The recent AAT decision in the case of Bendel and Commissioner of Taxation  AATA 3074 is in stark contrast to the ATOs longstanding position that an unpaid present entitlement of a corporate beneficiary constitutes the ‘provision of financial accommodation’ by the company to the distributing trust. […]
Avoid inadvertent surcharge land tax & purchaser duty
Emily Pritchard, Legal Services Director, current as of: 1 October 2020.
UPDATE – 21 June, 2022: The NSW foreign owner surcharge land tax rate will increase from 2% to 4%, commencing from the 2023 land tax year.
Late last year a bill was introduced into the NSW parliament proposing changes to the imposition of surcharge land tax and purchaser duty in NSW. That bill, known as the State Revenue Further Amendment Act 2020 (NSW) (“the Act”), is now law.
The Act provides an exemption from surcharge purchaser duty and land tax in respect of NSW residential property held in a discretionary trust if the trust prevents a foreign person from being a beneficiary of the trust by 31 December 2020. It also allows for refunds of already paid surcharge land tax and purchaser duty for previous years – but again, only if the trust prevents a foreign person from being a beneficiary of the trust by 31 December 2020.
What the changes mean in practical terms
Under the Duties Act 1997 (NSW) and Land Tax Act 1956 (NSW) a trustee of a discretionary trust that is a foreign person or foreign trustee will be liable to pay surcharge purchaser duty (currently an additional 8%) and surcharge land tax (currently an additional 2%) on the acquisition and holding of NSW residential property by the trust for which it is trustee..
These pieces of legislation have been amended by the Act so that the trustee of a discretionary trust is taken to be a foreign person or foreign trustee unless the trust prevents a foreign person from being a beneficiary of the trust. To do this, the following requirements must be satisfied:
- 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).
Important considerations for indirect interests
It is important to remember that the scope for foreign surcharges is wider than just discretionary trusts owning NSW residential property. Discretionary trusts holding indirect interests in NSW property should also be considered.
If a property is owned by a unit trust and a discretionary trust (that does not exclude foreign persons) owns units in that unit trust, the discretionary trust could cause the unit trust to be treated as foreign and assessed at surcharge rates. The same could be the case if a discretionary trust owns shares in a company that holds property.
Trust deeds for discretionary trusts that hold units or shares in entities that own property should also be reviewed and amended where appropriate.
Exemptions & refunds for trusts amended by 31 December
31 December 2020 is the critical deadline for amendments.
Discretionary trust deeds that comply with the above requirements before 31 December 2020 will be exempt from surcharge purchaser duty and surcharge land tax payable in respect of interests in residential property acquired or held by the trust.
- Trustees of discretionary trusts are entitled to refunds of surcharge purchaser duty already paid if the terms of the trust are amended to prevent foreign persons from being beneficiaries before 31 December 2020; and
- Trustees of discretionary trusts are entitled to refunds of surcharge land tax already paid in respect of the 2017, 2018, 2019 or 2020 land tax years if the terms of the trust are amended to prevent foreign persons from being beneficiaries before 31 December 2020.
We recommend an immediate review of all trust deeds for discretionary trusts that hold, or intend to hold, a direct or indirect interest in residential property in NSW.
We’ve developed some resources to help you:
|Suggested letter for your clients.|
- A trust that prevents a foreign person from being a beneficiary of the trust in this manner cannot distribute to foreign persons and this cannot be changed.
- 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.
- “Interest” where used in this article, includes an indirect interest.
- Revenue NSW requires that any named beneficiary who is a foreign person be deleted from the trust deed as a beneficiary (in additional to the requirements in this article) in order to exclude them.
- Specific legal advice should be sought on a case-by-case basis.
Acis does not provide advice in relation to taxation, duty, the Corporations Act, trust law, company law or any other matter. We do not purport to provide advice nor should you construe anything in any correspondence with us, or material provided by us, as advice of any kind.