How restructuring a discretionary trust's property holdings can affect its land tax treatment — a State-level cost that sits alongside, and separate from, transfer duty.
Land tax is a State and Territory tax, assessed annually on the value of land held above a threshold. It's calculated and administered separately from stamp duty, and trust-held land is often treated differently to individually-held land — commonly attracting different thresholds, surcharges, or trust-specific rules depending on the jurisdiction.
Any restructuring undertaken in response to Federal reform — moving property out of a discretionary trust and into a company or fixed trust — can change how that property is assessed for land tax going forward, independently of any stamp duty triggered by the same transfer.
Land tax is a yearly State tax on the land you own, separate from stamp duty, which is a one-off cost paid when land is bought or transferred. Across most States, land held in a discretionary trust is taxed more heavily than the same land held by an individual.
In New South Wales, a discretionary trust gets no tax-free threshold at all. An individual pays nothing on their first $1,075,000 of land value; a trust pays tax on every dollar, at a flat 1.6%. In Victoria, trusts get a lower tax-free threshold than individuals ($25,000 instead of $50,000) and pay a higher rate on top of that, until the property's value passes $3 million, when it comes to be taxed the same way for both trusts and individuals. A fixed trust, rather than a discretionary one, can generally access the ordinary, higher threshold in both States.
Here's something that catches many ordinary family trusts by surprise. In both NSW and Victoria, a discretionary trust can be charged an additional surcharge, as high as 5% in NSW with no threshold at all, if the trust deed could allow a distribution to someone living overseas, even if that was never actually intended or has never happened.
Most standard trust deeds are written broadly, using categories like "any relative" or "future spouses of beneficiaries," without anyone turning their mind to this rule at the time. As a result, many long-established, entirely ordinary Australian family trusts fall within it by accident, simply because of how the deed happens to be worded, not because the family ever planned to benefit anyone overseas.
Avoiding the surcharge means the trust deed has to specifically exclude foreign beneficiaries. The two States handle this differently. In NSW, that exclusion must be permanent and can't be reversed later. In Victoria, it doesn't need to be permanent, and can be amended again if the family's circumstances genuinely change. Tasmania applies a broadly similar rule to NSW and Victoria; other States generally only look at beneficiaries actually named with a specific share, which makes accidental exposure less likely.
If a family is considering restructuring their trust in response to the proposed Federal reform, the land tax angle deserves its own check, separate from the Federal tax and State transfer duty already covered in our Minimum Tax analysis. Converting from a discretionary trust to a fixed trust, for example, may reduce land tax by restoring access to the ordinary threshold, but that same conversion triggers its own stamp duty and CGT consequences, and changes the flexibility the family may have relied on the trust for. These are genuinely separate costs, assessed by separate State authorities, and they don't necessarily move in the same direction, so both need to be weighed together, not considered in isolation.
