29 May Land Tax and Trusts

Australians love bricks and mortar, and a  vast portion of Australia’s wealth consists of property.  At an estimated total value of $10 trillion, it far exceeds the value of the ASX and our annual GDP combined. 

Trusts are a preferred vehicle for many Australians to invest in real property. This is mainly for  asset protection but also for the flexibility it provides in managing taxation liabilities and in estate planning. 

However, one of the disadvantages of holding investment properties in trusts is that most states levy Land Tax on trusts at higher (surcharge) rates.  Victorian property owners in particular have been further hit by a temporary increase in the rates of Land Tax to help fill the hole in the State Government budget caused by the covid pandemic. 

The increase in the Land Tax bills has caused many taxpayers to re-examine their structures and consider strategies to mitigate this problem.  Trusts, in particular, may have these unintended consequences that were not a reality at the time of the initial investment: 

Multiple real properties  

All states charge Land Tax at progressive rates – that is, the higher the consolidated value of the properties held by the landowner, the higher the rate of Land Tax charged.  Many trusts own more than one property in their portfolio, as at the time of investment the cost and complexity of maintaining multiple trusts did not justify the savings in Land Tax.   

However, the significant increase in land values over the years coupled with the increase in Land Tax rates has now resulted in a significant increase in the annual Land Tax liabilities of these trusts. 

Attribution rules 

In certain cases (for example, unit trusts) the Land Tax rules assess the trust structure and then levy Land Tax on both the trust and the beneficiary. 

Further, at the time of introducing the trusts surcharge, the grandfathering rules allowed existing trusts to avoid the higher tax by nominating a natural person as the nominated beneficiary.  If the circumstances of the nominated beneficiary change – for instance, if they moves to an aged care facility and rents out the family home (thus losing the primary residence exemption) – the impact can be severe. 

Australia-wide landholdings 

Recently, Queensland proposed a measure to include all landholdings by an entity throughout Australia for threshold and rates purposes – similar to the levy of Payroll Taxes.  Though this proposal failed, the difficult conditions of most state finances post Covid increase the potential for such measures to be re-introduced at some time in the near future. 

None of the above should eliminate the consideration of trusts as an appropriate structure to hold investment properties; however, they add another dimension of complexity in making the decision.  In some cases, the impact of Land Tax increases has been so severe that investors who currently hold properties are consulting us  at EQ8 and their legal advisors, to design and implement a restructure of their investments.