A submission from: the Law Institute of Victoria, the Tax Institute of Australia and the Property Council of Australia.

Transcription

1 page 1 To: The Commissioner of State Revenue Land Tax Trusts Consultation Joint A submission from: the Law Institute of Victoria, the Tax Institute of Australia and the Property Council of Australia. Date: 23 November 2004 Queries regarding this submission should be directed to: Mick Giddings C/-Natalina Velardi nvelardi@liv.asn.au on behalf of the Law Institute of Victoria and Taxation Institute of Australia and Geoff Mann Blake Dawson Waldron Geoff.mann@bdw.com On behalf of the Property Council of Australia In Conjunction with: Law Institute of Victoria (LIV) and Property Council of Australia (PCA) and the Taxation Institute of Australia (TIA) No part of this submission may be reproduced for any purpose without the prior permission of the LIV, PCA or TIA. ww.liv.asn.au

2 page 2 This is a joint submission on behalf of the Law Institute of Victoria, the Tax Institute of Australia and the Property Council of Australia. You have requested comments on possible reforms to the way in which the land tax regime applies to trusts. In setting out our comments, we have taken into consideration the following principles for reform: (c) (d) (e) (f) any reforms should be revenue neutral; there should be no penalty simply for using a trust as opposed to any other form of collective investment vehicle (eg company, partnership, unincorporated joint venture); the presence of a trust structure should not be presumed to indicate a tax avoidance or reduction purpose; appropriate transitional measures would be required, including an amnesty period to allow people to make relevant and appropriate arrangements for their land tax affairs without penalty as a result of the introduction of a new land tax trust regime; appropriate transitional stamp duty relief would be required to allow for the reorganisation of land holdings (akin to the relief provided in New South Wales, for example, by section 99 of the Duties Act 1999 (NSW)); and any changes should not have the effect of penalising the professional trustee/custodian and managed fund industries. Ultimately, we would like to see the abolition of land tax and in the interim a lower competitive flat rate of land tax. We would appreciate the opportunity to meet with you to discuss our proposals further. These submissions are not necessarily intended to represent the final form of legislation to be enacted. 1. SUMMARY The proposal that we put forward involves the following: (c) repeal of sections 51 and 52 of the Land Tax Act 1958 (Vic) (Act); if the trustee of a Special Trust does not elect to nominate beneficiaries, the imposition of land tax at a flat rate equal to the top marginal rate of land tax (but limited to 3% until 2009) on trustees (ie holders of legal title to land) of Special Trusts. This new regime would include transitional capping of increases in notional liability to 20% pa; if the trustee of a Special Trust nominates a beneficiary or beneficiaries in respect of a specified proportion of the unimproved value of land held on trust then land tax liability is

3 page 3 (d) (e) calculated as if the beneficiary is the owner of the nominated proportion of unimproved value; for non-special Trusts, the land tax treatment would depend upon whether the relevant trust is a "public unit trust" (Public Unit Trust), "wholesale unit trust" (Wholesale Unit Trust) or an "excluded trust", ie other non-special Trusts (Excluded Trust). That is: (i) (ii) for Public Unit Trusts and Wholesale Unit Trusts, the trustee would be liable for land tax at marginal rates capped at 1.75% (reducing in line with reductions in the top marginal rate). This is a compromise rate, reflecting that land tax is passed down by trustees to be borne by unitholders; and for Excluded Trusts, to the extent that they are not otherwise exempt from land tax, the trustee would be liable for land tax at marginal rates, with the benefit of the incremental reductions being phased in by This proposal is summarised in the flowchart set out in Annexure A. Appendix B provides a number of examples of land ownership structures and the proposed land tax outcomes. 2. SPECIAL TRUSTS Under the proposal, sections 51 and 52 of the Act would be repealed and new provisions would be introduced by which a flat rate of land tax would be imposed on the trustee or trustees (ie holders of legal title to land) of those trusts defined as "special trusts" (Special Trusts). As a general proposition, land tax would be imposed on the legal owner of land (and not on the beneficial owner). 2.1 What is a Special Trust? Our proposal would utilise the following definition of a Special Trust: "special trust" means any trust other than: a Public Unit Trust; or an Excluded Trust. 3. PUBLIC UNIT TRUST 3.1 What is a Public Unit Trust? We consider that unit trusts held by the public should be excluded from the Special Trust regime. The basis for this is that public unit trusts provide a genuine collective investment

