Given that we are living in an increasingly smaller globalised world, concepts of citizenship, domicile and nationality are more fluid concepts as people freely relocate. Identifying a potential “foreign person” beneficiary of a discretionary trust may be more difficult than it appears at first blush and can have expensive consequences.
Revenue NSW Ruling G010v2 provides that the introduction of the surcharges on land tax and stamp duty extend to discretionary trusts in which a potential beneficiary is a “foreign person” (as defined under the legislation).
Whilst discretionary trusts tend to be structured to primarily benefit the immediate family of the principally named beneficiary, the pool of potential beneficiaries, particularly of income, tends to be so broad that beneficiaries are pooled by class as opposed to name. This often captures “family” of multiple degrees of separation from the principal. For example, the spouse of a second cousin. Of course, even spouses can come and go.
As it may be near impossible for NSW Revenue to regulate the pool of beneficiaries of a discretionary trust at any point in time and to avoid “foreign person” beneficiaries being excluded one day and reinstated the next, NSW Revenue (in its ruling) require all “foreign person” beneficiaries to be irrevocably excluded as potential beneficiaries of the discretionary trust in order for the surcharges not to be levied.
On acquiring residential property, the trustee of the discretionary trust is required to declare that there are no foreign person beneficiaries of the discretionary trust. A copy of the Trust Deed and any Deed amending the Trust Deed must be provided to Revenue NSW in order for the trust to be exempt from the surcharge on stamp duty.
In relation to the regulation of the surcharge on land tax, we understand from Revenue NSW that an initial land tax assessment notice will not include the surcharge. However, it requests that the trustee review the Trust Deed in terms of the application of the surcharge and lodge a land tax return within 6 months of the assessment notice. The return must state whether:
- The trustee believes the trust to include a “foreign person” beneficiary and to remain so, in which case, a revised assessment notice is issued including the surcharge;
- The trustee believes the trust not to include a “foreign person” beneficiary; or
- The trustee believes the trust to include a “foreign person” beneficiary but would like it to be assessed as not to include a “foreign person” beneficiary, then the trustee must amend the trust deed to irrevocably exclude “foreign person” beneficiaries and provide a copy of the stamped original trust deed and the deed of amendment to Revenue NSW.
If a trustee does not respond within 6 months, then Revenue NSW will issue a reviewed assessment notice to include the surcharge (i.e. assume it includes a “foreign person”).
Comparable surcharges have been brought in across other Australian States and Territories.