Effective as of 24 June 2020, the trustee of a discretionary trust is taken to be a foreign person in that capacity for the purposes of duty and land tax if the trust does not prevent a foreign person from being a beneficiary of the trust, as a result of the amendments made to the Duties Act 1997 (NSW) (“Duties Act”), Land Tax Act 1956 (NSW) (“Land Tax Act”) and Land Tax Management Act 1956 (NSW).
As a result, a trustee who owns residential land in New South Wales are liable for surcharge land tax, and those who purchase residential land would be liable for surcharge purchaser duty (surcharges previously reserved for foreign owners of residential land).
To avoid being treated as a foreign person for the purposes of duty and land tax, the discretionary trust must prevent a foreign person from being a beneficiary of the trust, pursuant to section 104JA(2) of the Duties Act and section 5D(2) of the Land Tax Act, by meeting the requirements in subsection (3) of the respective Acts, as follows:
(3) A discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if (and only if) both of the following requirements are satisfied—
(a) no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement),
(b) the terms of the trust are not capable of amendment in a manner that would result in there being a potential beneficiary of the trust who is a foreign person (the no amendment requirement).
For discretionary trusts that do not contain the no foreign beneficiary requirement and the no amendment requirement, a transitional period applies through to midnight, 31 December 2020 for the terms of the trust to be amended to avoid being assessed as a foreign person.
If you have created a discretionary trust for a client or your client is otherwise a trustee (or beneficiary of such a trust) who owns or intends to own residential property in New South Wales, now is the time to review and update those trust deeds.
Unless the terms of the trust deed contain the above requirements, trustees can expect to pay surcharge land tax as a foreign owner of residential land, in addition to standard land tax. The surcharge rate is 2 per cent from the 2018 land tax year onwards.
Trustees purchasing residential land may be liable for surcharge purchaser duty, in additional to standard transfer duty (stamp duty). Surcharge purchaser duty is currently 8 per cent on the value of the residential land.
If your accounting practice uses a precedent discretionary trust deed, now is the time to update your precedent to include the no foreign beneficiary requirement and the no amendment requirement, so that future trustees do not find themselves liable for surcharge land tax and surcharge purchaser duty, unless of course the trust is intended to benefit a foreign person.
Gavin Parsons and Associates can assist you and your clients with reviewing the applicable trust deed and making the necessary amendments to the deed.
Contact Gavin Parsons and Associates on (02) 9262 4471 or Gavin@gpalaw.com.au if you have any enquiries about land tax, transfer duty or property law.