If you are the trustee of a discretionary trust and you hold (or intend to hold) residential land in New South Wales (NSW) then you need to read this.
Recommended action
- Review all discretionary trust deeds and discretionary testamentary trusts that own residential land in NSW or hold an interest in a company or unit trust that owns residential land and, if required, arrange for the trust deed to be amended to satisfy the ‘no foreign beneficiary’ requirement.
- Ensure that any necessary consent to amendments are obtained and signed before midnight on 31 December 2019.
Brief background
As a result of recent changes introduced by the State Revenue Legislation Further Amendment Bill 2019 (NSW), discretionary trusts that either own or will own residential land in NSW will be deemed to be a ‘foreign person’ and liable to pay surcharge purchaser duty of an additional 8% and surcharge land tax of an additional 2%. That is, unless the trust deed prevents (or is amended to prevent) foreign persons from being beneficiaries of the trust by midnight on 31 December 2019.
Most discretionary trusts established in Australia are primarily intended to benefit Australian resident beneficiaries. However, it is common for a discretionary trust to contain a broad class of beneficiaries who are defined by reference to their relationship to a named beneficiary (e.g. spouses, grandparents, cousins etc).
If a ‘foreign person’ (e.g. an overseas relative or foreign corporation) is a possible beneficiary of a discretionary trust, the trust is deemed a ‘foreign person’ under the surcharge regimes.
Numerous states have now introduced or announced they are to introduce surcharges on either or both stamp duty and land tax, where land is acquired/held by a ‘foreign person’.
Why is this important?
As at Tuesday 10 December 2019, the rate of foreign person surcharge duty in NSW is 8% and the rate of surcharge land tax is 2% (in addition to the duty otherwise payable). These surcharges apply to residential land in NSW acquired or owned by the trust since the surcharges were introduced in 2016.
While the Bill's changes apply from 21 June 2016, the transitional provisions mean the surcharge will not apply where the appropriate amendments to the trust deed are made prior to 31 December 2019. If you have already paid surcharge land tax or surcharge purchaser duty on the basis that you are a foreign trustee and, if you amend your trust deed as above, then you could seek a refund from Revenue NSW.
However, if the trustee owns residential land in NSW but does not amend its trust deed to permanently exclude ‘foreign persons’ from being a beneficiary before 31 December 2019, then the surcharge duty and surcharge land tax may be applied for previous years dating back to 2016 (when the surcharges were first introduced).
What about discretionary testamentary trusts?
The changes also affect discretionary testamentary will trusts. The legislation contains transitional provisions. If an individual passes away before or within two years of the commencement of the new provisions (i.e. 21 June 2016) and they were not a foreign person at death, the trustee of a testamentary discretionary trust will not be a foreign trustee; even though there is no clause specifically excluding this in the trust’s deed.
What amendments need to be made to the trust deed?
To avoid falling within the definition of a ‘foreign person’ and attracting the payment of surcharge duty and surcharge land tax, the terms of the trust deed must not only prevent a ‘foreign person’ from being a beneficiary under the trust, but the exclusion must also be irrevocable.
Contact us
If you are a trustee of a discretionary trust or a discretionary testamentary trust, which holds (or intends to hold) residential land in NSW as at 31 December 2019, and you want to discuss anything raised in this alert or require a review of your trust deed, please contact HopgoodGanim Lawyers' Private Enterprise team.