Private ruling: Whether land tax is an allowable deduction
Published: April 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: Year ended 30 June 2011

Ruling: Q1: Is the taxpayer entitled to claim a tax deduction for the land tax assessed to the taxpayer, when some of the land is beneficially owned as the Nominated Beneficiary of the Family Trust? | A1: No.

Relevant facts and circumstances: All of the issued units of the Unit Trust are held by the Family Trust. The Family Trust is a discretionary trust. The taxpayer is a beneficiary of the Family Trust. The taxpayer is also the Nominated Beneficiary for the assessment of land tax by the State Revenue Office. The Unit Trust owns properties that are subject to State land tax, and it has received a 2011 land tax assessment. The Family Trust owns properties that are subject to State land tax and it has received a 2011 land tax assessment notice, which also includes its beneficial interests in property held by the Unit Trust. The taxpayer holds a joint interest in properties that are subject to State land tax and has received a 2011 Land Tax Assessment Notice, which includes the Family Trust's Nominated beneficial interest in the property held by the Unit Trust, and also his Nominated beneficial interest in the property held by the Family Trust. As the property values are aggregated in the Nominated Beneficiary calculation, the total taxable value increased above the value threshold and land tax is assessed at a rate higher than that which was assessed directly to the trusts. After taking into account credits for land tax assessed to the two trusts, the taxpayer is left with a balance to pay of which he states a component is attributable to the properties held by the two trusts. The taxpayer therefore considers that he has a liability to pay State land tax for land held by another entity. The properties held by the taxpayer were not used for the purpose of earning their assessable income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision: Summary: The taxpayer is unable to claim a deduction for the land tax for the following reasons: · he is not using his land for the purpose of earning his assessable income; · the deduction cannot be allowed against the Unit Trust distribution as he is not a unit holder; · the deduction cannot be allowed against the Family Trust income as the Family Trust is a discretionary trust, and deductions are not allowable against any discretionary trust distributions. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for expenses incurred in earning assessable income, unless the expenses are private or domestic in nature, or are capital or capital in nature. Taxation Ruling IT 2385 considers the issue of a trust beneficiary claiming a deduction under section 8-1 of the ITAA 1997 against a discretionary trust distribution. In this case, the State land tax is assessed not only to the land owner, but if the land is owned by a trust, the share attributed to the Nominated Beneficiary is also assessed to the beneficiary, with a credit provided for the amount of land tax assessed to the trust. The Unit Trust was assessed for land tax first on its properties as it is at the top of the chain of trusts. As the Family Trust is the Nominated Beneficiary of the Unit Trust, the land tax assessment issued to the Family Trust included the total of the Unit Trust's taxable value, plus its own properties, less a credit for the amount of land tax levied on the Unit Trust. Therefore, as the credit has been given to the Family Trust for the land tax payable by the Unit Trust, the only properties remaining with land tax levied on it are the properties actually owned by the Family Trust. The taxpayer is the Nominated Beneficiary for the Family Trust, so the land tax assessment issued to the taxpayer included his share of the total taxable value of the properties assessed to the Family Trust, plus his own properties, less a credit for the land tax assessed to the Family Trust (prior to the Unit Trust credit being taken into account). Therefore, as credit has been given to the taxpayer for the land tax payable by the Family Trust (and therefore the Unit Trust as well), the only properties remaining with land tax assessed are the properties actually owned by the taxpayer. The taxpayer has argued that he has a liability for land tax for land held by another entity. As the taxpayer was allocated a credit for the land tax actually payable by the Family Trust, then this is not the case, as the credit actually allowed has effectively stopped the double taxation of land tax on the same block of land. The taxpayer is actually looking at the increase in the percentage that they were required to pay due to the State government requirement that the Nominated Beneficiary rules be followed. This is a separate issue, and this issue will also be considered as part of the request. If the trusts either did not own land, or he was not the Nominated Beneficiary, then according to the information provided by the taxpayer, their principal place of residence is land tax free, and their share of the other property is under the State land tax threshold. Therefore State land tax would not have been payable in that circumstance. The land actually owned by the taxpayer is not used for the purposes of earning assessable income. Therefore the deduction is not an allowable deduction under section 8-1 of the ITAA 1997 as the expense was not incurred for the purposes of earning of assessable income. Therefore, if land tax would have been payable by the taxpayer, even if the land owned by the two trusts was not included, the land tax would not be an allowable deduction under section 8-1 of the ITAA 1997. This leaves the issue of the land owned by either of the two trusts which have been included on the State land tax notice issued to the taxpayer. The first point is that the total amount of State land tax payable by the Family Trust has been credited against the taxpayer's State land tax account, and so that amount is not considered to be incurred by the taxpayer. As it has not been incurred, a deduction under section 8-1 is not allowable for that amount. This effectively leaves the issue of the additional amount assessed to the taxpayer on his land because the two trusts actually owned land which was subject to State land tax. Firstly, that land was not used directly by the taxpayer to earn assessable income, so a direct deduction will not be available under section 8-1 of the ITAA 1997. The second possibility is to determine whether the deduction could possibly be allowable against a trust distribution made by the Family Trust. Taxation Ruling IT 2385 provides a view on the issue of whether discretionary trust beneficiaries are entitled to claim a deduction against the distribution received from a discretionary trust. The answer in IT 2385 is no, because the deduction must be incurred during the year of income, but the discretionary trust distribution cannot be made until after close of business at the end of the year of income, because the trustee cannot determine whether the trust has made a net income until that time. Only then can the trustee decide to exercise his discretion to distribute any amounts to a beneficiary. As a result, it is not possible for the beneficiary to have received any income during the year of income against which any deduction could be claimed. This is because the trustee's discretion cannot be exercised in favour of any beneficiary during the year of income. Therefore IT 2385 has determined that any deductions claimed against a discretionary trust distribution (or a potential discretionary trust distribution) are not an allowable deduction under section 8-1 of the ITAA 1997. As the taxpayer is not a unit holder of the Unit Trust, there is no way that the Unit Trust can distribute directly to the taxpayer. As a result, no deductions could be allowable to the taxpayer directly from the Unit Trust's income. Therefore the taxpayer is unable to claim a deduction for the State land tax as they are not using the land for the purpose of earning his assessable income. Also the deduction cannot be allowed against the Unit Trust distribution as they are not a unit holder, and the deduction cannot be allowed to the taxpayer against the Family Trust income, as the Family Trust is a discretionary trust.

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