Trust structures and land tax

On this page

• Key information
• Discretionary trusts
• Unit trusts
• Fixed trusts
• Sub-trust beneficiaries of fixed or unit trusts

Key information

General information about trusts and your obligations as a trustee, is on the trusts and land tax page. It covers:

• why trusts are treated differently for land tax
• how to manage land held in trust
• how land is assessed and the rates that apply
• trusts that do not have to pay the trust surcharge
• how the principal place of residence (PPR) exemption may apply to trust land.) exemption may apply to trust land.

Each trust structure (discretionary, unit and fixed) has different rules for how land tax is applied.

Trustees must notify us when they acquire or dispose of land or trust arrangements change. If you fail to notify us within one month, you may have to pay penalty tax on the additional amount that would have been assessed if you had notified us on time.

Discretionary trusts

For land tax purposes, a discretionary trust is a type of trust where the trustee decides:

• who among the potential beneficiaries receives income or assets from the trust, and
• how much each beneficiary receives.

Most family trusts are discretionary trusts. The trustee can decide who benefits, or the amount to be distributed at any time, within the rules of the trust deed. If the trustee does not decide, the trust deed usually includes a default way to distribute the property.

Discretionary trusts usually pay the trust surcharge. This is because the beneficiaries and their entitlements are not fixed, making it difficult to identify who ultimately benefits from the land.

The land tax treatment of discretionary trusts depends on whether:

• the land was acquired before or after 2006
• the trustee nominated a beneficiary for pre-2006 land
• the trustee nominated a PPR beneficiary.

Land acquired before 2006 (pre-2006 land)

If a discretionary trust acquired land before 2006, land tax is assessed at surcharge rates, unless there is a nominated beneficiary in place.

If there is a nominated beneficiary in place:

• we consider both the nominated beneficiary and the trustee to be owners of the trust land
• we assess the trustee at general land tax rates
• we also assess the nominated beneficiary for their interest in the land, but apply a deduction to avoid double taxation.

If there is no nominated beneficiary, or the nomination was late, the trustee is assessed at the surcharge rate. If a beneficiary is using the land as their PPR, the trustee may nominate them as a PPR beneficiary.

The deadline to nominate a beneficiary for pre-2006 land was 30 June 2006. We only accept late nominations now in 2 very limited situations:

1. The previously nominated beneficiary has died or the trustee has revoked their nomination. You can nominate a subsequent beneficiary if we consider it to be just and reasonable. You cannot change the nominated beneficiary just because they now own other taxable land and have to pay land tax on the trust land.
2. Land acquired before 2006 has only now become subject to land tax. This may arise if the land is no longer exempt from land tax or the total value of the land held by the trust now exceeds the trust threshold of $25,000. The nomination must be lodged within 3 months of the land becoming taxable and will take effect for the tax year in which it is lodged.

Assessment of pre-2006 land with a nominated beneficiary

We assess pre-2006 land held by discretionary trusts with a nominated beneficiary in 2 stages.

Stage 1 - Assessing the trustee

We assess the trustee at general rates. If the nominated beneficiary does not own other taxable land, there will only be one assessment issued to the trustee for the land.

Stage 2 - Assessing the nominated beneficiary

If the nominated beneficiary owns other taxable land, we assess all their interests in taxable land, in any capacity, including land:

• they own by themselves
• they own with others
• held under other trusts.

We assess them as if they were the owner of the pre-2006 land (excluding land with a nominated PPR beneficiary). We apply general land tax rates to the total value of pre-2006 land and any other taxable land they own.

Because we assessed the trustee for the pre-2006 land, we use a formula to apply a deduction to the nominated beneficiary’s assessment.

Trust deduction

This deduction is the lesser of:

• the beneficiary’s share of the tax in the trustee’s assessment, or
• the amount of tax that the pre-2006 land represents in the nominated beneficiary’s individual assessment.

If the deduction reduces the beneficiary’s land tax to zero, they will not receive an assessment. This is the case if they do not own any other land apart from their interest in the pre-2006 land.

You can find your deduction on your assessment.

Assessment of land acquired from 2006 (post-2006 land)

All land acquired by a trustee of a discretionary trust after 31 December 2005 is taxed at the trust surcharge rate. This applies even if the trustee has nominated a beneficiary for pre-2006 land, unless the land is used by a nominated PPR beneficiary as their PPR.

Assessments with both pre-2006 and post-2006 land

If a discretionary trust holds both types of land and has a nominated beneficiary, we use a formula to split the tax proportionally:

• [(Land tax at general rate on total taxable land) x (Total pre-2006 taxable land ÷ Total taxable land)] + [(Land tax at surcharge rate on total taxable land) x (Total post-2006 taxable land ÷ Total taxable land)]

This ensures the correct rate applies to each portion of land.

Nominating a PPR beneficiary

If a beneficiary is using trust land as their PPR, the trustee may nominate a PPR beneficiary for that land. This means:

• the land is assessed separately from the other trust held land
• the trustee is assessed at general land tax rates for that land
• the PPR beneficiary will not be assessed for land tax on that land.

A trust may only nominate one PPR beneficiary. This nomination will take effect in the tax year it is lodged and remains in force until either the nominated PPR beneficiary:

• dies, or
• ceases to use and occupy the land as their PPR.

Unit trusts

For land tax purposes, a unit trust is an arrangement where beneficiaries, generally called unitholders, hold units that give them a share in the trust’s income or profits. These profits come from acquiring, holding, managing or disposing of property under the trust. The share each unitholder gets depends on how many units they hold.

A unit trust does not include excluded trusts.

Unit trusts are taxed at trust surcharge rates unless the trustee chooses to either:

• notify us of unitholders in the land, or
• nominate a single PPR beneficiary of trust land.

