Australia: Foreign purchaser additional duty on purchases of Victorian land by trusts

Changes to the Duties Act 2000 (Vic) (Duties Act) with effect from 1 July 2015 mean that a foreign purchaser of Victorian land used or intended to be used as residential property may be charged with an additional 3% in duty. The wide definition of the term "foreign purchaser" means that even trusts domiciled in Australia with predominantly Australian beneficiaries may be caught by these changes.

Changes to the Duties Act
Sections 18A and 28A have been inserted:

18A Foreign purchasers—duty in respect of change of use of land

  1. This section applies if—
    1. on or after 1 July 2015, under a dutiable transaction, a land-related interest in property that is not residential property is transferred to a foreign purchaser; and
    2. after the land-related interest is transferred, the foreign purchaser forms an intention to affix a building on the land that is subject to the land-related interest that—
      1. is designed and constructed solely or primarily for residential purposes; or
      2. may lawfully be used as a place of residence.
  1. Within 14 days after the foreign purchaser forms the intention, the foreign purchaser must lodge with the Commissioner a statement of the foreign purchaser's intention.
  2. Within 30 days after the foreign purchaser forms the intention, the foreign purchaser must pay duty in relation to the land-related interest in residential property at a rate of 3% of the dutiable value of the interest at the time that it was transferred.
  3. 28A Rate for additional duty chargeable for foreign purchasers—residential property

  1. This section applies to a dutiable transaction under which a land-related interest in residential property is transferred to a foreign purchaser.
  2. In addition to the duty chargeable under section 28, duty is also chargeable at a rate of 3% of the dutiable value of the land-related interest in residential property.

Who is a foreign purchaser and what is a foreign trust?
Definitions have been inserted to the Duties Act:

foreign purchaser means a transferee (for the purposes of Chapter 2) or person who makes a relevant acquisition (for the purposes of Chapter 3), and that transferee or person is-

  1. a foreign natural person; or
  2. foreign corporation; or
  3. the trustee of a foreign trust.

foreign trust means a trust in which one of the following persons has a substantial interest in the trust estate—

  1. a foreign corporation;
  2. a foreign natural person;
  3. another person that holds the substantial interest as trustee of another foreign trust;

What is a substantial interest in a trust estate?
Sections 3B, 3D and 3E of the Duties Act have been inserted:

3B What is a substantial interest in a trust estate?

  1. For the purposes of the definition of foreign trust in section 3(1), a person has a substantial interest in the trust estate if—
    1. the person has a beneficial interest of more than 50% of the capital of the estate of the foreign trust; or
    2. the Commissioner has made a determination under section 3D in respect of the person.
  1. If, under the terms of a foreign trust, a trustee has a power or discretion as to the distribution of the capital of the trust estate to a person or a member of a class of person, any such person is taken to have a beneficial interest in the maximum percentage of the capital of the foreign trust estate that the trustee is empowered to distribute to that person.
  2. Subsection (1) applies whether or not the person has the substantial interest alone or together with an associated person.
3D Commissioner may determine person has a substantial interest in a trust
  1. For the purposes of section 3B(1)(b), the Commissioner may determine that a person has a substantial interest in a trust estate if, in the Commissioner's opinion, the person has the capacity to determine or influence the outcome of decisions about the administration and conduct of the trust, taking into account—
    1. the practical influence the person can exert in addition to any rights the person can enforce; and
    2. any practice or behaviour affecting the trustee's administration and conduct of the trust (even if that practice or pattern of behaviour involves the breach of an agreement or a breach of trust).
  1. This section applies regardless of any interests that any other person has in the trust estate.
3E Exemptions from holding controlling interests in foreign corporations or substantial interests in trust estates of foreign trusts
  1. Despite sections 3A, 3B, 3C and 3D, a person is taken not to have a controlling interest in a foreign corporation, or a substantial interest in the trust estate of a foreign trust, if the person has an exemption under subsection (2).
  2. The Treasurer, for the purposes of subsection (1), may, in writing, exempt a person who has a controlling interest in a foreign corporation, or a substantial interest in the trust estate of a foreign trust, if the Treasurer is satisfied that, having regard to any one or more of the following matters, the person should not be taken to have that interest—
    1. in the case of a person who has a substantial interest in the trust estate of a foreign trust—
      1. the nature and degree of the person's beneficial interest in the capital of the estate of the trust;
      2. the practical influence the person exerts or any rights the person enforces to determine or influence, directly or indirectly, the outcome of decisions about the administration and conduct of the trust;
      3. any practice or behaviour of the person affecting the trustee's administration and conduct of the trust;
      4. any other relevant circumstances.

How does this affect purchases of Victorian land through trusts?
Victorian land purchased by a foreign trust that is used or intended to be used as residential property will be required to pay an additional 3% duty on the dutiable value of the land-related interest in residential property purchased.

Discretionary Trusts
The application of section 3B(2) of the Duties Act means that discretionary trusts with just one beneficiary who is a foreign natural person may be deemed to be a foreign trust. Given most definitions of "beneficiaries" in discretionary trust deeds are drafted broadly, many discretionary trusts will be deemed to be foreign trusts. For example, if a discretionary trust deed states that the beneficiaries are:

  1. the principal beneficiary; and
  2. any child, grandchild, spouse, parent, brother, sister, nephew, or niece of the principal beneficiary,

and the principal beneficiary has a distant niece who is a foreign natural person, then that trust will be deemed to be a foreign trust.

Unit Trusts
If over 50% of the units in a unit trust are held by a single foreign natural person, foreign corporation, or another person in the capacity of trustee of another foreign trust, that unit trust will be a foreign trust.

Commissioner Determination
The Commissioner also has the power under section 3D of the Duties Act to make a determination to deem that a person has a substantial interest in the capital of a trust, having regard to, amongst other things, the influence a person has over the administration of the trust.

What does this mean for you?
Before purchasing Victorian land used or intended to be used as residential property through a trust, consider whether the trust will be deemed to be a foreign trust. If the trust is deemed to be a foreign trust, consider whether in the case of a discretionary trust, the trust deed may be amended to ensure it is not a foreign trust (for example by restricting the definition of "beneficiaries") or whether a new trust which carves out the possibility of the trust being a foreign trust should be established for the purchase.
With the median Melbourne house price now over $700,000, a 3% saving in duty on the average house equates to over $21,000.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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