Discretionary Trusts in NSW: Foreign Persons – Surcharge land tax & purchaser duty
Recently enacted changes to purchaser duties and land tax arrangements will expand surcharges for trusts which include foreign persons as beneficiaries.
Legislation passed to amend the Land Tax Act 1956 (NSW) and the Duties Act 1997 (NSW) provides that if a trust has a foreign person that holds a substantial interest in a Trust, and that Trust holds residential land in NSW, that land will be subject to a land tax surcharge of 2% for currently held NSW residential land, and a stamp duty surcharge of 8% for new NSW residential land acquisitions by the Trust. These changes came into effect from the 2017 land tax year.
Further legislation that came into effect this year clarified that all discretionary trusts will be automatically captured for the purposes of these surcharges even if they don’t have foreign persons as beneficiaries unless the trust deed for the trust does, or is amended to, specifically exclude foreign persons as beneficiaries of the Trust.
Surcharge purchaser duty applies to acquisitions of NSW residential land by foreign persons, and surcharge land tax 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.
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.
1. Changes to the Duties Act (1997) and section 5D of the Land Tax Act (1956) have the effect of:
- Confirming that all discretionary trusts that hold land in NSW will be liable for a land tax surcharge of an additional 2%,
- Unless the trust deed for the Trust is specifically amended to exclude foreign persons as beneficiaries of the Trust,
- Trustees of discretionary trusts may have the opportunity to be refunded the land tax surcharge if they have paid this surcharge for the 2017, 2018 and 2019 land tax years,
- And they amend their trust deed to exclude the foreign persons prior to 31 December 2019”.
The changes may apply to you, and it is important to contact your Accountant before December 1, 2020 to determine whether the legislative changes applies to you.
2. The rules are changing: ‘Foreign Persons’, stamp duty and land tax
It is important to note that, depending on your circumstances, you may need to make urgent (by 31 December 2020) changes to your trust deed, to ensure that you don’t pay additional surcharges.
Surcharge purchaser duty applies to acquisitions of NSW residential land by foreign persons, and surcharge land tax applies to foreign persons who are owners of residential land within NSW.
Surcharge purchaser duty and surcharge land tax are payable in addition to any other duty or land tax payable. Where an interest in property is either acquired by, or held through a discretionary trust, the trustee may be liable for these surcharges if any one of the ‘potential beneficiaries’ is a foreign person (see Duties Act 1997 section 104JA).
You might be wondering why you need to be concerned about foreign beneficiaries with respect to your family trust – after all, the named beneficiaries in your family trust deed are all Australian citizens? This is due to the fact that a ‘potential beneficiary’ is not limited to the beneficiaries who are named in the trust deed.
3. What is a ‘Potential Beneficiary’
Example A: | Amend your Trust Deed by 31 December 2020.
Revenue NSW provides the example of Mr and Mrs Jones and their children Mark and Peter, who are both toddlers. All four of the Jones family are each named as a primary beneficiary in the trust deed and are all Australian citizens.
As is common with family trust deeds, the deed also nominates beneficiaries by class. In this case, there is a class specified as a ‘spouse or child of a primary beneficiary’. This is to take into account a possible change in circumstances, or because the beneficiary does not exist when the deed is executed.
Clearly the trust has no existing foreign beneficiaries – however, the future spouse and children of Mark and Peter could potentially be foreign persons.
Revenue NSW advise that “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.”
In this example, the trustee is taken to be a foreign person, and will therefore be liable for both surcharge stamp duty and land tax.
To be exempt from foreign surcharges, the Jones must amend the trust deed to exclude any foreign beneficiaries (“no foreign beneficiary requirement”) and the no foreign beneficiary requirement must be irrevocable (“no amendment requirement”).
4. Transitional Provisions | Guidelines
No foreign beneficiary 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.
5. No Amendment Requirement
If before 24 June 2020, a 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.
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