Under current legislation, ‘foreign persons’ that acquire or own residential land in NSW may be subject to surcharge purchaser duty (additional 8%) and ongoing surcharge land tax (additional 2%).
Broadly, a ‘foreign person’ includes an individual who is not ordinarily resident in Australia (other than an Australian citizen) or various entities in which foreign persons hold a substantial interest.
Where a residential property is owned by a discretionary trust, if the trustee of the trust has the ability to make distributions to a foreign person, the trust may be deemed to be a foreign person.
Accordingly, for those that are not otherwise ‘foreign persons’, to the extent that they hold residential land in a discretionary trust, irrespective of who the named beneficiaries are, the discretionary trust may be considered a foreign person and therefore subject to foreign purchaser duty (on purchase of residential land), or surcharge land tax (if the trust holds residential land).
The State Revenue Legislation Further Amendment Act 2020 received assent on 24 June 2020.
The Act amends the Duties Act 1997 (NSW), Land Tax Act 1956 (NSW), and the Land Tax Management Act 1956 (NSW) to clarify that a trustee of a discretionary trust is a foreign person if the terms of the trust don't prevent a foreign person being a beneficiary. For the definition of a foreign person, a summary can be found in Revenue Ruling G009.
If the trustee is deemed to be a “foreign person” under the legislation, the trust may be liable for surcharge purchaser duty and surcharge land tax. If the terms of the trust prevent a foreign person from being a beneficiary, the trustee is often not a foreign trustee for surcharge purchaser duty and surcharge land tax purposes.
The legislation makes clear that in order for a trustee not to be deemed to be a ‘foreign trustee’, the terms of the trust must explicitly prevent a foreign person from being a beneficiary.
What does this mean for you?
For those with discretionary trusts holding residential property located in NSW, to prevent a discretionary trust from inadvertently attracting a liability for NSW surcharge duty and land tax, consideration should be given to amending the terms of your discretionary trust deed before midnight on 31 December 2020.
Not only must the terms of a trust deed prevent a foreign person from being a beneficiary under the trust, but such exclusion must also be irrevocable.
Under the Act, an exemption from (and refunds of) surcharge purchaser duty and surcharge land tax payable in respect of residential land in NSW held by the trustee of a discretionary trust will be given if the following requirements are met:
- No foreign beneficiary requirement: the terms of the trust deed prevent a foreign person from being a beneficiary of the trust, so as to prevent a discretionary trust from inadvertently attracting a liability for surcharge duty and land tax payable by a foreign trustee; and
- No amendment requirement: the clause preventing a foreign person from becoming a beneficiary cannot be amended to allow a foreign person to be a beneficiary at a later time.
Absent other factors, meeting the above requirements should be sufficient to prevent a discretionary trust from being liable for surcharge duty and land tax payable by a foreign trustee.
The Act provides for exemptions and refunds when discretionary trusts are amended before the end of 2020 (i.e. by 31 December 2020). The transitional provisions also have a retrospective effect on the commencement of the surcharge purchaser duty on 21 June 2016.
As a result, any trustee that has incurred a duty liability prior to the commencement of this Bill may have an opportunity to obtain relief by way of refund.
What do you need to do?
- Determine whether your discretionary trust owns residential land in NSW.
- If so, contact your RSM representative to review your discretionary trust deed to determine if you may be inadvertently exposed to the abovementioned surcharges.
If your discretionary trust is exposed to the abovementioned surcharges, your RSM representative can coordinate with you to determine whether or not your trust deed should be amended to exclude foreign persons as beneficiaries.
Importantly, consideration must be given to whether this amendment is workable, as it would mean that thereafter your discretionary trust can never distribute to a foreign person. This may be problematic if you or other potential beneficiaries are not Australian citizens and reside overseas (or may reside overseas in the future).
Further consideration will also need to be given as to whether such an amendment causes broader tax or duty implications for the trust (i.e. such a those resulting from a re-settlement of the trust). Often, this will not be an issue, however, such amendments are subject to the terms of the trust deed, and specialist advice may be required. Unless a discretionary trust deed complies with the above requirements, the trustee will not be eligible for the surcharge purchaser duty and surcharge land tax surcharge exemptions and refunds.
For more information
If you require further information regarding NSW land tax or would like an RSM adviser to review your discretionary trust deed, contact your local expert today.