Over the last couple of years various states have introduced a duty and land tax surcharge on residential property owned by foreign persons. Each State law is different, but the general principle amongst States was that a discretionary trust would be treated as a foreign person if a potential beneficiary could be a foreign person.
As a result, trust deeds were amended to ensure no distribution could be made to a foreign person.
We all thought that was the end of it. However, on 24 June 2020 the New South Wales legislature deemed a discretionary trust to be a foreign person unless a further requirement was satisfied.
That new legislation was the State Revenue Legislation Further Amendment Act 2020 (NSW) (Act).
Prior to the introduction of the Act it was sufficient for a trust deed to exclude a foreign person from receiving distributions from the trust in order to avoid the imposition of purchaser duty (8%) and/or surcharge land tax (2%) in respect of residential property in New South Wales.
Now in order to avoid being deemed a foreign person and avoid the imposition of purchaser duty and/or surcharge land tax in New South Wales, your discretionary trust deed must be amended as follows:
- First limb: to exclude foreign beneficiaries – so that no potential beneficiary of the trust is a ‘foreign person’ (which is satisfied if no distribution of application can be made in favour of a foreign person); and
- Second limb: make the exclusion of foreign beneficiaries irrevocable (ie that term could never be amended in the future).
Both limbs must be met.
As a result of this new legislation you should:
- Immediately reviewing all trust deeds where the trustee owns or intends to own residential land in New South Wales, or interests in companies or unit trusts that own such land in order to determine whether they require an amendment to satisfy both limbs above;
- Immediately reviewing all trust deeds where an amendment to exclude ‘foreign persons’ has already been made to ensure the exclusion of foreign beneficiaries is irrevocable in compliance with the second limb above;
- Consider the transitional provisions under the Act allowing for exemptions and concessions including the following:
- Entitlements to refunds where the first limb above is satisfied prior to 24 June 2020;
- Entitlements to refunds where surcharge purchaser duty has been paid on a transfer that occurred prior to 31 December 2020 where both limbs above are satisfied prior to 31 December 2020; and
- Entitlements to refunds where surcharge land tax has been paid in respect of the 2017, 2018, 2019 and/or 2020 land tax year where both limbs above are satisfied prior to 31 December 2020.
Note: From 1 March 2020, similar provisions exist in Victoria in relation to the requirements to exclude ‘foreign persons’ from beneficiaries of discretionary trusts (ie the first limb). Therefore if the trustee of the discretionary trust owns residential property in Victoria we recommend contacting us to review the trust deed also. Further, if the discretionary trust owns residential property in another State we recommend that you contact us to discuss the duty and land tax implications for your trust.