On 5 July 2018, the Commissioner of Revenue NSW (Commissioner) released Commissioner’s Practice Note No CPN 004(Practice Note) outlining how surcharge purchaser duty and surcharge land tax (Foreign Surcharges) will be applied in certain situations where residential land is held by a discretionary trust.

The Foreign Surcharges apply to the acquiring and holding of residential land in NSW by foreign persons. In the case of surcharge purchaser duty, the base rate is currently 7%, while the surcharge land tax rate is an additional 2%. The surcharge rate may apply to discretionary trusts where they are deemed to be a ‘foreign person’.

Broadly, the Practice Note provides:

  • Where there are no existing potential beneficiaries who are foreign persons, the Foreign Surcharges will not apply.
  • Where any one of the potential beneficiaries of a discretionary trust is a foreign person, the trustee may be liable for the Foreign Surcharges as beneficiaries under a discretionary trust are deemed to have a maximum entitlement to the income and capital of the trust, which the trustee may exercise in their favour.
  • Examples to demonstrate how the Commissioner will treat the discretionary trust when the class of potential beneficiaries is broad, including to prescribe that the Commissioner may treat a trust as having no existing foreign beneficiaries in circumstances where the class includes spouses and grandchildren and such persons have the potential to be foreign spouses and grandchildren. However, this example is provided in the context that the trust is formed when the children are under 10. The Commissioner may take a different view if, when the trust is formed, the children are older or the first marriage has broken down. In relation to the land tax surcharge, where the specified beneficiaries of the discretionary trust are permanent residents but not ordinarily resident in Australia for more than 200 days in a land tax year, the trust will be subject to the surcharge the following year.
  • In order to be exempt from the Foreign Surcharges, the trust deeds of discretionary trusts must be amended to prevent foreign persons from becoming potential beneficiaries of the trust, such as by prescribing foreign persons as an excluded class of beneficiary. Such amendments must be irrevocable. It is not sufficient that named beneficiaries merely be prevented from receiving distributions.

The Practice Note also expands on Revenue Ruling GO10 Version 2, which grants the Commissioner discretion to retrospectively approve trust deed amendments which remove the trustee’s power to make distributions to a person who is deemed a ‘foreign person’ for the purposes of the foreign surcharges.