Tax Tip 266: Land tax on NSW inherited main residence held by a Testamentary Trust

A great strategy is to leave assets to a TDT – Testamentary Discretionary Trust.

Under NSW land tax law a beneficiary under a Testamentary Discretionary Trust can obtain a land tax exemption on land inherited by the trustee of that trust if there is a right of occupancy created by the will of the deceased.

Example

Homer and Marge die in a skydiving accident.

They leave their main residence to the trustee of a testamentary Discretionary Trust. Their only surviving son Bart moves into the house as his main residence. Bart is just one of many potential beneficiaries of the trust. Will there be land tax?


Under NSW law there is no land tax free threshold for land held in discretionary trusts like this, even if they are testamentary trusts. There is a concession though for the 2 years following the death. So, the land would be exempt from land tax for 2 years following the death of the parents.


However, if the will gave Bart a right to occupy the premises, under the will, he will be considered the owner for land tax purposes while he resides in the property. This is even the case where the trustee is a company.


If the land value was $500,000 the land tax would be approx. $8,100 per year under a discretionary trust. But with the right to occupy it becomes nil.

In summary, where the deceased leaves the property to the trustee of a testamentary trust under their will and where this will gives a person the right to reside in that property the land will be treated as if that person owns it for land tax purposes.

strategy - include a right to reside when drafting your will

Clause 10 of Schedule 1A of the Land Tax Management Act 1956 (NSW).
LAND TAX MANAGEMENT ACT 1956 - SCHEDULE 1A

 

Is the right to occupy the same as a life tenancy? If not, which is usually better for Bart?

Does this have any extra protection for Bart under family law? Eg. lets say Bart and Sherri get in a relationship together and get married, either before or after (not sure if it makes a difference?) Homer & Marge's main residence passing to the trustee of a testamentary Discretionary Trust & Bart's right to occupy. Five years later they divorce without any kids. Does the family law courts treat this asset any differently?

 

Does this require Bart to be over 18? What if he is a minor and is taken care of by grandpa simpson?

 

Bart and his custodian guardian must all occupy the same property if he is not 18. This may pose issues if they own property of course. There is also the two year estate rule and each exemption must be applied for so the facts may vary and advice needed to then apply

 

A right to occupy is different to a life tenancy. It is a personal right that is of no value to anyone else. A life tenant generally gets the right to income from renting it out.

Yes potentially dffierent out come in family law too, depending on the circumstances.

 

If Bart is given a life tenancy instead of a right to occupy then a few years later moves out and the property is rented, the trustee of the Testamentary Discretionary Trust must only distribute the rental income to Bart? They don't have the discretion to distribute it to Lisa, Maggie or Bart's wife or Bart's kids?

 

It would depend on the terms of the will. Generally a life tenant gets the income I think.

Giving up a life tenancy is also a CGT event - I think they call it surrendering a life tenancy.