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Discretionary Trust Deeds – It’s That Time Again!

The recent imposition of additional duty and land tax in some States has prompted advisors yet again to revisit their clients’ discretionary trust deeds – especially where the beneficiaries, or even potential beneficiaries, are foreign persons.

A quick summary of the new provisions:

  • Queensland has introduced Additional Foreign Acquirer Duty (AFAD) from 1 October 2016 on;
    • AFAD residential land, including homes and apartments,
    • vacant land on which a home or apartment will be built,
    • land for residential development,
    • and buildings refurbished, renovated or extended for residential use.
  • New South Wales has introduced a 4% surcharge purchaser duty where a foreign person acquires NSW residential land on or after 21 June 2016, and additional 0.75% surcharge land tax where a foreign person owns NSW residential land at 31 December each calendar year.
  • Victoria has increased the Foreign Purchaser Additional Duty from 3% to 7% for contracts signed on or after 1 July 2016.

While these provisions share a common policy objective, they are not uniform in their drafting or application, and each State has devised its own tests for working out to whom and what transactions the provisions will apply.


In Queensland, the test for AFAD with respect to acquiring trusts focuses on those with a trust interest. Under section 237(1) of the Duties Act 2001 (Qld), a trust is a foreign trust if at least 50% of the trust interests are foreign interests. A foreign interest is a trust interest of any of the following:

  • a foreign individual (being an individual other than an Australian citizen or permanent resident);
  • foreign corporation (incorporated outside Australia or in which foreign persons have a controlling interest);
  • foreign trustee; or
  • a trust interest held by a related person of any of those entities.


A trust interest is in turn defined in section 57 to include a person’s interest as a beneficiary of a trust, other than a life interest. For a discretionary trust, only a taker in default of an appointment by the trustee can have a trust interest.


In New South Wales, however, the test for working out who is a foreign person under for additional duty and land tax is generally linked back to the definition of foreign person under the Foreign Acquisitions and Takeovers Act 1975 (FATA).


Most relevantly for advisors in the SME space, a foreign person for these purposes is defined in section 4 of the FATA to include, among other things:

  • an individual not ordinarily resident in Australia (note this is a separate test and not the same as the test for a non-resident for income tax purposes);
  • a corporation or a trustee of a trust in which an individual not ordinarily resident in Australia, or a foreign corporation, holds a substantial interest (defined in section 4 as at least 20%); and
  • a corporation, or trustee of a trust, in which two or more persons, each of whom is an individual not ordinarily resident in Australia or a foreign corporation, holds an aggregate substantial interest (defined in section 4 as at least 40%).


For a beneficiary’s interest in a discretionary trust, section 18(3) provides each beneficiary is treated as holding the maximum percentage of income or property of the trust which the trustee may (not does) distribute to them. Where the trust is discretionary, each discretionary beneficiary could potentially receive the entirety of the income or property of the trust, and so is deemed to hold 100% of the beneficial interest in the trust – even where there isn’t a remote intention to make a distribution, of any size to that beneficiary.


Where a non-resident falls into a very, very wide class of beneficiaries under a discretionary trust, that can cause a myriad of problems. It not only means considering whether your client needs to seek FIRB approval prior to purchasing a property, but where the residential land is in New South Wales, it also means the purchaser trust is liable to that 4% surcharge purchaser duty and 0.75% surcharge land tax.

It can also mean liability to Australian foreign acquirer duty in Queensland, and a 7% foreign investor surcharge on residential stamp duty in Victoria. And all of this is just because of the traditionally wide drafting of discretionary trust deeds!


In our experience, one-size-fits-all clauses do not work for our clients, and won’t work for yours either. The state of the law requires advisors to ask more questions, and have more patience, than it ever has before.


If your clients are using a trust to acquire a residential property or are due for a review, come and talk to us. 

 

Jodie Mills
Partner

LLB MTax | CTA | Accredited Specialist -Tax Law


07 5552 6615
0431 526 077

jmills@smh.net.au