Notifying us of unitholders

When the trustee notifies us of the unitholders, both the trustee and the notified unitholders will be considered the owners of the trust land. They each pay land tax on their interest in the trust.

We assess the trustee at general rates. Each notified unitholder is treated as if they own a percentage of the trust land equal to the number of units they hold as a fraction of the total number of units.

The notification of unitholdings takes effect from the tax year after it is lodged. It does not apply retrospectively and remains in force until the trustee withdraws it. If the notification is withdrawn, the trustee cannot lodge another notification.

If there is a change in the unitholdings while a notification of unitholdings is in force, the trustee must notify us within one month. Failing to do so may result in penalty tax being applied to the trust’s assessment.

Assessing unit trusts with notified unitholders

We assess these unit trusts in 2 stages:

Stage 1 - Assessing the trustee

We assess the trustee of the unit trust at general rates. If none of the unitholders own other taxable land, the only assessment for the trust is issued directly to the trustee.

Stage 2 - Assessing the notified unitholders

If a unitholder owns other taxable land, we will assess them at general rates on the total value of:

• their interest in the trust
• any other taxable land they own.

This includes land they own by themselves, with others and under other trusts.

If a notified unitholder is the trustee of another trust, we will treat it as a sub-trust.

Because we assessed the trustee for the trust held land, we use a formula to apply a deduction to the notified unitholder’s assessment.

Trust deduction

We apply a deduction to the unitholder’s assessment to avoid double taxation. This deduction is the lesser of:

• the notified unitholder’s share of the tax in the trustee’s assessment, or
• the amount of tax that the trust held land represents in the notified unitholder’s individual assessment. to the notified unitholder’s individual assessment.

If, after the trust deduction, you are not liable for land tax you will not receive an assessment.

You can find your deduction on your assessment.

Assessing a unit trust with nominated PPR beneficiary

If a unitholder uses trust land as their PPR, the trustee can make a PPR nomination.

We then assess the trustee on the PPR land as though it is the only land they own, and at general rates. The land is exempt for the PPR beneficiary and they are not individually assessed on it.

Each trust can only nominate one PPR beneficiary. Trustees can make or change a nomination at any time.

To be eligible, the nominated PPR beneficiary must:

• use and occupy the land as their PPR
• not use it to conduct substantial business activity.

The relevant PPR period is either:

• from at least 1 July to 31 December of the year before the assessment year, or
• any time before 31 December if the trustee became the owner of the land after 1 July.

A nomination applies in the land tax year it is lodged. A nomination cannot apply retrospectively, even if the nominated PPR beneficiary used and occupied the land as their PPR in prior years.

If the nominated PPR beneficiary dies, or stops using and occupying the land as their PPR, the trustee must notify us in writing within one month of it taking place. If another beneficiary uses the land as their PPR, the trustee may nominate a subsequent PPR beneficiary.

Fixed trusts

In a fixed trust, the beneficiaries and their share of the trust are set and cannot be changed. For example, a trust for 2 siblings who each hold a 50% share. The trustee cannot add or remove beneficiaries or change their share. Certain assets previously allocated to specific beneficiaries cannot be transferred to other beneficiaries.

For land tax purposes, a fixed trust is a trust that is not an excluded trust, a discretionary trust or a unit trust.

Fixed trusts are taxed at surcharge rates unless the trustee notifies us of beneficial interests in the land.

When the trustee notifies us of the beneficial interests in the trust land:

• both the trustee and the notified beneficiary are considered owners of the land
• we will assess the trust at general rates
• each beneficiary is assessed on their share of the trust land and any other taxable land they own.

A notification takes effect from the tax year after it is lodged. It cannot be applied retrospectively.

The notification will remain in force until the trustee withdraws it. However, once a notification is withdrawn, the trustee cannot lodge another notification.

Assessing fixed trusts with notified beneficial interests

We assess these trusts in 2 stages:

Stage 1 - Assessing the trustee

We assess the trustee at general rates. If a beneficiary does not own other taxable land, the only assessment for the trust land will be issued directly to the trustee.

Stage 2 - Assessing the notified beneficiary

Each notified beneficiary is treated as if they own a percentage of the trust land which is equal to the percentage of their beneficial interest in the trust land.

We asses each beneficiary at the general land tax rates on the total taxable value of:

• their share of the trust land
• any other taxable land that they own (other than exempt land).

We apply a deduction to the beneficiary’s assessment to avoid double taxation. The deduction is based on the proportional tax payable by the trustee.

If the notified beneficiary is the trustee of another trust, we will treat it as a sub-trust.

PPR exemption for fixed trust beneficiaries

If a beneficiary uses trust land as their PPR, the trustee may be eligible for a land tax exemption under section 54 of the Land Tax Act 2005.

The exemption applies to the part of the trust land used and occupied by the beneficiary as their PPR. It is proportionate to the beneficiary’s interest in the land, as long as the PPR exemption requirements are met.

Any part of the land held by a non-resident beneficiary remains taxable.

Sub-trust beneficiaries of fixed or unit trusts

If the beneficiary of a fixed or unit trust is a trustee of another trust (a sub-trust), we will ‘look through’ to the ultimate beneficiaries. This is provided we have been notified of the beneficial interest or unitholders of the first trust.

The second trust can avoid paying the surcharge rate if its trustee also notifies us of the beneficial interest in that trust. The beneficiaries of the second trust will be regarded as the owners of the land and assessed as notified beneficiaries or unitholders.

These ‘look through’ provisions do not apply if the second (or any other subsequent) trust is a discretionary trust. In those cases, the surcharge rate automatically applies.

You might also be interested in

• Land tax trust calculator
• Absentee trusts
• Deceased estates