Tax Tip 264: Property in a trust in NSW could cost $11,844 per year extra

In NSW the land tax threshold is currently $734,000 (as of 2020)

This means an individual could hold up to $734,000 in property, with a land value of this amount, and not have to pay any land tax.

However if the property was held by an individual or a company as trustee of a discretionary or unit trust there is no threshold.

This means that the land tax on a property with land valued at $734,000 would be

$100 (1.6% x $734,000) = $11,844


Example

Mr Burns goes out and buys his first 2 investment properties in NSW.
The land value of the 2 properties is currently $734,000 so no land tax is payable.

Homer goes out and sets up a discretionary trust, with himself as trustee, and without legal advice goes and buys 2 properties next to Mr Burn’s 2 properties. The land value is $734,000 combined.

Homer as trustee (and personally) is liable for $11,844 in land tax in 2020 – and this is likely to increase every year.

Does this mean you should not use a trust to hold land in NSW?

Not necessarily.

Once you have used up your land tax threshold there would be the same amount of land tax with a trust as without.

There is also more to consider than land tax when deciding ownership structure.

 

The one I commonly see s trusts where the (NSW) trust is neither a discretionary trust or a fixed trust and it has no threshold. Old style unit trusts. These have a concession which allows amendment to the terms of a fixed trust and strangely I see new clients who havent been told that they have a concession which allows this issue to be repaired BUT it cant be backdated.. After more than 10 years !! (Yes they are far from impressed)

 

Does that apply if the property is held by a Pty Ltd company, which also has it's own threshold? (Ignoring all of the other reasons not to hold property in a company).

Is the threshold lost if the property is held by the trustee of a SMSF?

 

Yes it is not separate for a trustee EXCEPT a SMSF. A trust has a $0 threshold excepting a fixed unit trust. The trust is considered to hold the benefit of the ownership rather that the trustee as legal owner. A SMSF has a threshold too.

A smsf can also lose its threshold if it allow a person who was not a member during the period it was owned to become a new member with any interest in the property. eg Mum and Dad are members and allow their 18 year old son to become a new member. It may be a strategy to have a segregated asset. Since 1.7.17 this can be problematic for the $1.6m transfer cap as segregation may be prohibited.

A member can have multiple SMSFs and access multiple thresholds Subject to caps etc Often not viable to do later due to related party issues and duty

eg ABC Pty Ltd atf The ABC SMSF owns 30%
BCD Pty Ltd atf The BCD SMSF owns 40% and
XYZ Pty Ltd atf for The XYZ SMSF owns 30%
There is no look through for a smsf but is for a unit trust.
A partnership of SMSFs. Each TIC. No loans etc Usually best for non-resi but if acquired at outset with no borrowing can work for resi.

 

A company can gets its own threshold but not if acting as trustee

 

Confused about the above example. Why would a person setup 3 SMSF and have a 30/40/30 split owning one property as TIC? If a SMSF gets a $734,000 land tax threshold does that mean doing it the way above those 3 SMSFs could get 3 times the threshold, in effect holding $2,202,000 worth of land in the above partnership TIC stuctures? (Either a single property or multiple properties)

 

Doesn't have much luck in the marriage stakes (or is in a few polyamorous relationships) and has remarried a couple of times but not wound up the super funds.

 

If the property had a land value of $2m do the land tax calcs. Yes three thresholds.

I once did a paper that suggested this property could have 8 or more potential owners to share the land tax amongst. in NSW to access multiple thresholds.. It depends on the property value. And the extent of super etc and ownership of other property.

1. Dad
2. Mum
3. Dad & Mum as 50/50 TIC or some other basis (harder in some states)
4. Dads SMSF x ??
5. Mums SMSF x ?
6. A company controlled etc by Mum
7. A company controlled by Dad
8. A company without control by either mum or dad.
Note I didnt mention trusts...These erode personal threshold so cant double count or impact a DT

Obviously the cost saving in tax v the structure costs and accounting etc must be considered. Pointless to have quarantined losses may e ??

 

For those 3 SMSF with 3 thresholds, could all 3 controlled by the exact same person? Eg. Homer Pty Ltd ATF Homer Super Fund No.1, Homer Pty Ltd ATF Homer Super Fund No.2 & Homer Pty Ltd ATF Homer Super Fund No.3 with Homer being sole director & shareholder of that company?

How does it work with land tax thresholds if multiple individuals are owning land? Eg. Homer, Marge and adult Bart owns one investment property with land valued at $600k. Their land tax threshold is combined together to also give $2,202,000. Bart goes out and buys another investment property only in his name with land valued at another $600k. How will all of this be treated? How much land tax threshold will each person have left?

 

Yes. SMSF thresholds for land tax are in respect of the SMSF and not the members, trustee company or any beneficial (member) entitlements. That said there is a rule which can limit a change of beneficial rights attached to smsf property. This typically impacts a situation when non-resi property is transferred inspecie to a SMSF (as resi is prohibited) eg a factory building used by Homer and Marge's business. The (NSW) stamp duty concession on this transfer is conditional that the asset rights are restricted to only the former owner/s. A new member, Bart, for example cant benefit from that property. If he is a member at the time of transfer the fund must segregate the asset (if it can)

In the case of Bart he has a threshold. It may be affected by any other property he owns personally. But not necessarily if it is jointly owned with others as a land tax assessment is issued to those people as "the owner". Consideration should be given to advice on the impact of secondary land tax assessment and each respective state land tax law prior to purchase as some states look into each ownership to limit a person to a single threshold.

This is why Terry continally mentions seeking legal structuring advice prior to purchase. An accountant cannot give land tax legal advice.

 

The land threshold has gone up to $969,000 in 2023

Therefore buying in NSW property with land content of just under $969,000 as trustee of a trust could cost you almost $15,504 more than if you bought in a personal name or a company with that being the only property held other than the PPOR perhaps

 

Yes NSW indexation means that the COST of using a trust with no taxfree threshold is rising annually. Of course if the individuals have already blown out personal thresholds etc it may not mean it is a extra cost as it would be same if personally owned.