Did you know that if you have a discretionary trust that holds residential land in NSW, you will soon become liable for a 2% land tax surcharge each year, unless your trust currently does, or is amended to, exclude foreign persons?
If this applies to you, read on, as a deadline is fast approaching to amend your trust deed to ensure your trust is exempt from this surcharge in future years, as well as the 2017-2019 land tax years.
Please note that a superannuation trust will generally not qualify as a discretionary trust. Therefore, this information will generally not apply to SMSF trusts.
Foreign persons surcharge land tax and duty
Surcharge land tax applies to foreign persons who are owners of residential land in NSW. The surcharge amount is 2% over and above the annual land tax liability. Similar rules apply when a foreign person buys residential property in NSW, in which case an 8% purchaser surcharge duty will be applied. The law has been in place for several years.
To give you an idea of the impact of the surcharges, let’s take the example of a $1,000,000 residential property and compare expenses for a foreign owner, with those for a non-foreign owner:
|Stamp duty on purchase*|
|Annual land tax*|
* Figures are calculated using rates applying as at November 2020
Discretionary trusts are automatically captured
Recent legislation clarified that all discretionary trusts will be automatically captured for the purposes of these surcharges even if they don’t have foreign persons as beneficiaries, unless the trust deed explicitly provides that:
- No potential beneficiary of the trust is a foreign person; and
- The terms of the trust cannot be amended in a manner that results in a foreign person being a potential beneficiary.
In addition, any named foreign person in the trust deed must be removed as beneficiary. This requirement applies even if the trust has no apparent foreign beneficiary or potential foreign beneficiary.
Broadly, a ‘foreign person’ includes an individual who is not ordinarily resident in Australia (other than an Australian citizen) or various entities in which foreign persons hold a substantial interest.
These provisions must be incorporated into the trust deed by 31 December 2020 in order to avoid the surcharge land tax being applied this year.
What do you need to do?
If your discretionary trust owns, or is looking to acquire, residential land in NSW, you will need to review your trust deed to determine if you may be inadvertently exposed to the foreign person surcharges.
If your discretionary trust is exposed to the foreign person surcharges, you will need to determine whether or not your trust deed should be amended to exclude foreign persons as beneficiaries. Care must be taken when amending a trust deed by a solicitor that the amendment clause is strictly followed.
Importantly, you will need to consider whether this amendment is workable, as it would mean that thereafter your discretionary trust can never distribute to a foreign person. This may be problematic if you or other potential beneficiaries are not Australian citizens and reside overseas (or may reside overseas in the future).
If you are affected by this legislation, you should seek further advice from the adviser or accountant assisting you with your discretionary trust.
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