Discretionary Trusts

If you have a family trust which owns or is purchasing residential land in NSW you may need to amend your trust deed to avoid a land tax and stamp duty surcharge applicable to foreign persons.

On 21 June 2016, the NSW state government introduced surcharge purchaser duty and land tax surcharge to be paid by foreign persons owning or acquiring residential land (including vacant land, houses and strata lots) in NSW. From 1 July 2017 where a foreign person acquires residential land they will be liable to an extra 8% stamp duty on the acquisition.  Similarly, a foreign person that holds residential land in NSW on 31 December 2017 and each 31 December thereafter will pay a 2% land tax surcharge on the value of the land. This will be payable even if the value of the property is below the current threshold rate of $549,000.

Discretionary trust deeds including family trusts often gives the trustee wide powers to distribute income and/or capital to a broad class of beneficiaries who are often defined by reference to their relationship to a principal beneficiary, either by being related to the principal beneficiary or a related company or trust. They may also include a default charity as a class of beneficiaries. Potentially there may never be any intention for any of these beneficiaries to benefit under the trust.  Nevertheless, problems will arise when any of these potential beneficiaries include foreign persons.

A trustee of trust is a foreign person if an individual who is not an Australian citizen, or a permanent resident who has actually been in Australia during 200 or more days of the preceding 12-month period, holds a 20% interest in the trust (or together with their associates holds an interest in at least 20% of the trust) . Where a trust is a discretionary trust, each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property that the trustee may distribute to that beneficiary (eg if 100% could be distributed to that beneficiary then that beneficiary has a 100% interest in the trust). Consequently, the trustee of a discretionary trust will be considered a foreign person if one or more potential beneficiaries of the trust are foreign persons.

To avoid this problem, trust deeds should be amended to exclude foreign persons as beneficiaries. On 1 March 2017, the Chief Commissioner of State Revenue issued Revenue Ruling No. G010 enabling a trustee to apply for a retrospective exemption from surcharge purchaser duty and/or surcharge land tax provided that the trust deed is amended within 6 months of the grant of the exemption.

Written by Tania Schiff