Transfer duty and land tax ramifications for discretionary trusts with foreign beneficiaries

18 February 2020

A recent announcement by the Victorian State Revenue Office may have serious transfer duty and land tax ramifications for discretionary trusts that have any potential foreign beneficiaries.

Changes to Victorian Foreign Purchaser Additional Duty and Absentee Owner Surcharge for Discretionary Trusts will be implemented from 1 March 2020. So, what does this mean for taxpayers?

Current provisions

With the increase in popularity of Australian property among foreign investors, the Victorian government introduced Foreign Purchaser Additional Duty provisions in the Duties Act 2000 (Vic), which took effect from 1 July 2015. The Foreign Purchaser Additional Duty and Absentee Owner Surcharge impacts foreign persons who hold an interest or acquire property in Victoria.

Effective 1 July 2019, a foreign person who acquires residential property in Victoria or holds a significant interest in a landholder that owns residential property in Victoria with a dutiable value, may be subject to Foreign Purchaser Additional Duty of 8% on top of the standard Transfer Duty Rate of 5.5%.

A foreign purchaser is either:

  • A transferee who is a foreign natural person
  • A foreign corporation, being:

- a corporation incorporated outside Australia

- an Australian corporation in which either a foreign natural person, a foreign corporation, or the trustee of a foreign trust holds a substantial interest

  • A trustee of a foreign trust

For discretionary trusts, any person may be deemed to have a beneficial interest in the entire capital of the trust estate where the trustee of the trust is empowered to distribute to that person. The effect of this special rule is that discretionary trusts with no restrictions on foreign beneficiaries will generally be treated as a foreign trust for Foreign Purchaser Additional Duty provisions.

Victoria introduced an Absentee Owner Surcharge with effect from the 2016 land tax year. Effective 1 January 2020 the surcharge is 2%. This change may impact land tax liabilities for foreign owners of property in Victoria and developers who are looking to encourage foreign investors to enter the property market.

An absentee owner is:

  • An absentee individual
  • An absentee corporation
  • A trustee of an absentee trust

There are different land tax implications for each of the different trust types.

Updated provisions effective 1 March 2020

Historically, the Victorian State Revenue Office adopted a practical approach in respect of discretionary trusts. Trusts with foreign beneficiaries who had not received any distributions and who were, based on available information, unlikely to receive any distributions in the future, were not considered a foreign trust.

If a family discretionary trust could demonstrate this, the trust would not be considered a foreign trust and therefore not liable for the Foreign Purchaser Additional Duty.

From 1 March 2020, the Victorian State Revenue Office will no longer apply this approach in respect of discretionary trusts. That is, a discretionary trust that has any potential for foreign beneficiaries to be entitled to capital distributions will be considered a foreign trust for transfer duty and land tax obligations.

What does this mean for taxpayers?

The Victorian State Revenue Office has transitional arrangements in place and will continue to apply the historical approach in relation to dutiable transactions where contracts of sale were entered into before 1 March 2020. The Foreign Purchaser Additional Duty and Absentee Owner Surcharge regimes in Victoria give rise to complexity and increase the onus on all taxpayers to comply with taxation obligations.

When acquiring residential property in Victoria it is important to consider the following which may safeguard against any unintended duty and land tax consequences:

  • Purchase residential property using a purchase vehicle that is not a foreign purchaser
  • Set up a new discretionary trust which excludes foreign beneficiaries
  • If you are a trustee of a discretionary trust, amend the trust deed to specifically exclude foreign beneficiaries

Changes may be necessary to discretionary trust deeds before 1 March 2020. The Findex Tax Advisory team can review your individual circumstances to help ensure you are compliant and not unnecessarily exposed to additional tax liabilities. We can also help you liaise with the Victorian State Revenue Office to make any required voluntary disclosure and assist if you are unsure of your obligations or require guidance on the correct operation of the Victorian transfer duty and land tax provisions.

Contact the Tax Advisory team