Duty and Land Tax Surcharges for ‘foreign’ discretionary trusts
By Riley Jones
Numerous States have now introduced, or have announced they are introducing, surcharges on either or both stamp duty and land tax where the land is acquired/held by a ‘foreign person’, including some discretionary trusts which may have only a single discretionary foreign beneficiary!
Consequently, we have produced new trust deeds that specifically exclude ‘foreigners’ (as defined in the respective States) from being able to be General Beneficiaries of our discretionary trusts.
Note: Trusts with these deeds also exclude Primary Beneficiaries (i.e., the named beneficiaries, and/or their child) where they are ‘foreign’ (generally, where they are not an Australian citizen).
In order to make these deeds as robust as possible, they have been drafted on a State-by-State basis, using the legislation from that particular State. This will mean that, if the relevant State Revenue authority looks at the deed, particularly clause 10, the wording will match the legislation in that State.
So far (as at 1 September 2017), the only States that have actually passed legislation are Victoria (with a stamp duty surcharge on certain foreign purchasers of residential land, as well as a land tax surcharge for certain 'absentee owners' of Victorian land), NSW (with a stamp duty surcharge on certain foreign purchasers of residential land, as well as a land tax surcharge for certain foreign owners of NSW land), and Queensland (with a stamp duty surcharge).
Therefore, if someone is considering setting up a trust to acquire land in one of the above States, and do not want any foreigners to be beneficiaries, they can request a deed that specifically caters to one of the above States (referred to as “Foreign Exclusion” deeds). Note that these Foreign Exclusion deeds exclude ‘foreigners’ (as defined) completely from being beneficiaries (or, in the Queensland deed, excludes all foreign persons and their related parties from receiving default distributions of income or capital), even though, technically, under some laws foreigners may still have limited entitlements to trust distributions. We have taken this position (i.e., completely excluding ‘foreigners’) so that the exclusion is more certain.
Note: We also provide ‘Foreign Exclusion’ versions of our variants of discretionary trust deeds, including our Pedigree Discretionary Trust and Child Maintenance Trust deeds.
The Governments of South Australia and Western Australia have also announced they will be introducing similar surcharges, but have not yet passed the relevant legislation. If someone is considering setting up a trust to acquire land in one of those two States, and do not want any foreign persons to be beneficiaries, they can (a) wait until the relevant legislation has been passed so that we can draft up a specific deed for that State, (b) request a NSW “Foreign Exclusion” deed (this appears to have the broadest definition of ‘foreign persons’, and refers to Commonwealth legislation for the definition), or (c) order a regular trust deed now, and then rely on the power to exclude beneficiaries after the trust has been set up and the legislation has been passed.
What should be the determining factor for whether I should get a Victorian, NSW or Queensland version of the deed? For example, is it based on the ‘Governing State’?
Basically, this issue affects trusts that own property in the relevant States, so the location of the property will be the determining factor. For example, even though the trustee might be based in Queensland and intends for the Governing State to be Queensland, if they are looking at buying property in NSW, they need to exclude foreign beneficiaries based on the NSW legislation.
Note that the issue of where duty is paid on setting up the trust is a separate question – this is generally determined by where the trust deed is first executed. Therefore, it is possible that a trust deed could be executed in Queensland (so there is no stamp duty on execution of the deed), but has a Governing State of Victoria (because the trustees are from Victoria originally, and their lawyers are still based in Victoria), but the trust is going to buy land in Byron Bay (i.e., NSW, so they will want to exclude foreigners from being beneficiaries based on the NSW law)!
What if someone has an existing NTAA Corporate Discretionary Trust deed and is looking at acquiring, or has already acquired, land in one of the above States?
Clause 10 of NTAA Corporate's current ‘standard’ discretionary trust deed provides the trustee of the trust with the power to exclude certain persons from being able to be General Beneficiaries of the trust (with the consent of the Appointor). The exercise of this power does not require the deed to be amended.
We have kits available for both Victoria and NSW to exclude foreign beneficiaries based on the legislation in that State.
Alternatively, for trusts that may acquire land in multiple States, we have a kit to exclude foreign beneficiaries based on the legislation in both Victoria and NSW.
Note that the Queensland surcharge legislation is basically only triggered where at least half of the default beneficiaries (i.e., the Primary Beneficiaries and, in some cases, their adult children) are ‘foreign’ (refer generally to Queensland revenue ruling DA000.14A.1). This is unlikely to be the case for most ‘ordinary’ Queensland discretionary trusts and therefore it is unlikely that a change will be necessary in most, if not all, cases. If a change is necessary (i.e., at least half of the default beneficiaries of a trust with Queensland land are ‘foreign’), then the power in clause 10 will not assist – it can only be used to exclude people from being General Beneficiaries. That is, it cannot be used to exclude Primary (default) Beneficiaries.
In such a case, the only course may be to vary the deed of the trust to exclude one or more of the Primary Beneficiaries. However, it should be noted that removing primary beneficiaries is pretty serious business, since the trust deed specifically states that, from the outset, the trust property is held for their benefit (and their related entities). Therefore, changing the primary beneficiaries has often been seen as a near-certain way of resettling a trust. That said, the ATO has relatively recently released a tax ruling indicating that certain changes to a trust will not result in CGT (TD 2012/21) and there is also a NSW revenue ruling that indicates it may be safe from a stamp duty perspective in NSW (refer NSW Revenue Ruling DUT 017).
Note: We do not provide stamp duty advice and are not liable for stamp duty, so if any changes are to be made to a trust, we recommend that you check with the relevant State Revenue authority as to whether any proposed changes will cause any duty problems.
However, note also that, even if a deed is varied to remove one or more Primary Beneficiaries, the trust may still be a ‘foreign person’, because some relatives, and maybe other foreign entities, could still be General Beneficiaries of the trust (by reason of their relationship to any remaining Primary Beneficiaries). On top of this, any beneficiaries that are removed will need to be advised that they will not be able to benefit from the trust in the future, and the trustee, in making such a change, will need to ensure that they are doing so in good faith, etc.
Therefore, if a trustee is considering removing Primary Beneficiaries, they should speak to a lawyer familiar with the State legislation who can take the parties through all the issues, ask all the right questions and look at all their assets, and also provide all the right warnings, as well. In some circumstances, it may end up that the best thing to do is simply to pay the extra land tax (i.e., the downsides of changing the beneficiaries may outweigh the increased land tax cost).
Stamp duty – refer SS.3, 3B and 28A of the Duties Act 2000 (Vic). Applies from 1 July 2015.
Land tax – refer S.46IA of the Land Tax Act 2005 (Vic) (and S.3 of that Act for the relevant definitions). Applies (basically) from 31 December 2015.
Stamp duty – refer S.104J of the Duties Act 1997 (NSW), and SS.4 and 18 of the Foreign Acquisitions and Takeovers Act 1975 (Cth). Applies from 21 June 2016.
Land tax – refer S.5A(6) of the Land Tax Act 1956 (NSW) and SS.4 and 18 of the Foreign Acquisitions and Takeovers Act 1975 (Cth). Applies (basically) from 31 December 2016.
Stamp duty – refer S.237 of the Duties and Other Legislation Amendment Bill 2016 (Qld) and SS.57 and 60 of the Duties Act 2001 (Qld). Applies from 1 October 2016.
Land Tax – No new surcharge, but all trusts pay a higher rate of land tax in Queensland.
Note: The South Australian duty surcharge is proposed to apply from 1 January 2018 and the Western Australian duty surcharge is proposed to apply from 1 January 2019.