Foreign Person Surcharge and Discretionary Trusts
13 Nov 2017
In an attempt to improve housing affordability, since 2016 the NSW Government has charged a duty and land tax surcharge on foreign purchasers and owners who have a ‘substantial interest’ in residential property. The surcharge was doubled in 2017, and so as a result, an 8% surcharge is now payable on the dutiable value of residential land purchased by foreign persons, where the contracts were exchanged after 1 July 2017. In addition, a foreign owner land tax surcharge of 2% of the property value will be payable for the 2018 land tax year (currently 0.75% for the 2017 land tax year).
Because of the way the legislation treats discretionary trusts, these changes can have significant effects on trusts involved in the purchase or ownership of residential land. As most discretionary trusts have a very broad class of beneficiaries, it is not unlikely that one of the potential beneficiaries is a foreign person. If one of the potential beneficiaries of the trust is a foreign person, then they will be deemed to have an interest in all of the trust’s income and assets, meaning that the trustee will incur the surcharge. This is the case even if no foreign beneficiaries actually receive, or are actually likely to receive, a distribution from the trust.
What is the current state of the law?
To address this issue, the NSW Chief Commissioner of State Revenue released a ruling in September 2017. This ruling provided that the Commissioner will use its discretion to exempt a trustee from the surcharge, provided that:
- the trust deed is amended to remove the trustee’s power to make distributions to foreign persons, or
- the trustee applies to the Commissioner for an exemption, on the basis that is not possible for the trust deed to be amended prior to the liability arising, but with an undertaking that the trust deed will be amended within 6 months.
This exemption will operate retrospectively from 21 June 2016.
What do I need to do?
If you are advising a trustee that is planning to purchase residential property, it is most prudent to amend the terms of the trust instrument to remove the trustee’s power to make distributions to foreign persons.
For discretionary trusts trustees that already hold taxable land in NSW, we recommend you pay close attention to any land tax levied on the property, and immediately obtain legal advice if foreign person surcharge is levied. In some circumstances, it may be advisable to amend the trust deed before land tax becomes payable.
If you are concerned or have any further questions please arrange to speak with one of the commercial team at Webb and Boland Lawyers.
By Dominic Wilcox (Solicitor), with assistance from Mitch Carrigan (Director).