20 November 2019
Last chance for relief from surcharge duty and land tax for family trusts
The State Revenue Legislation Further Amendment Bill 2019 (NSW) (Bill) introduced to the Parliament of NSW on 22 October 2019 gives trustees of discretionary trusts a final chance to amend the trust deed to avoid surcharge purchaser duty and surcharge land tax and obtain a refund of any surcharge duty and/or surcharge land tax previously paid.
From 21 June 2016, “foreign persons” became liable to pay a surcharge purchaser duty (currently 8% of the market value of the property) on the acquisition of residential property in NSW, as well as a surcharge land tax (currently 2% of the unimproved value of the land) for any residential property in NSW owned as at 31 December each year.
We previously discussed the operation of the surcharge regimes in the below articles:
Each beneficiary of a discretionary trust that has the potential to receive income or capital of the trust is deemed to have the maximum percentage interest in the income or capital over which the trustee may exercise a discretion to distribute to them. Accordingly, if any of the potential beneficiaries of a discretionary trust is a foreign person, then the trustee will be liable for:
foreign purchaser duty surcharge if the trust acquires residential property in NSW; and
foreign person land tax surcharge, on an annual basis, if the trust holds residential property in NSW.
Many trust deeds have already been amended to exclude foreign persons from benefiting from the discretionary trust. Some of these amendments were not made on an irrevocable basis because the legislation does not expressly require them to be irrevocable.
The Chief Commissioner released a ruling with effect from 13 September 2017 which clarified that the amendment needed to be made on an irrevocable basis.
The Chief Commissioner issued a practice note CPN 004 which stated:
Revenue Ruling G010 Version 2 clarifies that all amendments must be irrevocable. If the amendments were made prior to the 19th September 2017 (when the amended ruling was posted on our website), the Chief Commissioner will accept amendments without the irrevocable clause for surcharge purchaser duty if the dutiable transactions occurs on or before 31 December 2018 and for surcharge land tax for the 2018 land tax year.
Accordingly, an irrevocable amendment prevents surcharge liabilities from arising from the date of the deed of amendment onwards. The amendment, in and of itself, does not affect surcharge liabilities relating to the period after 21 June 2016 up to the date the deed of amendment was executed. For example, surcharge liabilities may have arisen in relation to the acquisition or holding of residential property by trustees of discretionary trusts during this time.
Administrative practice in relation to surcharge liabilities
Under Revenue Ruling Surcharge land tax and duty – discretionary trusts G 010 version 2, the Chief Commissioner currently has the discretion to exempt a liability for surcharge purchaser duty and/or surcharge land tax. The Revenue Ruling provides:
“7. The surcharge purchaser duty and surcharge land tax legislation is to be administered on the basis that the Chief Commissioner has a discretion to exempt a trustee of a discretionary trust from surcharge purchaser duty and/or surcharge land tax if satisfied that the trustee is not involved in a scheme or arrangement for the evasion or avoidance of these taxes1.
8. The trust deed must be amended so that the trustee is no longer liable for the taxes. Where it is not possible to amend the deed prior to when a dutiable transaction occurs or a land tax liability arises, the trustee may apply to the Chief Commissioner for an exemption to be granted on the proviso that the amendment has been made or will be made within 6 months after granting the exemption. If the trust deed is not amended within the required timeframe, the exemption will be rescinded with retrospective effect.
9. This variation to statute is to operate with retrospective effect from 21 June 2016, until retrospective legislation is passed.”
In accordance with the Revenue Ruling, trustees of discretionary trusts can avoid past and future surcharge duty and surcharge land tax liability by:
amending the terms of the trust to irrevocably prohibit the trustee from making any trust distributions to a foreign person and applying to the Chief Commissioner to exempt any prior surcharge duty and surcharge land tax liability; or
seeking the Chief Commissioner’s discretion to exempt the surcharge duty and surcharge land tax incurred on the proviso that a deed of amendment irrevocably excluding foreign persons from being a beneficiary is executed within 6 months after the Chief Commissioner grants the exemption.
Proposed Amendments to Legislation
The State Revenue Legislation Further Amendment Bill 2019 (NSW) introduces the retrospective legislation referred to in Revenue Ruling Surcharge land tax and duty – discretionary trusts G 010 version 2.
The Bill is particularly relevant to trustees that have not yet amended the trust deed or sought the Commissioner’s discretion in relation to prior surcharge liabilities.
The Bill amends the surcharge provisions, to allow for exemptions and refunds of surcharge purchaser duty and surcharge land tax, provided that the terms of the discretionary trust are amended before midnight on 31 December 2019.
Under the transitional arrangements in the Bill, a trustee of a discretionary trust will not be a foreign person if the trust deed is amended prior to the commencement date (i.e. date of assent) to ensure that no foreign person can be a beneficiary of the trust. The Bill provides that trustees of discretionary trusts who have amended their trust deeds on this basis will be entitled to exemption from or refund of prior surcharge liabilities. Interestingly, there is no requirement that the amendment be irrevocable. This conflicts with the Chief Commissioner’s requirements in Revenue Ruling G010 Version 2 and with practice note CPN 004.
After the commencement date, to access the exemptions and refunds of prior surcharge liabilities and not be considered a foreign trustee moving forward, the amendment to the trust deed must be made by 31 December 2019 and provide that:
(a) no potential beneficiary of the trust is a foreign person (the “no foreign beneficiary” requirement); and
(b) the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the “no amendment” requirement).
The Second Reading Speech to the Bill indicates that the NSW Government is giving one last chance for trustees to make the necessary amendment to their trust deeds before midnight on 31 December 2019:
to avoid the application of surcharge duty to transactions which occurred before midnight on 31 December 2019;
to avoid the application of surcharge land tax in respect of the 2017, 2018 and 2019 land tax years; and
to be entitled to receive refunds for surcharge duty and/or surcharge land tax already paid in respect of the above transactions or land tax years.
Given the limited time before the end of the year we are sceptical whether the Bill will be enacted before 31 December 2019. Nevertheless, we recommend that trustees of discretionary trusts which own residential property in New South Wales consider amending their trust deeds before 31 December 2019 to prohibit foreign persons from benefiting.
If “foreign persons” have never benefited and were never intended to benefit from the trust, then amending the trust deed will generally be an appropriate course of action.
Under the terms of the Bill in its current form, so long as the amendment is made before the commencement date of the amending Act the amendment does not need to be irrevocable. Once the amending Act commences, the amendment will need to be irrevocable. It will be interesting to see if the Bill is enacted in its current form.
Bartier Perry has the necessary knowledge and expertise to help you take the necessary action having regard to the provisions contained in the Bill. We can prepare the amendments to your trust deed and assist with applications to the Chief Commissioner for refunds of previously paid surcharge purchaser duty and surcharge land tax.
*The Bill also proposes to make amendments in respect of landholder duty provisions. These proposed amendments are discussed in our article: Proposed landholder duty changes set to capture more transactions
 Duties Act 1997 (NSW) section 104J; Foreign Acquisitions and Takeovers Act 1975 (Cth) definition of “foreign person” in section 4 and section 18(3); Land Tax Act (NSW) definition of “foreign person” in section 2A; Revenue Ruling Definition of foreign person G 009.
 Revenue Ruling Surcharge land tax and duty – discretionary trusts G 010 version 2.
 Revenue Ruling Surcharge land tax and duty – discretionary trusts G 010 version 2.
 Contained in the Duties Act 1997 (NSW), Land Tax Act 1956 (NSW) and Land Tax Management Act 1956 (NSW).