Unit Trusts & Land Tax Revisited by Paul Anderson | July 2006
In June 2006, the Commissioner of Land Tax made an announcement in relation to the land tax treatment of unit trusts, which was reported in the Turk Alert “Announcement on Unit Trusts and Land Tax” by Paul Anderson. The Commissioner has now announced, in response to various complaints, certain concessions which reduce the impact of his original announcement. However, the concessions are only in the administrative stages and are unlikely to be incorporated into legislation until the spring session of parliament.
Background Following the High Court decision of CPT Custodian v Commissioner of State Revenue on appeal from Victoria, the Commissioner announced that a unit trust was to be treated as a “special trust” rather than a “fixed trust”. The result was to deny a unit trust the standard threshold, which for the 2006 land tax year is $352,000. In the case of a unit trust holding land with a value in excess of $352,000, the effect was to increase its land tax liability by $5,984 for the 2006 year. The comment was made in the previous Turk Alert that the announcement was likely to have its greatest impact on small investors, for example, two families who hold a modest real estate investment structured as a unit trust.
New Announcement The Commissioner has now announced two forms of relief: special rules for family unit trusts; and an opportunity for other unit trusts to restructure.
FAMILY UNIT TRUSTS The Government will revert to the previous tax threshold in respect of a “Family Unit Trust” holding land up to $1,000,000 in value. Although details of the definition of a “Family Unit Trust” will be unknown until the legislation is introduced, a unit trust will qualify if it had previously been assessed as a fixed trust and at least 95% of the units are owned by members of the same family.
RESTRUCTURING OPPORTUNITY The Government will allow all other unit trusts that had previously been taxed as fixed trusts 12 months grace to restructure their holdings. The restructuring transaction will be exempt from state taxes, e.g. stamp duty. In addition, if a unit trust is restructured and becomes a fixed trust before 31 December 2007, it will be reassessed for the 2006 tax year, applying the standard threshold of $352,000. If appropriate, a refund of land tax paid will be made.
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Conclusion Owners of unit trusts will no doubt welcome the announcement. However, it is not yet embodied in legislation and in many cases the devil is in the detail. For example, it is not yet clear how a “family” will be defined. Although the Government has announced an exemption from state taxes on restructuring transactions, this concession clearly does not extend to Federal taxes. Great care will need to be exercised to ensure that the restructuring does not trigger a liability for income tax or capital gains tax.
For More Information Please Contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au
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