Surcharge purchaser duty applies to acquisitions of NSW residential land by foreign persons. Surcharge land tax applies to foreign persons who are owners of residential land in NSW. These surcharges are payable in addition to any other duty or land tax payable. The surcharge duty rate is currently 7% and the surcharge land tax rate is 2%.
A new practice note issued by Revenue NSW sets out how the Commissioner of State Revenue will administer the duty and land tax surcharges that may apply to discretionary trusts treated as foreign persons (Commissioner’s Practice Note No. CPN 004.) (Practice Notice).
Foreign persons as potential beneficiaries
Where an interest in a property is acquired by or held on trust by a discretionary trust, the trustee of the trust may be liable for foreign surcharges if any one of the potential beneficiaries is a foreign person. This poses difficulties in situations where there are no present beneficiaries who are foreign persons but the classes of beneficiaries are wide enough to allow foreign persons to become beneficiaries at a later date. For example, this could happen where:
- the classes of beneficiaries include children of the settlor as well as the children's spouses, and a child later marries a foreign person.
- the classes of beneficiaries include corporations whether incorporated locally or overseas, opening up the possibility of a foreign corporation later becoming a beneficiary even if no such corporation is a present beneficiary.
The Commissioner is prepared to administer the surcharges on the basis that where there are no existing potential beneficiaries who are foreign persons, the foreign surcharges will not apply. He gives the example of a case where potential beneficiaries include children, their spouses, grandchildren, aunts and uncles of the primary beneficiaries. In this case, he says that where the trust has no existing foreign beneficiaries, the trustee is not liable for the foreign surcharges. The trust deed does not need to be amended in this case.
However, in the case where the beneficiaries include as a class entities whether formed in Australia or elsewhere such as corporations, charities etc, the surcharges apply unless the trust deed also has an excluded class of beneficiaries and this class includes any beneficiary who is a foreign person. This will be the case even where no present beneficiaries fall within this description but future beneficiaries may fall within such a category.
Amendments to trust deeds
The Commissioner says that should the trust deed contain named or specified beneficiaries that are foreign persons, the Chief Commissioner will usually require that such beneficiaries are removed from the trust deed as beneficiaries. If the named foreign beneficiaries are not removed, the trustee will generally be liable for foreign surcharges.
Further, even if a discretionary trust may at the present time not fall within the surcharge regime, this could change if foreign persons become beneficiaries at a later date, for example, through marriage. Consideration needs to be given to whether an amendment would be desirable at the present time to exclude such persons as beneficiaries to avoid an unintended situation arising in the future where the surcharges apply.
It is likely that a large number of discretionary trust deeds established for families will need to be amended to ensure the surcharges do not apply, especially where there are classes of corporate beneficiaries allowing the possibility of future corporate beneficiaries who are foreign persons.
All amendments must be irrevocable. If the amendments were made prior to 19th September 2017 (when the amended Revenue Ruling G010 was issued), the Chief Commissioner says that he will accept amendments without the irrevocable clause for surcharge purchaser duty if the dutiable transactions occurs on or before 31 December 2018 and for surcharge land tax for the 2018 land tax year.
Where a trust deed has not been amended before a liability to the surcharge has arisen, the Chief Commissioner may exercise discretion to exempt a trustee of a discretionary trust in certain cases (Revenue Ruling G010). Where exemption is allowed, the required amendment must be made within 6 months after granting the exemption.
Taxpayers will be well advised to review discretionary trust deeds to check whether they require amendment to obtain the benefit of the Commissioner's Practice Note. Amendments will also need to be carefully considered to ensure that a tax or stamp duty liability does not arise through creation of a new declaration of trust or a resettlement.