The problem with potential beneficiaries who are “foreign persons”, surcharge purchaser duty & surcharge land tax
“Foreign persons” who enter into agreements to purchase residential real estate in New South Wales on or after 1 July 2017 will be liable for an 8% surcharge purchaser duty. The surcharge purchaser duty is in addition to the duty payable on the purchase of residential property. Surcharge purchaser duty is not only charged on an agreement or transfer of residential land. It is also chargeable on certain dutiable transactions that are defined under Chapter 2A of the Duties Act. Surcharge purchaser duty also applies to landholder transactions if there is a landholder liability and one or more of the properties owned by the landholder is classified residential and the purchaser is a foreign person who purchases shares or units in the landholder.
Further, “foreign persons” who own residential land in New South Wales, must pay a surcharge land tax of 0.75 per cent for the 2017 land tax year and of two per cent from the 2018 land tax year onwards. “Foreign persons” are required to pay the surcharge land tax on the taxable value of all residential land owned as at 31 December each year. The surcharge land tax is in addition to any land tax. Further, “foreign persons” may be required to pay the surcharge land tax even if they do not pay land tax.
The definition of “foreign person” is quite complex. However, for individuals who are Australian citizens, including people who hold dual citizenships (one of which is an Australian citizenship), they will not be “foreign persons” for the purposes of the surcharges, whether or not they are ordinarily resident in Australia. The definition of “foreign person” is in Foreign Acquisitions and Takeovers Act 1975 (Cth), from Section 4, as modified by section 104J of the Duties Act 1997 (NSW). Revenue Ruling G9 explains the definition in detail.
The Danger for Discretionary Trusts
In discretionary trusts, usually the trustee has wide discretion to distribute income and property.
However, now it will be considered that each beneficiary to whom the trustee has discretion to distribute the income or property, is deemed to have the maximum percentage interest in the income or property that the trustee may exercise a discretion to distribute to them.
The result is that any potential beneficiary who is a foreign person
• Even if they are in the class of secondary beneficiaries such as to family or other relatives of primary beneficiaries, or related companies, trusts or even charities; and
• Even though the trustee was unlikely to ever make a distribution to that person;
will almost always be deemed to hold a substantial interest in the trust, and the trustee will be deemed to be a foreign person who will be potentially liable for surcharge purchaser duty and surcharge land tax.
This means a discretionary trust may be liable for the foreign person surcharges even though none of the beneficiaries who actually receive or are likely to receive distributions of income or capital are foreign persons.
If there is potential for:
• any of your potential beneficiaries to be a foreign person
• your trust to own residential land
you should consider amending your Trust Deed.
Amendment of a Trust Deed must be undertaken with great care as there are significant consequences for resettling a trust – whether or not you meant to do so.