4 page 4 vehicle, often used by small investors (eg "Mum and Dad" investors) and superannuation funds, through which the investment of relatively small sums of money can be made and the significant benefits flowing from economies of scale can be achieved. Public unit trusts permit funds provided by a large number of small investors to be aggregated allowing for diversified investments which would otherwise be unavailable. Penalising public unit trusts by imposing a relatively high rate of land tax would have a significant effect on the margins available to public unit trusts which would effectively eliminate, or would at least significantly reduce, the returns to small investors. This is because the high rate is passed directly on to unitholders regardless of the value of their landholdings. On this basis, public unit trusts should be specifically excluded from the Special Trust regime. In our proposal, the definition of "Public Unit Trust" would draw on the existing definition used in the Duties Act 2000 (Vic), with appropriate amendments. Our proposed definition is as follows: "public unit trust" means any of the following unit trust schemes a) a listed trust; b) a widely held trust; c) a registered imminent public unit trust scheme; d) a registered declared public unit trust scheme; e) a wholesale unit trust; f) a unit trust scheme all of the units in which are, directly or indirectly, held by one or more unit trust scheme described in paragraph,, (c), (d) or (e). Suggested definitions of "listed trust", "widely held trust", "registered imminent public unit trust scheme", "registered declared public unit trust scheme" and "wholesale unit trust" could also be taken from the Duties Act (with appropriate amendment to reflect the land tax regime). We suggest that for land tax purposes it would be appropriate to make a number of changes to these definitions. For example, given the nature of a public unit trust scheme, for land tax purposes, we consider that it would be sufficient to require 50 unit holders. We submit that a trust with 50 unit holders is unlikely to have been established with a collateral purpose of achieving a "disaggregation" for land tax purposes. For the purposes of establishing who are the unit holders (and determining whether there are sufficient unit holders to meet spread the test), we propose that relevant interests could be "traced" through to the holders of the ultimate beneficial interest. Our suggested definitions are as follows: "listed trust" means a unit trust scheme in which units are listed for quotation on the Australian Stock Exchange or any exchange of the World Federation of Exchanges.

5 page 5 "registered declared public unit trust scheme" means a unit trust scheme that satisfies the requirements for registration by the Commissioner as a public unit trust scheme in accordance with the provisions contained in Division 7 of Part 2 of Chapter 3 of the Duties Act 2000 (Vic) or which is declared as such. "registered imminent public unit trust scheme" means a unit trust scheme that satisfies the requirements for registration by the Commissioner as an imminent public unit trust scheme in accordance with the provisions contained in Division 7 of Part 2 of Chapter 3 of the Duties Act 2000 (Vic) or which is registered as such. "widely held trust" means a unit trust scheme (c) that is a managed investment scheme registered under Part 5C.1 of the Corporations Act; and in which units have been issued to the public; and that has not less than 50 ultimate beneficial owners (i) each of whom is: I. beneficially entitled to the units and holds at least the minimum subscription under the prospectus or product disclosure statement; or II. beneficially entitled to the units and holds through a trustee at least the minimum subscription under the prospectus or product disclosure statement; and (ii) none of whom, individually or together with any associated person, is beneficially entitled to more than 20% of the units in the scheme (or 50% in the case of a qualifying investor). "wholesale unit trust" means a unit trust scheme that satisfies the requirements for registration by the Commissioner in accordance with the provisions of Division 7 of Part 2 of Chapter 3 of the Duties Act 2000 as a wholesale unit trust scheme or an imminent wholesale unit trust scheme or is registered as such. 3.2 Who is liable for land tax in respect of a Public Unit Trust? Our proposal would involve the legal owner of the land (ie the trustee of a Public Unit Trust) being liable for the land tax payable. 3.3 What rate of land tax would apply to a Public Unit Trust? The normal land tax rate scale would apply but subject to a top rate, say, 2 levels below the top marginal rate (ie 1.75% in 2005, reducing in following years corresponding with the reduction in the top marginal rate). Under this proposal, where a trustee holds land on trust for 2 or more non-special Trusts, the land of the separate trusts would not be aggregated. Provision may also be made to allow a head trust of a 100% owned group of trusts to elect to be liable for land tax in respect of all of the land held by the group.

