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discretionary trust owners of nsw residential land – changes you need to know

30 September 2020
chelyn murphy christine huynh
Read Time 3 mins reading time

On 24 June 2020, the State Revenue Legislation Further Amendment Act 2020 (the Act) received royal assent. The Act is particularly relevant to the trustees of discretionary trusts that own residential land in New South Wales, as their trust deeds may need to be amended before 31 December 2020 or else surcharge land tax may be imposed.

NSW surcharge land tax and surcharge purchaser duty

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

The imposts essentially oblige “foreign persons” who own or purchase NSW residential land to pay additional land tax (currently at the rate of 2% of the unimproved value of the land) and additional duty (currently at the rate of 8% of the market value of the property).

Similar levies apply in most other Australian states and territories, based on the specific legislation of those jurisdictions.

foreign persons

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 (ie 20% of the 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).

Each beneficiary in a discretionary trust is deemed under the NSW legislation to have the maximum percentage interest (ie 100%) in the income or property over which the trustee may exercise a discretion to distribute.

Therefore, given that typical discretionary trust deeds provide for broad classes of beneficiaries (as opposed to simply naming specific persons as beneficiaries), it is likely that the potential beneficiaries of a discretionary trust include “foreign persons”, which will in turn result in the trustee of a discretionary trust as being a “foreign person”.

impact of the new Act

The Act amends the NSW Duties Act 1997, Land Tax Act 1956 and Land Tax Management Act 1956 to deem the trustee of a discretionary trust to be a foreign person unless its trust deed provides that:

  1. no potential beneficiary of the trust is a foreign person; and
  2. the terms of the trust cannot be amended to allow a foreign person to become a potential beneficiary in the future.

Accordingly, if your discretionary trust owns NSW residential land, then in order for the trust to not be liable for surcharge land tax for previous and future land tax years, its trust deed must be amended to irrevocably exclude foreign persons from being beneficiaries of the trust. This amendment must be done by 31 December 2020.

If your discretionary trust is proposing to purchase NSW residential land, then its trust deed will need to be amended similarly.

what to do

If your discretionary trust owns or is purchasing residential land in NSW, then you should check whether the terms of its trust deed excludes foreign beneficiaries in accordance with the requirements of the Act.

Please contact us if you require assistance with making amendments to your trust deed, or if you require more detailed advice.

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discretionary trust owners of nsw residential land – changes you need to know

30 September 2020
chelyn murphy christine huynh

On 24 June 2020, the State Revenue Legislation Further Amendment Act 2020 (the Act) received royal assent. The Act is particularly relevant to the trustees of discretionary trusts that own residential land in New South Wales, as their trust deeds may need to be amended before 31 December 2020 or else surcharge land tax may be imposed.

NSW surcharge land tax and surcharge purchaser duty

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

The imposts essentially oblige “foreign persons” who own or purchase NSW residential land to pay additional land tax (currently at the rate of 2% of the unimproved value of the land) and additional duty (currently at the rate of 8% of the market value of the property).

Similar levies apply in most other Australian states and territories, based on the specific legislation of those jurisdictions.

foreign persons

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 (ie 20% of the 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).

Each beneficiary in a discretionary trust is deemed under the NSW legislation to have the maximum percentage interest (ie 100%) in the income or property over which the trustee may exercise a discretion to distribute.

Therefore, given that typical discretionary trust deeds provide for broad classes of beneficiaries (as opposed to simply naming specific persons as beneficiaries), it is likely that the potential beneficiaries of a discretionary trust include “foreign persons”, which will in turn result in the trustee of a discretionary trust as being a “foreign person”.

impact of the new Act

The Act amends the NSW Duties Act 1997, Land Tax Act 1956 and Land Tax Management Act 1956 to deem the trustee of a discretionary trust to be a foreign person unless its trust deed provides that:

  1. no potential beneficiary of the trust is a foreign person; and
  2. the terms of the trust cannot be amended to allow a foreign person to become a potential beneficiary in the future.

Accordingly, if your discretionary trust owns NSW residential land, then in order for the trust to not be liable for surcharge land tax for previous and future land tax years, its trust deed must be amended to irrevocably exclude foreign persons from being beneficiaries of the trust. This amendment must be done by 31 December 2020.

If your discretionary trust is proposing to purchase NSW residential land, then its trust deed will need to be amended similarly.

what to do

If your discretionary trust owns or is purchasing residential land in NSW, then you should check whether the terms of its trust deed excludes foreign beneficiaries in accordance with the requirements of the Act.

Please contact us if you require assistance with making amendments to your trust deed, or if you require more detailed advice.