Is your trust at risk of being deemed foreign and having to pay duty and land tax surcharges?

10 December 2020

Several Australian jurisdictions have recently brought in rules that deem discretionary trusts to be “foreign” for duty and land-tax purposes if there are potential foreign beneficiaries that might benefit under the trust.

Such trusts could be subjected to duty and land tax surcharges if they buy or hold residential property in those jurisdictions unless the trust deed is amended to exclude potential foreign beneficiaries.

Depending on the precise State or Territory jurisdiction:

  • General duty is payable on the acquisition of real property at rates of around 4-6%. The foreign buyer duty surcharge is typically an extra 7-8%.
  • Land tax is levied annually on the value of real property (other than main residences or other excluded property) at general rates of around 2- 3%. The foreign landholder land tax surcharge is typically an extra 1.5 to 2%.

The precise rules that deem discretionary trusts to be “foreign” in each jurisdiction are somewhat different. Here’s a snapshot:

New South Wales

Legislation was passed in June 2020 that provides a discretionary trust is deemed a foreign trust unless the deed expressly and irrevocably excludes foreign persons as beneficiaries. Further, the legislation imposes a deadline to amend the deed to exclude foreign beneficiaries by 31 December 2020.

Discretionary Trusts that fail to make this amendment by that day risk being subject to foreign person surcharge duty of 8% on the acquisition of interests in residential land and a surcharge land tax of 2% on the holding of residential land in addition to general rates. The surcharge risk is both prospective and retrospective. It can be applied back to purchases and holding of residential property from 2016.

Victoria

The Revenue Office announced it will commence deeming discretionary trusts to be foreign persons for the purpose of foreign purchaser additional duty unless the deed excludes potential foreign beneficiaries.

Previously, the Revenue Office applied a more practical approach whereby discretionary trusts were not deemed to be foreign unless there is evidence that distributions will actually be made to foreign persons.

Queensland/Western Australia/South Australia/Australian Capital Territory

Discretionary trusts are treated as being relevantly “foreign” if “controlled” by foreign persons and/or have “foreign” default beneficiaries.

These jurisdictions do not currently have deeming rules that risk the trust being considered foreign merely be having potential foreign beneficiaries.

If you are a trustee of a discretionary trust owning a direct or indirect interest in residential property in NSW, or planning to acquire such an interest, you should immediately seek advice in relation to amending the deed to exclude potential foreign resident beneficiaries before the hard and fast 31 December 2020 amendment deadline passes.

The duty and land tax position of trusts buying or holding residential property in other jurisdictions should also be considered on a case by case basis. Amendments to deeds to exclude potential foreign beneficiaries may also be required to avoid duty and land tax surcharges in those jurisdictions.

In appropriate cases, the Findex Specialist Tax team can facilitate a legal amendment of the deed through our legal providers to exclude potential foreign beneficiaries and remove the risk of these costly surcharge exposures.

If you believe you might be adversely impacted by these surcharges, please get in contact with your adviser or contact the Findex Tax Advisory team so we can review your circumstances and make recommendations on what actions to take.