6 page 6 This recognises the broad underlying beneficial ownership of the land. 4. EXCLUDED TRUST 4.1 What is an Excluded Trust? Having regard to the nature of Excluded Trusts and to relevant policy considerations, we consider that Excluded Trusts should not fall within the concept of a Special Trust. Under our proposal, the definition of an Excluded Trust would be: "excluded trust" means: trusts which are solely charitable; trusts established by a will, but only during the period being (i) (ii) where the testator died on or before 31 December 1991 the period ending on 31 December 1992; or where the testator dies after 31 December 1991 the period ending on the expiration of 12 months after the date of death of the testator; (c) (d) (e) trusts established for a disabled person or persons; trusts in respect of which the trustee is a Special Trustee"; and trusts declared in writing by the Commissioner not to be Special Trusts for the purposes of this Act because the Commissioner is satisfied that the purpose of altering or reducing the incidence of land tax on land held by the trust is not, to a material extent, a reason for the acquisition of the land by the trust. In this regard, the definition of "special trustee" in the Duties Act 2000 could be incorporated as follows: "special trustee" means a trustee company within the meaning of the Trustee Companies Act 1984; (c) a corporation constituted under the law of another State or a Territory that, in the Commissioner's opinion, corresponds to a trustee company referred to in paragraph ; the trustees of a fund that is a complying superannuation fund within the meaning of section 267 of the Income Tax Assessment Act 1936 of the

7 page 7 (d) Commonwealth or that, in the opinion of the trustees, will become a complying superannuation fund within 12 months after the execution of (i) (ii) an instrument appointing a new trustee; or an instrument by which a trustee retires without a new trustee being appointed in place of the retiree". We consider that it is appropriate to repose in the Commissioner a discretion to declare a trust not to be a Special Trust where the trust does not fall within the other categories of Excluded Trust. The discretion is intended to allow for situations where the trustee can show that although the relevant trust does not fall within the specified categories of the definition of Excluded Trust, there is a "genuine" purpose or reason why the land is held through the vehicle of a trust, ie., that the relevant land is not held through a trust vehicle with a purpose of avoiding or reducing land tax. The intention is simply to ensure that beneficiaries in "genuine" circumstances are not penalised because land is held through a trust as a collective investment vehicle. In considering whether a trust is to be "declared" not to be a special trust by the Commissioner, we consider that taxpayers and their advisers would obtain significant benefit from the provision of guidance (whether legislative or by way of ruling or publication) as to the circumstances in which the Commissioner will be satisfied that a trust will be declared not to be a Special Trust. By way of example, we set out the following circumstances which may be appropriate for the Commissioner to have regard when considering whether to declare a trust not to be a Special Trust. (c) Where a trust which holds land has existed and held the land for a period of time prior to a specified date (eg 31 December 1993). The policy behind this circumstances would be not to disadvantage the beneficiaries of a land holding trust where the land has been held for a long period of time prior to the proposed amendments. Where a trust which holds land for a "business use". A business use would essentially be a business activity or investment purpose other than leasing the property to a commercial tenant. The policy basis for excluding a trust which holds land for a business use would be to provide some relief for small to medium business where land tax is a significant burden in respect of business inputs. Where a trust can show that the land tax payable if it were to be taxed at marginal rates is equal to or greater than the land tax that would be payable if the unit holders or beneficiaries held the land directly. The policy basis for declaring such a trust not to be a Special Trust would be that if the beneficial owners would pay the same or less tax by holding directly, the land is not being held in the trust for land tax avoidance purposes.

