From 21 June 2016 a stamp duty and land tax surcharge applies to the acquisition and ownership of NSW residential property by foreign persons including foreign individuals, corporations and trusts. Surcharge stamp duty of 8% and surcharge land tax of 2% is payable on residential land by foreign persons.
The State Revenue Legislation Further Amendment Act 2020 (NSW) received Royal Assent on 24 June, 2020 and clarifies that a trustee of a discretionary trust is a foreign person if the terms of the trust do not prevent foreign persons being beneficiaries. The Chief Commissioner of State Revenue has also clarified the operation of these amendments in a recent Practice Statement, which have a broader operation than initially thought.
This means that discretionary trust deeds will need to be reviewed and amended to exclude foreign persons as beneficiaries, otherwise the discretionary trust will be up for surcharge stamp duty and surcharge land tax.
Direct and Indirect Interests
Surcharge purchaser duty and surcharge land tax applies not only where a discretionary trust holds property in NSW, but also where a trust holds an interest in a company which holds residential property in NSW (i.e. where there is indirect ownership) the tracing process will apply to deem a foreign interest in property in NSW.
Contemplate the following scenarios:
- The residential landholding discretionary trust (“Trust 1”) amends its trust deed to exclude foreign beneficiaries, as defined in Duties Act 1997 (NSW).
- Trust 1 distributed trust income to another discretionary trust (“Trust 2”), which did not amend its trust deed to exclude foreign beneficiaries, and is considered as a foreign trust under s104JA of the Duties Act 1997.
This would mean the distribution from Trust 1 to Trust 2 is ineffective under the trust deed of Trust 1, and would instead be distributed to either the default beneficiary, or if there is none, taxed to the trustee of Trust 1 at the top marginal rate as there is no beneficiary presently entitled to the trust income.
ABC Pty Ltd enters into a contract for the purchase of residential property in NSW. All the shares in ABC Pty Ltd are owned by a discretionary trust. ABC Pty Ltd will be liable to surcharge purchaser duty if the trust does not contain a provision to exclude foreign beneficiaries.
Corporations are foreign persons if a shareholder who is a foreign person has a substantial interest in the corporation. For a discretionary trust, each beneficiary that the trustee has discretion to distribute the income or property to is deemed to have the maximum percentage interest in the income or property that the trustee may exercise a discretion to distribute to them. It follows that as the discretionary trust is the shareholder of the company, then the company is a foreign person. However, if the trust deed is amended to exclude foreign beneficiaries and the terms of the trust are incapable of being amended to allow a foreign person to become a potential beneficiary, then no surcharge purchaser duty is payable.
Similar rules apply to a unit trust where the units in the trust are held by a trustee of a discretionary trust.
When do discretionary trust deeds need to be amended?
Accordingly, a trust deed will need to be amended to exclude foreign persons as beneficiaries if any of the following situations apply:
- Where a trust is a beneficiary of another trust which owns (or will own) residential property;
- Where a trust holds a substantial shareholding in a company which owns (or will own) residential property;
- Where a trust holds units in a unit trust which owns (or will own) residential property;
- Where a trust does not hold any property, but may purchase residential property in the future;
- Where a trust has already purchased residential property and has not yet had their deed amended (despite all beneficiaries being Australian citizens); and
- Certain testamentary trusts created under a Will.
Should a trust deed contain named beneficiaries who are foreign persons, such beneficiaries must be removed from the trust deed as beneficiaries, otherwise the trust will be liable to surcharge purchaser duty and/or surcharge land tax. Further, such an amendment must be irrevocable.
Even if none of the beneficiaries are foreign persons, the trust deed will still need to be amended.
How to amend your discretionary trust deeds
Discretionary trust deeds need to be amended prior to 31 December, 2020 to avoid inadvertently attracting liability for surcharge duties.
If you require your discretionary trust deed to be amended by us to exclude foreign person as beneficiaries, please click here to access our Information Schedule. Our Information Schedule should be completed and returned to us.
If you have any questions or require any other information in relation to the amendment of discretionary trust deeds to exclude foreign persons as beneficiaries, please do not hesitate to contact Ms Tracey Kumar or Mr Hayden Rudd of our office on (02) 9687 3755 or via email at firstname.lastname@example.org.
Please note that our blog post is of a general nature and is not intended to be a substitute for legal advice.