Land Tax on Discretionary Trust

Discussion in 'Accounting & Tax' started by Fluid36, 1st Feb, 2017.

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  1. Fluid36

    Fluid36 Well-Known Member

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    Hi All,

    I rather foolishly bought my first investment property in NSW under a discretionary trust structure with a corporate trustee without understanding the land tax implications and now it looks like I will have an annual land tax burden of around $3500.

    I have not registered for land tax yet but am planning on registering before the March 1st cutoff ( the most recent 31 Dec was the first day of that date that I owned the property).

    I have a couple of questions for the experts here that I would really appreciate help with:

    1) Is it possible to amend my trust to the degree where it can become a bare trust or unit trust that is eligible for the land tax threshold in NSW and therefore being able to avoid land tax going forward? If not can I possibly transfer ownership to a beneficiary or trustee without incurring huge costs?

    2) How does the office of state revenue track who owns which properties? For the context of this question I mean in regards to who is over the threshold for individual owners and for trusts how many properties the trust actually owns bearing in mind most trust do not get a threshold). They would need this information to determine how much land tax is payable.

    3) Do the office of state revenue only get this information if you register for land tax or do they / can they routinely monitor the ownership of properties and update records when change of ownership occurs (send out land tax invoices when this happens).

    4) Without an individual or trust / company registering how would the office of state revenue know if the property is an investment or a PPR?

    5) In the situation when someone owns properties over the threshold (whether it be an individual or a trust / company) and land tax has been payable but there has never been a registration for land tax I have heard it mentioned that it may get picked up at settlement and land tax will be payable for previous years. How would the office of state revenue flag this property as having land tax payable without knowing the specific situation of the property (PPR or investment) and / or the other properties owned by the individual?

    6) I have talked to multiple people with investment properties and none of them have registered for land tax, some were not even aware that this was necessary. Of these people I have talked to the majority are over the threshold and three of them own multiple properties in discretionary trusts which obviously puts them well over. The funny this is that all of them have sold properties from their trusts and never been caught out when settling on land tax owing.

    Thanks and apologies for all the questions, I'm basically just looking for a solution here and realise it's my mistake that I'm in this situation.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    1. Yes, but many consequences

    2. Land titles and notice of sale done at settlement

    3. They can monitor

    4. It wouldn’t necessarily know

    5. A land tax clearance certificate is needed at settlement. But if a person hasn’t registered it may fly under the radar. I once did a settlement where there was 10 years of land tax owing – and the owner could not deduct this



    Don’t forget, a trust is not an entity but a relationship so outsiders will not know there is a trust
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Amending the trust deed is part of the problem and is costly. The law firm that settled the discretionary deed should know how to approach this issue. Who advised you ? Thats a major defect in advice if you obtained it. With that in mind perhaps its possible that the trust wasnt settled correctly and legal advice may be that there isnt a trust !! If so a company may own the property and access a threshold - Thats a hard issue to argue if there is a loan to the trustee sometimes.

    The amendment can only be done in the present day and backdating isnt permitted or legal. It is wise to submit a copy of the proposed deed of amendment to OSR for a ruling before proceeding to determine if they will be satisfied the trust would become a fixed unit trust on execution. And just making the trust a fixed trust may not work anyhow. The unitholders are subject to the final threshold so if individuals have blown threshold a unit trust doesnt help.

    OSR have many ways to detect issues. Are you aware that GST is actually a tax collected by the Commonwealth to benefit the states and its in the states interest to share data on property with the ATO as part of the tax sharing deal and the ATO also share some non-taxpayer specific information with the states. The ATO are presently building a significant property database and OSR also have one that is shared with LPI NSW and other agencies incl power, water and councils.

    I dont agree with the view "none of them have been caught". The correct view is "yet". All property must obtain a land tax clearance certificate. Only fraud could possibly avoid that concern eg advising OSR that there is no trust and that a company owns the land for example. OSR can recover unpaid tax due to fraud even after a land tax clearance is given. And ALL land is subject to land tax if its owned by a disc trust - No threshold. All disc trusts that own land are required by law to be registered by 31March of the year following acquisition.

    The owner of land who is not registered is exposed to the 90% penalty OSR can impose plus interest. I have seen many people come to me over the years with that problem - some at the point of being forced to sell to clear a massive debt and frankly not much can be done. As Terry said they cant even claim a deduction after the event. One of the limited options is to seek remission or beg for clemency

    Interest and penalty tax | Office of State Revenue
     
  4. Fluid36

    Fluid36 Well-Known Member

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    Hi Paul, thanks for the reply, I'm not sure what you mean by the above and am a bit confused by your response, maybe I was unclear with my questions, I have not done anything wrong and still have two months to register for land tax as I have just bought the property.

