Tax Tip 172: Land Tax Comparison owning Property in Own name v Trust in NSW

Land Tax Comparison owning Property in Own name v Trust in NSW

Trusts are heavily taxed with land tax in NSW.
A simple example will be enough to talk most out of using a trust to own property in NSW, but legal advice should be sought anyway before deciding ownership structure.


Example
Mr Black owns his main residence in NSW and no other property. He sets up a discretionary trust to own the investment property he is looking at. The property value is $1mil and the land value for land tax purposes is $600,000.

Mr Black seeks legal advice before paying for the property (accountants cannot advise on land tax) and finds out the difference between owning the property in his own name v the trust with land tax.

a) Trust - $9,700 PER YEAR in land tax
b) Own name - $0

If owned by him personally he would be under the threshold so no land tax would be payable (this year anyway).

This is a huge difference isn’t it! The trust might save income tax and provide asset protection benefits, but Mr Black will need to consider whether it is worth paying almost $10,000 per year (and rising) for these benefits.


Does this mean discretionary trusts should not be used to hold property in NSW?

No, not at all.


In the example of Mr Black, if he bought that property in his own name then the next one he would be paying land tax anyway, so getting the next one will result in almost the same land tax being paid. (I say almost because the land tax threshold this year is $629,000 so Mr Black still has some threshold left unused. Also the threshold will change each year – upwards – so things may work out slightly different each year).


Mr Black might also want to consider other ways to structure the ownership so as to minimise or eliminate land tax.

 

Great stuff Terry!

 

Mr Black has a host of options. He could consider a fixed trust with Mr Black holding the units.

If Mr Black's main concern was asset protection he then has a myriad of ways to protect that interest,

 

Asset protection, neg v positive gearing, land tax, duties, main residence exemption, spouse / spouse transfer option, CGT discounts, CGT itself, borrowing issue, access to finance all impact structure.

In NSW a DT is not the first structure that comes to mind due to the nasty impact of land tax. A DT gets no land tax threshold. But a fixed trust doesnt access a additional threshold either. If the human parties have clear NSW land tax thresholds the typical saving can be $10K pa (and the cost may keep rising !). Sometimes a unit trust with a DT holding some of the units is also a Plan B if the land tax is already partly compromised.

Likewise in QLD a fixed trust which has many strategies available doesnt escape the duties impact if beneficial ownership later changes.

 

Now, in 2019, the NSW land tax threshold is $692,000 so this means getting the structure wrong could result in an extra $11,172 in land tax per year.

 

I note the NSW land tax thresholds change each year.? How is the adjustment determined (eg. Each tier is adjusted by CPI each year???).

 

Yes over the past 8-10 years the non-fixed trust "spread" has moved up and up and has more than doubled in my immediate memory. I used to say it was around $5500... Back in 2010. The larger increases in threshold (indexed) means that the tax effect is 1.6% x threshold (+$100) and is also indexed....

Past thresholds and % change and the potential tax differential:
2019 $692K 26.05% $11,172
2017 $549K 27.08% $ 8,884
2015 $432K 6.4% $ 7,012
2013 $406K $ 6,596

The valuer general is responsible for determining the threshold. Report issued this month : http://www.valuergeneral.nsw.gov.au.../Report_on_NSW_Land_Values_at_1_July_2018.pdf

Note this report is on LAND values. Not property values.

Land tax thresholds In September each year the Valuer General determines new land tax and premium rate thresholds for the coming year.

The requirements for the determination of new thresholds are set out in Division 4A of the Land Tax Management Act, 1956. The adjustments to the thresholds are based on the annual movement in the average land values of land within residential, commercial, business and industrial zones in NSW. The rate of change of land values in these zones from 1 July 2017 to 1 July 2018 was determined to be 5.559%.

The land tax threshold for the 2018 land tax year was determined to be $692,000 and the premium rate threshold was determined to be $4,231,000.

The 5.559% change = a 26% change in threshold ??

 

I was reviewing an owner's LT liability this morning (BIG).

The interesting thing to note was not all properties even within the same suburb have increased at the same rate, many stayed relatively stable and some jumped astronomically after having been stable for several years. (Probably not a statistically reliable sample as it was relatively small and restricted to a couple of LGAs).

With the slowdown in the growth of land values happening since mid-2018, it will take a couple of years for the 3 year moving average LV's to stop increasing the way they have in the past.

Will the rate of increase in the LT threshold also start to moderate or even fall depending on the movements in the market?

 

Yeah I reckon some people will see rising tax bills when they see the land values falling. But they had the cushioned effect when values rose. eg two years rising + one year down will be more up than down.

Comparing Vic and NSW offers some interesting differences between the two systems. NSW has indexed threshold where Vic is frozen. NSW has three year avgs where Vic doesnt.

 

as of 2020 the threshold is now $734,000

This could mean a individual or company could own $734,000 worth of land and not pay any land tax whereas if a trustee held the same land with the same value it would be $11,844 per year in land tax.

 

for 2023 the threshold has jumped to $969,000

That means a trust could pay up to $15,504 more land tax per year than an individual or company (not acting as trustee).

 

which state offers the best land tax regime in your opinions for trusts and personal?

 

NT - no land tax there last time I looked

 

The Comonwealth Govt manages Territories and only ACT has a land tax which is actually much like rates.

 

Yes NT however its not place I would invest. I have seen people choose low taxing places or strategies to lessen the burden of land tax and this isnt always wise.
eg Lower cost regional towns.

Each case will vary. And in some cases there may be little choice. eg A former home and the owners choose not to sell it but the rent it out. In some instances this could be exempt for a limited period where there is not rent being earned and in others it wont be exempt but the rent will more than offset the tax.

There is also the ability to pass on land tax for some commercial property so while land tax can be imposed it is not borne by the land owner.

 

You wouldn't want to base where you buy solely on land tax, and I don't know if NT is a great place to invest. In all my years advising I have only had a handful of clients investing in NT

 

no of course not, just curious, thanks