Can your client’s SMSF enjoy the land tax threshold?

Land tax is payable by owners of land on the value of all taxable land they own as at midnight on 31 December of each year in NSW. The rate for the 2014 tax year is $100 plus 1.6 per cent of the land value between the threshold ($412,000) and the premium rate threshold ($2,519,000) and 2 per cent of the land value above the premium rate threshold. No land tax is payable on the combined value of land below the threshold.

SMSF and holding trusts

Trustees of superannuation funds fall under the category of ‘owners’ and may be liable to pay land tax on land owned directly by the fund. On the plus side, complying SMSFs are entitled to the zero rate threshold.

As for holding trusts, they are treated as fixed trusts for land tax purposes which means the land tax threshold is also available on properties held by a holding trustee.

It is also worth noting that while both the holding trustee and the SMSF trustee will be considered taxpayers, the SMSF trustee generally pays the land tax assessment of the holding trustee. This payment then results in a credit for the amount of tax paid on behalf of the holding trustee which in turn will be applied against the tax assessment payable by the SMSF trustee.

Trust

For a trust to be able to enjoy the benefit of the land tax threshold it must qualify as a fixed trust as defined in section 3A(3B) of the Land Tax Management Act 1956 (NSW).

If you want to know whether your trust meets the necessary requirements, the first step is to look at the provisions contained in the trust deed and consider whether the following criteria are met:

• the beneficiaries are presently entitled to the income of the trust (subject only to the payment of proper expenses by and of the trustee relating to the administration of the trust);

• the beneficiaries 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 property; and

• the beneficiaries cannot have their income, corpus and winding up entitlements removed, restricted or otherwise affected by the exercise of any discretion or by the failure to exercise any discretion.

In short, the trust needs to be a passive trust whose sole purpose is to hold real estate.

Discretionary and family trust

Because the trustee has a discretion in allocating income and corpus in a discretionary or family trust these types of trusts do not qualify for the land tax threshold.

Unit trust

A unit trust is capable of qualifying for the benefit of the threshold but only if the trust deed is clear on the eligibility factors. The NSW Office of State Revenue has given guidance on how the deed can be amended if necessary.

Michael Hallinan, special counsel, Townsends Business & Corporate Lawyers