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Trusts holding residential land in NSW must amend their trust deed by 31 December 2020 or risk foreign surcharges applying

Discretionary trusts that own - or intend to enter into a contract to purchase - 'residential land' in New South Wales or hold an ownership interest in a company or unit trust that owns such land should amend their trust deeds before 31 December 2020 to exclude foreign persons as beneficiaries if they have not done so already. Failing to do will result in the trust being subject to New South Wales foreign land tax and duty surcharges.

Daniel Hui, Maddocks Lawyers

What is the issue for discretionary trusts and the foreign surcharges?

The issue of New South Wales (NSW) foreign surcharge land tax and duty for discretionary trusts has been present since 2016 and has been addressed in several earlier articles, including as recently as February 2020.

To recap briefly, where 'residential land' in NSW is acquired or held (directly or indirectly) by a discretionary trust, the trustee of the trust may be liable for NSW foreign surcharge land tax and duty if the trust is considered 'foreign', i.e. any of the potential beneficiaries is a 'foreign person'.

Legislation was passed in June 2020 which now deems a discretionary trust to be 'foreign' for the purposes of surcharge land tax and duty, unless the trust expressly excludes any foreign person from being a potential beneficiary of the trust by irrevocably amending its trust deed.

What do my clients have to do before 31 December 2020?

If your client's discretionary trust has acquired or held (directly or indirectly) NSW residential land on or after 21 June 2016 - or intends to enter into a contract to purchase such land - you should check whether the trust deed expressly excludes a 'foreign person' (as that term is defined in the NSW land tax and duties legislation) from being a beneficiary.

If it does not, the trust deed should be amended to include such a clause by 31 December 2020 or the foreign surcharge land tax or duty will apply (and if the trust does not own land, then the deed should be updated prior to entering into a contract to buy such land, even if that is after 31 December 2020). Further, the terms of the trust must not be capable of amendment in a manner that would result in a foreign person being a potential beneficiary

If the trust has already paid surcharge land tax or duty, the trust is entitled to a refund if the amendment is made before midnight on 31 December 2020.

What if the trust deed is not amended in time?

If the trust deed is not amended by 31 December 2020, the trust will be subject to the following:

  • surcharge purchaser duty of up 8% on NSW residential property acquired on or after 21 June 2016 (in addition to the transfer duty that would ordinarily be payable); and/or
  • surcharge land tax of up to 2% on NSW residential property held at midnight on any 31 December starting from 31 December 2016 will be payable (in addition to the land tax that would ordinarily be payable).

Next steps

Given there are significant adverse consequences for Australian-controlled trusts being deemed as 'foreign' and subject to the foreign surcharges (which can more than double the duty or land tax payable), there has been a lengthy transitional period from when the rules were first enacted in 2016 and the 31 December 2020 deadline to amend trust deeds. Now that this deadline is fast approaching, you should review the trust deeds for any discretionary trusts that have acquired residential land in NSW since 21 June 2016 and determine if:

  • an amendment is necessary to exclude foreign persons from benefitting under the trust so that the foreign surcharge land tax and duty do not apply; and
  • whether such an amendment is appropriate for the trust given the profile of the beneficiaries of the trust.

Cleardocs have a deed of variation product to assist with such amendments.

More Cleardocs information on related topics

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

Order Cleardocs discretionary trust packages


Lawyer in Profile

Daniel Hui
Daniel Hui
Senior Associate
+61 3 9258 3563

Qualifications: BCom, LLB (Hons), Monash University

Daniel is a member of Maddocks Tax and Structuring team. He has expertise advising on both direct and indirect taxes. He has represented private and publicly-listed companies, high net worth family groups and not-for-profit organisations in a broad range of tax and duty matters.

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