If a discretionary trust (therefore a special trust) holds residential land in New South Wales the trust will be liable for additional land tax and stamp duty purchaser stamp duty if any one of the potential beneficiaries is a foreign person. To avoid these additional charges a discretionary trust needs to exclude foreign persons as a discretionary beneficiary and include a provision that the trust cannot be amended to result in a foreign person being a potential beneficiary. The change must be done before midnight on 31 December 2020.
Surcharge purchaser duty (8%) applies to acquisitions of NSW residential land by foreign persons, and surcharge land tax (2%) applies to foreign persons who are owners of residential land in NSW. Surcharge purchaser duty and surcharge land tax (together, the foreign surcharges) are payable in addition to any other duty or land tax payable.
For transactions dated on or after 1 July 2017, the new rate of surcharge duty is 8 percent on top of the usual transfer duty.
Where an interest in a property is acquired directly or indirectly by or held through a discretionary trust, the trustee of the trust may be liable for foreign surcharges if any one of the potential beneficiaries is a foreign person.
Each beneficiary in a discretionary trust is deemed to have the maximum percentage interest in the income or property over which the trustee may exercise a discretion to distribute.
Potential beneficiaries are not limited to persons named in the trust instrument. The term extends to the members of any class of persons to whom or for whose benefit trust property can be distributed or applied pursuant to the exercise of the discretions of the trustee under the trust.
Potential beneficiaries are often nominated by class rather than name for a number of reasons. They could be foreign persons for the purposes of surcharge purchaser duty and surcharge land tax. In such circumstances, it follows that the trustee of a discretionary trust will be a foreign person.
A person is a 'potential beneficiary' of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person.
To avoid being a foreign trustee, the discretionary trust must meet both of the following requirements:
- 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").
If the trustee of a discretionary trust is liable for surcharge purchaser duty on a transfer of dutiable property that occurred before 24 June 2020 or after that date but before midnight on 31 December 2020, the trustee will still not be liable if the terms of the trust have been amended before midnight on 31 December 2020. If surcharge purchaser duty was paid, the trustee is entitled to a refund if the amendment is made before midnight on 31 December 2020.
If the trustee of a discretionary trust is liable to pay surcharge land tax in respect of the 2017, 2018, 2019 and/or 2020 land tax year, the trustee will still not be liable if the terms of the trust have been amended before due date for the payment of land tax or after the due date but before midnight on 31 December 2020. If surcharge land tax was paid, the trustee is entitled to a refund if the amendment is made before midnight on 31 December 2020.
If, before 24 June 2020, a special trust satisfied the no foreign beneficiary requirement under section 104JA of the Duties Act 1997 or section 5D of the Land Tax Act 1956, the trustee will be exempt from surcharge purchaser duty and surcharge land tax without having to satisfy the no amendment requirement.
You're generally considered a foreign person, unless:
- you're an Australian citizen
- you've lived in Australia for more than 200 days in the 12 months before the purchase date, and you're:
- a New Zealand Citizen, who holds a subclass 444 visa or
- a permanent resident of Australia.
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.