Nsw unit trusts problem

Sorry to be bearer of bad news but lawyers and accountants you may have some clients with a land tax problem.

Where a fixed trust holds property in NSW it is not considered a special trust. It receives a tax free threshold. This can save around $6,000 or more a year ($6k per trust) since land tax for a special trust (all trusts that arent a fixed unit trust) receives no threshold.

On 20th May the NSW Governor gave assent to the State Revenue Legislation Amendment Bill 2004. This package of law includes a nasty little land tax problem that will catch a hell of a number of accountants and their clients.

Schedule 2 of the Bill amends s3A of the NSW Land tax Management Act to add a further definition to a "fixed trust". Form 20th May a unit trust must continue to pass all the existing requirements for a fixed trust. I wont try to explain here. But two further conditions has been added. Both must also be satisfied.

1. There must only be one class of units; and
2. the proportion of trust capital on winding up or surrender of units MUST be fixed and in the same proportion of income of the trust to which the unit holder is entitled.

What do all your unit trust deeds say ?? I checked one a client ordered from a very reputable law firm at high cost a few weeks ago and it FAILS. They have argued with me and didnt know of this problem. They do now. It allows income and capital units and seems to also allow other units to be issued. And income and capital units are proportional. ie a stapled unit comprising a unit of income and a unit of capital.

What does this mean?
In NSW, not all fixed trusts are fixed trust for land tax purposes. Loss of the NSW land tax threshold will occur. Effective 31 December 2014. The clock is ticking.

It affects all existing and future NSW unit trusts that own land in NSW. This includes SMSF Unit Trusts (Reg 13.22).

Which Trusts arent affected?
Some NSW Unit trusts wont be affected.
- Those that have maxed out land and the threshold isnt relevant
- Those without land in NSW
- Trusts where land tax concerns are irrelevant and a specific need overrides the land tax issue. ie They accept the higher cost for alternative benefits

How do I identify / fix this problem
Read the deed. Older deeds may be more problematic than newer deeds. Newer deeds may also be non-compliant.

Practitioners who assist with trust setup should already be aware of what their preferred deed says. I know my provider has ZERO concerns with this. I know all my clients are 100% compliant.

Macquarie Group Services Land Tax Unit Trust has always been compliant and remains so. MGS is a private specialist company unrelated to any banks. It includes the problematic "absolute entitlement requirement" too. This means unit holders have a RIGHT to demand redemption rather that a right to request it from the trustee who can exercise discretion to refuse the request. (How can that help a SIS Reg 13.22 ungeared trust).

The valuation basis for units is solid and based on market values. Based on a large review of other unit trust deeds I cant confidently name another at this time I know that also meets every requirement for NSW Land Tax.

Happy to hear from posts on others that a certain to comply. A further nicety of the MGS deed is the accompanying written view of OST that it complies with s3A.


How can I fix this
Accountants and lawyers you need a better provider. Perhaps give MGS a call ? I would be rethinking deed provider at same time. What other issues may exist in their other products ?

I'm a Trustee or have a NSW UT but my accountant hasnt mentioned this? Solution ?
Happy to discuss. Contact me. MGS wont assist non-practitioners. I can assist after identiying any concern.
 
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I just received a private ruling for my fixed unit trust deed from the OSR. They rejected it at first but accepted it after amendments.
 
Terry - yes thats a common issue. Back and forward like the Australian open.

Did they also give a ruling on the amendment of an existing trust? Important they agree on this in advance too to avoid duty triggers. This probably more a concern for trusts which allow cap & income if different %.

I'm trying to understand how CGT could impact those trusts too. I suspect if the trust is changed so income and capital and now identical where they weren't I see a CGT event. May this only apply to the capital units ?

Interested too if they see a duty concern if that issue is addressed for a trust with land > $2m.

I'm hoping Chris Batten from MGS may comment.
 
Usually, trustees (and beneficiaries) only find out what a "fixed" trust is when dealing with tax losses or franking credits.

When the ATO starts really cracking down on interest deductions for purchase of units then it will be much more than NSW SRO issues to worry about.
 
Chan & Naylor NSW Fixed Trust has some issues in a client deed. It features income and capital units which doesnt comply.
Amendment is available. Not by C&N !
 
Im very grateful house of wealth has been using mgs since inception. No problems with our deeds.

I agree Mike. MGS deed is still 100% OK after this change. No issue whatsoever that I know of !!! I used to work at MGS I will admit. We worked hard to address the "fixed issue" and were light years ahead of even the court decisons. We uspet some others I admit and dont give a toss. Never wrong. We saw the problem with a SMSF buying units in a trust that cant be redeemed. Hello !! Reg 13.22 ?? Arms length ?? We saw the valuation issues (hard) work on making a hybrid trust that the ATO accepted and much much more. Chris Batten & I worked together for a time and I cant fault the technical. You get what you pay for - Yet MGS isnt expensive. Buy cheap get cheap??

Shame most accountants have no idea their clients are being sold RUBBISH deeds, rubbish SMSFs and they will incur the problems. Is a $200 deed from Clipdocs really worth the hassle ?? What makes a 80 page deed better than 13 pages ?? It doesnt attempt to restrict the Trustee. It is flexible, permissive and doesnt restrain. What does the clause about voting rights say ?? What does the deed say about "forfeiture of benefits". Does a clause that contradict common law really work ?? And what about all those unit trusts they bought since 2007 ???? I will guarantee that most are rubbish and a land tax clearance certificate away for a PI claim.

Today I had to explain to a client why a C&N "NSW FIxed Unit Trust" doesn't comply with NSW Land Tax Mgmt Act and their trust will cop a $6k penalty if they dont fix it. Cost to client to amend to fix....Bad advice or a bad product.

Anyone else with this issue I'm happy to discuss. Call.
 
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