Update Unit Trust for NSW land for foreigners to pay lower land tax
Why vary Unit Trust for NSW land? This reduces land tax payable on NSW land. Build this Deed of Variation to update your Unit Trust for NSW land tax. The Variation complies with Section 3A Land Tax Management Act 1956 (NSW). The NSW Office of State Revenue has reviewed the Variation to ensure its compliance. Upon signing the Deed of Variation your Unit Trust is then treated as a ‘fixed trust’ – thus reducing land tax.
Failure to have a section 3A ‘fixed trust’ means that you pay extra land tax.
Concessional land tax in New South Wales
In most States, there is an automatic threshold before land tax is payable for land held in Unit Trusts. In NSW, there is no tax-free threshold for taxable land in a Unit Trust unless it is a ‘fixed trust’. If your Unit Trust is a ‘usual’ Unit Trust then you pay land tax on every dollar of your NSW land.
If you own land in NSW that is in a ‘fixed trust’ complying with section 3A, you only pay tax on the amount over the threshold. For example, if you have a $300,000 property in your Unit Trust then in all States you don’t pay land tax because it is under the threshold. However, in NSW, you do pay land tax on a $300,000 property – if you are in a Unit Trust. However, if you are in a section 3A ‘fixed’ Unit Trust then this property is under the NSW threshold for land tax, no land tax is payable.
Example of why you need to vary Unit Trust for NSW land
If the threshold is, say, $400,000 and your property is worth $500,000 then you should only pay land tax on $100,000 – that is the case in a ‘fixed’ unit trust. In contrast, if your trust is not ‘fixed’ you pay land tax on the full amount – $500,000. You missed out on the threshold.
How is this fixed unit trust different from a normal unit trust? To make your unit trust a ‘fixed trust’, we rectify a number of things including but not limited to the following:
- Normally, unit trusts have ‘par units’. Par units give discretion to the trustee in distributing trust income and capital. In this trust, we have removed par units to ensure compliance with sections 3A and 3A(3B) Land Tax Management Act 1956 (NSW) –this section does not permit trustee discretion
- The unit trust deed has been fettered, including all discretions, to make it a fixed ‘fixed trust’, so that at all times it complies with sections 3A and 3A(3B)
- Any unit issued by the Trust must be the same class and of equal value. The proportion of trust Capital to which a unitholder is entitled upon the winding-up of the unit trust must be fixed and in proportion to the net income of the trust to which the unitholder is entitled
- The trustee has no power to reclassify units
- The unitholders are presently entitled to the income of the Trust
- The unitholders are presently entitled to the Capital of the Trust
- Unitholder entitlements cannot be affected by the trustee’s discretion
- The trustee must comply with a unit holder’s request to repurchase units
Unit Trust variation template has been checked by Revenue NSW
As to the template document of which your Deed of Variation is based, Revenue NSW advises:
The draft Deed of Variation appears to effectively introduce the “relevant criteria” to satisfy the NSW “fixed trust” provisions contained under Sect 3A (3B) of the Land Tax Management Act 1956. Provided that the Original Unit Trust deed and Unit holder register, together with the fully executed Variation of Unit Trust deed is presented in the format as per your draft variation deed attached, those Unit Trust deeds should then be accepted as “fixed trusts” for NSW land tax purposes for the land tax year immediately following the date the amending deed is fully signed and executed by all relevant parties.
Nb. This advice may not apply to an existing “hybrid” unit trust. A Hybrid Unit Trust can amend its trust deed to become a fixed trust. If different classes of units have issued they must be cancelled and subsequently the trust must contain only one class of units being “ordinary” units. Details of the holders of the “ordinary” units must be provided. The trust is a special trust until the cancellation of the different classes of units and execution of the amending deed. The amending deed must satisfy the provisions of the relevant criteria.
Does a Family Trust holding units in the fixed Unit Trust also get the exemption?
The NSW fixed Unit Trust you are building complies with the NSW land tax rules. However, there is a second test. Each Unit Holder must also pass the test of being ‘fixed’. It is possible for a Unit Holder to fail the test as to the Units they hold.
There are two tests: one for the Unit Trust itself, and another test for the Unit Holder.
For example, while the Unit Trust is fixed and complies with the NSW land tax rules, any Unit Holder that is a Family Trust fails the test. A Family Trust by its very nature cannot be ‘fixed’.
For a Unit Holder to gain the benefit of the ‘fixed’ Unit Trust, then the Unit Holder must itself be ‘fixed’:
1. Humans and companies generally pass the test of being ‘fixed’ if they hold the Units in the Unit Trust for themselves.
2. Also, a human or company holding the units as a ‘bare trust’ generally complies. (‘Bare trusts’ by their nature are generally sufficiently fixed for the NSW Office of State Revenue. But email the bare trust for us to check, just to make sure.)
3. However, a Family Trust holding units in the fixed Unit Trust fails the test. So a human as trustee for a Family Trust fails the test. And similarly, a company holding the Units as trustee of a Family Trust fails the test.
Have a look at the Sample document and there are training videos and hints to help you as you build the document.
For more legal advice telephone us. We are a law firm. We can help you answer the questions.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
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