In brief - It may be necessary to amend discretionary trust deeds to expressly exclude foreign beneficiaries where foreign persons are not intended to be potential beneficiaries. Otherwise, stamp duty and land tax surcharges may apply.
In this article, we look at the rules on when discretionary trusts will be taken to be foreign trusts in Victoria, New South Wales and Queensland for stamp duty and land tax surcharges.
There have been recent changes in Victoria and New South Wales, which require trust deeds to be amended to exclude foreign beneficiaries if the trustee has no intention of making distributions to foreign beneficiaries so that additional surcharges are not applied to trust property.
A stamp duty surcharge of 8% applies if the buyer of residential property is the trustee of a foreign trust.
A foreign trust is a trust where foreign persons hold a beneficial interest of more than 50% of the capital of the trust. For a discretionary trust, there are special rules that treat each potential beneficiary to have a beneficial interest in the maximum percentage of the capital that the trustee can distribute to that beneficiary. For many discretionary trusts this will be 100% as there is no restriction on the amount of capital that can be distributed to a beneficiary.
If any of the potential beneficiaries are foreign persons then the discretionary trust will be taken to be a foreign trust.
After the stamp duty surcharge provisions were introduced in 2015, the Victorian State Revenue Office (VSRO) adopted a practical approach to assess whether a discretionary trust was a foreign trust. Under that approach, trusts that had foreign beneficiaries who did not, and who were unlikely in the future to, receive any distributions based on available information were not considered to be foreign trusts.
The VSRO recently announced that it will no longer apply the practical approach and it will apply the special rules for discretionary trusts strictly. This change of approach took effect on 1 March 2020.
The good news for buyers of residential property is that the announcement includes transitional arrangements.
The VSRO will continue to apply the practical approach to contracts entered into before 1 March 2020.
For contracts entered into on or after that date, the trustee can amend the trust deed before settlement to exclude foreign persons as beneficiaries. It is unclear whether the trust deed can be amended to remove the exclusion of foreign persons after settlement.
Trustees of discretionary trusts that have entered, or propose to enter, into contracts to buy residential property in Victoria should consider amending trust deeds before settlement.
A land tax surcharge of 2% applies to land owned by the trustee of an absentee trust.
A discretionary trust will be an absentee trust if it has at least one specified beneficiary who is an absentee person (essentially a foreign person who is absent from Australia). A specified beneficiary is a named beneficiary in the trust deed.
As the rules for the land tax surcharge are different, the announcement by the VSRO does not impact on the land tax surcharge.
New South Wales
A stamp duty surcharge of 8% applies if the buyer of residential property is a foreign trustee. A land tax surcharge of 2% applies if the owner of residential property is a foreign trustee.
The New South Wales government is currently pursuing amendments in the State Revenue Legislation Further Amendment Bill 2020 (NSW), which effectively apply a similar position to that in Victoria but for both the stamp duty and land tax surcharges. The bill is currently being considered by the Legislative Council. You can read more about this bill in our October 2019 article State Revenue Legislation Further Amendment Bill 2019 (NSW).
Under the bill, where the trust deed does not prevent a foreign person from being a beneficiary, the trustee will be taken to be a foreign person.
Where the trust deed prevents a foreign person from being a beneficiary, the trustee is not a foreign trustee for surcharge purposes. This occurs where:
- the trust deed expressly excludes a foreign person from being a potential beneficiary of the trust, and
- the terms excluding foreign persons are incapable of amendment
Under transitional arrangements, trustees are exempt from the stamp duty surcharge or entitled to refunds for transfers of residential property before midnight on 31 December 2020 if the trust deed is amended before midnight on 31 December 2020. Similarly, trustees are exempt from the land tax surcharge or entitled to refunds for the 2017 to 2020 land tax years if the trust deed is amended before midnight on 31 December 2020.
Trustees of discretionary trusts who own residential property or are proposing to buy residential property should amend trust deeds before 31 December 2020.
A stamp duty surcharge of 7% applies if the buyer of residential property is the trustee of a foreign trust. A land tax surcharge of 2% applies if the owner of land is a trustee of a foreign trust.
A foreign trust is a trust where foreign persons hold at least 50% of the trust interests. For a discretionary trust, only default beneficiaries hold a trust interest.
The Commissioner of State Revenue has ruled in Public Ruling LTA000.3.1 Foreign corporations and foreign trusts—interests of foreign persons and related persons and Public Ruling DA000.14.2 Foreign corporations and foreign trusts—interests of foreign persons and related persons that a discretionary trust is not necessarily a foreign trust only because one of its default beneficiaries is a foreign person.
The facts and circumstances surrounding a discretionary trust will affect whether the discretionary trust is a foreign trust. The factors that the Commissioner of State Revenue will consider when determining whether a discretionary trust is a foreign trust include:
- the likelihood of the distribution to a foreign person, and
- the terms of the trust deed which concern any priority or proportion for sharing between default beneficiaries
The approach to foreign trusts and discretionary trusts in Queensland is similar to the approach taken by the VSRO before its announcement. It is not necessary to amend trust deeds, which is good news as a change to default beneficiaries may give rise to stamp duty.
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.