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Beware – The impact of the NSW surcharge land tax on discretionary trusts

26 June 2017
Read Time 7 mins reading time

If a potential beneficiary of your discretionary trust is a “foreign person” and the trust owns residential land in New South Wales, then the trust may be liable for surcharge land tax from the 2017 land tax year onwards.

Surcharge duty and tax

In response to public concerns regarding the level of foreign property investment in New South Wales, the NSW Government introduced “surcharge purchaser duty” and “land tax surcharge” in June 2016.

Surcharge purchaser duty is imposed on the purchase of residential property by foreign persons, while the land tax surcharge applies to residential land owned by foreign persons.

Surcharge land tax

Under the Land Tax Act 1956 (NSW), surcharge land tax is payable in respect of “residential land” owned by a “foreign person” at the rate of 0.75% of taxable value (which is due to rise to 2% from 1 July 2017). There is no tax-free threshold applicable to the surcharge.

“Foreign persons” has the meaning given to it in the Foreign Acquisitions and Takeovers Act 1975 (Cth), and includes:

  • individuals not “ordinarily resident in Australia”;
  • corporations and trustees in which an individual(s) “not ordinarily resident in Australia”, a foreign corporation or a foreign government holds a substantial (or an aggregate substantial) interest;
  • foreign governments; and
  • other persons prescribed by the applicable regulations.

Australian citizens are deemed to be “ordinarily resident in Australia” and hence will not be foreign persons (even if they hold dual citizenship).

An individual is also taken to be “ordinarily resident in Australia” if they have been in Australia during 200 or more days in the preceding 12 month period and their continued presence is not subject to time limitations imposed by law (eg those imposed by work/business visas).

Application to discretionary trusts

A “foreign person” includes a trust in which a foreign person holds a beneficial interest in at least 20% of the income or property of the trust (ie a “substantial interest”).

Where a trustee has the power to distribute trust income or property to one or more beneficiaries, each beneficiary is taken to hold a beneficial interest in the “maximum percentage” (ie 100%) of the income or property of the trust.

Accordingly, if your discretionary trust owns residential land in New South Wales and has as a beneficiary a non-Australian citizen who is not “ordinarily resident in Australia”, then the trust may be deemed to be a “foreign person” and liable for surcharge land tax.

It does not matter if a distribution is ever made to the foreign beneficiary – so long as the trustee has the power to make a distribution to such person or entity, they will be taken to hold a “substantial interest” in the trust and the trust will be taken to be a “foreign person” and may hence be liable to pay surcharge land tax.

Examples

A typical discretionary trust deed is drafted to include broad classes of beneficiaries, for example, a named primary beneficiary, that person’s spouse and relatives and companies and trusts in which any of them hold shares or units or are eligible beneficiaries.

Such broad beneficiary classes may have unexpected consequences in the context of surcharge land tax, even if the trust was established for the purpose of primarily benefitting Australian beneficiaries.

A straightforward scenario where a NSW residential land-holding trust with broad beneficiary classes could be caught would be where a primary beneficiary (or that person’s child or sibling) moves overseas for work and marries a foreign national who does not obtain Australian citizenship.

A less apparent example could occur, for example, where the named primary beneficiary of the trust is an Australian citizen who holds shares in a company equally with another shareholder who is not an Australian citizen and is based in another country for most of the year. In this case, the company will be taken to be a “foreign person” as the foreign shareholder holds a “substantial interest” (ie 50%) in it. Assuming that the company falls within a class of eligible beneficiaries of the trust, the “foreign” company will be taken to hold a “substantial interest” (ie 100%) in the trust.

Consequently, the trust will be taken to be a “foreign person”. In this case, the trust may be liable to pay surcharge land tax simply by virtue of the primary beneficiary’s co-shareholder being a foreign person!

What to do

If your discretionary trust deed is amended to exclude foreign persons from benefitting from the trust (whileever the trust holds residential land in New South Wales), then the trust will not be a foreign person and should not be liable for surcharge land tax.

In March 2017, the NSW Commissioner of State Revenue issued a ruling announcing that it has the discretion on a case-by-case basis to exempt discretionary trusts from surcharge land tax (and/or surcharge purchaser duty). Within 6 months of granting the exemption, the trust deed must be amended so that the trustee is no longer liable for the taxes.

We note that similar levies may apply in Victoria and Queensland, based on the specific legislation of those states.

Please contact us if you require an amendment to your trust deed for the purposes of the NSW surcharge land tax (and/or the NSW surcharge purchaser duty), or if you require more detailed advice.

