Residential Property in Trusts – the Impact of Vacant Residential Land Tax

A “New” land tax

The Vacant Residential Land Tax (“VRLT”) commenced operation in Victoria in relation to occupation of residential land from January 2018. It operates to apply additional land tax on residential properties that were considered “vacant” in certain councils close to the Melbourne CBD.  Unlike traditional land tax however, which is calculated on the unimproved value of the property, VRLT is calculated on the capital improved value – which is usually significantly higher.

The stated policy behind the VRLT was to disincentivise property banking in the face of a housing shortage. However, it appears that in application, the new law has the potential to go beyond that stated policy, largely due to the definition of “vacancy” and as to how it relates to trusts and other private entities.

The definition of vacancy is wide and can catch private use by family members (even where rent is being paid). While there are exceptions for some private use, their application is very limited where property is held in a trust of company structure.

An example

Kim is a director of a publicly listed company and works in Melbourne. Her partner Tom lives in Albury with their 3 children where he works as an accountant. Tom owns their principal residence in Albury.

Kim regularly spends 2-3 nights a week in Melbourne rather than commuting each way. An apartment in East Melbourne was acquired for her to use for that purpose, at a cost of $1.8M. Kim and Tom did not want Kim owning the property given the risk associated with her role, so the property was acquired via their family trust.

Under this example:

  • the property would likely be considered vacant for the purposes of the VLRT
  • the annual VRLT on the property would be 1% of $1.8M ($18,000) in addition to the standard land tax which may include the trust surcharge as well.

In effect, the outcome is up to 3 different land taxes applying to this property.

How did this result occur?

Generally, a property is considered “vacant” for the purposes of the VRLT unless the owner or the owner’s “permitted occupier” occupies the property for more than 6 months in the relevant year or another specific exception applies. Those exceptions include:

  • holiday house use by the owner (for at least 4 weeks a year)
  • work use by the owner (for at least 140 days a year)

The issue for Kim and Tom is that even if her use qualified under the time periods applicable to these exceptions, because she is not the owner of the property (the trustee of her family trust is), on the face of the legislation the exceptions do not apply.  Explanatory commentary on the SRO website supports this interpretation, stating that those exceptions do not generally apply to trusts or companies.

Who will this affect?

People acquiring residential property in the relevant council areas, who are not using it as their principal residence but do not want to personally own the land as part of an asset protection strategy. 

Ironically, the very people wanting to use the work exemption are more likely to be the ones wanting to use a trust for asset ownership, if their role brings with it asset protection concerns. 

What are the lessons?

For Kim, she may be able to have considered structuring a loan from a related trust to enable her to acquire the property personally. As the owner, she would then have the potential to qualify under either the work exemption or the holiday home exemption.  However, she loses the asset protection benefits of trust ownership.

Other lessons are:

  • Don’t assume your property won’t be caught by the VRLT, just because you are using it part of the time.
  • Consider all implications of trust ownership of real property including general land tax, land tax trust surcharges, VLRT, foreign ownership rules and the potential for duty and tax to transfer out of a trust. 

How we can help

Getting thorough advice before nominating a trust to acquire property will minimise the chances of an unwelcome surprise assessment.

For more information or expert advice, do not hesitate to contact us.