Trustees of discretionary trusts impacted by the Land Tax Surcharge may have a small window of opportunity to get an exemption and claim a refund on tax already paid. Azlin Lufti explains.
Land tax has been around for a long time but the goalposts are regularly changing due largely to the increasing number of foreign property investors in Australia.
One of the most significant changes for many of our clients is the Surcharge Land Tax by NSW Revenue.
Under changes introduced in 2016, foreign persons pay a surcharge on any NSW residential property they own on 31 December of each year on top of regular land tax.
This surcharge, which is currently 2% of the taxable land value, is designed to moderate demand by foreign property investors.
Unfortunately, an unintended consequence of this change is that many discretionary trusts are disadvantaged because their beneficiaries (or potential beneficiaries) could include foreign residents.
The surcharge is applied if a trust has not explicitly excluded foreigners from receiving distributions.
What can be done?
To avoid getting hit with Surcharge Land Tax, trust deeds can be amended to exclude foreign persons from benefiting from the discretionary trust.
On 22 October 2019, the State Revenue Legislation Further Amendment Bill 2019 NSW (The Bill) was introduced to Parliament proposing to grant trustees of discretionary trusts the chance to avoid Surcharge Land Tax (and Surcharge Purchaser Duty) and get a refund for any surcharge already paid, provided the terms of the discretionary trust are amended before midnight on 31 December 2019.
While the proposed deadline has passed, at the time of writing this article, the Bill still had not.
It is, therefore, possible that the original 31 December 2019 deadline could be pushed out.
Nonetheless, the Bill includes a provision for a six-month extension in some circumstances, potentially giving affected landowners until 30 June 2020 to amended their trust deeds to stipulate that:
- No potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement); and
- The terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who a foreign person (the no amendment requirement).
Recently, one of our clients (see case study) received a letter from NSW Revenue advising her of this new legislation and offering her the opportunity to amend her trust deed to self-certify that foreign persons have been excluded from her trust.
Rather than wait for further clarity, trustees of discretionary trusts which own residential property in NSW should amend their trust deeds immediately and request an extension from the Chief Commissioner of State Revenue to avoid a large land tax bill.
According to the below link this Bill will be retrospective to 21 June 2016 (if the surcharge applies):
It is important to note that the land tax rules vary from state to state so if you think you may be impacted, please seek specialist legal advice from a solicitor.
Case study: A simple amendment saved this client $36,000
In November, one our clients received a letter from NSW Revenue asking her to pay the Surcharge Land Tax, backdated to 2017.
Under current land tax legislation, the client faced an annual surcharge of circa $12,000, or $36,000 in total because the potential beneficiaries of the discretionary trust could be foreign persons. As such, the trust was being treated as a foreign person for land tax purposes.
The client was able to reclaim Australian residency status by amending the trust deed to specifically exclude payments to foreign persons. Upon our advice, she contact the solicitor who established her testamentary trust who amended the deed for a nominal fee.
This saved her $36,000 in Surcharge Land Tax.
What is land tax?
Land tax is an annual tax on all property you own above the land tax threshold, excluding your primary residence and any other exempt property such as farms, boarding houses and childcare centres.
Land tax rates and rules vary from state-to-state and change regularly.
In NSW, the general land tax threshold is $734,000 for the 2020 tax year.
Property owners pay $100 plus 1.6% of land value above the threshold up to the premium land tax threshold of $4,488,000 for 2020.
The thresholds change annually.
In NSW, the value of land is determined by the Valuer General at 1 July each year in line with the Valuation of Land Act 1916.
What is the Surcharge Land Tax?
In addition to regular land tax, foreign residential land owners in NSW, Queensland and the ACT pay a land tax surcharge.
The surcharge rate in NSW and QLD is 2%, calculated on property as at 31 December and 30 June each year respectively. The surcharge rate in the Act is 0.75%.
From 1 July 2020, South Australia plans to introduce a surcharge on land owned in trusts, where the interests of underlying beneficiaries are not disclosed or cannot be identified.
Currently a land tax surcharge is not imposed in Western Australia or Tasmania. It is slightly more complicated in Victoria which has an Absentee Owner Surcharge, a Vacant Residential Land Tax Rate and Special Land Tax Rate.
If you’d like to discuss your tax situation in detail, please contact Azlin Lutfi on 02 9222 1422.