Critical December deadline for discretionary trusts

Emily Pritchard, current as of: 14 November 2019.

This article was updated on 16 December 2019.

IMPORTANT NOTE 

Revenue NSW has released the following update on 13 December 2019:

“… the Government intends to extend this deadline to a later date, in 2020. However, trustees are encouraged to amend their deeds by midnight 31 December 2019, if possible, to avoid incurring a land tax surcharge liability and having to apply for an exemption or refund.”

To see the full Revenue NSW press release please click here.

The State Revenue Further Amendment Bill 2019 (NSW) was introduced before the NSW parliament on October 22, seeking to amend legislation relating to duties and land tax.

What does this have to do with discretionary trusts? More than you may realise, even if you are located outside NSW.

Under the Duties Act 1997 and the Land Tax Act 1956 (NSW), a foreign trustee will be liable to pay surcharge transfer duty and surcharge land tax on the acquisition and holding of an interest in residential property owned by the trust for which it is trustee in NSW.

The proposed changes stipulate that the trustee of a discretionary trust is taken to be a foreign trustee, unless the trust prevents a foreign person from being a beneficiary of the trust. A discretionary trust is taken to have done this if:

  • no potential beneficiary of the trust is a foreign person (the no foreign beneficiary requirement); 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 (the no amendment requirement).

What this means in practical terms

Essentially, a discretionary trust deed that complies with the above requirements will be exempt from, or may be entitled to a refund of, surcharge purchaser duty and surcharge land tax payable in respect of residential property acquired or held by the trust.

While the NSW Office of State Revenue’s interpretation of compliance with these requirements is yet to be seen, the Acis trust deed has already been amended with these provisions in mind.

There are transitional arrangements for trust deeds amended before 31 December 2019. 

We recommend an immediate review of all trust deeds for discretionary trusts that hold, or intend to hold, residential property in NSW.

Foreign beneficiaries in other states

Beyond NSW, all Australian states and territories (except the NT) have introduced foreign person surcharge duty and/or foreign person surcharge land tax, which may impact land holdings of discretionary trusts.

The Acis trust deed excludes the following from being a beneficiary:

  • any person who is a foreign person (or equivalent) under the relevant state/territory legislation; and
  • who, by being a beneficiary, would or might cause the trust to be assessed to additional or increased duty or land tax,

but only while they continue to be a foreign person (or equivalent) under the relevant state legislation and the trust holds an interest in property to which the same provisions would apply.

This exclusion first appeared in our discretionary trust deed in June 2017 and has been amended over time as legislation in various jurisdictions has been introduced and/or varied.

It is not mandatory that trusts set up by Acis include the foreign beneficiary exclusion. There may be circumstances when surcharge duty or land tax is acceptable in order to allow distributions to a foreign person. In such cases, just let us know at the time of ordering.

Existing trust deeds which don’t contain an exclusion can generally be amended to include these exclusions and avoid inadvertent surcharge duty and/or land tax liabilities.

Key takeaways

  1. Review all discretionary trust deeds for trusts that hold or intend to hold an interest in residential property in NSW to satisfy the no foreign beneficiary requirement and the no amendment requirement.
  2. For Acis deeds supplied before June 2017 foreign beneficiaries were not excluded, and the deed may need amending if the trust owns, or intends to own, residential property. Acis deeds supplied after June 2017 may require amendment depending on the jurisdiction in which the foreign beneficiary exclusion is required.

More technical information and the broader implications of these changes can be found in the reference articles below.

How to order the new Acis trust deed

Acis released new discretionary trust deeds on Friday, 15 November 2019. When ordering new discretionary trusts, capital protected trusts and hybrid family unit trusts, you will be asked two questions:

  1. Does this trust intend to acquire a direct or indirect interest in residential property in NSW?
  2. Is the trust deed to irrevocably exclude foreign persons?

You will also need to consider these questions when you order a foreign beneficiary exclusion amendment for existing trust deeds.

Why the questions?

The proposed legislative changes in NSW require a more restrictive foreign persons exclusion be included in the trust deed. As such, the NSW exclusion has not been incorporated into our standard trust deed. Instead it can be selected when you order at no additional cost.

The purpose of these questions is two-fold:

  1. To ensure deeds for trusts holding an interest in residential property in NSW comply with the changes and prevent inadvertent foreign person surcharge duty and land tax liabilities; and
  2. To achieve the above without unnecessarily restricting distribution capabilities in trusts for which this legislation may never be a concern.

If you answer NO
The Acis trust deed excludes foreign persons for the purposes of surcharge foreign person duty and land tax in all Australian jurisdictions for which these surcharges apply, except NSW.

If you answer YES
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.

Please talk to us if you have discretionary trust deeds that may need amending by close of business Monday, 16 December 2019.

Heads up: Deletion of named foreign beneficiaries

While Revenue NSW’s interpretation of compliance with these requirements is yet to be seen, it does require that, where any named beneficiary is a foreign person, their name must be deleted from the trust deed as a beneficiary in order to exclude them. When ordering the amendment to exclude foreign persons, we can include the deletion of named beneficiaries for an additional $55 inc GST. You just need to request this at the time of ordering. The relevant trust deed amendment order form can be downloaded here.

Please note:

As amendments of these types have the effect of changing the beneficiaries, specific duty/tax advice should be obtained prior to execution. 

“Discretionary Trust”can include any trust under which the trustee has discretions in relation to the distribution of income and capital.  This could include hybrid trusts, capital protected trusts and some unit trusts.  Specific legal advice should be sought on a case-by-case basis.

“Interest” where used in this article, includes an indirect interest.

Reference articles:

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