Discretionary trust deeds and foreign surcharge liability – act before 31 December 2020

On 24 June 2020, in New South Wales, the State Revenue Legislation Further Amendment Act 2020 (‘the Act’) received royal assent and is now in force.  If you are a trustee or beneficiary of a trust that owns property in NSW this new amendment could have far reaching implications for you.

The Act has amended the Land Tax Act 1956 (NSW) and the Land Tax Management Act 1956 (NSW) so that if there is or there may be a “foreign” beneficiary of a discretionary trust, that trust will incur a foreign land tax surcharge. The only way to avoid this surcharge is for the trust deed to contain an irrevocable provision that specifically prevents foreign persons from benefiting from the discretionary trust. If your trust deed is silent on current or future foreign beneficiaries, then the land tax surcharge will apply.

Two of the main purposes of Act[1] are:

  1. To avoid discretionary trusts becoming subject to surcharge purchaser duty or surcharge land tax where there is no intention that income or assets in the trust will be distributed to foreign persons; and
  2. To enhance landholder duty provisions to address inequities and anomalies their application and to bring New South Wales closer in alignment with other jurisdictions and to fortify them against avoidance through the use of foreign acquisitions vehicles.

So, who is a “foreign person”?

For the purposes of determining whether there will be a surcharge on purchaser duty or land tax, a ‘foreign person’ is, essentially, someone who:

  1. is not an Australian Citizen; and
  2. does not reside in Australia for at least 200 days per annum.

It follows that foreign corporate entities are not permitted to be beneficiaries of discretionary trusts. A foreign entity is as an entity in which a foreign person shareholder holds at least a 20% interest in the entity. For more information on who is a “foreign person” NSW Revenue have this helpful page: https://www.revenue.nsw.gov.au/help-centre/resources-library/g009.

What is the amount of foreign land tax surcharge?

The trusts that fail to comply with these new regulations will be required to pay a foreign land tax surcharge of 2% on residential land on top of ordinary land tax rates. Additionally, non-compliant trusts will be subject to a foreign surcharge rate of duty of 8% that will apply to dutiable transactions pertaining to residential property.

It is important to note, that even if you do not pay land tax, you could be required to pay the land tax surcharge if your trust contravenes these new provisions.

What do you need to do?

Trustees will have until 31 December 2020 to update their trust deeds to include a provision that irrevocably and specifically prevents foreign persons from benefiting from discretionary trusts. As of 1 January 2021, trustees will be required to pay the foreign surcharge if they have failed to include such a provision in their trust deed.

If you need assistance varying the terms of your trust deed to avoid the foreign surcharge, get in contact with Katie Innes or Ben Grady at BAL lawyers.

[1] As outlined in the Second Reading Speech