8 page 8 (d) Where a trust is not land-rich. The mechanism for determining whether a trust is land-rich could be extracted from the Duties Act It would be important, however, for the Commissioner to retain a discretion to declare a trust not to be a Special Trust in other circumstances where the Commissioner is satisfied that the purpose of altering or reducing the incidence of land tax on land is not, to a material extent, a reason for the acquisition of land by the trust. 4.2 Who is liable for land tax in respect of an Excluded Trust? Our proposal would involve the trustee (ie., the legal owner) of an Excluded Trust being liable for land tax. 4.3 What rate of land tax would apply to an Excluded Trust? The trustee would be assessed for land tax under the normal rate scale for land held to the extent that the Excluded Trust is not otherwise exempt from land tax. 5. TAX TREATMENT OF SPECIAL TRUSTS 5.1 If the trustee of a Special Trust does not make an election to nominate beneficiaries of the Special Trust Who is liable for land tax? Our proposal would involve the legal owner of land being liable for land tax on the land held by it in its capacity as trustee of a Special Trust. On the basis that sections 51 and 52 would be repealed, it would not be necessary to trace the beneficial ownership of land through to the ultimate beneficiaries of the Special Trust. A potential benefit of holding land through a trust arises because multiple parcels of land may be "disaggregated". The effect of this is that the beneficial owners of the land can benefit from the land tax thresholds and the lower land tax rate scales. Our proposal would seek to protect the revenue by applying a flat rate of land tax at the top marginal rate to Special Trusts, thereby eliminating the benefit of seeking to hold multiple parcels of land through different trusts. There would also be no need to disaggregate land holdings where a trustee holds more than one parcel of land in its capacity as trustee for different Special Trusts. Any property held by the trustee in its own capacity should not be aggregated with trust property and would continue to be taxed at the appropriate marginal rate in the hands of the legal owner. What rate of land tax would apply? We propose that the rate of land tax imposed on the trustee of a Special Trust would be a flat rate equal to the top marginal rate of land tax from time to time. However, in recognition of the fact that the top rate is set to progressively reduce

9 page 9 to 3%, and the need to not penalise existing trust structures, we submit that until 2009, the fixed rate of land tax for the trustee of a Special Trust be 3%. As a policy matter, and to limit "hardship" to existing taxpayers, we submit that a cap should be imposed on increases to land tax as a result of the new regime. By way of example, land tax liabilities should not be increased by more than 20% per annum for a fixed period of, say, 5 years after taking into account valuation changes. This would be similar to the collars on liability found in clause 1B of Schedule 2 to the Act. These collars were applied when the 5% top rate was introduced in If the trustee of a Special Trust makes an election to nominate beneficiaries of that Special Trust It is proposed that the trustee of a Special Trust be allowed to nominate one or more beneficiaries entitled to a proportion of the land held by the Special Trust 1, who would be treated as the legal owners of the land for the purpose of assessing land tax. The land tax liability of each nominated beneficiary would be based on the respective values of the land holdings of the nominated beneficiaries and would cover land held by the nominated beneficiary in its own right as well as the proportionate value of the land held by the Special Trust in respect of which the nominated beneficiary has received notification of a nomination). Our proposal would involve the following process. Upon receipt of a land tax assessment in respect of land held by the Special Trust, the trustee of the Special Trust would nominate one or more beneficiaries to receive a substitute land tax assessment in respect of that beneficiaries proportionate interest in the land. The nominated beneficiary would need to consent, in writing, to a nomination by the trustee of the Special Trust. The nomination form would be forwarded to the State Revenue Office. The nomination form would include the following details: (c) (d) the name of the nominated beneficiary; that the beneficiary consented to the nomination; the proportionate number of units or other proportionate interest in the Special Trust held by the nominated beneficiary; and the unimproved value of the relevant parcel (or parcels) of land held by the Special Trust in respect of which the nominated beneficiary has an equitable/beneficial interest. The unimproved value of the relevant land could be obtained from the land tax assessment issued to the Special Trustee or a Council Rates Notice. 1 such a beneficiary could be referred to as the 'owner' of a proportionate interest in the trust land so as to fit within current concepts within the Act

