- On 24 June 2020, the State Revenue Legislation Further Amendment Act 2020 (NSW) received Royal Assent. It clarifies that a trustee of a discretionary trust owning residential property in NSW is taken to be a foreign person for foreign surcharges purposes, if the trust does not irrevocably prevent a foreign person from being a beneficiary of the trust.
- The transitional provisions give trustees of discretionary trusts an exemption and refund for foreign surcharges where the trust deed, made on or before 24 June 2020, contains a provision to prevent a foreign person from benefitting.
- Until 31 December 2020, trustees of discretionary trusts have an opportunity to amend their trust deeds to include the provision and the provision must be irrevocable for the past and future surcharges not to apply.
- From 1 January 2021, trustees of all discretionary trusts (including testamentary trusts) will be subject to surcharges unless the trust deed contains an irrevocable provision.
- In July 2020, Revenue NSW issued Commissioner's Practice Note CPN 004 Version 2 which provides practical guidance on how surcharges apply in situations where residential property is held by the trustee of a discretionary trust.
The State Revenue Legislation Further Amendment Act 2020 (NSW) (the 'Act') received Royal Assent on 24 June 2020. The Act is relevant to trustees of discretionary trusts (including discretionary testamentary trusts) that own or will purchase residential property and have trust deeds that do not contain a term preventing foreign beneficiaries from benefitting under the trust. The transitional provisions under the Act allow for exemptions and refunds of surcharge purchaser duty and land tax, provided that the trust deed contains terms that prevent a foreign person from benefitting.
One of the aims of the Act is to treat Australian discretionary testamentary trusts the same as discretionary trusts for surcharge purposes. The transitional provisions operate differently for discretionary trusts and discretionary testamentary trusts to give trustees time to seek specialist advice and make the necessary amendments.
The Act inserts section 104JA and amends Schedule 1 to the Duties Act 1997 (NSW) ('DA'), and inserts section 5D into the Land Tax Act 1956 (NSW) ('LTA') and Schedule 2 into the Land Tax Management Act 1956 (NSW) ('LTMA').
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 (Chapter 2A of the DA); and
- 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 (section 5A of the LTA).
For definition of 'foreign person' see - Revenue Ruling G 009 Definition of a foreign person.
Revenue Ruling G010 version 2 - Surcharge land tax and duty - discretionary trusts
Under Revenue Ruling G010 version 2 ('Surcharge land tax and duty - discretionary trusts'), the Chief Commissioner had the discretion to exempt a liability for surcharge purchaser duty and surcharge land tax (paragraph 8).
Many discretionary trust deeds have already been amended to exclude foreign persons from benefitting in accordance with Revenue Ruling G010 version 2. The Act introduces the retrospective legislation referred to in Revenue Ruling G010 version 2 (paragraph 9).
Trust deeds with no foreign beneficiary before 24 June 2020
Under the transitional provisions, a trustee of a discretionary trust will not be a foreign person if the trust deed prevents a foreign person from being a beneficiary prior to the commencement date of the Act (i.e. date of assent being 24 June 2020). The Act provides that trustees of discretionary trusts who have amended their trust deeds on this basis will be entitled to an exemption from, or refund of, prior surcharge liabilities. The application must be made to Revenue NSW with a copy of the trust deed (or amending deed) containing the foreign person exclusion provided the application is made on or before 31 December 2020.
There is no requirement that the amendment be irrevocable (DA Schedule 1, clause 3). This is confirmed by Commissioner's Practice Note CPN 004 version 2 - see Example 8.
Trust deeds amended between 24 June 2020 and 31 December 2020
From 24 June 2020, to access the exemptions and refunds of prior surcharge liabilities and not be considered a foreign trustee, the amendment to the discretionary trust deed must meet both of the following requirements by 31 December 2020:
- no potential beneficiary of the trust is a foreign person (the 'no foreign beneficiary requirement'); and
- the terms of the trust must not be capable of amendment in a manner that would result in a foreign person being a potential beneficiary (the 'no amendment requirement').
In Example 1 of Commissioner's Practice Note CPN 004 version 2, the beneficiaries are Australian citizens with potential beneficiaries who include future spouses and children. Similarly, in Example 2, although there are no existing foreign beneficiaries, the future potential beneficiaries could be foreign persons. The trustee is taken to be a foreign person (sections 104JA(1) of the DA and 5D(1) of the LTA). The trust deed must be amended to exclude any foreign beneficiaries and the amendment must be irrevocable. From 24 June 2020, all amendments will need to be irrevocable.
Example 7 of Commissioner's Practice Note CPN 004 version 2 highlights that refunds of prior surcharges are only available where the amendment is undertaken prior to 31 December 2020.
Australian discretionary testamentary trusts
Revenue Ruling G010 v2 operated from 21 June 2016 until the date of assent of the Act, 24 June 2020 (para 12), and the Chief Commissioner outlined the implication of the foreign purchaser duty and surcharge land tax for testamentary trusts in paragraphs 10 and 11.
The Act inserts the definition of 'Australian testamentary trust' in section 104JA of the DA and section 5D of the LTA.
The trustee of an Australian testamentary trust is not a foreign person (even if the trust does not prevent a foreign person from being a beneficiary of the trust) if:
- the will or codicil was executed on or before 31 December 2020; or
- the deceased died intestate before, or within two years after, 24 June 2020; or
- a court order varying the application of the provisions of a will or codicil or rules governing distribution of intestate estate was made on or before 31 December 2020.