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Beware – The impact of the NSW surcharge land tax on discretionary trusts

26 June 2017

If a potential beneficiary of your discretionary trust is a “foreign person” and the trust owns residential land in New South Wales, then the trust may be liable for surcharge land tax from the 2017 land tax year onwards.

Surcharge duty and tax

In response to public concerns regarding the level of foreign property investment in New South Wales, the NSW Government introduced “surcharge purchaser duty” and “land tax surcharge” in June 2016.

Surcharge purchaser duty is imposed on the purchase of residential property by foreign persons, while the land tax surcharge applies to residential land owned by foreign persons.

Surcharge land tax

Under the Land Tax Act 1956 (NSW), surcharge land tax is payable in respect of “residential land” owned by a “foreign person” at the rate of 0.75% of taxable value (which is due to rise to 2% from 1 July 2017). There is no tax-free threshold applicable to the surcharge.

“Foreign persons” has the meaning given to it in the Foreign Acquisitions and Takeovers Act 1975 (Cth), and includes:

  • individuals not “ordinarily resident in Australia”;
  • corporations and trustees in which an individual(s) “not ordinarily resident in Australia”, a foreign corporation or a foreign government holds a substantial (or an aggregate substantial) interest;
  • foreign governments; and
  • other persons prescribed by the applicable regulations.

Australian citizens are deemed to be “ordinarily resident in Australia” and hence will not be foreign persons (even if they hold dual citizenship).

An individual is also taken to be “ordinarily resident in Australia” if they have been in Australia during 200 or more days in the preceding 12 month period and their continued presence is not subject to time limitations imposed by law (eg those imposed by work/business visas).

Application to discretionary trusts

A “foreign person” includes a trust in which a foreign person holds a beneficial interest in at least 20% of the income or property of the trust (ie a “substantial interest”).

Where a trustee has the power to distribute trust income or property to one or more beneficiaries, each beneficiary is taken to hold a beneficial interest in the “maximum percentage” (ie 100%) of the income or property of the trust.

Accordingly, if your discretionary trust owns residential land in New South Wales and has as a beneficiary a non-Australian citizen who is not “ordinarily resident in Australia”, then the trust may be deemed to be a “foreign person” and liable for surcharge land tax.

It does not matter if a distribution is ever made to the foreign beneficiary – so long as the trustee has the power to make a distribution to such person or entity, they will be taken to hold a “substantial interest” in the trust and the trust will be taken to be a “foreign person” and may hence be liable to pay surcharge land tax.

Examples

A typical discretionary trust deed is drafted to include broad classes of beneficiaries, for example, a named primary beneficiary, that person’s spouse and relatives and companies and trusts in which any of them hold shares or units or are eligible beneficiaries.

Such broad beneficiary classes may have unexpected consequences in the context of surcharge land tax, even if the trust was established for the purpose of primarily benefitting Australian beneficiaries.

A straightforward scenario where a NSW residential land-holding trust with broad beneficiary classes could be caught would be where a primary beneficiary (or that person’s child or sibling) moves overseas for work and marries a foreign national who does not obtain Australian citizenship.

A less apparent example could occur, for example, where the named primary beneficiary of the trust is an Australian citizen who holds shares in a company equally with another shareholder who is not an Australian citizen and is based in another country for most of the year. In this case, the company will be taken to be a “foreign person” as the foreign shareholder holds a “substantial interest” (ie 50%) in it. Assuming that the company falls within a class of eligible beneficiaries of the trust, the “foreign” company will be taken to hold a “substantial interest” (ie 100%) in the trust.

Consequently, the trust will be taken to be a “foreign person”. In this case, the trust may be liable to pay surcharge land tax simply by virtue of the primary beneficiary’s co-shareholder being a foreign person!

What to do

If your discretionary trust deed is amended to exclude foreign persons from benefitting from the trust (whileever the trust holds residential land in New South Wales), then the trust will not be a foreign person and should not be liable for surcharge land tax.

In March 2017, the NSW Commissioner of State Revenue issued a ruling announcing that it has the discretion on a case-by-case basis to exempt discretionary trusts from surcharge land tax (and/or surcharge purchaser duty). Within 6 months of granting the exemption, the trust deed must be amended so that the trustee is no longer liable for the taxes.

We note that similar levies may apply in Victoria and Queensland, based on the specific legislation of those states.

Please contact us if you require an amendment to your trust deed for the purposes of the NSW surcharge land tax (and/or the NSW surcharge purchaser duty), or if you require more detailed advice.