If you have a family trust, it is likely to be a discretionary trust.
Each year, trustees of discretionary trusts have the ability to decide which of the trust's beneficiaries receive an income drawn from the funds held within the trust - as well as how much they should get. As such, discretionary trusts have become popular within the context of family tax planning.
The rules are changing: 'Foreign Persons', stamp duty and land tax
It is important to note that, depending on your circumstances, you may need to make urgent (by 31 December 2020) changes to your trust deed, to ensure that you don't pay extra stamp duty or land tax.
Surcharge purchaser duty applies to acquisitions of NSW residential land by foreign persons, and surcharge land tax applies to foreign persons who are owners of residential land within NSW.
Surcharge purchaser duty and surcharge land tax are payable in addition to any other duty or land tax payable.
Where an interest in property is either acquired by, or held through a discretionary trust, the trustee may be liable for these surcharges if any one of the 'potential beneficiaries' is a foreign person (see Duties Act 1997 section 104JA).
You might be wondering why you need to be concerned about
foreign beneficiaries with respect to your family trust - after
all, the named beneficiaries in your family trust deed are all
Australian citizens, right?
This is due to the fact that a 'potential beneficiary' is not limited to the beneficiaries who are named in the trust deed.
Example of potential beneficiaries
Revenue NSW provides the example of Mr and Mrs Jones and their children Mark and Peter, who are both toddlers.
All four of the Jones family are each named as a primary beneficiary in the trust deed and are all Australian citizens.
As is common with family trust deeds, the deed also nominates beneficiaries by class. In this case, there is a class specified as a 'spouse or child of a primary beneficiary'. This is to take into account a possible change in circumstances, or because the beneficiary does not exist when the deed is executed.
Clearly the trust has no existing foreign beneficiaries - however, the future spouse and children of Mark and Peter could potentially be foreign persons.
Revenue NSW advise that "A person is a 'potential beneficiary' of a discretionary trust if the exercise or failure to exercise a discretion under the terms of the trust can result in any property of the trust being distributed to or applied for the benefit of the person."
In this example, the trustee is taken to be a foreign person, and will therefore be liable for both surcharge stamp duty and land tax.
To be exempt from foreign surcharges, the Jones must amend the trust deed to exclude any foreign beneficiaries ("no foreign beneficiary requirement") and the no foreign beneficiary requirement must be irrevocable ("no amendment requirement").
Revenue NSW have issued the following guidance:
- No foreign beneficiary requiremen
If the trustee of a discretionary trust is liable for surcharge purchaser duty on a transfer of dutiable property that occurred before 24 June 2020, or after that date but before midnight on 31 December 2020, the trustee will still not be liable if the terms of the trust have been amended before midnight on 31 December 2020.
If surcharge purchaser duty was paid, the trustee is entitled to a refund if the amendment is made before midnight on 31 December 2020
If the trustee of a discretionary trust is liable to pay surcharge land tax in respect of the 2017, 2018, 2019 and/or 2020 land tax year, the trustee will still not be liable if the terms of the trust have been amended before due date for the payment of land tax or after the due date but before midnight on 31 December 2020.
If surcharge land tax was paid, the trustee is entitled to a refund if the amendment is made before midnight on 31 December 2020
- No Amendment Requirement
If before 24 June 2020, a trust satisfied the no foreign beneficiary requirement under section 104JA of the Duties Act 1997 or section 5D of the Land Tax Act 1956, the trustee will be exempt from surcharge purchaser duty and surcharge land tax without having to satisfy the no amendment requirement.
What you need to do
If your trust owns property, or may purchase property in the future, you should review the terms of your trust deed.
You may need to amend the trust deed to avoid being liable for a foreign person surcharge.
This article provides just one basic example - but all trust deeds are unique. You should ensure that your family trust deed is reviewed to ensure that the trustee is not deemed a foreign person.
Don't be caught out!
If you do need to amend your trust deed, this must be completed before midnight on 31 December 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.