From 1 March 2020, the Victorian State Revenue Office (SRO) will no longer apply the practical approach in respect of discretionary trusts for the purposes of the foreign purchaser additional duty (FPAD).

FPAD was introduced by the SRO in July 2015 and is payable (in addition to land transfer stamp duty) upon purchases of residential property in Victoria by foreigners and certain visa holders, Australian corporations where a foreign person or another foreign corporation has a controlling interest of more than 50%, and trustees of a foreign trust. From 1 July 2019 the FPAD rate is 8 per cent.

The FPAD provisions apply in the same way for purchases of residential property by a trustee of a discretionary trust. As the name suggests, a discretionary trust is a category of trust where the trustee has the power or discretion to determine the distribution of the capital of the trust estate to the trust beneficiaries. Given its discretionary nature, and the potentially wide pool of beneficiaries, how then to determine the application of the FPAD?

The SRO introduced special rules. The special rules deem any person where the trustee has discretion to make a capital distribution of the capital of the trust estate to have a beneficial interest in the maximum percentage of the capital of a trust estate. The effect of the special rules is that many discretionary trusts would be deemed foreign trusts for the purposes of the FPAD.

As a consequence of the special rules, the SRO adopted a practical approach for family discretionary trusts, determining that where residential property was purchased by a trustee of a trust that has foreign beneficiaries who have not, or are unlikely in the future to receive any distribution, the trust would not be considered a foreign trust.

Worryingly, the SRO announced that it would cease applying the practical approach, from 1 March 2020.

If you are a trustee of a discretionary trust, and intend to purchase residential property there are measures you can take to avoid the FPAD, such as an appropriately worded variation to the trust deed.