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Discretion is the Better Part of Valor: Trusts & Foreign Persons Purchaser Duty & Land Tax Surcharge

Do you have a family trust or are you thinking of establishing a discretionary trust? This blog contains important information for you to take into consideration.


Discretionary trusts (often referred to as family trusts) are becoming more common, and many people are using them as a vehicle through which to buy property.


The New South Wales Government amended section 104JA of the Duties Act 1997 by means of the State Revenue Legislation Further Amendment Act 2020 (commencing 24 June 2020).


These amendments provides that a trustee of discretionary trust is automatically deemed to be a foreign trustee, unless the trust explicitly prevents foreign persons from being a beneficiary of the trust, including any ‘potential’ beneficiaries.


This means that as of 1 January 2021, unless your Trust Deed contains terms that explicitly and irrevocably excludes foreign (and potentially foreign) beneficiaries, your trust will become liable to paying the additional ‘foreign persons’ surcharges. These charges are by no means insignificant and include:


  • A surcharge purchaser duty tax on the purchase of residential property (currently 8% of the market value of the property), in addition to the normal transfer duty; and


  • An annual surcharge land tax for any residential property held in New South Wales on 31 December each year (currently 2% of the unimproved value of the land).


Specifically, the Trust Deed must meet both of the following legislative requirements for the discretionary trust to be considered to prevent a foreign person from being a beneficiary:


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


The legislative amendment defines a person as being a ‘potential beneficiary’ of a discretionary trust in circumstances where 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’.


The deadline for amending a discretionary Trust Deed to include terms that irrevocably exclude foreign beneficiaries was on 31 December 2020.


If you believe you may be affected by these changes, it is recommended that your existing Trust Deed be reviewed and that you seek legal advice on whether your Trust Deed is compliant and, if not, what other legal options are available to you. This will depend on the terms of your existing Trust Deed and your individual circumstances.


If you are considering setting up a new family trust, you should ensure that the Trust Deed is drafted in a way that complies with the legislative requirements.


If you need assistance or advice regarding your existing Trust Deed or you are thinking of setting up a new trust, please feel free to contact us.


Vincent Chong

Graduate

Gramelis Attorneys

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