Tax & Accounting9/09/2020 12:00:00 AM

Trusts and the foreign person duty and land tax surcharge: Act before it’s too late!

Contributed by James Whiley, Partner, Jim Koutsokostas, Special Counsel and Stevie Bladen, Law Graduate, Hall & Wilcox

As 2020 nears to a close, advisors should note the impending 31 December deadline in NSW to exclude foreign persons as beneficiaries of discretionary trusts, to prevent these trusts from becoming foreign persons for the purposes of surcharge duty and land tax. Similar rules also apply to:

  • testamentary trusts created under Wills or codicils executed on or after 1 January 2021 that hold or acquire NSW residential land, and
  • foreign purchaser additional duty for discretionary and testamentary trusts in Victoria and Tasmania.

In this update, we discuss the what, when and why of excluding foreign beneficiaries from trusts. Given the increasingly frequent use of discretionary and testamentary trusts for asset protection and tax planning, this update will be valuable to many advisors and their clients.

Discretionary trusts

New measures introduced on 24 June 2020 provide that a trustee of a discretionary trust holding NSW residential property is deemed a foreign person unless the trust deed:

  1. expressly excludes foreign persons as beneficiaries, and
  2. provides that this exclusion is irrevocable.

In NSW, the deadline to amend an existing trust deed to exclude foreign beneficiaries is 31 December 2020. Trust deeds that fail to do so will risk being liable to foreign person surcharge purchaser duty (currently 8%) on the acquisition of an interest in residential land, and surcharge land tax (currently 2%) on the holding of residential land, in addition to ordinary rates. The risk is not only prospective; it is also retrospective with respect to any residential land:

  • purchased since 21 June 2016 (for surcharge duty)
  • held on and from 31 December 2016 (for surcharge land tax).

The Victorian State Revenue Office has applied a similar approach to discretionary trusts since 1 March 2020 with respect to foreign purchaser additional duty, although there is no deadline to make the necessary exclusion. Deeds must simply be amended prior to a dutiable transaction completing (eg settlement of a property).

For Tasmanian foreign investor duty surcharge purposes, all trusts are taken to be foreign unless the trustee proves otherwise. In effect, any discretionary trust that has any potential foreign beneficiaries is likely to be a foreign trust. A trustee of a discretionary trust can amend their trust deed within 6 months of a dutiable transaction to ensure the trust is not foreign (in which case a refund of the duty surcharge should be available).

You may be thinking — why do I need to exclude foreign persons if my intended beneficiaries are all Australian citizens, trustees or corporations?

Even if the trust has never, and never intends to, distribute to a foreign person, the trust remains liable to the surcharges if there is a mere possibility that the trust could distribute to a foreign person. Given that most discretionary trust deeds include a broad class of beneficiaries for maximum flexibility and tax planning opportunities, many trusts will be caught by these surcharges.

If your client’s discretionary trust holds or intends to acquire residential property in NSW, Victoria or Tasmania, they should consider amending their trust deed before the end of the year.

Testamentary trusts

Similar surcharges will apply to testamentary trusts created under Wills or codicils executed on or after 1 January 2021 that hold or acquire NSW residential property1 unless the trust deed for a relevant testamentary trust expressly and irrevocably excludes foreign persons as beneficiaries. Similar rules currently also apply in Victoria and Tasmania.

Notwithstanding this, a blanket approach may not be suitable in all cases, due to the risk of excluding foreign beneficiaries that your client may wish to benefit in the future. In our view, changes should be made on a case-by-case basis at the administration stage, provided that they are made:

  • before residential property is acquired by the testamentary trust (to ensure the duty surcharges do not apply), or
  • before the end of the calendar year in which the land is first held by the trust (to prevent surcharge land tax on residential land in NSW2 or absentee owner surcharge land tax on any non-exempt land in Victoria from being payable)3.

Of course, the terms of the testamentary trust will need to allow an irrevocable amendment to occur at the administration stage. If not, consideration should be given to irrevocably excluding foreign persons as beneficiaries when the Will or codicil is executed.

Advisors should also be aware that from 31 December 2020 (in NSW), a trust resulting from a court order varying a Will, codicil or application of distribution in an intestate estate may also be liable to surcharges.

What is the position in Queensland?

The Queensland rules are somewhat less rigid — foreign person surcharge duty (called “additional foreign acquirer duty”) and foreign surcharge land tax only become a concern if (broadly) a foreign person is:

  • named as a beneficiary with a specified interest in the trust, or
  • a taker-in-default.

While clients in Queensland should be aware of these issues, the position is clearly less stringent than Victoria and NSW whereby any potential beneficiary who is a foreign person causes a discretionary or testamentary trust to be a foreign trust.

The other jurisdictions that impose surcharges take a similar approach to Queensland but with some differences. Accordingly, trusts that hold residential land in the ACT or are contemplating the acquisition of residential land in WA or SA should consider the status of their trust for surcharge purposes.

This article was originally published on the Hall & Wilcox website and has been reproduced with permission.

[1] Other than property of the estate, which is not subject to primary duty and surcharge duty.
[2] Even if the land is otherwise exempt from land tax in NSW.
[3] Tasmania does not currently have a land tax absentee/foreign owner surcharge.