We have seen a number of recent examples of people using unit trusts to invest in property and being caught out with land tax charges where their trusts are not fixed for land tax purposes.
Revenue NSW are picking up more and more of these, through data checking and review of trusts, and will backdate assessments if it picks up on this issue down the track.
If your unit trust holds land and isn’t fixed for land tax purposes, you should check with your accountant ASAP about whether it should be. Note that not all unit trusts should or can be fixed. If your unit trust should be fixed for land tax purposes, you have until 31 December to vary the terms of the trust, to avoid another year of increased land tax liability accruing.
In NSW, land tax is a significant consideration for unit trusts, which are commonly used for property investments. Land tax is calculated based on the total value of the land held by the trust, and can be assessed to pay a higher amount compared to individual landowners in certain circumstances, including where the trust isn’t fixed for land tax purposes when it should have been.
A unit trust is eligible for land tax threshold exemptions if it qualifies as a “fixed trust” under section 3A(2) and sections (3A) and (3B) of the Land Tax Management Act 1956 (Act). If a unit trust does not qualify, it is considered a “special trust” under the Act and will not be entitled to the land tax threshold exemptions. Where a unit trust does not meet the threshold criteria, land tax will be assessed on the whole land value. It’s therefore critical that trustees ensure that the unit trust deed satisfies the relevant criteria to be considered a fixed trust in order to benefit from land tax threshold exemption – or expect what could be a hefty land tax bill.
In recent months, we have helped several clients who have been caught out when they realised their unit trusts were not fixed for land tax. As we were able to correct this well before the land tax due date, we were able to save them from paying thousands of dollars on future land tax bills.
What you need to do next:
- Contact your accountant and check:
- if your unit trust is/should be liable for land tax;
- whether your unit trust is/should be fixed for land tax purposes.
- Contact us as soon as possible if the trust deed needs to be varied to avoid future liability (and start planning for what possible liability you may already have if you haven’t opted in for the land tax registration when you should have).
As there’s considerable work involved in drafting a variation of a unit trust deed to include the land tax provisions, we strongly recommend you take action as soon as possible. Leaving it to December may be too late and any benefits that the trust would have received cannot be backdated after the payment deadline.