It is important to understand how changes made by the New South Wales Parliament to foreign land tax and duty surcharges will impact Trust Deeds. Attwood Marshall Lawyers Property and Commercial Partner, Barry van Heerden, explains why you must urgently review your Trust Deeds prior to 31 December 2020 to avoid paying unnecessary surcharges in the new year.
Buying property in a Trust
Trusts are commonly used for investment and business purposes. Most Trusts are drafted to provide for a wide range of beneficiaries, some of whom may be foreigners as defined in the Foreign Acquisitions & Takeovers Act 1975 (Cth). There can be many benefits of buying property in a Trust including:
- Asset protection: If the property is owned by a Trust, not an individual, there can be a benefit for people in certain businesses, professions or occupations who have a high risk of being sued. Buying property through a Trust can also protect this asset in the event you face bankruptcy, although this depends upon the provisions of the trust deed and who has effective control.
- Estate planning: A Trust can be a simple way to hand down properties to children without the need for capital gains tax or stamp duty, although sometimes the better way may be to create testamentary trusts in your Will;
- Tax advantages: The trustee can distribute or split the trust’s income between the trust beneficiaries in the most tax-effective way.
It is this last benefit that we need to highlight as the ATO’s deadline looms. A single foreign beneficiary is enough to cause an entire trust to be considered foreign and in turn be burdened with the full surcharges applicable. For many Australian trusts, the beneficiaries or people who set up the trusts may not be aware that they may be subject to significant tax and duty surcharge liabilities as a result of beneficiaries being deemed to be ‘foreigners’ and not specifically excluding foreign persons from the trust.
Amendments to Legislation
The State Revenue Legislation Further Amendment Bill 2020 was brought in to address anomalies in revenue legislation, close tax loopholes and align the technicality of certain New South Wales revenue legislation with the laws of other jurisdictions.
The ATO decided to increase the duty payable in purchasing of a property by a Trust, and land tax payable on property in the name of a Trust, where the Trust can be deemed a ‘foreign Trust’ due to the possibility that any of the beneficiaries may be a foreigner.
This decision came after the NSW Parliament passed the State Revenue Legislation.
From 21 June 2016, foreign persons became liable to pay a surcharge purchaser duty (currently 8% of the market value of the property) on the acquisition of residential property in NSW. In addition, a surcharge land tax (currently 2% of the unimproved value of the land) for any residential property is also applicable.
New South Wales
In New South Wales, the Trust will be deemed a foreign Trust unless the Trust Deed contains specific clauses to exclude all beneficiaries which may be classified as foreigners.
It is therefore advisable to amend any Trust Deed where the trust owns property in New South Wales. The amendment should exclude foreign beneficiaries from any distributions from the Trust and prevent any amendment to the exclusion of foreign persons as beneficiaries, so that the exclusion is permanent or irrevocable.
The ATO has put a deadline of 31 December 2020 in place for parties to amend their Trust Deeds accordingly.
If you do not review and update your Trust Deed and it is deemed a foreign trust, a surcharge duty of 8% along with surcharge land tax of 2% will be payable on any residential land in New South Wales acquired or owned by the trust.
In Queensland, a Trust is not necessarily deemed a foreign Trust only because one of its beneficiaries may be a foreign person.
The Commissioner of State Revenue will consider each Trust and specifically the following:
- The likelihood of distribution to a foreign person; and
- The terms of the Trust Deed which concern any priority or proportion for sharing between default beneficiaries.
Even though it is therefore not necessary to amend your Trust Deed in Queensland, we would strongly recommend you attend to these amendments to avoid any disputes with the Commissioner.
How can Attwood Marshall Lawyers help?
Our expert Property and Commercial lawyers can help you review your Trust Deed to satisfy the foreign person exclusion requirements to ensure you meet the ATO’s deadline. It is important you contact our team as soon as possible as there is only a small window of opportunity remaining to make these changes.