10 page 10 A variation on this proposal would involve the trustee remaining liable for land tax in respect of all of the land held by the Special Trust at the Special Trust rate and each nominated beneficiary being liable for land tax in respect of their proportionate interest in the land held by the Special Trust at the relevant marginal rate. However, each nominated beneficiary would be entitled to receive a "credit" against their personal land tax liability for the proportionate amount of land tax paid by the Special Trustee, calculated according to the beneficiary's nominated percentage interest. If the beneficiary's entitlement to a credit (as result of the land tax paid or payable by the trustee of the Special Trust) exceeded the beneficiary's land tax liability, the beneficiary would be entitled to a cash refund. It is envisaged that the "credit" system would apply predominantly to discretionary trusts and private unit trusts - these are the two main investment vehicles. The proportion nominated for a beneficiary would not necessarily need to be linked to proportion of trust distributions received by the beneficiary. Consideration needs to be given to the administrative arrangement for such a system. If the trustee is required to pay at the special land tax rate of 3%, and then make available a proportionate credit to each of the nominated beneficiaries for such tax then there is a cash flow impact for the trust. An alternative arrangement could be for the trustee to calculate and pay land tax according to the proportionate unimproved value nominated to each consenting beneficiary. Any additional tax on that proportionate unimproved value - which would arise if the nominated beneficiary has other land holdings in its own right - would need to be paid by the beneficiary. It is submitted that if a system based on the above principles is not implemented, the Special Trust arrangements will unfairly penalise a significant number of existing land holding arrangements through legitimate trust vehicles and in particular could significantly impact on trusts owning small businesses with land holdings. Example For example, consider the position of a trustee (T) of a discretionary trust holding land with an unimproved value of $3,000,000 with a class of beneficiaries that includes A, B, C, D, E. If T decides not to nominate, or no beneficiary consents to T's nomination, T is liable for land tax of $65,905 based on unimproved value of $3,000,000. If T nominates A, B, C, D and E for 20% each of the land held in trust, the liability would be $5,900 based on unimproved land value of $600,000 each. Another example is a discretionary trust holding land with an unimproved value of $1,000,000. If the trustee does not nominate, then it is liable for land tax of $5,755.

11 page 11 If the trustee nominates four beneficiaries, the liability for each of these beneficiaries, based on unimproved land value of $250,000 would be $1,200 ($300 for each beneficiary). 5.3 What rate of land tax would apply if a nomination is made? Our proposal would involve the application of existing marginal rates of tax for separate nominated beneficiaries. This would be a result similar to what was intended under the current section 52(1). 5.4 What rate of land tax would apply if a nomination is not made? If a trustee of a Special Trust elects not to nominate, or the trustee's nomination is refused, the top marginal rate (3% until 2009) would apply. 6. ASSESSING THE APPROPRIATE ENTITY The Commissioner would not necessarily know, based on information which is available to him at the time land tax assessments are issued, whether a given parcel of land, in respect of which a land tax assessment is to be issued, is held by a legal owner on trust or otherwise or the nature of the trust. Accordingly, an administrative mechanism is needed to assist the Commissioner in determining: (c) (d) (e) (f) whether the trust regime is applicable; what sort of trust is applicable; what the applicable rate of land tax is; whether the land tax assessment is issued in the name of the appropriate entity; whether other land is required to be aggregated; and whether a nomination has been or will be made. One means of dealing with this issue would be to trigger the application of the "return provisions" contained in sections 14 and 15 of the Act. It is contemplated that in the transitional land tax year (ie, the first land tax year following commencement of the new regime) every taxpayer would be required to furnish a return upon which basis the Commissioner would issue land tax assessments. Thereafter, returns would only be required in respect of relevant changes to land holdings. An alternative could include appropriate amendments to the Notice of Disposition and the Notice of Acquisition which are already required to be lodged with the Commissioner. It is anticipated that only a small change to the forms would be needed, for example, the inclusion of a "tick the box" indicating whether the land to which the notice relates is held on trust. An additional "tick the box" may also be included, indicating the type of trust. Through these notices, the Commissioner could update the land tax database which is currently used to generate land tax assessments.

