On 2 September 2015, we provided an update regarding the Foreign Purchaser Additional Duty (FPAD) in Victoria and discretionary trusts. To recap, under changes introduced on 1 July 2015, FPAD of 3% is applied where a foreign purchaser:
- acquires Victorian residential property (being land on which there is a residence or vacant land which will have a residence built on it)
- acquires Victorian property that is not residential at that time, but later forms an intention to build a residence on that land (Relevant Residential Property).
The FPAD applies to any arrangement or transaction that involves the transfer of an interest in residential property (Relevant Transactions). These include:
- buying residential property at, for example, auction or private sale
- gifts of residential property
- certain leasing arrangements
- transfers of interests in a deceased estate
- acquisitions of interests in a ‘landholder’ that holds residential property (generally, a company or trust).
On 1 July 2016, FPAD will be increased from 3% to 7%, in addition to the usual rate of duty.
The FPAD applies to foreign purchasers, being a foreign natural person, a foreign corporation, a trustee of a foreign trust. A key aspect of this is that a foreign trust includes a trust where a foreign natural person,foreign corporation or atrustee of another foreign trust has a ‘substantial’ interest in the trust estate of the trust. For discretionary trusts, a person or member of a class of persons, is deemed to have a beneficial interest in the maximum percentage of the capital of the foreign trust estate that the trustee of the discretionary trust is empowered to distribute to that person.
Practically speaking, for a discretionary trust, if any member of the class of specified or general beneficiaries is a foreign natural person, foreign corporation or a trustee of a foreign trust, the discretionary trust will be a foreign purchaser. Examples would include where the class of general beneficiaries includes a grandmother in Italy, a relative in Hong Kong or a son-in-law in the US.
If you are advising clients who are considering entering into Relevant Transactions through a standard discretionary trust and involving Relevant Residential Property, care needs to be taken as there is a significant risk that the class of general beneficiaries will include a foreign natural person, foreign corporation or trustee of another foreign trust. If this is the case, the discretionary trust will be a foreign purchaser, and the Relevant Transaction will be subject to the FPAD.
The terms of the trust deed should be reviewed, and advice taken as to whether the trust deed should be amended. If you have a client in this situation, or a client who has entered into a Relevant Transaction through a discretionary trust since 1 July 2015, we recommend you obtain specific advice.
On a separate note, the New South Wales and Queensland governments are following Victoria’s lead. As part of its 2016/2017 budget, the Queensland government has announced it will introduce a 3% stamp duty surcharge with effect from 1 October 2016 for foreign purchasers buying residential property. Similarly, the New South Wales government has announced that as part of the 2016/2017 budget to be handed down on 21 June 2016, it will introduce a 4% stamp duty surcharge with effect from 21 June 2016 on the purchase of residential real estate by foreign purchasers.