The State Revenue Legislation Further Amendment Act 2020, which came into effect in New South Wales on 24 June 2020, includes changes to “foreign person surcharges” for purchaser duty and land tax relevant to residential land in NSW owned by discretionary trust.
So, if you are concerned about some changes of foreign surcharges for trusts holding NSW residential property, this article can tell you more about it.
Surcharge Purchaser Duty & Surcharge Land Tax
Surcharge purchaser duty (since June 2016) and surcharge land tax (since the 2017 land tax year) have applied to ‘foreign persons’ acquiring or holding NSW residential property. Currently, surcharge purchaser duty is 8% and surcharge land tax is 2%, in addition to ordinary rates.
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.
New Measures
There are several new changes which may influence your prior discretionary trusts and the future planning.
Firstly, the new measures provide that a trustee of a discretionary trust holding NSW residential property is deemed a foreign person unless the trust deed expressly excludes foreign persons as beneficiaries and irrevocably prevents foreign persons from becoming beneficiaries.
It is important to keep in mind that a discretionary trust that does not exclude foreign persons as beneficiaries will be liable to foreign person surcharge purchaser duty and surcharge land tax even if the trust has never distributed to a foreign person and intends to never distribute to a foreign person. So, it is essential for trustees to clarify relevant terms in the discretionary trust.
Secondly, the new measures also contain transitional provisions that have retrospective effect to the time the surcharges were introduced in 2016/17.
Gradually, if a trustee incurred the surcharge purchaser duty and surcharge land tax, they could claim a refund of the surcharge. However, for this to apply, the trust deed must be varied before 31 December 2020.
From our perspective, it is necessary to check your previous discretionary trusts because Revenue NSW may reassess relevant discretionary trusts for previous transactions or years to include surcharge purchaser duty or surcharge land tax if they find that the deed for the relevant trust has not been amended by 31 December 2020. If you are planning foreign surcharges for trusts in the future, it is better to read the new measures.
Potential Beneficiary
We have known, it is now essential for trust deeds to include provisions that exclude foreign persons as beneficiaries as well as provisions that irrevocably prevent foreign persons from becoming potential beneficiaries.
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.
Thus, to avoid being a foreign trustee, the potential beneficiary must be clarified. 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”）
Considering the new changes, we are suggesting clients to reassess their discretionary trust deeds where the trust holds NSW residential property and, if necessary, seek advice about varying the terms to comply with the requirements as soon as possible.
If you are interested in knowing more about foreign surcharges for trusts which may impact your future planning, careful consideration should also be made because the duty and land tax surcharge provisions operate differently in different jurisdictions.
If you want more suggestions and seek for assistance about trusts, call BOA & Co. accountants on 02 9904 7886 and our Trust Specialist will be pleased to assist you.