Revenue NSW releases further guidance of foreign surcharges and discretionary trusts – relief or reiteration?

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.

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.

Commissioner's Practice Note No. CPN 004

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:

• if the class of beneficiaries does not currently include a foreign person, but may in the future include such a person, then the foreign surcharges will not apply and the deed need not be amended;
• it remains the case that, if at some time in the future a beneficiary becomes a foreign person – the Practice Note provides the example of named beneficiaries who reside overseas for more than 200 days in a single year – then in respect of that year the trust will be a foreign trust subject to purchaser surcharge duty (if it acquires residential land) and surcharge land tax.

The Practice Note further confirms:

• that where a named or specified beneficiary is a foreign person, the Commissioner will require such beneficiary be removed from the trust deed as a beneficiary – otherwise the foreign surcharges will apply. The Practice Note provides no guidance on resettlement issues which may arise;
• that the question of who is a beneficiary is one which is assessed from time to time – according to change of circumstances – so at any time, a trustee must ask "who are the existing potential beneficiaries?"; and
• accordingly, the Practice Note supports the approach adopted by the Cleardocs 'Discretionary Trust - excluded beneficiaries' deed. The Cleardocs deed takes the approach that any person who may otherwise be a potential beneficiary is excluded as a beneficiary for any period in relation to which they are a foreign person.

Suggested actions for trustees of discretionary trusts

In light of the Practice Note, trustees of discretionary trusts should:

• review the terms of their trust deeds;
• determine whether any individual potential beneficiaries of the trust are foreign persons – take a conservative approach;
• determine whether the classification of entities who are beneficiaries is broad enough to allow distributions to foreign entities; and
• if there is any doubt, amend the trust deed to obtain the benefit of the Commissioner's Revenue Ruling (if necessary). Such amendments must be irrevocable.

Cleardocs will soon be releasing a 'Deed of Variation - Exclusion of foreign persons' product to assist Cleardocs customers with such changes.

Recapping surcharge purchaser duty and surcharge land tax

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.

Amending trust deeds

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).

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

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.

Order Cleardocs products

• Discretionary (Family) Trust set up
• Discretionary Trust – excluded beneficiaries that provides options to exclude foreign and/or non-blood beneficiaries from the trust set up
• Discretionary (Family) Trust Minutes & Resolutions