Australia: Are you establishing a foreign discretionary trust?

Discretionary trusts have long been a cornerstone of business, asset and wealth structuring though their benefits of protecting assets and allowing income to be streamed to beneficiaries in the most tax-effective manner.

Over recent years changes to state duties legislation have reduced these benefits by imposing additional duties on discretionary trusts deemed to be foreign by the nature of their beneficiaries, regardless of the interest they hold (or may hold) in the trust assets.

While the duties legislation in each jurisdiction has its own definition of a foreign trust – commonly involving a non-Australian citizen or permanent resident holding a 'substantial interest' in the trust – the Duties Act 1997 (NSW) links its definition of foreign person to the definition under the Foreign Acquisitions and Takeovers Act 1975 (Cth), under which any foreign beneficiary – whether primary, secondary, general, default or otherwise – of a discretionary trust is taken to hold a 100% interest in the income and property of the discretionary trust and therefore a substantial interest in the trust.

Similarly, the Tasmanian Duties Act 2001 provides that any person or member of a class of persons to whom a distribution of trust capital may be made by power or discretion of a trustee is taken to have a beneficial interest in the maximum percentage of the capital of the trust and therefore a substantial interest in the capital of the trust. The Tasmanian legislation goes so far as to place an onus on the trustee of a Tasmanian discretionary trust to satisfy the Commissioner that it is not a foreign trust.

In this context it is extremely important to consider before establishing a discretionary trust whether you should specifically exclude foreign persons from being beneficiaries. This is not as straightforward a process as it might sound, as it will involve an examination of the purposes of the trust, whether the trust is likely to hold any dutiable property and whether any identified or potential beneficiaries are considered foreign persons.

If you are looking at establishing a discretionary trust our commercial and structuring team can assist you in determining the best way of addressing this and any other potential issues that may inadvertently arise.