In NSW, where even a single potential beneficiary of a discretionary trust is a foreign beneficiary, the trust is treated as a foreign trust and therefore may be liable for purchaser surcharge duty (when it acquires residential land) and surcharge land tax. To avoid this, careful amendments must be made to most standard form trust deeds to prevent distributions to foreign beneficiaries.
Revenue NSW has issued Commissioner's Practice Note No. CPN 004 on the administration of the purchaser surcharge duty and surcharge land tax. However, it provides little in the way of relief.Daniel Hui, Maddocks Lawyers
On 5 July 2018, Revenue NSW (previously the NSW Office of State Revenue) issued Commissioner's Practice Note No. CPN 004 on how surcharge purchaser duty and surcharge land tax will be administered for discretionary trusts.
As set out in our recap below, even where a single potential beneficiary of a family trust is a foreign person, surcharge rates of duty and land tax will apply to that trust. The Practice Note does not change this.
The Practice Note does, however, suggest that there has been a subtle change in the administration of these rules. The examples it provides suggest that the Commissioner's approach to potential foreign persons as beneficiaries is:
The Practice Note further confirms:
In light of the Practice Note, trustees of discretionary trusts should:
Cleardocs will soon be releasing a 'Deed of Variation - Exclusion of foreign persons' product to assist Cleardocs customers with such changes.
In 2016 (effective from 21 June 2016), the NSW Government introduced a 4% surcharge (surcharge purchaser duty) on the purchase of residential land by foreign persons. For agreements entered into on or after 1 July 2017, the rate of surcharge purchaser duty increased from 4% to 8%.
Similarly, the surcharge land tax imposes an additional surcharge for owners of residential land that are foreign persons. This was 0.75% for the 2017 land tax year and increased to 2% for the 2018 land tax year.
The definition of 'foreign person' for both surcharge purchaser duty and surcharge land tax purposes is a modified definition of 'foreign person' from the Foreign Acquisitions and Takeovers Act 1975 and includes the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest.
For discretionary trusts, each beneficiary is deemed to hold the maximum percentage interest in the income or property of the trust. The unfortunate outcome of this is that where even a single potential beneficiary of a discretionary trust is a foreign person (such as a foreign individual, foreign corporation or foreign trust), the discretionary trust is considered a foreign trust for the purposes of the foreign surcharges.
This was an unjust outcome for many discretionary trusts, as they were treated as foreign trusts notwithstanding that none of the beneficiaries who received or were likely to receive distributions were foreign.
In response to this, it was necessary for the trust deeds of affected discretionary trusts to be amended to limit the trustee's ability to distribute income and capital to foreign persons. Revenue NSW issued Revenue Ruling G010 on 1 March 2017 (and an updated version on 13 September 2017) on this, which broadly stated that the Commissioner could exercise a discretion to give retrospective effect to amendments to trust deeds (so that the surcharge purchaser duty and surcharge land tax would not apply).
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Revenue Practice Group.
You can read earlier ClearLaw articles on a range of matters.
You can read about the foreign purchaser surcharge duty and surcharge land tax here.
You can read Commissioner's Practice Note No. CPN 004 here.
Daniel is a Senior Associate in the Maddocks Tax & Revenue team.Daniel advises extensively in the following areas:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.