Duty and Land Tax Surcharges to sting discretionary trusts

The New South Wales Government announced two surcharges aimed at ‘foreign persons’ acquiring and holding residential property in the 2016 budget.  The surcharges were introduced by the State Revenue Legislation Amendment (Budget Measures) Act 2016 (NSW).

The surcharge regimes have a common definition of ‘foreign persons’ which is very broad and will catch discretionary trusts that include foreign persons as possible beneficiaries.  Many discretionary trusts will be inadvertently caught by the surcharges. 

It is important to review the beneficiaries in your discretionary trust deed and consider amending it if one or more foreign persons are possible beneficiaries.

Why is this significant where your trust was established to benefit Australian residents?

Most discretionary trusts established in Australia are primarily intended to benefit Australian resident beneficiaries.  However, discretionary trusts typically contain a broad class of beneficiaries who are defined by reference to their relationship to a named beneficiary (e.g. grandparents, cousins etc. of Fred). 

If a ‘foreign person’ (e.g. an overseas relative or foreign corporation) is a possible beneficiary of a discretionary trust, the trust is deemed a ‘foreign person’ under the surcharge regimes.

Broadly, the surcharges are:

  • an additional duty of 4% of the purchase price of the property levied on foreign persons who purchase residential property on or after 21 June 2016; and
  • a land tax surcharge equal to 0.75% of the unimproved value of all of the residential land owned by a foreign person at midnight on 31 December in any year (commencing on 31 December 2016).  This tax is additional to the usual land tax liability.

There are similar surcharges in other states.

How is a discretionary trust deemed to be a ‘foreign person’?

The definition of a ‘foreign person’ is very broad and is based on the definition of a ‘foreign person’ in the Foreign Acquisitions and Takeovers Act 1975 (Cth).  It does not include an Australian citizen no matter where they reside.

A ‘foreign person’ includes a trustee of a trust in which a foreign person holds a beneficial interest in at least 20% of the income or property of the trust.

In a discretionary trust no beneficiary has a beneficial interest in the income or property of the trust.  However, if there is at least one foreign person within the class of possible beneficiaries then the legislation deems the foreign person to have a 100% beneficial interest in the income and property of the trust.  Consequently, the discretionary trust will be within the definition of a ‘foreign person’.  

The fact that a foreign person who is a possible beneficiary may not receive any actual benefit from the trust is irrelevant.

What should you do if you are concerned about the surcharges?

If you are considering establishing a discretionary trust to purchase and hold residential property, then you will require a carefully drafted discretionary trust deed that does not include foreign persons as potential beneficiaries.

If you have an existing discretionary trust that holds or is about to purchase residential property, then the trust deed will need to be reviewed and may require amendment to exclude foreign persons from the class of beneficiaries. 

We can assist you with establishing a discretionary trust and amending your discretionary trust deed to ensure that it achieves your objectives in relation to these new tax surcharge regimes. 

Author: Peter Kramer