Land Tax Legislation Changes 2019 – Impact On Discretionary Trusts

Land Tax Legislation Changes 2019 – Impact On Discretionary Trusts

What Is The Surcharge?

Foreign persons acquiring residential property in NSW on or after 21st June 2016 are liable to pay a 4% surcharge duty in addition to the usual duty payable on the purchase. A land tax surcharge of 0.75% will also be applicable to foreign persons owning residential property in NSW from 31st December 2016. Foreign persons will not be provided with a tax-free threshold currently at $482,000 for the land tax surcharge.

The changes to this legislation have a substantial impact on discretionary trusts. A trustee of a discretionary trust is considered to be a foreign trustee (and so is liable for surcharge land tax as the owner of residential land) if the terms of the trust do not prevent a foreign person from being a beneficiary.
A discretionary trust is considered to prevent a foreign person from being a beneficiary of the trust if both of the following requirements are satisfied:

  • No potential beneficiary of the trust is a foreign person
  • 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

Who Will Be Caught Out By It?

Foreign person:
The modified definition of ‘Foreign Person’ excludes an Australian citizen and New Zealand citizen holding a special category visa from liability to the surcharges no matter where they reside. A non-Australian citizen will be ‘ordinarily resident’ in Australia at a particular time where the individual has actually been in Australia during 200 or more days in the last 12 months and is not (or was not from most recent departure) subject to any legal limitation as to time for continued presence in Australia. A person who falls outside of the exclusion or is not ‘ordinarily’ in Australia will be regarded a ‘foreign person’.

Foreign trustees:
A beneficiary of a discretionary trust is taken to be entitled to 100% of the income and the capital of the trust regardless if a distribution is made to the individual or not. If a beneficiary is not ordinarily in Australia, the trustee of the trust will be considered a foreign person and will be liable for the surcharges where the trust acquires or owns residential land at the relevant taxing date

What Can Be Done To Reduce Exposure To The Surcharge?
Review trusts that own residential land prior to 31 December 2019 to consider amendment to discretionary trust deed to exclude foreign persons and limit the liability of the trustee. When the amendment is lodged, you will be required to indicate if the trust intend to acquire residential property in NSW and if the trust deed is to irrevocably exclude foreign persons. If you answer yes to both of these questions, you will receive a version of the ACIS trust deed that excludes foreign persons for the purposes of surcharge foreign person duty and land tax in all Australian jurisdictions for which these surcharges apply; and incorporates additional clauses to prevent inadvertent foreign person surcharge duty and land tax liabilities of the trust in NSW. If you order this trust deed, the trustee will not be able to distribute to foreign persons and this cannot be changed later.

If you require more information about the Land Tax Legislation Changes or advice specific to your situation please don’t hesitate to contact us!

Article written by Isaac Vaccarella.