If you are a financial planner or accountant advising the trustee of a discretionary trust, and that trustee plans to hold (or holds) residential land in New South Wales, you must read this! Critical reforms have been tabled in Parliament affecting all discretionary trust deeds, writes Property & Commercial Partner Barry van Heerden.
Changes affecting discretionary trust deeds in NSW
Discretionary trusts that own ‘residential land’ in New South Wales or hold an ownership interest in a company or unit trust that owns residential land in New South Wales are strongly advised to consider amending their trust deeds to exclude foreign persons as potential beneficiaries in the trust, otherwise additional foreign land tax and duty surcharges may apply.
The New South Wales Parliament has tabled an Amended Bill that will deem discretionary trusts to be ‘foreign persons’, unless the trust deeds specifically exclude any foreigners from being a beneficiary.
The Bill allow for amendments to trust deeds to occur by 31 December 2019. However, the Bill has not been passed in Parliament and therefore it is widely accepted the date of 31 December 2019 will be extended to a currently unknown date in 2020.
The Chief Commissioner also issued a Practice Note CPN004 which deals with the amendments of a trust deed to exclude any potential beneficiary which may be a foreign person. The amendment must be irrevocable and must exclude all foreign persons as potential beneficiaries in the trust.
Effect of changes on surcharge duty and surcharge land tax
If a discretionary trust is deemed a ‘foreign person’, surcharge duty of 8% and surcharge land tax of 2% will be payable on any residential land in New South Wales acquired or owned by the trust since the surcharges were introduced in 2016.
The proposed changes will apply retrospectively, so that if a discretionary trust:
- paid surcharge duty or land tax but amends its trust deed to permanently exclude foreign persons as beneficiaries before a date yet to be determined as a cut-off date, the trust may apply for a refund of the surcharge
- owns residential land in New South Wales but does not amend its trust deed to permanently exclude foreign persons as beneficiaries before the cut-off date, the surcharge duty and land tax may apply for prior years since the surcharges were initially introduced in 2016. Different transitional rules apply to testamentary trusts.
What Is Surcharge Land Tax?
Land tax is a tax on the land you own (excluding your primary place of residence) as at midnight of 31 December of the previous year (in the case of NSW and VIC, some states work on a financial year). If you are a foreign person or if the land you own is held by a trust, you will have to pay surcharge land tax in addition to any land tax you might be liable.
Again, a surcharge land tax is a tax for residential land owned by a foreign person at midnight on 31 December of the previous year. Trusts are classified as foreign persons unless the trust deed specifically excludes any foreigners as potential beneficiaries.
What should a trustee in a discretionary trust consider?
- Review the trust deed and amend it to satisfy the no foreign beneficiary requirement.
- Do this as soon as possible. We would strongly recommend not to wait for a cut-off date to be provided.
Foreign discretionary trust law in Queensland
The government announced a number of State tax measures in their budget on 11 June 2019. These were swiftly introduced into law with the relevant legislation passing on 17 June 2019. One of these measures was an amendment to the land tax rules, which came into effect almost immediately (at midnight on 30 June 2019).
The changes were:
- If a person owns land in Queensland – they need to determine if they are foreign and if so, seek advice on the land tax implications;
- If a person is the buyer of land under a contract – they need to ensure that they will not be liable to for additional land tax if the seller is foreign; and
- If a person is a tenant – they need to review the terms of their lease to ensure there are not paying more because their landlord is foreign.
What must property buyers and tenants do?
Following these changes, it is more important than ever to ensure the ownership structure is properly identified so that the appropriate amount of land tax is being paid.
For buyers and tenants, any contract or lease for property in Queensland should appropriately address liability for land tax, particularly where the landholder is foreign (or suspected to be). In contracts for sale, the contract typically (except in residential sales) requires an adjustment at settlement for land tax.
In leases, land tax may form part of the outgoings that are recoverable from a tenant (except in residential or retail leases). It is open to the parties to negotiate how land tax liability will be apportioned, which could be:
- not adjusting or re-allocating land tax liability at all (more common in residential property sales, and mandated in retail leases – this favours the buyer or tenant);
- on the amount actually assessed, including any surcharge (this favours the seller or landlord); or
- on some notional or deemed assessment, which could be determined based on some combination of the below criteria (each of which favours the buyer or tenant):
- as if the seller or landlord was a natural person (reducing the rates to the individual rates);
- as if the seller or landlord was resident in Queensland (avoiding any absentee surcharge); and
- as if the land was the seller or landlord’s only land (avoiding aggregation).
How can Attwood Marshall Lawyers help?
Attwood Marshall Lawyers is the leading Property & Commercial law firm. We can peruse your trust deed to determine whether any amendments are required and then attend to a Deed of Variation to ensure your trust is not classified as a foreign person. For professional and experienced legal advice in this area please contact Property & Commercial Department Manager Jessica Kimpton, direct line on 07 5506 8214. We are open throughout the Xmas and holiday period and ready to help you ensure your legal obligations are met.