You may have heard that some states in Australia have introduced a duty and/or land tax surcharge for foreign persons buying residential land.
What do we mean by residential land?
Residential land is defined differently in most states.
- In Queensland and Victoria: generally land that is solely or primarily used for residential purposes, or land that has, or will have, a building for ‘human habitation by a single family unit ’
- In New South Wales: vacant land or strata-titled lots zoned for principally residential purposes, or land on which dwellings are or will be constructed.
Here’s the current breakdown:
- Queensland has a 3% duty surcharge, but no land tax surcharge (yet)
- New South Wales has a 4% duty surcharge and a 0.75% land tax surcharge 
- Victoria has a 7% duty surcharge (increased from 3%) and a 0.50% land tax surcharge 
What do we mean by a foreign person?
Each state has a different definition of a ‘foreign person’. While the definitions for Queensland and Victoria are generally similar (but with subtle differences), New South Wales has a lengthy and far more harrowing definition. This article will focus on the Queensland duties position and highlight the considerable risk associated with the extended New South Wales definition as it will apply to all land acquired or held in New South Wales irrespective of where the trust was settled.
Queensland defines a foreign person as:
- a foreign individual – any individual other than an Australian citizen or permanent resident (for instance, Kiwis)
- a foreign corporation – a corporation incorporated outside of Australia or a corporation where foreign persons have 50% or more interest
- the trustee of a foreign trust – a trust where 50% or more of the ‘trust interests’ are held by foreign persons or their related persons (which includes partners and related entities). In the case of unit trusts, they will look at the unitholders. For discretionary trusts, they will look at those persons who will be the beneficiaries if the trustee fails to make an election (commonly referred to as ‘takers in default’).
What causes the greatest concern is the definition of a foreign trust as applied to discretionary trusts.
Discretionary trusts are set up for a class of beneficiaries, usually family members, their lineage and companies and trusts controlled by any of those individuals.
A lot of the time, the trust contemplates other family members such as brothers, sisters, aunties and uncles and their lineage. In law, a beneficiary has no legal entitlement to the assets of the trust (as it is dependent on the trustee first making an election in favour of that beneficiary). When considering such matters, the Queensland office of state revenue will look at the takers in default.
In New South Wales the problem is escalated as it incorporates the definition of ‘foreign person’ from the Foreign Acquisitions and Takeovers Act 1975 (Cth).
That Act states that a foreign beneficiary must first have a ‘substantial interest’. In working that out, each beneficiary is taken to hold 100% of the beneficial interest in the trust.
That means every beneficiary of a discretionary trust has, for the purpose of New South Wales duty and land tax assessment, a ‘substantial interest’ and that if even one contemplated beneficiary is a foreign person, the trust is a foreign trust.
So if you control a family trust that has takers in default who are (or could be) foreign persons, you may have a problem.
Here’s what could happen
Let’s say your family trust owns or buys property in Queensland, New South Wales or Victoria. Your Uncle Bob lives in the States and is not an Australian citizen. If Uncle Bob is a taker in default, your family trust may by definition a ‘foreign trust’ and the surcharge may apply.
The same could be true if you own an interest in foreign company, because it is not unusual for those companies to be takers in default under the family trust deed.
Scarier still is what could happen if one of your children (who is a taker in default) renounces their Australian citizenship to live with their partner in another country. Even though it has nothing to do with you, that very act could cause the foreign taxes to become payable by your family trust.
Isn’t this all just scare mongering?
But until the legislature cures this unintended effect (particularly in New South Wales), we are governed by a law that allows the relevant offices of state revenue to impose duty and/or land tax on trusts that they treat as foreign (even though they shouldn’t be).
That has already been confirmed by the New South Wales office of state revenue issuing a ruling on 20 December 2016 on the definition of ‘foreign person’. It has confirmed that a discretionary trust is treated as a ‘foreign person’ if the class of beneficiaries could include a foreign person. It matters not whether they are named or not – it is if that ‘foreign person’ is contemplated as a potential beneficiary. 
Also, with increased focus and funding given to governments (Federal and State) to fund tax recovery (as illustrated in the last Federal budget), a considerable amount of money is being spent on very elaborate data-matching systems.
It’s not beyond the realm of possibility that the data-matching system could match a family trust owning property in a state to a family member leaving the country to take up residency elsewhere.
Of course some would argue: how would the office of state revenue know who the takers in default are? The answer is, easily. If the trust is recorded on the title or through data matching, an audit is commenced.
Case in point
About 15 years ago, a Victorian trust received a letter from the Queensland office of state revenue asking why duty hadn’t been paid on various transfers of units in its unit trust. The letter demanded approx. $80,000 in duty and approx. $160,000 in penalties. The client’s Victorian lawyer was perplexed as there was no such duty in Victoria, and the client came to Mahoneys for assistance. It turned out the Victorian lawyer was unaware of the Queensland assets owned by that trust.
After engaging in vigorous negotiations, we are glad to say the Queensland office of state revenue agreed to our submission to waive the penalties on the basis that the approx. $80,000 was paid. So no harm, no foul this time. However, when asked how the office of state revenue found out, the answer was simple: they monitored changes in shares as noted on the ASIC register, which mirrored the changes in the unit trust. And this was all well before elaborate data matching was instigated by various government departments.
So what do we do?
Build a wall around Australia to stop potential beneficiaries leaving?
Stop using trusts and forgo other tax and asset protection advantages?
While the above options are viable (and, according to one President, sensible), the smarter thing to do is make sure new trusts cover this off and review existing trust deeds to ascertain whether the trust can be changed without triggering any costs.
If you have any questions or wish to discuss your matter, please contact Antony Harrison.
 s232 of Duties Act 2001 (Qld) definition of “AFAD residential land” ; and s3G of Duties Act 2000 (Vic) definition of “residential property”
 The NSW land tax Act used the same definition as the NSW duties Act
 The Vic land tax Act refers to “absentee persons” which, in relation to trusts, means the trustee of an absentee trust: where at least one beneficiary is not an Australian or NZ citizen or a permanent resident of Australia, who does not ordinarily reside in Australia.
 Revenue Ruling No. G 009