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Discretionary trusts: recent developments in "foreign person" rules for duty and land tax purposes

If a "foreign person" buys residential land in Australia, then in addition to regular stamp duty, they may pay a surcharge duty amount of up to 8%, depending on the jurisdiction.

For this reason explicitly excluding the possibility of foreign resident beneficiaries in discretionary trusts, which is intended as a vehicle for holding or purchasing land in Australia, has been regarded as best practice to avoid unnecessary additional duty and taxes.

Ari Armstrong, Maddocks Lawyers

What are the recent developments in New South Wales?

This issue on FPAD and land tax surcharges on Australian property was addressed in an earlier article published in March 2019. Since then, the New South Wales (NSW) Government has introduced a Bill which has the effect of deeming all discretionary trusts to be "foreign trusts" unless there are terms within the trust deed which explicitly prevent a foreign person from being, or ever being, a beneficiary of the trust. In order to avoid this result, the legislation requires deeds to have been amended to exclude foreign persons by 31 December 2019.

A sizeable number of trusts established in NSW do not contain the foreign exclusion and therefore will require amendment. It is therefore strongly advisable that all trustees of discretionary trusts which do not have any foreign beneficiaries and plan on acquiring dutiable property in NSW, take immediate action to ensure that the trust deed explicitly excludes any foreign person from ever potentially being a beneficiary.

Could I be liable for retrospective additional duty in New South Wales?

Trustees in NSW that have inadvertently incurred surcharge land tax under the new legislation may receive an exemption (or refund) if their trust deeds are amended in accordance with the legislation. This is in line with Revenue NSW?s media release on 13 December 2019.

In the media release, Revenue NSW noted that whilst the Amendment Bill required affected deeds to be amended by 31 December 2019, the NSW Government intends to extend this deadline to a later date in 2020, as the Bill is yet to be passed.

What are the recent developments in Victoria?

Victoria?s State Revenue Office (SRO) recently announced that from 1 March 2020 it will no longer apply a "practical approach" in respect of family discretionary trusts.

At the moment the SRO does not consider a family discretionary trust to be a "foreign trust" for foreign purchaser additional duty (FPAD) purposes, in circumstances where the trust had foreign beneficiaries who have not and who are unlikely in the future to ever receive any distributions. That is, it takes a "practical approach".

In Victoria the duty surcharge can apply where the trustee has the ability to distribute 50% or more of the trust capital to foreign persons and their associates. The SRO?s "practical approach" was based on input from numerous stakeholders and has meant that the need for language in Victorian trust deeds to explicitly exclude "foreign persons" as beneficiaries was historically not of paramount importance.

However, the SRO has now stated that it will enforce the applicable rules, so that if the family discretionary trust has any potential foreign beneficiary, the trust will generally be a foreign trust for the purposes of the FPAD provisions.

When will the SRO?s change in policy take effect from?

The SRO will continue to apply the practical approach in relation to dutiable transactions where contracts of sale were entered into before 1 March 2020.

How to vary your existing deed to avoid foreign land tax surcharge and FPAD?

The Cleardocs Discretionary Trust - Deed of Variation (excluding foreign purchaser) product will assist in avoiding additional land tax and FPAD where foreign persons could arguably fall into the general class of beneficiaries in a discretionary trust deed. The variation works to exclude "foreign persons" as they are defined in a wide range of legislation, including the relevant duty and land tax rules in each State. Find out more about how the variation product works here.

Where a discretionary trust deed specifically names a foreign person as a beneficiary - then this product cannot be used and legal advice needs to be obtained.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Revenue Practice Group.

More Cleardocs information on related topics

For more information relating to these issues relevant to foreign resident taxes, please see our earlier ClearLaw article in January 2017 here or our ClearLaw article in March 2019 here.

You can read earlier ClearLaw article on a range of matters.


[1] Every Australian State has a foreign purchaser additional surcharge in addition to ad valorem duty, and Victoria, Queensland, the Australian Capital Territory and New South Wales all levy a land tax absentee owner surcharge for foreign landowners in those jurisdictions.

 

Lawyer in Profile

Andrew Wright
Andrew Wright
Partner
+61 3 9258 3362
andrew.wright@maddocks.com.au

Qualifications: LLB (Hons), BCom, University of Melbourne

Andrew is a Partner in Maddocks Tax and Structuring team. He has significant experience in advising Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.

Andrew regularly provides advice on:

  • structuring of businesses and transactions,
  • mergers and acquisitions,
  • sale of businesses,
  • corporate reorganisations,
  • fixed and discretionary trust deeds, and
  • international tax structuring.

His advice covers both direct and indirect tax considerations.

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