TAX Alert: Applying surcharge purchaser duty and surcharge land tax to discretionary trusts

24 November 2016


New South Wales has recently imposed a surcharge purchaser duty on foreign persons acquiring ‘residential-related property’.  It has also imposed a surcharge land tax on foreign persons holding ‘residential property’.  Broadly, the effect of the changes is that discretionary trusts that have even just one foreign person as a potential beneficiary are themselves treated as foreign persons.

This means that trust deeds of discretionary trusts that are going to acquire ‘residential-related property’, or at 31 December 2016 will hold ‘residential land’ in NSW, need to be reviewed and potentially amended, as soon as possible.

This article discusses the key issues associated with these new surcharges.

Possible action

It may be possible to amend the trust deed of a discretionary trust to exclude any foreign persons from being beneficiaries.  It needs to be considered whether the amendment would trigger any resettlement of the trust, and whether adverse capital gains tax or stamp duty implications could arise from such an amendment.  Additional caution should be taken in the situation when the foreign person excluded from the trust is a default income or capital beneficiary, particularly if the trust owns land in Victoria or Queensland.

We can review a discretionary trust deed, consider and advise upon the resettlement issues, and amend the trust deed (provided that there will be no adverse consequences).  Our fees for this work for each trust will generally be $990 (including GST).  Our fees may be lower than this if we are reviewing multiple deeds.  There may be additional fees if default income or capital beneficiaries are proposed to be removed.

We have an instruction sheet which we can send you if you would like us to review any deeds.

NSW surcharge purchaser duty

From 21 June 2016, the NSW government imposes surcharge purchaser duty of 4% on the dutiable value of residential-related property in a surcharge duty transaction made by a ‘foreign person’.

Residential-related property includes residential land in NSW.  Residential land means any of the following and does not include any land used for primary production:

  1. a parcel of land on which there are one or more dwellings, or a parcel of land on which there is a building or buildings under construction that, when completed, will constitute one or more dwellings;
  2. a strata lot, if it is lawfully occupied as a separate dwelling, or suitable for lawful occupation as a separate dwelling;
  3. a utility lot (within the meaning of the Strata Schemes Management Act 2015), if its use is restricted to the owner or occupier of a strata lot referred to in paragraph (b);
  4. a land use entitlement, if it entitles the holder of the land use entitlement to occupy a building, or part of a building, as a separate dwelling;
  5. a parcel of vacant land (including any land that the Chief Commissioner is satisfied is substantially vacant) that is zoned or otherwise designated for use under an environmental planning instrument (within the meaning of the Environmental Planning and Assessment Act 1979) for residential purposes or principally for residential purposes.

Other forms of residential-related property include options to purchase residential land in NSW.

A surcharge duty transaction includes the purchase of residential-related property.

Foreign person includes:

  • the trustee of a trust in which an individual not ordinarily resident in Australia holds a substantial interest;
  • the trustee of a trust in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest.

An individual is ordinarily resident in Australia at a particular time if the individual has actually been in Australia during 200 or more days in the period of 12 months immediately preceding that time and, at that time the individual is in Australia, the individual’s continued presence in Australia was not subject to any limitation as to time imposed by law.

A person holds a substantial interest in a trust if the person, together with any one or more associates, holds a beneficial interest in at least 20% of the income or property of the trust.

A discretionary trust with at least one beneficiary who is a foreign person would be treated as a ‘foreign person’.

This is because if a trustee has the power to distribute the income or property of the trust to one or more beneficiaries, each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary (eg 100% to a discretionary beneficiary).

NSW surcharge land tax

From the 2017 land tax year, NSW surcharge land tax of 0.75% will be imposed on the taxable value of all residential land owned by a foreign person at midnight on 31 December in any year (commencing with 31 December 2016).

The meaning of ‘foreign person’ and ‘residential land’ for surcharge land tax purposes is the same as that for surcharge purchaser duty.

Accordingly, our above comments on discretionary trusts for the purpose of surcharge purchaser duty also apply to NSW surcharge land tax.

Victoria and Queensland

There are also similar provisions in Victoria and Queensland dealing with state taxes similar to the NSW surcharge purchaser duty and surcharge land tax, which could apply to discretionary trusts (though the Queensland provisions are more limited and can only apply if a foreign person holds a trust interest as a taker in default).

For further information please contact:
Philip de Haan | Partner | +61 2 9020 5703 |
Yat To Lee | Senior Associate | +61 2 9020 5742 |