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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.
Setting up or amending a discretionary trust to exclude foreign beneficiaries for surcharge land tax
The trustee of a discretionary trust may be liable for foreign surcharges if any one of the named beneficiaries or potential beneficiaries is a foreign person.
To avoid surcharge land tax discretionary trusts must be set up or amended to prevent beneficiaries 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.
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.
The trust will be liable for surcharge land tax on any residential land held even if the trust does not intend to distribute income and/or capital to the foreign persons who are beneficiaries of the discretionary trust.
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.
A trustee will be considered foreign and liable to pay surcharge land tax on any residential land held unless the trust satisfies both of the following criteria:
No beneficiary or potential beneficiary of the trust is a foreign person (the "no foreign beneficiary requirement"), and
The terms of the trust must not be capable of amendment that would result in a foreign person being a potential beneficiary (the "no amendment requirement").
If both of the above criteria are not satisfied the trustee will be considered foreign.
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
Where a trust is a unit trust it must also:
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.
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.
Generally, foreign person beneficiaries of a fixed trust are individually liable for any surcharge liability, not the trust/trustee.
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 (PPR) can be applied provided that the beneficiaries resides in the property and all relevant eligibility requirements the PPR exemption are met.
Before you amend a trust deed, you should consider seeking professional advice as any amendment may change the way your trust is considered for other circumstances.
To ensure amended deeds meet the requirements, you will need to lodge a return via Land Tax Online and upload the following documents:
an executed copy of the amended deed trust, and
an executed full copy of the original trust deed, if you have not already given it to us.
a copy of the unit holder register showing the unit holdings as at the date of the amending deed.
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 may be liable for land tax and any surcharge land tax (if applicable), as if they were legal owners of the land.
Therefore, a beneficiaries/unit holder’s interest in the 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 trusts must provide details of the beneficiaries/unit holders.
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.
If a superannuation trust is not a complying or pooled trust, it is a special trust and will not receive the benefit of the land tax threshold.
Trusts created by a will
A fixed testamentary trust created by a will receives the land tax threshold.
A discretionary testamentary trust created by a will may receive the land tax threshold for a period of 2 years from the date of death of the testator.
After this period the trust will be considered a special trust. Special trusts do not receive the land tax threshold.
A concessional testamentary trust created by a will is considered a fixed trust and will receive the land tax threshold while all the beneficiaries are minors (children under 18 years). The terms of the trust will determine what happens when the eldest beneficiary turns 18.
A family unit trust is classified as a fixed trust when:
land was held at midnight on 31 December 2005 with a taxable value of $1 million or less
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.
95% more of the units are owned by the same family group.
Note: 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.
A family group consists of:
people who are related to each other by blood, as well as adopted children and their spouses
the ultimate beneficiary, if any of the units are owned by a trustee - this excludes discretionary trusts.
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.
Note: 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.
