The Office of State Revenue (OSR) has released a ruling on 22 December 2016 in relation to the definition a ‘foreign person’. This is important if you hold an investment property in a discretionary trust.
The OSR ruling confirms that the trustee of a discretionary trust is deemed to be a ‘foreign person’ if the class of potential beneficiaries of the trust could include a foreign person, even if that person is not specifically named. For example, if the class of potential beneficiaries includes a cousin who was born and lives in London, the trust may be deemed to be a ‘foreign person’ even if your cousin has never received a benefit under the trust. It is enough that a foreign person could benefit under the trust.
A surcharge tax at the rate of 0.75% will be levied on NSW residential land owned by a foreign person. This new surcharge is over and above the trustee’s regular land tax liability. To illustrate, if a residential investment property has an unimproved value of AU$1 million, the normal land charge would be AU$8,388. The surcharge, if applicable, will then be charged at 0.75%, being an extra AU$7,500 in addition to the regular land tax charge.
A new surcharge duty, at the rate of 4%, will also be charged on purchases of residential land in NSW by ‘foreign persons’. The surcharge duty is imposed on top of any duty payable under the general stamp duty rules.
Similar provisions now operate in other Australian jurisdictions.
Why is this relevant to your discretionary trusts?
Under the recent changes to the NSW land tax and duties legislation, the trustee of a discretionary trust may be treated as a ‘foreign person’ if any member of the class of income or capital beneficiaries is a non-resident.
Discretionary trust deeds are typically drafted to capture a broad range of persons. It is commonplace for discretionary trust deeds to identify one or more primary beneficiaries and to include among broader classes of beneficiaries a wide range of individuals, companies and trustees who are related to or have a connection with the primary beneficiary.
The trustee of a discretionary trust may be treated as a ‘foreign person’ for these purposes if any member of the class of income or capital beneficiaries is a non-resident, even if not specifically named. It is irrelevant that many of the so-called ‘beneficiaries’ may never benefit under the trust. The trustee may be subject to the surcharge taxes if just one non-resident is among the class of potential beneficiaries.
Ask yourself: Do you know the residency of every potential beneficiary of your trusts?
What should you do?
You should review your discretionary trust deeds to determine whether any foreign person may fall within the class of potential beneficiaries.
Where appropriate, consider varying the trust deeds to exclude from the class of beneficiaries any person who is a foreign person within the meaning given by the Foreign Acquisitions and Takeovers Act 1975 (Cth), as modified by subsection 104J(2) of the Duties Act 1997 (NSW).
Care should be taken to ensure that any variation:
- is made in accordance with the trust deed and is within the trustee’s powers;
- does not trigger a resettlement; and
- does not affect the present entitlement of any beneficiary.