    The discretionary trust has been setup with a corporate trustee and there are no setup issues as far as I am aware, why do you think there are issues with my trust? I don't think I gave this impression.

    I am simply looking for potential measures or actions to restructure if possible to avoid land tax in the future and plan on paying this years land tax as required.

    Kind Regards
     
  5. Fluid36

    Fluid36 Well-Known Member

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    Thanks for the reply Terry, when you say that the Trust is not an entity but a relationship so outsiders will not know there is a trust what exactly do you mean? Would the OSR title show the company as the owner or the company as trustee for the trust as owner?

    Also, when you did the settlement with 10 years land tax owing did the seller have to pay this or was it not picked up due to non registration?

    Thanks
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I mean exactly that.

    If I am a trustee and I buy a property my name goes on title. A trust is a relationship where I own property for others.

    The OSR will only see the title of the property and only know it is the company that is the owner.

    Yes land tax had to be paid or I would not settle - think it was about $70k from memory.

    If you are thinking of not registering and telling OSR about the trust this would be fraud and a breach of several laws.
     
  7. Fluid36

    Fluid36 Well-Known Member

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    Thanks again for your feedback Terry, I am not thinking about avoiding registering for land tax at all and have no intention of breaking any rules, I am a stickler for the rules myself.

    I am just interested in how the process works, to be fair I would never have even known that land tax was a requirement without doing my own research on the topic and could quite easily never have registered due to ignorance. I'm sure this is the case in a lot of situations.

    I am still confused as to how the system works, if all of these trusts with individual and corporate trustees have not registered for land tax then how would the non payment of land tax be picked up as it was in the case of your client?

    Is it a requirement to register for land tax for all owners of property regardless of whether they are under the threshold or not?

    Thanks
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    At settlement the purchase would require a land tax clearance certificate. This would show any land tax arrears that the OSR knows about.

    Some would possibly slip through the net though
     
  9. Fluid36

    Fluid36 Well-Known Member

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    Thanks Terry,

    The system seems hopeless, registrations is an optional process and little is known about it. There must be thousands of properties under titles to individuals and companies and the OCR has no idea that there is a trust involved. When a land tax tax clearance certificate is applied for it would show no land tax owing as this may well be the only property owned by that entity and therefore under the threshold.

    A poor system that needs improving.
     
  10. Fluid36

    Fluid36 Well-Known Member

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    Apart from the above I was wondering what my options are going forward, ie what would others do in regards to ownership structure to minimise costs?

    Thanks
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not much you can do now without incurring large costs.

    Who advised you on this?
     
  12. Fluid36

    Fluid36 Well-Known Member

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    Hi Terry, I set the trust up myself and the corporate trustee, I then simply bought the property with the trust. I did no understand the land tax issues at the time I'm afraid.

    I would be happy to fork out money now to fix the structure if it saved me money in the long run and was cost affective, that's why i'm looking for advice and would appreciate any help to be pointed in the right direction.

    Cheers
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    seek legal advice. DIY trust are often poorly set up and not transacted properly. I haven't seen a well set up one yet. (but only those with problems come to be I guess!)
     
  14. Fluid36

    Fluid36 Well-Known Member

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    Thanks Terry, so you think the current situation of paying land tax is unsustainable and I should look to change this situation through seeking legal advice?

    Any particular advice on who to see?
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Nope, I didn't say that.
     
  16. Fluid36

    Fluid36 Well-Known Member

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    I'm sorry, let me rephrase that Terry. What would you do if you were in my situation?

    Thanks again.
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Probably look at the costs to change it. Then consider the benefits and disadvantages of doing so.
     
  18. Fluid36

    Fluid36 Well-Known Member

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    Thanks Terry, just to clarify, do you mean changing the trust deed so it is no longer liable for land tax?

    Cheers
     
  19. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It could be, but that would depend. It would cause a resettlement and I believe this would trigger stamp duty and CGT - CGT may be nil.

    Then you have to consider the other flow on effects such as asset protection, deductibility of interest etc.

    By not getting advice you saved yourself some money but cost yourself a fortune!
     
  20. Fluid36

    Fluid36 Well-Known Member

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    Thanks again - yes I am aware that it was not planned correctly but that's in the past and I'm looking to the future, the only expense I'm not happy with is the land tax and that's what I'll look into.

    Interest deductibility is not really an issue for me as losses are quarantined within the trust and can't be offset against personal income as you know, I don't see how this would be affected anyway. Asset protection should be ok with changes.

    Anyway, what you are saying is that you are unaware of any options without triggering a capital gains and stamp duty event which is what I'm looking for unfortunately, dam this is a pickle.