No action is required by trustees for testamentary trusts arising from a will or codicil executed before 31 December 2020. Legal practitioners should consider and alert their clients to the following:
- Wills or Codicils executed on or after 1 January 2021 should include both the 'no foreign beneficiary requirement' and the 'no amendment requirement' where there are no foreign beneficiaries benefitting from the trust created.
- Where a person dies intestate after 24 June 2022, and a trust is created by way of distribution in accordance with the laws of intestacy, the trustee may be liable for surcharge duty tax and surcharge land tax.
- Any trust resulting from a court order varying a will, codicil or application of distribution in an intestate estate made after 31 December 2020 may expose the trustee to surcharge duty tax and surcharge land tax.
Technically, Australian testamentary trusts arising from a will, codicil or court order made on or after 1 January 2021 must meet both the no foreign beneficiary requirement and no amendment requirement to not be a foreign trustee. However, the terms of testamentary trusts under a will are often customised compared to standard discretionary trust deeds. The style and structure of testamentary trusts vary widely, with some testamentary trusts containing standalone trust provisions with variation powers for the trustees to amend the provisions contained in the testamentary trust. An Australian testamentary trust is not established until the death of the deceased.
A testamentary trust's potential beneficiaries may include persons who renounce their Australian citizenship and/or no longer satisfy the 'ordinarily resident' test. In designing an appropriate estate plan and testamentary trust structure, regard to the deceased's intentions to distribute to foreign person beneficiaries for asset protection and to preserve the family wealth through the bloodline may outweigh the costs of the foreign surcharges that may apply. The insertion of the no foreign beneficiary and no amendment requirements in a testamentary trust means that the trustees will never be able to distribute to a foreign person, including where the foreign person is their sole surviving family member.
Practically, foreign surcharges will not apply to the trustee of the testamentary trust unless residential property is acquired or held by the trustee of the testamentary trust. This is similar to Example 3 in Commissioner's Practice Note CPN 004 version 2 (see: https://www.revenue.nsw.gov.au/news-media-releases/commissioners-practice-note-004v2-foreign-surcharges-and-discretionary-trusts). For foreign surcharges not to apply, the terms of the testamentary trust should be amended prior to the acquisition of the residential property.
Alternatively, the estate plan may be structured with two testamentary trusts where the:
- residential property is held by a testamentary trust (satisfying the no foreign beneficiary and no amendment requirements) established for the benefit of Australian beneficiaries; and
- non-residential property assets (cash, shares and commercial properties) held by a testamentary trust (without no foreign beneficiary and no amendment requirements) established for the benefit of foreign beneficiary family members.
The decision to include the 'no foreign beneficiary' and 'no amendment' requirements will depend on whether the intended beneficiaries are foreign persons or may become foreign persons. It would be prudent that the testamentary trusts contain variation powers to make amendments, depending on the circumstances at a later date and prior to residential property being acquired by the testamentary trust.
Trust instruments that do not have a power of amendment or variation
The trust instrument specifies the rules which bind the trustee. Some contain a broad power of amendment or variation of the trust. However, those without or with limited variation powers (including those in testamentary trusts) will need to be carefully reviewed. Commissioner's Practice Note CPN 004 version 2 recognises that trusts which cannot be amended and are not covered in the practice note will be dealt with on a case by case basis. A request for a private ruling should be lodged.
Where the trust instrument does not contain terms creating a power to amend the trust terms, the trustee may need to:
- obtain directions from the Supreme Court to confirm that they can in fact vary the terms of the trust;
- make an application to the Court pursuant to section 81 of the Trustee Act 1925 (NSW) to seek powers to effect a particular transaction if, in the opinion of the Court, it is 'expedient' in the circumstances to do so.
Opportunities before 31 December 2020
Trustees of discretionary trusts which own residential property in NSW should consider whether to amend their trust deeds before 31 December 2020 to irrevocably prohibit foreign persons from benefitting. If the trust deed is not amended to irrevocably exclude foreign persons from being a beneficiary of the trust before midnight on 31 December 2020, the trustee will be considered a foreign trustee and:
- surcharge purchaser duty (currently 8% of the market value of the property) will apply to the purchase of residential property in NSW;
- land tax surcharge (currently 2% of the unimproved value of the land) will apply annually on the residential property in NSW held as at 31 December of each year;
- land tax surcharge will apply for the 2017, 2018, 2019 and 2020 land tax years; and
- there will be no entitlement to receive refunds for surcharge duty or surcharge land tax already paid in respect of the above transactions or land tax years.
If foreign persons have never benefitted and are not intended to benefit from the trust, then amending the trust deed before 31 December 2020 will generally be an appropriate course of action. Broadly, Revenue NSW may request a copy of the trust deed or amending deed together with a declaration. Amending the trust deed will have the benefit of saving time and costs in satisfying Revenue NSW on its annual land tax surcharge audits. The incentive to obtain refunds for previously paid surcharge duty and land tax surcharge is only available if the trust deed is amended to prevent foreign persons from benefitting from the trust by 31 December 2020.
Bartier Perry can assist with preparation of trust deeds, amending deeds and estate planning.
* The author wishes to thank her colleagues at Bartier Perry as well as Arlene Fernandez of Revenue NSW, for their comments.
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.