Losing Out on Land Tax Threshold

A businessman with a family discretionary trust also had a block of land on the coast and plans to redevelop it.

He inherited the property, worth about $1.5 million, from his parents and it had been in his name for some years.

He also held a share portfolio in his family discretionary trust and decided to transfer the property into the trust before adding value by building a new holiday home. What he hadn’t taken into account was this would increase his land tax bill.

The businessman was familiar with the process. The land value of the property was the same as the previous year – about $1.25 million. He calculated land tax at $13,808 – $1.25 million minus the $387,000 land tax threshold ($863,000) multiplied by 1.6 per cent (the land tax rate).

However, the land tax threshold doesn’t apply to special trusts and, in essence, most trusts are special trusts, except those that jump through the hoops of the definition of ‘fixed trust’ under the Land Tax Management Act. To be a fixed trust, beneficiaries must be presently entitled to the income and capital under entrenched provisions.

This is the opposite to a family discretionary trust where beneficiaries only become entitled to income at the end of each year and often don’t become entitled to the capital until the trust ends.

Unfortunately, just because the property is owned by the family trust, land tax will be an extra $6,192 each year.

Contact Anne Brown for more information on Family Trusts.

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