharge land tax must be paid, even if you do not intend to distribute income and/or capital to the foreign persons who are beneficiaries of the discretionary trust.
It is irrelevant that a trustee may not exercise discretion to distribute income and/or capital to a foreign person.
For a discretionary trust, each beneficiary or potential beneficiary to whom the trustee has discretion to distribute the income or property is deemed to have the maximum percentage interest in the income or property that the trustee may exercise discretion to distribute to them.
Setting up or amending a trust to exclude foreign beneficiaries for surcharge land tax
Discretionary and special trusts should be set up or amended to prevent named and potential beneficiaries that are foreign persons from receiving distributions as to income and/or capital of the trust.
Should the trust deed contain named beneficiaries who are foreign persons, such beneficiaries must be removed from the trust deed as beneficiaries.
Trust deeds that do not remove or exclude named beneficiaries will be liable to surcharge purchaser duty and/or surcharge land tax.
It is not sufficient that named beneficiaries are merely prevented from receiving distributions, such as through a general clause excluding foreign persons from being beneficiaries.
Any amendments to the trust deed must also be irrevocable.
A fixed trust is eligible for the land tax threshold. Generally, foreign person beneficiaries of a fixed trust are individually liable for any surcharge liability, not the trust/trustee.
A fixed trust is where the beneficiaries or unit holders are considered owners of the land as at the taxing date because they are presently entitled to the income and capital of the trust, and these entitlements cannot be varied by the trustee in any way.
A fixed trust includes some unit trusts and bare trusts. Fixed trust has the meanings given by section 3A(2) and sections (3A) and (3B) of the Land Tax Management Act 1956.
To qualify as a fixed trust, the trust deed must satisfy the following:
the beneficiaries or unit holders are presently entitled to all the income of the trust, after payment of the proper expenses incurred by the trustee in authorised administration of the trust
the beneficiaries or unit holders are presently entitled to the capital of the trust and may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust
the 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
for unit trusts, only one class of units can be issued, and the proportion of trust capital a unit holder is entitled to on winding up or surrender of units must be fixed, and must be the same as the proportion of income of the trust to which the unit holder is entitled.
In cases where the trustee and the beneficiaries of a fixed trust (along with any other joint owners) are all natural persons, a principal place of residence exemption can be applied provided that the beneficiaries meet all relevant eligibility requirements.
A unit trust that does not meet the relevant criteria and is a special or discretionary trust, can restructure its trust deed so it is considered a fixed trust for future tax years.
To ensure amended deeds meet the requirements, you will need to lodge a return via Land Tax Online and upload the following documents:
a draft copy of the amended deed trust, and
a full copy of the original trust deed, if you have not already given it to us.
If a trust satisfies the relevant criteria, the beneficiaries of the trust are taken to be owners of an equitable estate in the land and are liable for land tax and any surcharge land tax, as if they were legal owners of the land. They are treated as secondary taxpayers as per section 25 of the Land Tax Management Act 1956.
Therefore, a unit holder’s interest in the unit trust, which owns other taxable land, or is a special trust, is assessed on the combined value of their interest in the land held in the trust, and any other taxable land owned. They may be entitled to a secondary deduction to prevent double taxation.
All fixed unit trusts must provide details of the unit holders.
A unit trust may be a special trust, a fixed trust or a family unit trust.
To be a fixed trust, certain criteria apply. If they do not apply, the trustee can restructure the trust deed to meet the criteria, but the threshold will only apply from the next tax year.
A trustee must lodge a land tax return, if the land is subject to a trust. A copy of the trust deed should be lodged with the return.
If a beneficiary or a unit holder owns other taxable land, or is a special trust, they are assessed on the combined value of their interest of the land held in the trust and any other taxable land owned. They may be entitled to a secondary deduction to prevent double taxation.
However, a testamentary discretionary trust becomes a special trust two years after the date of the testator’s death, or a further period as approved by the Chief Commissioner of State Revenue.
If a person holds units as trustee – e.g. as trustee of a complying superannuation trust - and the members of the trust are all members of the same family group, the units will be regarded as being owned by members of the same family group for the purposes of determining whether the 95% test is satisfied.
If the trust acquires additional land after midnight 31 December 2005 that makes the combined taxable land over $1 million, the trust will be assessed as a special trust for the tax year following the purchase.
The unit holders are entitled to a fixed proportion of any distribution of income or capital of the trust made by the trustee, based on the proportion of income or capital units that each person owned in the trust.
If any new units are issued, redeemed or cancelled, the trust will continue to be assessed as a fixed trust, provided the proportion of units owned by members of the same family group remains at least 95%. If the trust does not meet this requirement, it will become liable as a “special trust” for the following land tax year.
