Under the laws of most Australian states and territories, where a ‘foreign trust’ purchases property, a foreign purchaser surcharge will apply, thereby increasing the transfer duty payable in relation to the purchase. Recent changes in New South Wales and Victoria will (or propose to) expand the circumstances under which a discretionary trust will be deemed to be a foreign trust for transfer duty purposes.
In New South Wales, the State Revenue Legislation Further Amendment Bill 2020 (Bill) is expected to come into effect soon. Pursuant to the Bill, a discretionary trust will be deemed to be a foreign trust if the terms of the trust do not prevent a foreign person from being a beneficiary of the trust. A discretionary trust will be considered to prevent a foreign person from being a beneficiary if:
- no potential beneficiary of the trust is a foreign person; and
- 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 – that is, the exclusion of foreign beneficiaries must be irrevocable.
A person is a potential beneficiary of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person.
Pursuant to the Bill, discretionary trusts will not be liable to pay the foreign purchaser surcharge (or will be entitled to a refund) where the terms of the trust are amended to comply with the requirements set out above before midnight on 31 December 2020.
Similarly, the Victorian State Revenue Office has recently announced that all discretionary trusts that do not specifically exclude foreign beneficiaries will be held to be a foreign trust and be subject to the foreign purchaser surcharge on contracts entered into after 1 March 2020.
The majority of discretionary trust deeds will include wording designed to include and capture as beneficiaries a wide range of persons who are in some way related to a particular beneficiary. Accordingly, most discretionary trusts will likely be deemed to be foreign trusts in New South Wales and Victoria due to the likelihood that foreign persons could be captured as beneficiaries. It will likely be necessary for the terms of all discretionary trusts intending to hold property in New South Wales and Victoria to be amended in order to expressly exclude foreign persons from being beneficiaries.
If you require further advice or assistance in relation to amending the terms of discretionary trust deeds so as to avoid unintended duty consequences, please do not hesitate to contact us.