Land tax in Victoria is an annual tax imposed on the total taxable value of all land owned in Victoria at midnight on 31 December of the year preceding the year of assessment. Land tax has become an area subjected to vast legislative changes over the last few years. This rate of change has continued, despite the introduction of the Land Tax Act 2005 (LTA), with frequent alterations since it came into operation on 1 January 2006.
The new regime
With limited exceptions, the LTA introduced a land tax surcharge to apply to Victorian land held in trusts (other than excluded trusts).
Excluded trusts include:
- a charitable trust;
- a concessional trust, (a trust created for the benefit of a person(s) with a disability);
- a public unit trust scheme;
- a trust the sole beneficiary of which is a non-profit society, club or association;
- a trust established under a Will;
- a superannuation trust (a complying superannuation fund).
The surcharge is 0.375% and applies to land with an unencumbered value of between $20,000 and $2.7 million. Land valued at more than $2.7 million incurs no land tax surcharge, however ordinary land tax rates will be applied.
Principal place of residence and testamentary trusts
Land owned by a natural person that is used or occupied as their principal place of residence (PPR) is, and continues to remain, exempt from land tax. The PPR exemption also extends to trustees of certain trusts created in a Will (excluding discretionary and unit trusts created by a Will) for 3 years from the date of the testator’s death (unless the Commissioner approves the period be extended). These circumstances include situations of land owned by a trustee of a fixed trust where:
- the property is transferred under a Will to an Executor who occupies the property as their PPR and holds the property on trust for themselves and others under the terms of a Will;
- the property is held by a trustee appointed under a Will on trust for all beneficiaries who reside in the property as their PPR;
- the property under a Will is vested in a trustee on trust for a life tenant who uses the property as their PPR;
- the property is occupied by a natural person who is granted a right to reside under a Will;
- the property is owned by a trustee of a fixed trust to the extent that a beneficiary of the trust occupies the property as their PPR.
- Where more than one beneficiary is specified, and not all the beneficiaries reside at the property, land tax is assessed on proportional basis, providing an exemption to the share of the resident beneficiaries.
- The application of the land tax provisions to testamentary trusts will require careful planning when preparing a Will.
Nomination of PPR beneficiary of discretionary trusts
Where a PPR is owned by a discretionary trust, the provisions are more complex. A trustee of a fixed trust is the only type of trust which may qualify for a complete exemption. A discretionary trust or unit trust scheme which owns a PPR may avoid the surcharge rates (but not ordinary land tax rates). The surcharge rates may be avoided by nominating a beneficiary or unitholder of the trust who occupies the land as their PPR.
- can only nominate a natural person who is a beneficiary or unitholder of the trust;
- may not nominate more than one PPR beneficiary;
- cannot alter the nomination, unless the beneficiary dies.
The trustee will be liable for land tax on the residence at the ordinary land tax rates on a single holding basis as long as the PPR beneficiary continues to occupy the land as their PPR. The beneficiary will not be assessed for land tax.
Nomination may not be appropriate for all trusts and the individual circumstances of a trust must be considered each time to appropriately determine if the nomination is truly beneficial.
Finally, although land that is occupied as a PPR may be exempt from land tax or the land tax surcharge, a trustee should also consider capital gains tax implications as the Income Tax Assessment Act 1997 restricts a PPR ownership to an individual (not a trust).
Without a nomination
|Land Value||Land Tax||Land Tax Surcharge||Total Tax Liability|
With a nomination
|Land Value||Land Tax||Land Tax Surcharge||Total Tax Liability||Total Tax Saved|
Illustrated above is your land tax liability if the land (owned by a trust) has an unencumbered value of $500,000 in 2008.
For further information, please contact a member of our Estate Group on (03) 8600 8885.
Note: This update is a guide only and is not intended to constitute legal advice.