Foreign Purchaser Duty Surcharge & Discretionary Trusts
As of midnight 1 March 2020, the Victorian State Revenue Office drew a line in the sand, imposing a mandatory 8% duty surcharge on the purchase of residential land by foreign discretionary trusts.
This mandate has the potential to impact most discretionary trusts, given the commonly broad classes of beneficiaries prevalent in discretionary trusts.
Although this article focuses on Foreign Purchaser Duty Surcharge Rules in Victoria, it is worth noting that such Rules differ slightly in New South Wales and Queensland. In New South Wales, a foreign person is required to pay an 8% surcharge on any residential land they acquire. In Queensland, a foreign person is required to pay a 7% surcharge on any residential land that they acquire. Additionally, in both states, a foreign person must pay a land tax surcharge of 2%.
What Constitutes a Foreign Trust?
The Duties Act 2000 (Vic) (“Act”) defines a foreign trust to mean any trust in which a foreign corporation or natural person holds a substantial interest in the trust estate.[1]
Special
rules under the Act apply for determining the substantial interest threshold
for discretionary trusts, because under a discretionary trust there can be
times when no person has a beneficial interest. The Act provides that if, under the terms of a trust, a trustee has
the power or discretion to distribute the capital of the trust to
a person or a member of a class of persons, any
such person is taken to have a beneficial interest in the
maximum percentage of the capital of the trust.[2]
What Does This Mean For Your Discretionary Trust?
Most, if not all, discretionary trusts have a broad class of beneficiaries (e.g. any spouse, child, grandchild or grandparent of the primary beneficiary or the spouse of such child, grandchild or grandparent).
A single person from amongst this wide-ranging class of beneficiaries who satisfies the Act’s definition of a foreign person, regardless of whether they have received any distributions from the trust or are likely to in the future, will cause the entire discretionary trust to be deemed foreign.
This means that in the case of most discretionary trusts, any future purchase of residential land (or indeed purchased from 1 March 2020) will incur an additional duty surcharge, which, depending on the value of land, could be upwards of several hundred thousand dollars in additional stamp duty.
What Does This Mean For Your Unit Trust?
The Foreign Purchaser Duty Surcharge also applies to Unit Trusts. If a unit holder is a foreign natural person and has a substantial interest in the trust, the trust will be deemed foreign trust. Any purchase of residential property by such a Unit Trust will therefore attract additional duties.
How Can You Avoid Additional Surcharge Duty?
Most trust deeds provide a mechanism for the provisions of the deed to be amended. The terms of your trust deed may be varied by a simple deed of amendment to exclude foreign beneficiaries from being eligible to receive allocations of income and advancements of capital from the trust. Such an amendment to the trust would limit the class of beneficiaries and the trust would no longer trigger the foreign beneficiary surcharge duty provisions of the Act.
If you would like to have your Trust Deed reviewed to establish whether the updated provisions of the Act apply to you, or wish to discuss the above further, please feel free to contact Mr Zaid Mohseni or Mr Mitchell Hickey of our office.
[1] Duties Act 2000 (Vic), s 3.
[2] Duties Act 2000 (Vic), s 3B.