A recent state government proposal to levy land tax on properties owned by trusts could see some land owners facing land tax increases of 600 - 800 per cent.  The proposed tax levy on land held in trusts would be greater than land tax on land not held in trusts.

A trust is a form of property ownership where one person (the trustee) holds the property on behalf of the beneficiaries.  The trust may earn income and the trustee may distribute income to the beneficiaries.  One of the most common forms of trust is a family trust where the beneficiaries are family members.  This is a common form of ownership for family businesses and for self funded retirees.  

Owning a property in a trust is a way for small businesses and professionals to protect their asset, especially a business or property other than their residential home.  If the person is personally sued then the property will not be classed as a personal asset

The proposed new tax would apply $200 plus 1 per cent tax rate on all land properties held by trusts valued between $20,000 and $1.19 million.  Land tax for land not held in trusts starts at 0.2 per cent on properties worth $200,000.  This would mean a property worth $400,000 held in trust would pay $4,000 in land tax compared to $600 for property owned by an individual or company.

The Law Institute of Victoria (LIV), the Tax Institute of Australia, the Property Council of Australia and the Real Estate Institute of Australia have all been critical of the proposal.  The current proposals penalise people for simply using a trust structure compared with using other forms of collective investment such as a company, partnership or unincorporated joint venture.  There is also concern that the Government has assumed that the presence of a trust structure is simply a tax avoidance scheme and ignored the other benefits of trust structures. 

The Law Institute of Victoria believes any reforms should not generate extra revenue.  Measures should be put in place to allow people to rearrange their land tax affairs without penalty before the any new tax regime takes effect.  Otherwise people will be retrospectively penalised for adopting investing structures that were and still are perfectly legal.