Trusts are a widely used tax and asset protection strategy in Australia.
For maximum flexibility, trust deeds normally have wide beneficiary classes and wide trustee powers relating to the distribution of income or capital under the trust.
The existence of a wide class of beneficiaries in the trust deed may now bite the unwary Trustee with higher surcharge duties in NSW.
Why your trust may be exposed
Changes in 2016 in NSW to the Duties Act and the Land Tax Act have resulted in additional duty surcharges being levied on “foreign persons” who purchase (and own, for land tax purposes) certain types of land – known commonly as “foreign surcharge duty”.
In NSW, the foreign surcharge duty is in addition to normal conveyancing stamp duty and land tax rates – the rates of which are as follows:
|State||Foreign Surcharge Duty||Land Tax Surcharge|
The definition of a “foreign person” in the legislation is extremely wide in the way it applies to beneficiaries of a discretionary trust and has caused a major headache for Trustees. Whilst it may not have been originally intended to apply in the way it does, the NSW Government has not said it will modify the new laws.
This means that Trustees must take urgent action to protect the trust assets from the surcharges by amending their deeds.
The problem – wide beneficiary classes
Trustees could be forgiven for thinking that their Trust has no foreign beneficiaries.
However, the problem is that the wide beneficiary classes contained in most family trust deeds will catch family members that may be foreign residents. The problem is even worse if the beneficiary list includes “eligible trusts”, as those trusts can be a “foreign trust”.
If this is the case the trust will attract foreign surcharge duty even if no distribution is made or ever intended to be made to that foreign trust.
What you need to do
If you are a Trustee of a discretionary trust and you wish to prevent the “foreign surcharge duty” applying then the trust deed must be amended to exclude a “foreign person” from being a beneficiary and benefiting from the trust.
How we can help
Rolf Koops, Partner – Tax
+61 2 9762 0480
Madison Marcus Law Firm produced this article. It is intended to provide general information in summary form on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.