Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.
by John Wojtowicz (Director - Law Central Legal)
Recent changes to stamp/transfer duty and land tax legislation may affect nearly every family/discretionary Trust that purchases or holds residential land in New South Wales, land in Victoria and residential land in Queensland.
For years the rise in number of family trusts as an asset protection structure with tax benefits has been unabated.
According to the ATO figures (July 2017) there are more than:
Unfortunately, the very feature that makes family trusts such an excellent asset protection structure, can now lead the trust to incur higher state duties and taxes.
To be used as an asset protection structure, the trust must have the feature of the beneficiaries in the trust having no defeasible interest in the trust or the trust fund. To achieve this, the trust deed normally has wide beneficiary classes and unfettered trustees powers relating to the distribution of income or capital under the trust. From an asset protection point of view, this enables the beneficiary to argue that the assets in a family trust are not his, where a creditor seeks to enforce a judgement.
Although the unique features of a typical family trust have served it well over the years for asset protection purposes, the existence of a wide class of beneficiaries in the trust deed may now bite the Trustee with higher surcharge duties in New South Wales, Victoria and to a lesser extent, in Queensland under recent legislative changes in those states.
Why is your family trust exposed to paying higher duties?
Recent legislative changes in 2016 in New South Wales, Victoria and Queensland have resulted in an additional duty surcharge (and land tax in New South Wales and Victoria) being levied on “foreign persons” who purchase (and own, for land tax) certain types of land in those states.
Each of the above states has enacted their own legislative changes with the wording used and duties imposed being different in each state. For the purposes of this Bulletin, the words “foreign surcharge duty” will be used to discuss the duties imposed in a general sense by the affected states.
The foreign surcharge duty imposed in each affected state varies, but is of an amount that can be of significant concern. For instance in Victoria, the foreign surcharge duty between an Australian resident and a foreign person is 7%. The duty differential between Australian residents and foreign persons and the types of land that is affected varies between the states.
Below is a table listing the rates of all the different foreign surcharges (as at November 2017). Note that these are in addition to the duty and land tax rates already applicable in these states.
Foreign Surcharge Duty
Land Tax Surcharge
For discretionary trusts see the applicable rates in Part 5 of Schedule 1 Land Tax Act 2005
Who is a “foreign person”
The term “foreign person” (or “foreign purchaser” in Victoria) is defined in the relevant legislation as follows:
NSW - "foreign person" means a person who is a foreign person within the meaning of the Foreign Acquisitions and Takeovers Act 1975 of the Commonwealth, as modified by this section. (s104J(1) Duties Act 1997 (NSW) (“NSW Duties Act”)).
Victoria - "foreign purchaser" means a transferee (for the purposes of Chapter 2) or a person who makes a relevant acquisition (for the purposes of Chapter 3), and that transferee or person is—
(a) a foreign natural person; or
(b) a foreign corporation; or
(c) the trustee of a foreign trust. (s3 Duties Act 2000 (Vic) (“Vic Duties Act”)).
QLD - Each of the following is a foreign person -
(a) a foreign individual;
(b) a foreign corporation;
(c) the trustee of a foreign trust. (s234 Duties Act 2001 (Qld) (“Qld Duties Act”)).
A key part of the definition of a foreign person in the above legislation in the case of a “foreign trust” is where a foreign beneficiary has a “substantial interest” in the trust.
Substantial interest in a trust
Section 18(3) of the Foreign Acquisitions and Takeovers Act 1975 (“FATA”) has determined the extent of a beneficiary’s interest in a family/discretionary trust. The section states:
“For the purposes of this Act, if, under the terms of a trust, a trustee has a power or discretion to distribute the income or property of the trust to one or more beneficiaries, each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary.” (s18(3) FATA)
The Vic Duties Act contains similar wording to the FATA in the definition of “substantial interest in a foreign trust” in section 3B. We note section 3D of the Vic Duties Act – Commissioner may determine person has a substantial interest in a trust which states:
“(1) For the purposes of section 3B(1)(b), the Commissioner may determine that a person has a substantial interest in a trust estate if, in the Commissioner's opinion, the person has the capacity to determine or influence the outcome of decisions about the administration and conduct of the trust, taking into account—
(2) This section applies regardless of any interests that any other person has in the trust estate.”
The Qld Duties Act differs as it states that a “trust is a foreign trust if at least 50% of the trust interests in the trust are foreign interests” (s237 Qld Duties Act).
Problem facing family trusts
At first glance, Trustees may think that their Trust has no foreign beneficiaries, so this does not apply to them. However, bear in mind that the beneficiary list of the standard family trust is not limited to just the immediate family, but may include extended family members. Consider, for example, families that have migrated to Australia after World War 2. Some family members will be residing in Australia and some of the extended family may be residing in the original country of origin. Children or grandchildren of the original founders of the trust may have also moved overseas for work purposes.
Wide beneficiary classes contained in most family trust deeds will catch family members that are resident overseas. The problem is further compounded by the beneficiary list including “eligible trusts” as those trusts in turn could be a “foreign trust”. In New South Wales and Victoria, if you have a beneficiary that is a foreign person then they are deemed to have a maximum interest in the trust (i.e. 100%) therefore attracting the additional foreign surcharge duty.
The fact that no distribution has been made or is intended to be made to a beneficiary that is a foreign person is of no help when determining when the trust is affected by the legislation.
Platinum readers should read our platinum section to see whether certain beneficiary classes are exempted from the legislation.
What to do now
Should a Trustee of a discretionary trust wish to prevent the “foreign surcharge duty“ applying then the trust deed will need to be amended to exclude a “foreign person” from being a beneficiary and benefiting from the trust.
In NSW the Office of State Revenue has recently issued Revenue Ruling no G 010 version 2 which contains certain criteria for a trust to meet to avoid the foreign person surcharge for purchases of land and the surcharge land tax.
For commentary on this ruling please go to our platinum content.
Law Central has developed a document that amends the family/discretionary trust deed to exclude foreign persons from benefiting from the trust. See Family Trust - Update to Exclude Foreign Persons (NSW).
Alternatively ring Law Central Legal on (08) 9476 4999 to obtain a quote for amending your family trust deed.