12 page 12 Perhaps as a corollary to the above suggestions, for the transitional year, the Commissioner could include a form with the mail-out of the annual land tax assessments. The form (which would be required to be completed and returned to the Commissioner) could require details as to whether land the subject of the land tax assessment is held by a trust and, if so, details of the trust. 7. CONSEQUENTIAL AMENDMENTS In light of our proposals above, it may be necessary to make some consequential amendments. For example, the definition of "owner" may need to be revised. Additionally, it may be desirable to include a definition of "unit trust scheme", which may also be adapted from the Duties Act 2000.

13 page 13 Annexure A Land Tax Treatment of Trusts Is the trust a Special Trust? Yes Did the trustee nominate beneficiaries? No Yes Beneficiary taxed separately at marginal rates on each beneficiary's nominated entitlement No Trustee taxed at flat rate of 3% or, from 2009, the top marginal rate. Increases due to regime change capped at 20% pa for 5 years. Is the trust a Public Unit Trust? No Yes Trustee taxed at marginal rates capped at 1.75% (reducing) in line with top marginal rate. Is the trust an Excluded Trust? Yes Marginal land tax rates apply if not otherwise exempt.

14 page 14 Annexure B Examples Example 1 Family Discretionary Trust Land Treated as a Special Trust unless declared to be an Excluded Trust. If a Special Trust, land tax imposed at the top marginal rate (or 3% until 2009) on the trustee. Trustee can elect to nominate beneficiaries who are then taxed at their marginal rates based on total land holdings under the system developed in part 5 of this submission. If an Excluded Trust, land tax imposed at marginal rates on the trustee unless the land is exempt. Example 2 A (Public Unit Trust) B is also a Public Unit Trust. Land tax is imposed on the trustee of B at marginal rates capped at 1.75% (reducing). B (Subsidiary Unit Trust) Land

15 page 15 Example 3 A (Public Unit Trust or Excluded Trust) B (Public Trust Unit) C (Unit Trust) Land C would be a Special Trust unless the Commissioner declared it to be an Excluded Trust. Land tax is imposed on the Trustee of C at the top marginal rate (fixed to 3% until 2009). The trustee can nominate the beneficiaries. Example 4 A (Public Unit Trust) B (Public Unit Trust) 50% 50% C (Unit Trust) C is also a Public Unit Trust. Land tax is imposed on the trustee of C at marginal rates capped at 1.75% (reducing). Land

16 page 16 Example 5 A (Public Unit Trust) B (Excluded Trust) C C would be a Special Trust unless the Commissioner declared it to be an Excluded Trust. Land tax is imposed on the Trustee of C at the top marginal rate (fixed to 3% until 2009). The trustee can nominate the beneficiaries Land Example 6 A (Excluded Trust) B (Trust) B would be a Special Trust unless the Commissioner declared it to be an Excluded Trust Land tax is imposed on the Trustee of B at the top marginal rate (fixed to 3% until 2009). The trustee can nominate the beneficiaries Land