We previously advised that trustees of discretionary trusts with an interest in NSW land (or which may in the future acquire an interest in NSW land) should have the terms of their discretionary trust deed reviewed to avoid potential liability for surcharge purchaser duty and surcharge land tax. The (NSW) was assented to on 24 June 2020 (the Act) with Parliament extending the date by which these amendments must be effected to 31 December 2020. We update our article published on 4 December 2019 below.
From 21 June 2016, the NSW Government put into place the Foreign Purchaser Surcharge Duty, which is a duty paid by foreign buyers (or a ‘foreign person’) in addition to stamp duty when purchasing a residential property in NSW. However, the State Revenue Legislation Further Amendment Act 2020 (the Act) has significant implications for discretionary trusts which result in those trusts now being classed as foreign entities (and therefore attracting surcharge duty and surcharge land tax) even though no actual foreign person currently falls within the class of beneficiaries. . The Act has retrospective effect and it is critical that trustees of discretionary trusts with an interest in NSW land, or that intend to acquire an interest in NSW land in the future, have their trust deeds reviewed and amended where necessary prior to 31 December 2020.
The impact of the existing regime on discretionary trusts
A discretionary trust is a trust where there is a class of persons falling under the definition of beneficiaries.
Currently, a trustee of a discretionary trust that purchases or owns residential land in NSW will be liable for surcharge purchaser duty and surcharge land tax where the trust is classified as a ‘foreign person’. A discretionary trust will be liable for these surcharges if any beneficiary of the trust is or could be a foreign person. This includes generic beneficiary classes such as spouses, children, companies owned by another beneficiary etc, if any of those persons/entities would be classed as a foreign person unless the terms of the trust expressly exclude a foreign person from benefitting from the trust.
When a discretionary trust is classified as a foreign person, it must pay an 8 per cent surcharge on the value of any residential land purchased in NSW (in addition to ordinary transfer duty). In addition, a 2 per cent surcharge on the taxable value of all NSW residential land owned as at 31 December each year (in addition to any land tax already paid) is payable. These surcharges significantly increase the tax otherwise payable and represent a material cost to purchasing or holding residential land.
What is proposed by the Act?
The Act makes a number of changes to the duty and land tax legislation in NSW. In respect of discretionary trusts, the Act sets out the rules that will need to be satisfied for the surcharges not to apply to discretionary trusts.
The trustee of a discretionary trust will be exempt from, and may be eligible for a refund of any surcharge purchaser duty or surcharge land tax already paid, if:
- the terms of the trust prevent a foreign person from being a potential beneficiary of the trust (the “no foreign beneficiary requirement”) and
- the terms of the trust cannot be amended in a manner that would result in a foreign person becoming a potential beneficiary of the trust, that is, the “no foreign beneficiary requirement” should be irrevocable (the “no amendment requirement”).
The “no amendment requirement” does not apply to any trust that satisfies the “no foreign beneficiary requirement” prior to enactment of the Act (i.e. before 24 June 2020). This has the effect that discretionary trust deeds that have already been amended to exclude foreign persons as beneficiaries of the trust (or were adopted with these provisions) do not need to be varied as a result of the Act.
While the proposed amendments appear to reflect existing practice, the Act requires taxpayers to amend the terms of their trusts before 31 December 2020 to avoid the foreign person surcharges. Trustees of discretionary trusts that own, or intend to own, residential property in NSW must act promptly to ensure they do not unintentionally attract liability for surcharge purchaser duty or surcharge land tax.
Where surcharge land tax or surcharge purchaser duty has already been paid and the trust deed is amended in accordance with the provisions of the Act, a refund should be sought from Revenue NSW.
What should I do?
Trustees of discretionary trusts with an interest in NSW land (or which may in the future acquire an interest in NSW land) should have the terms of their discretionary trust deed reviewed promptly and ensure any required amendments are undertaken before 31 December 2020.
If you are concerned about your potential liability for surcharge purchaser duty or surcharge land tax and would like your discretionary trust deed reviewed and amended, get in touch today for a confidential discussion and fixed fee package.