In 2006, a significant amount of discretionary trusts made beneficiary nominations with the State Revenue Office of Victoria to mitigate the trust from being assessed at surcharge land tax rates on their pre-existing landholdings. In accordance with section 46F of the Land Tax Act of Victoria, the effect of these nominations were as follows:
- The discretionary trust is assessed on its pre-existing 2006 landholdings at ordinary land tax rates rather than surcharge land tax rates; and
- The pre-2006 landholdings of the trust will be aggregated with the personal landholdings held by the nominated beneficiary, the beneficiary will separately be assessed on the pre-2006 landholdings of the trust, and the beneficiary will receive a tax credit for the land tax assessed to the trust on its pre-2006 landholdings.
Since 2006 when these nominations were made, various circumstances may have arisen that now result in these nominations causing a detrimental outcome. For example, the value of the pre-2006 landholdings in the discretionary trust could now exceed $3M (which is the cut-off for surcharge land tax rates applying), or the nominated beneficiary may have purchased other landholdings in their personal name resulting in the land tax savings by the discretionary trust having a nomination in place being less than the additional land tax payable by the nominated beneficiary as a result of the pre-2006 land of the trust being aggregated with their own landholdings.
There is provision within section 46F of the Land Tax Act for a nominated beneficiary of a discretionary trust to revoke their nomination. In limited circumstances, there is also provision within section 46F of the Land Tax Act for there to be a change in the nominated beneficiary of the trust if the Commissioner considers it just and reasonable.
At the end of each year, a land tax modelling exercise should be undertaken to ensure that discretionary trust land tax nominations still provide tax savings. If they don’t, consideration should be given to revoking the elections.