Many discretionary trusts have wide pools of potential beneficiaries as to both income and capital of the trust.
Strictly speaking, the very nature of a discretionary trust means that no beneficiary has any fixed entitlement. State revenue offices treat these trusts differently with respect to both stamp or transfer duty and land tax.
South Australia, for instance, applies a foreign duty surcharge to foreign persons or foreign trusts that acquire an interest in residential land within the state. A surcharge of 7% is applied to the value of said interest on certain transactions entered into on or after 1 January 2018. The surcharge payable is in addition to any stamp duty that would otherwise be payable on such acquisition of an interest in land.
A foreign natural person is any individual who is not:
Under South Australian legislation, a discretionary trust would be a foreign trust with one or more of the following as a foreign person:
- a trustee;
- a person who has the power to appoint under the trust;
- an identified object under the trust;
- a person who takes capital of the trust property in default.
The rules as to who these provisions are interpreted are complex and specific advice is required in each circumstance.
New South Wales
In New South Wales similar provisions apply with respect to transfer duty.
Importantly, under the State Revenue Legislation Further Amendment Bill 2019 (NSW), increased surcharge land tax will be payable on residential land owned by “foreign persons”. Under certain amendments to the relevant laws, a trustee of a discretionary trust will be deemed to be a “foreign person” or “foreign trust” unless the terms of the trust specifically prevent such entities from being a beneficiary of that trust.
The “foreign trust” will pay a 2% surcharge in land tax from the 2018 land tax year onwards and an increase in transfer duty of up to 15% on the dutiable value of any residential land purchased in New South Wales.
A land tax surcharge exemption will be provided to the trustee if:
- the terms of the trust deed prevent a foreign person from being a beneficiary of the trust; and
- the clause preventing a foreign person becoming a beneficiary cannot be amended to allow a foreign person to be a beneficiary at a later time.
This transitional arrangement in New South Wales only applies if the terms of the discretionary trust are amended before midnight on 31 December 2019.
If you have already incurred surcharge land tax or surcharge purchaser duty on the basis that you are a foreign trustee, and the terms are amended before this time (where it is possible and appropriate to do so), then you may be eligible to seek a refund from Revenue New South Wales.
This publication is © Nexus Law Group and is for general guidance only. Legal advice should be sought before acting in relation to any specific issues