Land tax: discretionary and hybrid trusts
Business Succession Update – Spring 2013
Property held in a discretionary trust does not get the land tax-free threshold of $406,000. Why not just amend the discretionary trust or hybrid trust to form a unit trust to avoid the definition of “special trust” and therefore become entitled to the land tax-free threshold? Firstly, you will need to look at OSR Ruling DUT 17. In doing so, take into account s 3B of the Land Tax Management Act which requires amongst other things, that the unit holders must be: “(ii) … presently entitled to the capital of the trust and may require the trustee to wind up the trust and distribute the trust property or the net proceeds of the trust property” to them.
Then look at s 140-75 ITAA 97 which provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust) as against the trustee.
Do the words “except a unit trust” in s 104-75 prevent ad valorem duty being paid? Arguably they do not, in circumstances where a trust only becomes a unit trust after the variation. The only way to be sure is to obtain a private ruling from the Tax Office.
Even if CGT event E5 does not apply, the cost of base of the units in the unit trust will be nil because the market value substitution rule does not apply where the acquisition results from another entity doing something that did not constitute a CGT event happening – s 112-20. So, no CGT event E5 means no cost base. Problems, problems. The solution? Get the structure right to start with!